Yum! Brands, Inc. (YUM) Earnings Call Transcript & Summary

Good morning, everybody. I'm Brian Bittner, the restaurant analyst at Oppenheimer. And we are thrilled to welcome Yum! Brands back to our 2023 Consumer Conference. Yum! is the world's largest restaurant company with over 55,000 units across 156 countries. It is a diversified and highly franchised business model that's comprised of 4 established iconic brands in KFC, Taco Bell, Pizza Hut and the Habit Burger. We believe Yum!'s attractive investment thesis is highlighted by the company's ability to generate above-average growth at scale, yet at the same time, operate a business that is armed with blue chip-like resiliency, positioned to thrive in any operating environment. We're delighted to be joined by Yum!'s Chief Financial Officer, Chris Turner. Chris has been the CFO of Yum! Brands since 2019 when he joined the company from PepsiCo. Chris, thank you so much for being with us at our conference today. We greatly appreciate your time.

Thanks so much for hosting this, Brian. It's great to be with you. I love the summary you just gave of the business, and appreciate everyone out there who's spending their time to learn about the Yum! story.

I'd like to start the discussion at an incredibly high level before we dive into the business and the brands. As it relates to the Yum! platform, there's not many multi-brand franchisors in the market. And as such, I think this is a very distinctive characteristic for you. Can you talk about the advantages of a multi-brand franchisor and the areas of business that gives you an upper hand over the competition?

Yes, it's a great question. And we believe there is incredible power in Yum!'s portfolio and in Yum!'s multi-brand business model. You mentioned one of them at the beginning, which is our blue-chip resilience. Obviously, in having the power of 4 brands, the global breadth of the portfolio, it gives our business incredible resilience. But at the same time, those brands have in common an incredible growth aspiration and an incredible growth capability. So while we are the world's largest restaurant company, we're still a growth company at heart, and that is a common thread across all of our brands. And that's where you get to growth-driving capabilities and best practice sharing that we share across the brands as another asset of that multi-brand business model. Development is one of our most distinctive growth drivers. We took our long-term growth algorithm on unit development up to 5% at last year's Investor Day. We've opened, for 2 years straight, a new restaurant every 2 hours. And so that sort of best practice sharing and capability building across brands is one of those assets. Scale is obviously another one. And the scale benefits are increasingly important in the restaurant industry, and we bring that to life through our purchasing across brands and through our digital strategy, which continues to become a bigger and bigger part of our story. Franchises -- franchising and being the world's franchisor of choice, I think, is the next element that I'd mentioned. We've got the world's best franchisees, and we have an obligation to them to continue to provide them with new opportunities for growth, and I think our teams do that well. Last thing that I'd mention, last but not least, is talent. We are able to attract talent to the business because of the multi-brand opportunities that I don't think we would find otherwise. And for folks who have grown up in our brands, they see incredible value in the ability to have new opportunities in other brands. This week, I'm out with Scott Mezvinsky, our Taco Bell U.S. President. Scott spent most of his career in the KFC business but then switched over to be the CFO of Taco Bell a couple of years ago, now the U.S. president. Just an example of those sorts of opportunities. So those would be the things on my list when I talk about the power of the model.

Well, it's obviously a great way to set the stage for the discussion. And I want to stay zoomed out here and talk about the financials at a high level. At your Investor Day in December of 2022, you increased all the components of your long-term financial algorithm. Unit growth was up to 5%, system sales growth up to 7%, your operating profit growth was increased to at least 8% as you move forward over the long term. Now I appreciate that you've been out-punching all of these targets right off the bat, particularly showcased with your incredibly strong first quarter results. But as we stay high level, can you take us inside the company and help us understand what informed the management team's decision to officially lift these long-term growth targets across the board?

