Good morning. Welcome to Third Quarter 2020 Yum! Brands Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Keith Siegner, VP of Investor Relations, M&A and Treasurer. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO; Chris Turner, our Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, 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 these statements. We’re going to do our best to provide our current thinking about the impact of the COVID-19 pandemic on our business, but obviously, this situation is completely unprecedented and evolving. So any forward-looking remarks should be considered in light of the uncertainty regarding the severity and duration of the pandemic and the variables that will be impacted as a result. All forward-looking statements are made only as of the date of this announcement and 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 and relevant sections of our filings with the SEC to find disclosures and reconciliations of non-GAAP financial measures that may be used on today’s call. Please note the following regarding our basis of presentation. First, all system sales results exclude the impact of foreign currency. Second, core operating profit growth figures exclude the impact of foreign currency and special items. For more information on our reporting calendar for each market, please visit the Financial Reports section of our website. We are 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 upcoming Yum! investor events. First, disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing. Second, fourth quarter earnings will be released on February 4, 2021, with the conference call on the same day. Now I’d like to turn the call over to Mr. David Gibbs.

Thank you, Keith, and good morning, everyone. I want to start by saying thank you to our entire global system for exceptional execution of our Recipe for Growth and Good strategy during the quarter. Our employees, franchisees and restaurant team members are successfully adapting to this year’s ever-changing environment, while also accelerating progress on our digital and technology journey. We’ve deepened collaboration around the world and across functions and brands to bring customers our delicious food through safe contactless methods, while also caring for our team members, employees and communities. For that, I am incredibly proud. These efforts led to encouraging third quarter results, including a return to year-over-year core operating profit growth. Our restaurants that had temporarily closed because of the pandemic continued to reopen throughout the quarter. And despite many of our restaurants operating with only a portion of their normal sales channels, same-store sales growth in our open stores was approximately flat in aggregate. While 2020 has presented many challenges, our portfolio of brands has proven resilient. Our balance sheet and liquidity position are strong, franchisee health has improved and we’re incredibly well positioned to drive global growth and maximize stakeholder value for years to come. Our Recipe for Growth using our four key growth drivers continues to guide our long-term strategy. So I’ll start with an overall review of third quarter results and use a few examples to illustrate the power of our relevant, easy and distinctive, or R.E.D. for short; unmatched operating capability and unrivaled culture and talent growth drivers. Then Chris will share more details of our Q3 results, including some discreet one-time impacts, our bold restaurant development growth driver and our healthy liquidity position. First, Q3 results. Overall Yum! system sales grew 1% with a 2% increase in net unit’s year-over-year, partially offset…

Thank you, David, and good morning, everyone. Today, I’ll discuss our third quarter results, bold restaurant development and our strong liquidity and balance sheet position. To begin, let’s discuss Q3. As David mentioned, overall Yum!’s system sales grew 1%. This was driven by a 2% increase in net unit’s year-over-year, partly offset by a 2% same-store sales decline. Core operating profit grew 7% in the quarter, outpacing system sales growth, owing to strength at Taco Bell and improved franchisee health. EPS, excluding special items, was $1.01. This represented a 27% increase compared to ex-special EPS of $0.80 in Q3 2019. I’ll now provide some additional color on several line items, beginning with general and administrative expenses. G&A, excluding the impact of the acquisition of the Habit, FX and special items increased by 3% over the third quarter 2019 due to charitable contributions related to COVID relief efforts; incentive compensation and other items, which offset reductions in T&E and other efficiencies. We are constantly balancing the need to be efficient with the desire to lean in on digital and technology during a period when acceleration in these initiatives should only enhance our competitive advantage. For the fourth quarter, our current estimate is that consolidated G&A expenses will approximate the fourth quarter of 2019 due to accelerated growth initiatives, which may offset continued efficiencies. Interest expense, ex-special was approximately $127 million, a 6% increase from the prior year, driven by higher outstanding borrowings offset by a decrease in rate on our floating rate debt. We recorded $8 million of pre-tax investment income related to the change in fair value of our investment in Grubhub, which resulted in a $0.02 benefit to EPS in the third quarter. Our Grubhub investment favorably impacted year-over-year EPS growth by $0.17 this quarter, as we lapped $60…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Dennis Geiger from UBS. Go ahead.

