Yum! Brands, Inc. (YUM) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Yum! Brands First Quarter 2019 Earnings Release Call. At this time, all participants have been placed in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. It is now my pleasure to turn the call over to Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us. On our call today are Greg Creed, our CEO; David Gibbs, our President, Chief Operating Officer, and Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from Greg and David, we'll open the call to questions. Before we get started, I'd like to remind you that this conference call includes forward-looking statements. Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from those statements. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the Risk Factors included in our filings with the SEC. In addition, please refer to our earnings releases in relevant sections of our filings with the SEC to find disclosures and reconciliations of non-GAAP financial numbers that may be used on today's call. Please note the following regarding our basis of presentation for today's call. First, all system sales results exclude the impact of foreign currency. Second, Pizza Hut division and worldwide system sales and net new unit growth include the benefit of the increase in units in the fourth quarter of 2018 related to our strategic alliance with Telepizza. Same-store sales growth reflects the inclusion of Telepizza in the prior year base. Third, core operating profit growth figures exclude the impact of foreign currency and special items. Fourth, the lease accounting standard was prospectively adopted on January 1, 2019. As a reminder, this is a GAAP required change resulting in the recognition of operating lease assets and liabilities on the balance sheet. We did not expect to change in our income statement or cash flows as a result of this accounting change. And last, please note that 2019 results will include a 53rd week. We're broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question it will be included in both our live conference and in any future use of the recording. We'd like to make you aware of the following changes in upcoming Yum! Investor Events. Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing. Second quarter 2019 earnings will be released on August 1, 2019, with the conference call on the same day. Now, I'd like to turn it over to Mr. Greg Creed.