Yes. I think it's grounded in confidence in the long-term potential that our business model has and in our ability to deliver against that potential, which we've demonstrated for a number of years at Yum!. So those 2 things combined caused our management team when we got together and we said, "Hey, how do we want to describe the long-term trajectory of this business to make those raises in the algorithm?" And of course, in the long run, it's our job to find a way to deliver against those each year, to over-deliver when the opportunity exists and in the long run, potentially find ways to further raise elements of that algorithm. The first element, though, you mentioned the 5% net new unit growth is really grounded in that distinctive unit development capability and opportunity. We went out and across the brands have analyzed the market potential. And we said at the Investor Day, we think there is a potential for another 100,000 units on top of our existing 55,000 units. And we've actually already mapped a significant portion of where those units should be. So opportunity is not our problem. We've got brands that are wildly translatable across markets. Consumers love them. And we've got strong unit economics that go along with those plus strong franchisees who can bring it to life. So that was at the basis of the unit development story. In terms of overall system sales, you couple that with same-store sales growth. Of course, we have the best marketing teams in the business who bring the brand to life on a day in and day out basis, ensure we always have brand buzz, we're creating innovation and we're always providing strong relative value, which, of course, is supported by our scale. And then the last element, at least 8% core operating profit growth. There should be leverage in our business model over time and we think that reflects that. And we're going to manage the investments appropriately to ensure that happens. So those were all the things that went into that calculus, and we were proud to make those raises back in December.

Well, it was impressive. And I think we just need to touch on the unit growth piece a little bit more because it is a powerful pillar of the Yum! investment thesis. You just talked about how you disclosed that there could be another 100,000-plus incremental unit opportunity on top of the 56,000 units you have today. Obviously, this suggests the best growth days are ahead. But can you just help us wrap our heads around how the team thinks another 100,000 units is achievable? It's hard to comprehend from the outside looking in. Can you unpack that a little bit more for us?

Yes. Start with the fact that we've got 4 brands, that each have slightly different consumer occasion, slightly different consumer appeal. If you're like me, you can enjoy all 4 brands multiple times in 1 week, so that provides us with a broader set of opportunities. And in the long run, we should be able to create more density as Yum! in markets than a single brand entity could. So next, you go to the broad appeal of those brands. I mean, just take KFC, our largest brand. If you're a human on this planet and you're not a vegetarian, you probably had fried chicken and you probably loved it, and there's no better fried chicken than KFC. And so the consumer appeal is just incredibly broad. I was at our annual market planning meetings with the KFC team. We kicked them off on Sunday night this week. All of our marketing teams from around the globe were there, and the ways they're bringing the brand to life is just incredible. And you can see why the brand resonates with customers in every corner of the globe. And the same is true for our other 3 brands. We think they all should have tens of thousands of units and growing around the globe. So you got this broad appeal. Next, I'd go to strong unit economics. In an asset-light model, it's our franchisees who put their capital to work to build these units. As we talked about at the Investor Day, we've got strong unit economics around the globe. And I think the growth that we put up is the best proof of that. Again, that only happens when the franchisees see returns. Next, I'll go to those franchisees. We talk about having 3C franchisees. They've got to be capable great restaurant operators. They've got to be well capitalized. But third, they have to be committed to growth. So it's not good enough in our system to just run restaurants, you got to be committed to expanding that network, and our partners do an incredible job with that. Last thing I'll say is we've got the best development teams in the business. And we're increasingly using more and more analytical tools to support their work to pinpoint exactly where the highest return opportunity to go attack next are. So those are all of the elements that create our development capability, and we think that's a really distinctive and hard-to-replicate competitive advantage of Yum!.

Great. And you've consistently said that your brands at Yum! are built to showcase blue chip-like resiliency and are positioned to win and thrive in any environment. And this dynamic seems to be proving out your recent results, where the platform generated 8% same-store sales growth globally in the first quarter. And you've suggested a continuation of healthy trends into 2Q so it's kind of backing that up. Can you help us understand the drivers of this resiliency and why you believe the resiliency can sustain if the macro environment indeed gets more challenged from here?

