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

Good morning, everyone, and thank you for joining us. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. I should say, with news of my plans to retire actually at the end of this month, the outgoing analyst with the next analyst still to be named. But after 25 years covering the restaurant and food service distribution sector, it's actually making me a little sad to be here over these 3 days, I feel like Markley has thrown me a fantastic going away party. So thank you all for joining us this morning. . I should just mention that this is day 2. We're excited to have 14 restaurant and food service distribution analyst here -- distribution companies here over the 3 days. So just as a recap, we did have a Cheesecake Factory, BJ's Restaurants and Kura Sushi here yesterday. And today, we've got 10 led by Yum!. But otherwise, we have Blooming and Dine Brands, First Watch Performance Food Group, Restaurant Brands, Cisco, Texas Roadhouse, when these U.S. Foods and wing stop and then Performance Food Group or by themselves tomorrow. We hope you find the conference a good use of time. We get a chance to chat in the halls between meetings. But at this point, I'd love to introduce our first presenting company, which is Yum! Brands. So with us on stage, we have Ranjit Roy, the CFO of Yum! Brands. By way of background, for those not familiar, Yum! is a multinational quick service portfolio comprised of 3 brands, KFC, Taco Bell, and Habit Burger, having recently sold off their Pizza Hut business and a successful transaction earlier this year. Just for background, Yum!'s long-term annual guidance is for 7% system sales growth. supported by 5% net unit growth and ultimately resulting in 8% plus core operating profit growth. And again, most recently, the company announced the sale of Pizza Hut ex China to a long-range capital and the Mainland China arm to Yum China. So we want to thank you all very much for joining us and specifically Yum!. And I will now kick it off with some questions for Roy, the CFO. Thank you.

Thanks, Jeff.

Thank you very much for joining us. So I had a few bigger picture, maybe consumer questions since you get to look at the world of consumer across your brands. And I know it makes it hard to make generalizations. So I'll just say that upfront. But if you could just maybe think about starting just with the U.S., the health of the consumer, obviously, this is a consumer conference. Like what do you look at to assess the health of the business, obviously, your brands along with just broader macro? And have you seen any changes in trend, whether an age group or income cohort or ethnicity or anything like that over the past year? How would you lay that out?

Yes. Good question, Jeff. Look, obviously, as a brand that has the kind of footprint we do, both in the U.S. and internationally, we've got to focus a lot of time on thinking about how the consumer is doing. I'd say, as we think about the past year, there's probably 2 words we'd use it's resilient and diligent or consumers using discretion, resilient because frankly, I'm sure a lot of analysts in this room were always surprised and heartened by the strength of the consumer, whether that's kind of wages, unemployment being low and so on and so forth and consumer spending holding up. We're continuing to see that. But it's not just whether consumers are spending. It's -- in our business to win, it's about how they're spending, when they're spending and why they're spending. And when you actually think about that, we obviously, similar to many others, are seeing more strength in higher income consumers and slightly lower growth, I'd say, in households making less than $100,000 a year. . And that's something that I'm sure you've seen in a lot of companies that you cover. But in addition to that, the consumer is making choices and the divergence in performance in our industry, I think, has never been higher than it is right now, i.e., consumers still need to eat out. Consumers are still going out and using restaurants as an affordable luxury for themselves, but they're making very deliberate choices about what they want and what they don't want and we're seeing that in the divergence of results, particularly in the U.S. So when you think about Taco Bell in Q1 and Q2 of this year, Taco Bell demonstrated kind of mid- to high single-digit same-store sales growth clearly taking share from a lot of other players and benefiting from consumer spending. And a lot of it comes down to really not just the contributing strong, but us thinking about consumer sentiment, consumer love for our brand, what offerings are relevant, how do we enhance our digital offerings to bring in younger consumers. And as a result of that, we saw transaction growth and dollar sales growth across all income cohorts in the U.S. with, of course, the strength being in the higher income and slightly lower growth in the lower income consumer.

That's impressive resilience because clearly, we have some that are winning and others that are struggling. And when you think about food away from home and I have to be careful to say this because I'm at a staples conference with a lot of food at home peers, but the battle of food at home versus a from home, we often like to say that food away from continues to win in that battle versus food at home, but how would you describe that battle and maybe the most recent restaurant industries push towards more value, how that's helped to continue to sway consumer and food away from home.

That's a great question. Like look, we often get the question of food at home, put away from home. And look, as we look at the data, we see the gap in inflation and food away from home versus food at home has narrowed, i.e. over the last couple of years, the restaurant industry, in general, has started to become more competitive versus food at home. And that means we probably are in a slightly more constructive pricing environment, we think, than in the last couple of years. But reality is like our business has not changed. So in the U.S. and Taco Bell is the vast majority of our business in the U.S. In the U.S., Taco Bell has always had a value on mentality. I think when you look at the cycle of when people said restaurants took too much pricing, Taco Bell did not participate in that. And so we've always had value. We've had very high value perception, and we continue to have that. But it's not just price. It is overall value, which includes are you relevant? Are you delivering a great experience to consumers? And in some of those areas, we continue to put a lot of effort in to make sure we stay ahead of the game.