Thank you, Keith, and good morning, everyone. This quarter marks the start of the third and final year in our transformation of the Yum! Brands. We're pleased to report a strong start to the year, with first quarter system sales growth of 8% including 4% system sales growth and 7% net new unit growth. Focus on our four growth drivers increased collaboration and our unrivaled culture continue to fuel these results. As usual, David and I will walk you through the lens of these four key growth drivers. I'll provide an update on our relevant, easy, and distinctive brands or as we say RED for short as well as unrivaled culture and talent. Then, David, will discuss bold restaurant development and unmatched franchise operating capability. I'll begin with our three RED brands. In the first quarter, KFC division delivered system sales growth of 9%, with same-store sales growth of 5%, and net new unit growth of 6%. This global powerhouse saw widespread strength coupled with standout performances in some of our larger markets, as well as a tailwind from lapping the distribution disruption in the UK last year. Internationally call-outs for the quarter include Japan, Indonesia, Australia, Africa, and China. And you'll notice as I give some details, there are consistent themes value and innovation working well together. Japan and Indonesia led the way each with double-digit same-store sales growth. Japan's 15% same-store sales growth was driven by the well-received share pack as well as lunch value deals and Hot and Honey Chicken on-the-bone innovation. Indonesia’s 12% same-store sales growth was driven by value and innovation with Big Box value counterbalanced by the Combo Superstar Innovation. Australia' same-store sales grew 6% on the back of the dual layer value combined with core product news. And Africa where 10% same-store sales growth came as a result of strong value promotions such as the streetwise mix coupled with an innovative Zinger chutney sandwich. Importantly these markets maintain momentum in development while generating this strong same-store sales growth. Now the KFC U.S. where same-store sales grew 2%. We started the year off with a continued focus on value by introducing a new Channel for Ala Carte menu items offering our original Famous Bowls for just $3 and two chicken littles for $3. Both offers drove transactions for the quarter and allowed customers flexibility to build their own meals. We then followed this up with new options in both the $5 fill-up and $20 family meal offerings. Operational enhancements such as a new menu board design and delivery through Grubhub each positively contributed to first quarter sales. We now have 2,200 KFCs offering delivery and 3,200 restaurants available for click-and-collect on the Grubhub marketplace. We're excited about the operational ease and the increased check growth for our franchisees and we look forward to the nationwide launch of KFC delivery in the U.S. later this year. Lastly, KFC continued its campaign of distinctive and truly breakthrough marketing from the KFC innovations lab. Moving onto our Pizza Hut division. In the U.S. same-store sales were flat and system sales declined 1% due to a net new unit decline of 1% as we continue to transform our asset base from dining to off-premise focused assets. Pizza Hut U.S. continued to provide compelling value to customers by maintaining our $7.99 large two topping Pizza deal and the $5 line-up. The $5 line-up which features favorites like a medium one topping pizza, garlic knots, wings, and cinnabon mini-rolls helped drive traffic and provides a pipeline for future product innovation. In March, we added a new teammate to the line-up with our pepperoni pizza ensuring our best innovation is accessible at a great price. As we've continued to reiterate for both the U.S. and the international businesses, sustainable improvements in sales growth will remain a slow build as we update and reposition the asset base and make the messaging more distinctive. We're encouraged by the steps we've taken to enhance assets, provide value offerings, and improve operations to help our franchisees succeed. With that in mind, we're excited about our partnership with Grubhub and the opportunity to leverage the Grubhub marketplace as an additional sales channel for Pizza Hut. We ended the first quarter with over 200 locations on the Grubhub marketplace. While customers are placing the orders on the Grubhub website, Pizza Hut delivery drivers are completing the orders. Now onto Pizza Hut International. System sales grew 13% in the quarter including a benefit from the addition of the Telepizza units in Q4 of last year, while same-store sales were flat. We were pleased to see same-store sales growth in places like Malaysia, Indonesia, and Hong Kong. As one example, Malaysia delivered a very strong same-store sales growth at 6% with their dominant value offering I buy one get one promotion. In regards to development, we continue to find success in our off-premise focused asset options including Delcos, fast casual Delcos, and express units. As we mentioned during our previous earnings call and at our Investor Day last year, the gap between dining channel sales and off-premise is significant with the U.S. and international seeing roughly seven points and six point differentials between the two channels respectively. In order to enhance the assets we view as the future of the brand, we're leveraging best practices from our strongest markets to provide targeted compelling options in our off-premise focused asset options. Last, but not least, Taco Bell where system sales grew 7% with same-store sales growth of 4% and net new unit growth of 3%. Encouragingly the U.S. same-store sales grew a healthy 5%, they talked about international caused the division to round down to 4%. Starting with the U.S., we began the quarter by showcasing $1 and $5 value and finished the quarter with innovation. Taco Bell continued to double down on value in the U.S. with the $1 Grundy burrito and the Double Cheesy Gordita Crunch Box. Our famous Nacho Fries came back for again for a limited time and was so popular that yet again one in four orders contained fries. We then finished the quarter off strong by introducing a new limited time offering steak rattlesnake fries, our signature season fries with marinated steak keep that with a bit of creamy jalapeño sauce. Of course not surprised the Quédate [ph] but they're also awesomely spicy. The official launch of Taco Bell's delivery has been very encouraging. Having launched with marketing support in February franchisees are all in on this major initiative and are very excited about delivery as an opportunity to drive incremental sales and transactions. Given its early days, we aren't going to provide specific data, but I will say that both traffic and check saw benefits from the launch. Customers are also loving a new way to get their favorite Taco Bell products. Feedback has been positive plus the strength of our partnership with Grubhub has allowed for real time feedback and learnings to continue to elevate the customer experience to even higher levels. Delivery is now live in over 4,000 Taco Bell restaurants in the U.S. and opportunistic market expansion should increase restaurant coverage over time. Additionally, click-and-collect functionality is available on all tacobell.com and Taco Bell App while we're also expecting this functionality through Grubhub. The Taco Bell International there's a lot to be excited about. We expanded into the first new market of 2019 with the launch of Taco Bell Thailand where we hosted a launch party that generated nearly a half a billion impressions. Borrowing from the U.S., we introduced value boxes around the world which drove growth in the UK, India, and Japan. The UK opened its fifth restaurant in Central London and the £5 Taco Box was a success. India maintained momentum with positive same-store sales driven by their launch of their Big Bell Box. And Taco Bell's dedication to their purpose to feed people's lives with Moss is shining through and we are proud of the team and our franchise partners who work hard to bring this iconic brand to life. Now to unrivaled culture and talent. As you've heard me say before, our two most important assets are our brands and our people. For us unrivaled culture and talent is a true competitive advantage and we'll continue to focus on fuel results and accelerate growth. In the 140 markets where we operate, it's our 2,000 franchisees and their employees who are delivering the customer experience at KFC, Pizza Hut, and Taco Bell. In fact, recently in Europe, David and I launched our next-generation leadership development course for franchisees and employees called Inspiring Culture to fuel results. This is a program focused on building up our people to lead in a way that makes our three iconic brands relevant, easy, and distinctive from the inside out. Because of the investment we continue to make in unrivaled culture and talent, we're seeing the strong progress and results on the transformation and setting a healthy foundation for sustainable growth. In conclusion, I'm excited about the work we're doing with world class leaders focusing on our four key growth drivers to build a world with more Yum! We remain confident as we relay the foundation of our transformation strategy to maximize shareholder value. And with that, it gives me great pleasure to introduce our President, Chief Operating Officer, and Chief Financial Officer, David Gibbs.