Yes, it's a great question. Of course, with 156 markets around the globe, the macroeconomic situation is a little bit different from market to market. And we may have some markets where the macros are a bit more challenging for consumers. At the same time, we've probably got others where -- that there are lots of tailwinds for consumers. So we think about that on a global basis. But in any of those environments, our brands are positioned to succeed. I'll start with QSR. QSR is a great space to be in any sort of environment because you've got this mass appeal and QSR is known for value. Then within QSR, I think our brands do a distinctively great job at delivering on what consumers want. Take Taco Bell as an example in the U.S., and Taco Bell has talked about their magic formula, and it includes 4 elements, includes first, how we always create brand buzz. We want to be at the leading edge of culture. We always want to be in the conversation and our marketing needs to be generating pull with consumers for the brand. Second, we've always got to have our food innovation engine running and bringing craveable food to our customers. And at Taco Bell, that means a combination of new innovation, like we've seen over the last couple of years with fries, with the Grilled Cheese Burrito and bringing back favorites. You saw the Mexican Pizza come back last year, which generated incredible buzz. Later this month in June, you're going to see the Volcano Menu back, which I think was sort of neck and neck with the Mexican Pizza in terms of consumer demand for bringing things back. I recently had an Enchirito in one of our restaurants, which there was a lot of buzz for bringing it back. Third is always providing tremendous value to our customers relative to the other offerings on the market. And Taco Bell does a great job managing mix here. We got the $2 value menu where you can get an incredible amount of craveable food for just $2 for customers who are seeking that sort of value. Of course, a lot of customers come into the restaurant and they say, "Yes, I'm looking for value," but the Grilled Cheese Burrito, for example, is a really big product at a bit of a higher price point, but it's still an amazing value relative to what it would take to buy a similar amount of food that's, that good and that craveable somewhere else. So a lot of them choose to trade up when they do that. So that's the third element. The fourth element in the magic formula is digital. And Taco Bell digital sales were near 0 back in 2018. Last year, we got to 24% and we're continuing to grow. And of course, we provide value to our loyal customers through digital. We've got a 1:1 customer connection when customers deal with us from a digital standpoint. And you put all of those together, that's what allows the business to thrive in good times and in more challenged times because we're providing what customers want in all of those situations.

Let's dig a little into the digital because I do think that's maybe more of an underappreciated driver for Yum!'s business than the others. It's experienced broad-based acceleration and, in my opinion, it's again, probably the most underappreciated driver of sales growth. Your digital mix, some people may not know this, now exceeds 45% of system sales across Yum!. We all know that digital drives incremental traffic. It drives higher check. But Chris, just seeing it from the inside, help us better appreciate what digital can do to the future of Yum!? You've obviously made several acquisitions on the digital side. Maybe unpack how it can be effective from here.

Yes. It's really an amazing story. And our overall objective in digital is to drive profitable growth for our franchisees and to drive profitable growth for Yum!. And we think digital is an accelerant to that. And we like everything about all of those digital sales transactions that we have. Anytime we have customers who deal with us through our digital platforms, we consistently see higher check sizes and higher frequency because of the relationship that we form and because of the easy experience that they get whenever they deal with us digitally. And of course, that word easy really is at the center of our digital strategy. We call it -- we put all of our capabilities into 1 of 3 areas: easy experiences for our customers, easy operations for our franchisees and team members and easy insights generated from the data that comes from the other elements. And so that's really a comprehensive digital strategy, which we think is 1 element that makes our digital strategy distinctive. A lot of our competitors, when they talk about digital, they're just talking about that e-commerce component, whereas ours is a comprehensive way of thinking about running and managing the business. Another element that is distinctive about what we're doing is we're going to own more of the technology than many of our competitors. Our scale allows us to do that. Technology is largely a fixed cost investment. Our scale allows us to get the most leverage out of that. And by owning our technology, we'll also be faster and more responsive to changing market needs over time. So those are a couple of elements of the strategy. The way this is coming to life and driving value -- we shared a case example at our Investor Day in December in Taco Bell. If you go back and look at that growth from near 0 in 2018 to mid-20s percent digital mix in Taco Bell U.S. last year, the incrementality of that has been over $1 billion. There's $1 billion in Taco Bell U.S. sales that we wouldn't have had if we hadn't gone down the path of launching the digital strategy there. And of course, incremental sales in our system flow through at a really high rate. And for our franchisees, we believe that's created an additional $4 billion in franchisee value in the U.S. and $1 billion for Yum! shareholders. And of course, the franchisees co-invest with us to bring all of this to life. But -- hopefully, that gives you a feel for why we're so excited about digital and how it translates to value.