Great. Thanks for the question. Just wondering if you could talk a bit more about Taco Bell, strength of the brand and the strength of the franchisees you touched on. And just kind of thinking about maintaining the industry-leading momentum in recent years; and maybe if you can comment someone on latest developments, loyalty program, delivery, and kind of the opportunity going forward post-COVID, as we think about menu simplification speed and what that new product pipeline could look like, please? Thank you.

Thanks, Dennis. Look, the Taco Bell brand performance in Q3 is obviously something we’re very proud of. Mark King and his team have done an amazing job of pivoting in this environment to meet the consumers’ new needs. So you touched on a couple of other things that they’ve done – to do so, but the ability to embrace larger meals – family meals, they’ve seen a doubling of their party size meals. They’ve obviously rolled out a lot of tech, rolled out a loyalty program to connect better with consumers and giving them access to delivery. They’ve added delivery partners as the quarter went on and they’re now on multiple platforms. And I think Taco Bell always has their finger on the pulse of the consumer. That’s what makes the brand great, the way they connect with consumers. They’ve recognized that this is – we’re really in an environment where the food is going from something as fuel to being something a little bit more like entertainment. This is an environment where people are now comfortable with how things are going to be for awhile and they’re looking for a little bit more excitement. That’s why you saw the success of something like the Grilled Cheese Burrito that got rolled out and was well received by consumers. So across multiple fronts, the brand is really connecting well with consumers and excited about the progress they made. Obviously, the margin progress they made in the quarter is somewhat related to the limited hours. The menu simplification that you mentioned, Dennis, was also helpful in that regard. So I think they’re getting through this in an admirable way.

Thanks. Next question, please.

Our next question is from John Ivankoe from JPMorgan. Go ahead.

Hi, thank you so much. The question was also on Taco Bell, but I want to pivot it a little bit. Can you talk about your experience with new unit openings internationally? I mean, are you kind of seeing the type of new consumer reception and trust that you see in the U.S. internationally in a post-COVID environment? And guess what, some of your international franchisees are telling you in terms of their willingness to kind of accelerate unit development of this important brand. And where I want to go with that is, do you think Taco Bell – it is potentially the driver internationally to get you back to 4%-plus unit development, where – is Yum! in a position where it can start to take advantage of what is obviously a much stronger balance sheet and cash position to maybe consider even adding additional either brands to the portfolio to add to some of that international unit growth? Thank you.

Hey, John, this is Chris. Good question. Look, I think I’ll start a little bit more broadly. As you think about the development journey, we’ve got three of our four brands, where we’ve had positive net new unit growth globally so far this year. Taco bell is one of those. We remain very confident in the long-term potential for development in Taco Bell around the globe. In certain markets, the sales in this situation have been impacted, but there are other markets where the business has done quite strongly through COVID, including all of the things that are supporting us around the globe in terms of shift to off-premise and digital and delivery, those trends have existed in the Taco Bell international stores. And so in the long run, we continue to remain confident in Taco Bell’s international growth as a pillar of our overall unit development engine. Nothing’s changed there in the long run. It’s just the uncertainty on the timing of us getting on that track.

Yes. On Taco Bell development, I mean, just to pick an example, market Australia just opened their 15th units starting from scratch two years ago. That unit in its first day did weekly type sales volumes. The team in Australia, we’ve got two great franchise partners. They couldn’t be more excited. They have big plans for development next year, probably more than doubling the unit count there. So I think your question though is really country specific. Like everything, if we talk about averages on average, we’re pretty excited about development, but there’s going to be pockets and countries where we have franchisees that have – are more reliant on dine-in for any of our brands, they’re more affected by this obviously. And so we’ll have impact in certain markets and hopefully other markets where we’re on fire with our off-premise business can make up for that.

Our next question is from David Palmer from Evercore ISI.

Great. Thank you. Good morning. I’ll just squeeze in two quick ones. So just if you have a big comment to be made about what your divestiture of Grubhub, what that stake – removal of that stake means about your strategy with delivery over the long-term? And maybe you’re thinking about the future of third-party delivery in general. And then also on Pizza Hut, what would you say to people about this brand longer-term? Post-COVID, you’ve put a new brand management there. There’s been some closures. You’ve gotten rid of some margin dilutive value, but what would you say about the restaging of that brand and sort of the concern that it remains in a fragile financial state and the brand is just benefiting right now from COVID. Thanks.