Thank you, Greg, and good morning everyone. Today I'll discuss our first quarter results, a remaining transformation initiative and two of our four growth drivers bold restaurant development and unmatched franchise operating capability. To begin, our first quarter results. Consistent with our expectations, core operating profit growth increased 12%. And as Greg mentioned, we delivered system sales growth of 8%, same-store sales growth of 4%, and net new unit growth of 7%. A major contributor to this success was KFC, our largest division in units and profit contribution with 5% same-store sales growth and 6% net new unit growth driving 9% system sales growth in the quarter. It's great to see KFC offer such a strong start under new CEO, Tony Lowings. They're leaning in on same-store sales growth on top of what is already a development machine. Contribution to the KFC strength this quarter were broad-based. Japan, Indonesia and Africa which together represent 9% of KFC system sales performed particularly well. Easier laps at KFC UK were also beneficial. And not to be left out, Taco Bell had another solid quarter with 7% system sales growth driven by 4% same-store sales growth including 5% in the U.S. As a reminder, our first quarter results are lapping the distribution disruptions in our KFC UK business in 2018. We estimated that 2018 same-store sales growth at KFC was negatively impacted by 1% in both Q1 and Q2 thereby having a full-year negative impact of 50 basis points for KFC and 25 basis points for consolidated Yum! Additionally, we estimated the negative impact on KFC 2018 core operating profit growth was 5% for the first quarter, 3% for the second quarter, and 2% for the full-year. For Yum! core operating profit, the impact was 3% for the first quarter, 5% for the second quarter, and 1% for the full-year. Now I'd like to discuss our guidance. We remain confident in our long-term growth algorithm. As it pertains specifically to 2019; our full-year core operating profit growth guidance of low-double-digits is slightly above our longer-term algorithm for high-single-digit growth in 2020 and beyond. This upside is primarily a result of three factors. First the roll-off of special media spending in 2018 related to the Pizza Hut transformation agreement; second, the roll-off of the KFC U.S. acceleration agreement expenses; and third, the expected recovery of the KFC UK business as we just discussed. I'll now update you on our EPS outlook and the moving pieces that will impact our reported results versus the adjusted EPS guidance, all of which is outlined in a table within our earnings release. First, there is no change to our goal to deliver at least $3.75 in 2019 adjusted EPS which we introduced in 2016. Second, as a reminder the $3.75 excludes any benefit from the 53rd week in 2019, the impact of changes in FX rates, any special items, and any gains or losses associated with our Grubhub investment. We estimated the benefit of the 53rd week to 2019 and on top of the $3.75 guidance to be approximately $0.06. Our updated estimate of the impact of FX rate movements remains $0.04 headwind to the $3.75. This is because rates have moved against us since we provided the original guidance in October of 2016. This estimated headwind is based on applying current forward rates to local currency forecasts which will undoubtedly vary over time. First quarter 2019 special items are $0.01 tailwind and first quarter Grubhub mark-to-market adjustments are $0.05 headwind to the $3.75 figure respectively. Taking these items into account as outlined in our earnings release, the GAAP equivalent to our adjusted 2019 EPS guidance of at least $3.75 is at least $3.73. Now turning to our transformation initiatives to be more focused, more franchise, and more efficient in order to deliver more growth to our shareholders. With our target franchise mix of at least 98% having been reached in the fourth quarter of 2018, and with focus on our four growth drivers consistently at the heart of everything we do, I'll update you on our plans to be more efficient. In summary, we remain on track. G&A was 1.7% of system sales in the first quarter and this remains the appropriate target for 2019. As for CapEx, at our Investor Day we discussed it in three buckets run rate CapEx, targeted new equity units to spur additional growth that we would fund through refranchising of comparable number of units, and potential strategic investments outside of a run rate that would create incremental value for shareholders and franchisees. I'd now like to elaborate on our thinking for 2019 including two positive updates. First, given strong returns on new equity builds, we see attractive opportunities to increase equity unit development to spur additional growth and generate excess returns. Again these incremental units will be funded by a corresponding increase in the number of units refranchised, so our overall equity unit count remains unchanged. Second, we're now even more convinced there are attractive opportunities to lean in on strategic investments to generate faster growth and incremental value particularly as it pertains to technology. Importantly, much of this strategic spend is being or will be reimbursed by our franchise partners for services related to technology. Now of course these initiatives will drive gross CapEx higher near-term and we now estimate our gross CapEx for 2019 will be approximately $225 million inclusive of