Understood. And in terms of questions you get from investors, and I'm sure they cover a broad range. But what do you think you question, maybe there's a misunderstanding about from investors or perhaps questions that you're not getting that you're surprised that you think investors should be asking.

So I've been in my seat 1 year for those of who don't know me too well. So I have the benefit of CFOs and CEOs before me who've done a very good job to in the Yum! story. And so as a result of that, I think we're pretty well understood entity out there. But a couple of questions that I think surprised me as I stepped into the seat. One is, at least in the early months, not so much recently, but in the early months, I get a lot of questions about how is Taco Bell going to lap the lap, You had a really strong year last year. How are you going to repeat that this year? Are you going to do more innovation? Or is it even possible to beat what you did last year? And I think that we were surprised by that because as we think about the business, Taco Bell has already put out 2030 targets of going from 2 million AUVs that they had in 2024, 2025 to 3 million AUVs and through the first half of this year, they were already tracking ahead of that. In order to achieve that, you got to have a very solid plan and a multiyear step change in performance, which they were well on the way of doing. And really, the Taco Bell magic formula is something that is replicable every single year. We just have a brand and an operating model that can do what it does and attract more consumers, more occasions, more frequency every single year for many years to come. And so we have a lot of confidence we don't really think about it as lapping the lab. We just think about it as like you got to get to 3 million plus AUVs. And if you back out it from that, of course, you've got to deliver strong same-store sales growth, and you have to lap it. I'd say the second question more recently that surprises me a little bit is some people ask hey, KFC Global is obviously a powerhouse in all these different 150 different markets, but you have chicken competitors in the U.S. that are starting to make inroads, whether that's opening in the U.K. or in Singapore or in the Middle East, you've got a few units opening. How do you think about competition. And I think the degree of concern surprises me a little bit because to be clear, we are paranoid about competition. Every time Wingstop or Chick-fil-A opens 1 unit somewhere. Everyone's walking around the hallways of Yum! talking about how we're going to win. But make no mistake, the scale of global KFC is tremendous. Like last quarter, we opened 660 gross new units around the world. We have a presence of 150 markets. In many of those markets, we are the #1 QSR player period. There's nothing else close to us across the entire industry. And when you think about the 660 units, that's like opening 220 gross new units every month. 220 gross new units, that's like a mid-market private equity investment. So every month, we are spawning a new mid-market private equity investment all around the world, and we have the ability to replicate that. So the scale advantages we have globally are tremendous. And you couple that with the extreme paranoia in the company that we are not going to be complacent about our leadership. We're going to go and earn it every day and that includes modernizing the brand, innovating and continuously changing how we do business. I think the combination of that is extremely powerful.

I have to say over the past couple of decades of covering you the statistics that you just throw out, suspect at Investor Days and whatnot of opening up I mean this is just KFC, but a store every 3 hours around the world somewhere, a new case opening with a new team, and it's hard to understand the spreadsheet that we look at. But clearly, it is a machine.

Yes. The thing that you really have to visit some of these international markets to understand it because I think a lot of us in the U.S. see KFC in the U.S. Cash in the U.S. is not the true representation of KFC anymore. The U.S. chicken market is obviously extremely competitive. We're making changes to KFC to make it more competitive over time. Internationally, KFC is just a beast. And we're so proud of whatever the number of 70 years of investment overseas that have led to 35,000 restaurants in virtually every country out there where the brand is a leader .

And just 1 last industry question perhaps is the topic of GLP-1s, which ebbs and flows depending on the quarter or the year, but it would seem like it is a very viable threat to the restaurant industry more so than perhaps others. I'm wondering, well, it's just because access is more about while the price is coming down. Do you think the industry and/or Yums, in particular, has been impacted at all? Or is there something that you anticipate over the next few years? Or how do you think about that impact to your business? .