Thanks. I’ll take your first question and turn it over to David for your second question. Yes, during the quarter we did sell our position in the Grubhub shares, all 2.8 million shares for a total of $206 million. That doesn’t reflect anything about our view on the delivery space in general. As David mentioned, we’ve expanded our relationships with aggregators. Our overall thesis is we want to be where our consumers want to do business with our brands. And if that’s through a delivery channel with an aggregator, we want to be there. And with the relationships we continue to bring online in the U.S. and around the globe, we’re off to solid starts on those. It’s also a story of leveraging our scale. When we bring our restaurants under those platforms, the economics improve for the aggregator, and we’re able to get advantage economics for our franchisees and for Yum! when we do it. So we think it’s a way to drive profitable growth for the system.

Yes. On the other point on Grubhub, obviously, that our ability and our scale, our ability to get a board seat participate and understand what’s going on in the aggregator space was helpful to us with that investment. And we made a little money on the investment on the side. So I think that worked out the way we essentially had hoped. Turning to your question on Pizza Hut, obviously, this is an environment right now as we – as us and a lot of people have talked about where existing trends in the restaurant industry have just been accelerated. It’s not as so much about new trends being introduced. It’s just existing trends being accelerated like off-premise, like delivery, like ordering through tech. Pizza Hut is perfectly positioned for a lot of those trends. And that’s why you’re seeing such a strong performance from the Pizza Hut brand right now in the off-premise category. Our delivery carry out sales in the U.S., if you just isolate those sales, are up 21% mid-teens globally. So we do think the brand is well positioned for the future based on these accelerating trends. Franchisees are obviously benefiting from that in terms of their financial condition. And the opportunity to execute the strategy that we’ve talked about for now for a couple of years about wanting to get out of certain dine-in assets that aren’t brand building assets that are essentially holding us back. We’ve accelerated the transition out of those assets as you’re seeing in the numbers. So, certainly it’s a brand with a bright future in our portfolio, but still has a lot of work to do to pivot the asset base, the asset base that makes sense for today’s consumer.

Our next question is from Brian Bittner from Oppenheimer. Go ahead.

Thanks. Good morning. I want to follow-up on the unit growth. When you’re talking about unit growth, I noticed a couple of times in your prepared remarks that not only do you think you can get back to 2019’s pace of unit growth, which was over 4% and kind of hit on all cylinders, but you’ve said you could potentially do better than that. I’m just wondering, what’s driving that commentary. Are you starting to see specific incremental growth opportunities open up because of what’s happened through the pandemic or any other color you can put on that comment would be helpful. Thanks.

Great. Good question. Look, if we think about the overall development picture, as we’ve said before, we remained very bullish on the long-term opportunity for Yum! And we think it’s, as we said, a matter of when, not if, we get back to that long-term unit growth algorithm. The macros are promising. Our brand stand tall in this type of environment, they stand for value which pivoted to off-premise. So that’ll drive the top line for the stores. Our teams are developing prototypes that are fit for this with lower footprint sizes that have great digital capabilities and enhance even further our off-premise capabilities. And in certain markets, there likely will be some real estate tailwinds from a real estate cost standpoint. And our franchisees have been growth minded, historically, and they’ve shown their resilience through this situation and we’ve got great development teams. And even if you just think about what’s happening this year in the pandemic, there are some very positive signs. As I mentioned earlier, three of the four brands have grown their units this year. And if you think about KFC and Taco Bell alone, we’ve had 540 net new units this year, which is three, three quarters, 1.5 of net new unit growth. Even at Pizza Hut, we’re working through the asset transformation that David mentioned, we’ve had 340 gross opening so far this year. So it indicates that our development teams and our franchisees are working hard there. So all of that I think is what gives us the long-term confidence. I’d love to say that we’ll get there as soon as we can. And our teams are going to be striving to do even more as you described, but we’re confident in the long run. We still have uncertainty about the timing of it. And that’s why we just can’t commit to the exact timing of when we get back to that algorithm. You’ve seen the news from Western Europe over the last couple of days. That’s an example of the types of things that are driving the uncertainty on exactly how this will play out. And that’s why we just can’t provide specific guidance on the timing or the exact number.

Our next question is from John Glass for Morgan Stanley. Go ahead.