base CapEx, new equity builds, and strategic investments in tech projects. However on a net basis meaning gross CapEx net of refranchising proceeds, we estimate closer to $125 million or only slightly higher than we've previously discussed. Please note 2019 does include a small incremental benefit from timing as we collect certain trailing proceeds related to our previous refranchising initiatives. One consequence of this outlook is that CapEx may exceed depreciation and amortization over the next few years which could push our free cash flow conversion below 100% depending on the absolute level of spend in a given year. To be clear, we're excited by recent returns on investments beyond our base CapEx and believe that through a measured approach, we can enhance growth and value creation for both our franchise partners and shareholders. As for capital return plans, our goal to return $6.5 billion to $7 billion of capital to shareholders over the three-year period 2017 through 2019 remains firmly on track. During the first quarter, we repurchased 1.1 million shares for $106 million at an average price of $94. When combined with dividends, we have already returned $5.4 billion in over two years of this program. Now let's discuss our growth drivers, beginning with unmatched franchise operating capability. I'll start with Taco Bell. As I recently had the opportunity to attend their 2019 Franchise Owners Forum where franchisees from all over the U.S. share their enthusiasm for the brand. I'm truly impressed by the spirit, the positive spirit, and growth mindset of all these franchise partners. In regards to operating initiatives, their fast and friendly obsession is all about world-class service to our customers not simply speed and efficiency. This is exactly why initiatives like this are so powerful because of efforts like this by our franchise partners, restaurant managers, and employees that customer satisfaction and friendliness increased by two points year-over-year. Lastly during the quarter, each of our service measures improved with the highlight being transaction times dropping nine seconds from the previous year. At Pizza Hut, we continue to execute on our hot fast and reliable initiatives. In the U.S., we've improved our percentage of orders delivered in under 30 minutes by three percentage points year-over-year. At Pizza Hut International, we're continuing to run workshops on speed and taste with our franchise partners. As a result, overall customer satisfaction scores have improved in these markets which include India, France, Indonesia, and Australia. Each increase their overall customer satisfaction score by 5% or more. KFC continues to drive taste as the key differentiator for the brand with a focus on elevating the role of the cook. This year we are hosting Taste Talks across the globe to ensure finger licking good quality in every bite. We have seen improvements across the board on sharing proven ideas and global best practices such as open kitchen tours and Fast Fridays. Each of these examples show how we are leveraging our scale to adopt and share the best ideas. Next to bold restaurant development. During the quarter, we opened 310 net new units. This represents a step-up in development from our recent historical rates, keeping us on track for 2019 to be the fourth consecutive year of increasing net new unit openings. At KFC, strong development trends continued into 2019 with 265 net new units. We continue to see momentum in China, Asia, Russia, and Latin America, and the Caribbean. In the U.S., we continue to strive for positive net new unit growth, while at the same time we continue to transform our asset base to the American Showman Image. We closed out the quarter with over 1,500 American Showman restaurants across the country as 65 remodels were completed in the U.S. during the quarter. Taco Bell continued to grow in the U.S. with 23 net new units during the quarter. Among those four urban and Cantina asset formats opened including restaurants in New York and San Diego where we are seeing strong cash-on-cash returns and outperforming our closest competitors. Internationally, Taco Bell opened 10 new units in markets such as Japan, Thailand, India and the UK. Lastly, I want to give an update on our international growth alliance with Telepizza. The integration is off to a great start with our transition tasks largely complete. Specifically, we're pleased Telepizza has worked closely on transferring and integrating Pizza Hut franchisees into their systems. Further even during the most intense period for integration, Telepizza reported positive net new unit growth and has begun converting Telepizza units to the Pizza Hut brand. As a reminder, we still anticipate between 100 and 150 units may close over time due to overlap though minimal of these closures have occurred thus far. To summarize, the first quarter was consistent with our expectations which included future [indiscernible] for the first half of the year. We're pleased with the results as they set us up to deliver on our commitments. The three category leading iconic brands that uniquely diversified global business and over 48,000 restaurants Yum! is well-positioned to accelerate growth and improve franchise unit economics, while leveraging our massive scale and expanding digital technology. We look forward to updating you throughout the remainder of 2019. Now the team and I are happy to take your questions.