No, it does. Thanks for that. And one more high level before we get into the brands. You talked about, on the last earnings call, how you are encouraged by the commodity inflation trends and the labor availability trends that you're seeing. And I think the labor availability dynamics are becoming better understood by investors. But on the commodity inflation front, can you elaborate on the trends you are seeing there? And how could an improving commodity environment potentially impact the company and its strategy?

Yes. So it's no secret in the restaurant industry and across industries broadly, particularly in developed markets, inflation has been a trend and a challenge to deal with. I think our brands have done a great job navigating that in the markets where we've seen the highest inflation. Of course, last year, we had both higher-than-normal inflation on our inputs, but we also had higher-than-normal inflation on the labor side. Now in many of our global markets, particularly in emerging markets, which represent about 40% of our global business, we were seeing the commodity inflation, but labor inflation was more muted because of our position in those labor markets around the globe. So that sort of helped to moderate that in a significant portion of our business. But the way we've managed those inflationary trends, we start by leveraging our scale. And of course, with 55,000 restaurants, we've got more scale than anyone else in the U.S. For example, we do purchasing across all 4 of our brands so we're leveraging our combined scale when we do that. And then for the component -- given the higher-than-normal inflation that we couldn't offset or defend, then we obviously have used our pricing strategy. We've taken a little more pricing than we would in a normal year, but we've informed that through strong analytics, partnering with our franchisees to help them make decisions about where to set prices in their restaurants. And the guiding drivers there have been ensuring that we have strong long-term unit economics for our franchisees, but simultaneously ensuring that we never get too far ahead of the customer and that we always have strong relative value in the market. I think our brands have done a nice job achieving that. And of course, Taco Bell, as an example, despite all of those inflationary challenges, our restaurant margins in the large Taco Bell company-owned store base were actually stronger last year than they were pre-COVID. So I think that's evidence that we've dealt with that well. As things start to moderate, and we've said that this year, we're seeing year-over-year inflation that looks more like a normal year than what we saw the last 18 months just alleviate some of those pressures, allows us to be a bit more moderate in the pricing that we take. But again, the overarching thing is we want to have strong relative value for our customers in the lineup and our brands, they're known for value, and I think we're doing a nice job delivering that to customers who need it.

And as we start to talk about the brands, I want to start with KFC. It's your largest profit contributor at 50% of Yum!'s operating profits. And for those that don't know KFC well, it's an international powerhouse. You have 85% of your system sales coming from outside the U.S. And we have good insights into how KFC is performing in China, given YUMC is a public company who's also at the conference. But importantly, the KFC International business, excluding China, has been experiencing broad-based strength. Same-store sales were up 11% last quarter in that International business, excluding China. And you talked about this being driven by sustained momentum across emerging markets, renewed strength in European markets. Can you just further elaborate on what's driving this strong same-store sales trend in the KFC business?

Yes. The KFC business globally really is a powerhouse. That's the right word to use. And as you said, the vast majority of the business is actually outside of the U.S. And I would encourage our investors, anytime you're traveling around the globe, go find a KFC and visit it in one of the 100-plus markets in which it operates. You'll be blown away by the experience, by the menu, by the teams that we have around the globe. It really is incredible how it comes to life. And I'd love for investors to get more and more exposure to the international component of the business, which, again, as you said, makes up the vast majority of KFC. But the things that are consistent, we've got a tremendous brand that resonates with customers, it stands for checking. We've got craveable product that comes to life in one level in a consistent way, 11 herbs and spices, high food quality, craveability, but we also have a fair bit of local tailoring that we use in markets to make that relevant to the local customer base. You mentioned Yum China. If anyone has ever been to a KFC in China, there are a lot of sort of locally tailored options on the menu. One of my favorite KFC products around the world is actually in the KFC India business, the Biryani Chicken, which has these amazing hand-breaded, 11 herbs and spices nuggets on top of rice with this Biryani sauce. So it's a local twist on KFC. It's a fantastic product. Of course, you think about chicken off the bone being a big consumer trend in the U.S., we've been a chicken off the bone business outside of the U.S. for years now. We've had massive sandwich businesses in a number of markets. You go to South Africa, you go to Australia, you'll see the Zinger sandwich, which really resonates with customers. Big strips and tenders business, big nuggets business. And so all of those things have powered the brand and its growth around the globe. In the U.S., we now have a chicken sandwich platform that is resonating incredibly well over the last couple of years with customers. And at the end of Q1, we introduced the hand-breaded chicken nuggets here in the U.S. that's resonating very well with families. And so we're excited about bringing some of those elements to life in the U.S. as well. The other thing I would say, going back to the digital story, our digital and technology teams at KFC in partnership with Yum! have really done an amazing job bringing digital life in the business, and that's been a driver as well. We talked at the Investor Day about how we're driving a kiosk strategy and, of course, a mobile strategy across a number of markets. And so that's just further supporting our ability to build 1:1 customer relationships in all of our markets around the globe.