Yes. Jeff, GLP-1s, we all know are real. We've been thinking about it for several years now. Because of our scale, we have the benefit -- we talk about Colider, our in-house consumer insights group. They've been studying it for several years now. And alongside a number of other consumer trends, we do put GLP-1s in there as a trend that's out there that we need to adapt to, that's not new to us. We've been adapting to consumer trends and preferences for a long period of time, and we're going to have to continue to do that. In our minds, even if you don't measure discrete impacts, and as you pointed out, every quarter, people say, like, is it having impactive is not the pendulum keeps swinging, the reality is it is going to have some impact in things like portion sizes, protein consumption, hydration, snacking, usage occasions shifting and our view is twofold. One, we're not going to over-rotate to any single consumer trends. This is part of a spectrum of consumer trends where the consumer is changing, and we have to adapt to it. This is part of the spectrum. And secondly, we're not -- and so we're not going to over-rotate to just GLP-1s. And the second part is we got to be flexible and adapt. So when you think about what we're doing in our business from an innovation standpoint, making sure we have enough choices available for consumers to shift over to things that they want. Beverages are a good point. The push we're making on beverages, whether that's a LiVacafe, which is the store within the store at Taco Bell that we're testing right now, or Quench, which is KFC global's version of enhanced beverages that we are rolling out around the world. You're going to start to see things across our portfolio that adapt to where the consumer is going, but I would put GLP-1s as a factor in a number of factors that consumers care about that we have to adapt to, and we will.

And as we sit here now in September, all of if we were to look forward for the next 12 months, is there 1 or 2 initiatives that you'd say is most focused on that we'll look back on and say 2027 was the year of something in particular? .

2027 is going to be an extraordinarily exciting year from where we're sitting. The biggest thing is really it's going to be the first clean look at our portfolio post the separation of Pizza Hut. If you remember, Yum! used to be Taco Bell, KFC, Pizza Hut and Habit, Pizza Hut comprised about 10% to 12% of our operating profit, but you can imagine it took a lot of time, resources and focus to manage it. With Pizza Hut now exiting the portfolio, I think we're very excited about putting our energy into acceleration of growth. Chris Turner, our CEO, has been now talking about raising the bar, which includes the battle for the future consumer, accelerating unit economics and expanding the reach of bite. There's a number of work streams underway at the company right now that will start to play out over the course of the rest of this year in 2027. And just the freedom to be able to pursue them with more focus, having a more concentrated portfolio is very exciting.

Right. And as we think about the go-forward. As you mentioned, people are often asking about Taco Bell and comp on the comp. Like what's the discussion like between -- for the portfolio between Yum! -- corporate and franchisees in terms of how to balance in a strategic way, check and traffic and perhaps how to best, like you said, bring in or improve the trends with that lower income consumer.

Check and traffic. I'd say, look, first of all, when we talk about franchisees, we have a great relationship with our rent. We're very happy with the franchises we have. We probably have the best franchisee network in the business. So from a partnership standpoint, we're very pleased. This is very alignment. When you think about check and traffic, I don't think we actually sit around and say, "Hey, how much should we take checkup and how much will the impact be on -- like we don't look at that in isolation. What we really think about is how do we bring the Taco Bell magic formula to life, which is, first of all, brand buzz, we got to have a young, relevant brand for consumers. Secondly, we got to have strong innovation, which means it's nice to have buzz and cultural relevance. But behind that buzz, you got to have real products that consumers care about. So how do we keep a very strong innovation pipeline going that keeps consumers wanting to come back. Third part of the magic formula is value ensuring that we have a strong value platform day in and day out, which means if you think about price points we've got a Lux value menu where we have 10-plus items under $3. I mean you can actually go get a cheese wrap at Taco Bell for $1.19, you can get a spicy potato taco for $1.29. You can get a beef burrito for $2.50. That kind of headline value is just fantastic for us to have. But what we do with that value is to drive check higher by having then above that, a Lux value menu, which includes a $3 box of $5, $7, $9 box and that allows us to drive some pretty strong check growth while having strong value perception because of the kind of architecture we have. And then lastly, it's digital, right? Like if we can have more digital transactions, and we've grown digital transactions at Taco Bell from a low single-digit percentage about 7 years ago to now it's almost 50% of the business today and it is trending higher. If we can drive digital that results in a better consumer experience, more frequency, better upsell, higher check averages. And so when you talk about traffic versus check, we don't think of it as pricing necessarily driving that. It's all those elements of the magic formula are driving more consumers to the brand, which is traffic. And each consumer coming in and buying more, which drives check.

Yes. And presumably, having multiple brands, you can talk between brands, the ability for Taco Bell to share some of their successes with KFC trying to for on the KFC business. I assume that's a very powerful combination.

The ability to cross-pollinate is very strong. It's not just brand learnings but also talent. So if you -- 1 of the exciting things is a change we made a couple of -- like 1.5 years ago at this point, where 1 of the key leaders in Taco Bell, Scott Naswinski, who drove a lot of the thinking behind the consumer day and the 2030 targets they set was moved over to be CEO of Global KFC. So you can think about all his learnings in Taco Bell being moved now to rub off on KFC Global. And Scott is on the war path around the world talking about how KFC, I mean, KFC is going to do in a KFC specific way, to be clear. But there's elements of Taco Bell's magic that can rub off, whether that's Boulder marketing, stronger innovation, a greater focus on value, all of those things are coming to life in KFC, and that's exciting.