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from the line of John Glass of Morgan Stanley.

Hi, thanks very much. David, can you just go back and just clarify the CapEx increases this year and potentially next year and what the difference between gross and net would be, do you expect franchisee to contribute something to that or do you expect to get returns from that capital and technology because you're going to pay an incremental fee. And what is the metric if you could describe a little bit more just what the nature of those capital -- incremental capital investments are? That would be helpful. Thanks.

Sure, John. We talked about this a little bit at the Investor Day, when I presented what the $100 million of run rate CapEx and noted that we were contemplating an increase in equity development and also that we were seeing good opportunities to invest further capital to create more shareholder value and improve the strength of our business. That's pretty much how this is playing out. So the original $100 million of run rate capital hasn't really changed. What's changed is our interest in building a little bit more equity units, all of which will be -- the capital for that will all be generated by refranchising a comparable number of units. In fact the math on that is such that and this is why it's such a great shareholder value enhancing move. We get more money when we sell a store than it costs to build a new store. So we might get on average $2.5 million every time we sell a store and it costs more like a $1.5 million or less to build a new store. So we're seeing sort of an arbitrage opportunity there to help spur development in certain parts of the country particularly with Taco Bell where we do own a decent amount of equity stores. Some of the best examples are in your backyard in New York City where I was a couple of weeks ago visiting some of those great new Taco Bell's that have opened those stores are worth substantially more than what we paid to build them. So we're going to build probably more 40 maybe 50 equity stores this year when the original plans were only to build five to 10. So that's driving some of the incremental CapEx. And then on the other side of the equation on strategic investments, we're looking at things like the recent acquisition we announced in the fourth quarter of QuickOrder where we bought the e-commerce provider for Pizza Hut which I can tell you we're just one quarter in but has worked out incredibly well. Just actually this past weekend, left the Pizza Hut franchise convention and I was talking to some of the Pizza Hut franchisees there about us now owning QuickOrder and they are really excited about our ability to create enhancements real time on that platform and just having a lot more control over their tech future. But on the Pizza Hut platform, for example, there is a significant investment made to purchase that in Q4. It has some follow-on CapEx investment this year, we go through some contingency to the purchase price and then there's capitalized G&A that comes along with making investments in tech companies. So some of that is going to start to show up on our CapEx line. The good news is, as you noted, John, is we are recovering a lot of that -- a lot of our investment through service fees that franchisees pay for these to access these platforms. Again our commitment to the franchise community is we're going to give them the best technology at the best price but you'll see us recover the cost of these platforms which is why we say this is great for our franchisees, for our customers, and for our shareholders. So if you break the $225 million gross down the excess above the $100 million run rate that we had quoted before about half of that is due to equity development and half of that is due to technology and strategic investments.