Great. And I want to talk about Taco Bell. It's 34% of Yum!'s operating profits and its U.S. business is the majority of this. In the U.S., Taco Bell business is considered a crown jewel asset in the quick service industry. A Category of One is how I've heard you reference it. This brand just has so much momentum that's been building for such a long period of time through a combination of value and digital and craveability. What's next for Taco Bell? What do you view as the largest go-forward catalyst for Taco Bell's business after you've already had so much success?

Yes. The Taco Bell business is also a powerhouse. I love the phrase, Category of One. And we actually use that to refer to 2 parts of our business: one which is KFC International that we were just talking about, plus the Taco Bell business. Those 2 in combination represent about 80% of our global operating profit. And really, they stand alone incredibly distinctively in their space as Taco Bell is the, by far, the largest Mexican QSR in the U.S. and around the globe. And KFC in those international markets is the major chicken player in its international markets. If we dig in on Taco Bell, we talked earlier about the magic formula that brings it to life and it worked so well. That brand buzz, new product innovation, the value component, regardless of where you are on the menu, you're always getting a great relative value and the growing digital presence in Taco Bell. And so all of those elements resonate so well with our customers, plus we've got a great set of franchisees. I'm actually out in California this week, meeting with our Taco Bell franchisees who've done a great job driving the business over the last couple of years, and I'll be spending time with Mark King and the leadership team; Scott Mezvinsky, who runs the U.S. business for us at Taco Bell; and Sean Tresvant, who's our Global Brand Officer and has been leading the marketing campaigns plus has responsibility for our International business. And that International business is a growing component and one of the long-term massive growth drivers for Yum!. We've always said there should be tens of thousands of Taco Bells outside of the U.S. someday. Well, that's really starting to come to life. We passed the 1,000-unit mark last year in Taco Bell. 40% of those units have been built in the last couple of years in Taco Bell International. And we adjusted our strategy to focus on a set of markets where we wanted to get scale because that's where we believe the flywheel really takes off. The U.K., Spain, India, China are all north of that 100-units mark. We've got another set of markets behind that, that we'll be focused on. And Taco Bell is coming to life in the global markets. It's also being born as a digital brand. So whereas in the U.S., we're up to mid-20s mix on digital, Taco Bell International is 40% digital. And so it's really being born as a digital-oriented brand that has a great connection with customers in these markets. So lots of things to be excited about in the long term on the Taco Bell business and really, really excited about what the team there is doing.

Yes. No, it seems like the next big unlock for Taco Bell is that international growth, and it seems like you got a lot brewing there lately. On Pizza Hut, that's 17% of Yum!'s operating profits. And the U.S. Pizza Hut business seems to have had a resurgence. You optimized the portfolio a few years ago, and you've had very solid same-store sales trends in the U.S. as of late, with actually positive transactions in the first quarter. There's been a lot of drivers there with innovation, third-party partnerships, et cetera. What do you believe has been the biggest driver of Pizza Hut U.S.'s improved performance that's sustainable moving forward?