Thank you. Next question.

Our next question comes from the line of Brian Bittner of Oppenheimer.

Thanks. Good morning. I want to talk a little bit more about KFC, such an impressive comp, 5% driven by that international strength. Greg, you drove into a couple of drivers in your prepared remarks lapping the UK issues and we also heard from Yum! China this week. But I'm really trying to figure out more about this inflection and why it happened now and how sustainable it is. Are you really seeing the consumer outside the U.S. start to inflect here and is your delivery initiatives you've talked about for a couple of years outside the U.S. really starting to drive some incremental momentum for you now. Just any other color you can add to that KFC momentum?

Yes, sure, Brian. I think it really, fundamentally starts with our focus on what we call RED, Relevant, Easy, and Distinct. As I travel the world and meet with the KFC teams, they are amazingly focused on making sure the KFC brand is more relevant, it's more easy, and more distinct. Now in some markets, we may go as distinctive and not as good as relevant and others we go as relevant and they're not as good as distinct. But I think the fact that we got absolute just laser like focus on making sure that each KFC Brand in each country delivers on RED. I think that's certainly helping. I think secondly, as I did say in the prepared remarks, I think the value like a pound of food for $3 which KFC U.S. run, that that may sound like simple communication. It's both distinctive and it's relevant. So I think that's great, the innovation that's happening. We're seeing a lot of great innovation, flavor innovation on existing forms and new form innovation also occurring. And then, Brian, as you rightly said, we've got delivery in click-and-collect and equally in the U.S. we're excited that later this year we'll obviously do what Taco Bell has just done which is put marketing muscle and effort behind delivery which we think we will accelerate that. So it's -- there's no silver bullet. It is really doing RED incredibly well; value incredibly well; innovation incredibly well; and a growing contribution from delivery. I think all of that is sustainable going forward and that's why we remain very positive about the KFC brand.

Our next question comes from the line of Sara Senatore of Bernstein.

Great, thank you. I have a question about Pizza Hut and it's sort of a two-part question. One is I know that you're repositioning the State and it sounds like dine-in is still quite a bit softer to go. But I guess I'm -- when I think about the U.S. so much a carry out and delivery business that the implication is that even that business might still be sort of muted in terms of comps. And I guess I'm trying to understand, is there a scenario where you're repositioning the state that's happening at a time when aggregators are taking away some of the growth that the Pizza category has had kind of to itself for so long. And then the related question is what are you seeing in terms of the customers on Grub find you through Grub versus the Pizza Hut App, is it -- I assume a very different customer base as we've heard from other restaurants but given that Pizza Hut is so well known for delivering Pizza, I was just trying to figure out to what extent the Grub orders are incremental? Thanks.

Sure. Well I just say dine-in does lag by that seven points on the sales growth between off-premise and on-premise and so that is obviously a headwind that we continue to have to work with. I do think that the Pizza Hut brand particularly in the U.S. and internationally is doing a much better job at the foundations or the fundamentals. As David pointed out in his prepared remarks, temperatures improving, delivery times are getting lower. I think all of that is working, we're sustaining and we've got franchisee support to sustain obviously great value, so the $5 line-up. Adding Pizzone which is both great innovation and at $5 obviously I think will continue to help and you will see that play out I think later in the year. With regard to your question on aggregators, I think it's -- there's obviously a negative impact but it's hard to measure what the cannibalization effect is of aggregators on Pizza Hut, on the Pizza category. I think what's exciting for us is that we still think there's obviously a huge opportunity for Pizza Hut in the $40 billion Pizza delivery business to do better. But at the same time, the non-Pizza delivery market in the U.S. is worth about $100 billion. It's growing at 15% and now we're going to leverage Taco Bell and KFC to take advantage of that opportunity. So, yes, a little bit of negative impact but I see this whole opportunity of growth and delivery to be an upside for us not a negative. And as we've only got about 200 stores at the moment which are actually going through the Grubhub marketplace, it's not having a massive impact on our business. But I think the point you made is we are excited by the incremental customers we're seeing come through that marketplace. But obviously the vast majority of the business is still coming through Taco -- through our Pizza Hut traditional business.

Yes, I mean and on the Grubhub piece, I think we are encouraged that there are different customers on Grubhub versus many of the customers that use Pizza Hut directly, so we are accessing customers through their platform in many cases where we wouldn't be able to access. That's why we're excited about the test. Back to the other part of your question, Sara, on the dine-in in the State, yes, Pizza Hut in the U.S. is the vast majority of our business comes through the delivery carry out channels but still close to half the assets are dine-in assets and there is still a long process to take those assets often which are in the wrong part of the trade area and reposition them to the right part of the trade area or if they're in the right part of the trade area and oftentimes upgrading the assets to modern standard. So the challenges of the dine-in in the state are very different internationally versus the U.S. In the U.S., we already have 90% of our business is off-premise but the assets are still a problem. Internationally, half of the assets are dine-in and the business has more of a 50/50 split to it so very healthy assets in most cases around the world though. Before we move on to the next question, I just want to correct a comment from the prepared remarks, some of you probably caught, there was a typo. As far as the 2018 impact from the KFC, UK supply disruption to Yum! that impact was 1% on core operating profit in the second quarter, not the 5% that was stated. So I just want make sure we all set the right number there.

Next question, please?

Our next question comes from the line of John Ivankoe of JPMorgan.

Hi, thank you. At first and there are two I think relatively small questions, in terms of Telepizza, I mean it has been discussed before that this transaction would be net neutral to earnings. It actually does look like it was accretive in the first quarter. So could you make a comment on that? And if there's some type of thought of what Telepizza will mean to operating income growth in fiscal 2019?

We continue to believe that Telepizza will be neutral from an earnings standpoint. What you may be seeing is the increase in franchise revenues relative to expenses, some of that's more related to QuickOrder than it is to Telepizza. But again we think Telepizza from a long-term standpoint, it's a great acquisition for us, we love their management team and their ability to leverage them over our existing markets and we're excited about how the integration is going and what it means for us from a growth potential. But the impact in Q1 was flat. There really was a profit impact from Telepizza.

Our next question comes from the line of Dennis Geiger of UBS.

Good morning, thank you. I'm wondering if you could talk a bit more about the QSR promotional or the QSR value environment that you're seeing in the U.S. And if that's had any impact on your value strategy for the balance of the year depending on whether you think the industry becomes less promotional or not. It seems like your brands remain as focused on value as ever currently. So do you think there could be greater benefits as that gap appears on value increases? And I guess just kind of related to that maybe if you could quickly comment just on the importance of franchisee buy-in on value that you're seeing which it seems like your system is seeing better buy-in from franchisees here than most? Thanks.