Yes. The Pizza Hut story is one -- I think it's on a great trajectory. And we've always talked about this concept of SOBO, driving sales overnight and brand over time, so always thinking about both the short and the long run in the business. And I think the Pizza Hut team has done a very nice job of that. The longer-term component is continuously elevating the fundamental health of that business model. And if you think about where we are in Pizza Hut U.S., for example, right now, our franchisee base is in a much stronger place than it was just a few years ago. We've continued to make good progress on the asset transformation, moving from the dine-in-centric asset base of the past to the modern off-premise-focused delco asset base. So we continue to make progress there. Our digital capabilities continue to strengthen. We acquired Dragontail as part of our easy operations pillar and that really transforms the way our restaurants operate from a delivery standpoint. Of course, we're now applying it in KFC and in our other brands. But that has really elevated our operational game in Pizza Hut. The other thing that the team did in Q4 and coming into this year was one of the challenges in the pizza category -- it's just a great way to provide abundant value to customers. The challenges that a pizza -- if you're feeding a family of 4, great value per person, but at the same price, if you're feeding a family of one, we needed more range on the menu to deal with some of the macroeconomic trends, and that's where they introduced the Pizza Hut Melts. We say it's enough for 2, priced for 1. The team did a great job bringing that to life through the marketing and you saw it helped drive sales at the end of Q4 and into Q1, and we're now launching that in a number of international markets. The final component is there was a challenge last year that we've been dealing with. We had labor challenges across industries, not just the restaurant industry, across industries. But in the restaurant industry, driver labor was really challenging last year. And you recall that, that led to a situation where our carryout sales were actually up but our delivery sales were significantly down, particularly at the beginning of the year. We went ahead and launched with the aggregators. Now it wasn't just a response to that situation. We've been building an aggregator strategy for Pizza Hut for a number of years. You'll recall back in 2018, we had an investment in Grubhub, that was to help us learn about the aggregator space. We actually had the Pizza Hut Global CEO sit on the Grubhub Board and that helped to inform our strategies. So we're ready to go, ready to put that in place. And when we implemented that last year, it's really worked well. It gave us incremental customers on the aggregator marketplaces. It also gave us incremental delivery capacity. We also stood up delivery as a service. So when you order on the Pizza Hut app, we'll either deliver that through our own delivery capabilities or if we're running a bit short, the restaurant has a lot of demand at that point, we have a relief valve that we can use with our white label provider on those delivery services. And of course, we do all that in a way where the economics work for the franchisees and for us. So all of that's been in motion over the last year. It's a highly competitive category so it's always going to be a business where we're having to, again, continuously adjust the strategy and really stay competitively strong in the category. But pleased with the progress that Aaron Powell and the Pizza Hut team is making.

And rounding it out with the Habit Burger, it's a very small piece of the portfolio today. So my question is really more about, what have you learned about the integration process of this acquisition? And how does this make you think about using Yum!'s platform in the future for making more acquisitions?

Yes, the Habit story. We're excited about the long-term potential in Habit, and we acquired that back at the beginning of 2020. Of course, we didn't know COVID was going to hit us at the time of the acquisition, and the majority of the Habit sales were actually in the dining room. So the team had to be focused on how do we sustain AUVs. And that really was the focus for the next 18 to 24 months. Russ Bendel and the team did an amazing job doing that. But that was the primary focus. So it sort of delayed our integration plans and our growth plans on Habit. But we've stabilized the AUVs. Shannon Hennessy is there now as the President. Right now, her mission is on resetting the P&L. And of course, inflation had an impact on that business. We wanted to be very careful about doing anything that would affect the customer experience or the consumer-facing value proposition. Shannon is systematically going through line item by line item and working on strengthening the P&L, and then we'll be focused on returning that brand to growth. We've also been driving units. We've had nice unit growth story there. So all that's coming together, and we're still very excited about the long term at the Habit. Now from an integration standpoint, that part of the rationale for making the Habit acquisition, the small acquisition, was to build our integration muscle because we hadn't done a brand acquisition in more than a decade. And we did develop a great integration playbook. If we look back on it, a lot of what we did, I think, worked very well, and we'd say, hey, that stays as part of the playbook. We had some learnings on things that if we do another acquisition, we would tweak in terms of the approach, but that was all part of the strategy for making the Habit acquisition in the first place. So pleased with the progress and still very excited about the long-term potential of the Habit.

Great. Well, Chris, with that, we are already out of time somehow. I appreciate your time, I thought it was a great discussion. Thank you so much for participating in our consumer conference, and I hope you enjoy the rest of your day. Thank you, everybody, for joining us.

Thanks so much, Brian. I appreciate it.

Thank you.