Yes, sure. So there are two parts to the question, look obviously the U.S. economy is in pretty good shape. We also, the GDP numbers for Q1 from the government, look I also do think though there is some sort of bifurcation going on in the marketplace which is there are certainly people that are making a lot of money and there are certainly people where value will always remain incredibly important. And so I think that our focus on as we've said earlier building these relevant, easy, and distinct. Part of being relevant is to make sure we've got the right value proposition for every customer we run in the marketplace. So we're going to focus on value. We're going to focus on innovation. We're going to focus on delivery and click-and-collect as we -- as we've talked about. And it really is sort of how that gets to your second question which is the ability for us to sustain value on all three brands is predicated on our ability to get franchisee alignment. And I think what David and I are fundamentally focused on is making sure that at the core, franchise unit level economics are getting better. And as they get better then obviously franchisees will hang-in on value, they will invest in new assets, refurbishing assets, they'll support innovation. And so, yes, I think the economy is in pretty good shape in the U.S. There are people who are benefiting, people who are not benefiting. We're going to stay on value, we're going to stay on innovation, we're going to stay on building these relevant, easy, distinct brands. And I'm really excited that the brands have worked incredibly hard with their franchise partners to ensure that we can sustain this sort of what I call really strong model going forward.

Next question, please?

Our next question comes from the line of David Tarantino of Baird.

Hi, good morning. Just one clarification, then a question. On the clarification, David can you tell us what tax rate you've embedded in your $3.75 plus target and whether that's changed. And then my real question is on KFC development globally that number was very strong. If I look back at the history, it's usually Q1 tends to be the low point for the year for the number of units opened. So I wanted to ask is this kind of a timing issue where you're starting to smooth out the openings across the year or is this kind of real momentum in the development cycle. And can we expect that kind of step-up to continue as we look at the rest of the year? Thanks.

Sure, David. On the tax rate question, the guidance for 2019 is 20% to 22% and despite the low tax rate in Q1, we still feel like that's the appropriate guidance for the year. If you look back in past years, we do have a little bit of a cadence of having a lower tax rate in Q1 that's driven mostly by share-based compensation that tends to get exercised in the first quarter. Then on the second question on the KFC Global development, I mean we've been consistent in saying our goal is to ramp up the pace of development. We're pleased with the progress we've made. Obviously, Q1 in recent history was a record quarter for us in terms of net new units. And I do think the development momentum is widespread and will continue. We're confident that we can hit new highs this year versus last year. It isn't really sort of a timing issue. There is a good pipeline of deals for this year and for future years. You saw lot of the upside as in most previous quarters driven by Yum! China. And as I've talked about they're happy with the returns they're getting for KFC China so lots of reasons to be optimistic about global development.

Operator, we have time for one more question, please.

Thank you, sir. Our final question will come from the line of Chris O'Cull of Stifel. Chris O’Cull: Thanks. Could you guys talk about how customers are using the KFC delivery in the 2,200 stores in the U.S.? I mean what day parts are consumers using, is it more large party orders, individual orders, is it over under indexed with bone-in or boneless product. Any insights into how U.S. consumers are using delivery at KFC could be helpful.

Sure, Chris. It tends to be more focused, the dinner it tends to be larger packs. I always jokingly said, I think the Kernel 60 years ago invented the bucket realizing that one day we'd be delivering it because it's the perfect delivery vehicle. So I think what we're seeing is what we expected to see which is sort of a focus on dinner, a focus on big packs bone-in, and obviously it's incremental. And as I said, I think the bucket is a incredible delivery device. It really delivers piping hot, great tasting food. And I think that's also a benefit that the KFC customer is currently seeing which is getting restaurant quality food delivered to your house. So all going well. I'm looking forward to the launch of KFC delivery in the U.S. later in the year which I think will be an exciting time and we think obviously positive things will come out of that as well.

Okay. Just some closing remarks. First of all, I want to thank you, thank everyone for being on the call today. Second, I'm pleased that we're off to a strong start in 2019. In fact when I look at the metrics that best indicate the underlying health of the business, so those without noise some special items or mark-to-market on our Grub, our investment in Grubhub. I think there's a lot to be excited about. We delivered 8% system sales growth, 12% core operating profit growth, and 18% EPS growth. So I'm very confident that our enviable business underpinned by unrivaled culture will deliver lasting growth that maximizes shareholder value in 2019 and beyond. Thanks for being on the call with us today.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.