Thanks. Good morning. Two questions. One is on Pizza Hut. Can you just help us understand what the system sales impact would be for the closures? Either the year-to-date, the 5% closures or decline in 5%, what was the system sales? I assume these are lowered volume units. And if you think about the portfolio over time, is there a way to think about the system sales impact versus just a unit closure, so we can try to understand the financial impact? And then Chris, can you also just on the bad debt recoveries, where are you now? So is this an expected fourth quarter benefit again? And what’s kind of the order of magnitude that’s still outstanding recoveries versus a normalized level to get back to sort of what you’re fully up to normalized levels of collections?

Great. Couple of good questions there. Look, I’ll give you a couple of facts that help on the Pizza Hut side just as we think about the closures that we’re seeing. First, there, more than 50% of the closures are our dine-in units and our express units, and that’s how we’re driving the asset transformation. That’s why you saw the two-point reduction in the dine-in percentage of the estate both in the U.S. and internationally. And as you might expect, those stores that were closing are underperforming stores. So on average, in the U.S. as an example, the average unit volume of the closed stores is about two-thirds that of the overall system average. And that’s true, whether you’re talking about the regular stores that are closing, the dine-in stores that are closing, or the express units, they’re both on the underperforming side. So hopefully that gives you a little bit of a feel for the nature of how we’re cleaning up underperforming assets and driving this asset transformation in Pizza Hut. On the bad debt side, yes, you saw this quarter the recoveries were dramatic. We think that is a great signal about the long-term health of the franchisee base and the resiliency of the franchisee base and the way that we’ve worked with them through the pandemic. In the quarter, relative to last year, it was about a $30 million swing, $17 million in KFC and about $13 million in Pizza Hut, mostly in Pizza Hut U.S. Look, in the long run, we hope to get back to more normal levels of bad debt expense, but I think we’ve got to remain vigilant in the near-term just given the uncertainties around COVID. But we’re certainly pleased with what happened in the quarter and think overall it’s a great sign of the resiliency of our franchisee base and business model.

Our next question is from Sara Senatore from Bernstein. Go ahead.

Thank you. A quick follow-up on that question, please. The follow-up was, if you could just talk a bit about Taco Bell’s business mix before the current crisis. I knew breakfast has historically been about 6% of sales, but what would late night or fourth meal look like? I’m trying to figure out what the sort of headwinds might be from those day parts which has lagged. So that’s just a quick housekeeping. And then could you talk about sort of acquisitions and portfolio, I mean, given [Technical Difficulty] would you consider a larger acquisition [Technical Difficulty] may not be top of the list of things you’re focused on. But I would say after a circle of mixed track record in the past of acquisitions for Yum!, there seems to be – at this point relatively unambiguous in its success.

Yes. Thanks, Sara. And part of your question broke up at least for us here, but I think I got it. On the Taco Bell mix and the impact from the impact to ours, our breakfast business, as you said, typically mix is around 6%. I think that mix is down to four now as a number of people have stopped serving breakfast, although it’s still in more than half of our stores. And we obviously we are committed to breakfast long-term and expect to be back into that with all stores as time goes on. I do – as far as the impact to the business, it’s a point or two of same-store sales impact depending on how you want to cut it. So it’s nothing that we can’t overcome, obviously, as we pivot to other means of serving customers. And then the question on acquisitions, I think we mentioned it in the speeches, I’ll repeat it. We’re really pleased with the acquisitions that we’ve done, whether it’d be the QuikOrder acquisition that we did on the technology side a couple of years ago. We recently bought Heartstyles, Collider, a consumer insights company. Now these are smaller acquisitions, but more recently obviously the Habit Burger Grill. It’s worth really taking a look at what they have done in this environment. They went from over 50% of their sales coming from dine-in and another good portion of their sales coming from carry out in the restaurant to pivoting almost everything coming outside the restaurant and recovering to nearly flat. I think they’re basically flat in the stores that are open. So I think that’s an incredibly positive data point for a brand that we believe is on the rise. We have lots of interests in the franchise community from it. But we’re in no rush to do another acquisition. We want to digest Habit, get that established, get the right partners around the world and get the growth going there. And if we continue to see the kinds of results that we think we’re going to see and that we have seen from them that would be obviously a positive data point as we think about other similar type acquisitions down the road.

Our next question is from David Tarantino from Baird. Go ahead.

Hi, good morning. My question is on G&A. I just want to make sure I understand your comments there. What is your long-term G&A outlook? Is it still a target of 1.7% of system sales? And I guess the nature of my question is I think you talked about achieving some efficiencies in the current environment about reinvesting. Just want to try to reconcile that on your long-term target.

Yes. So David on G&A, we’ve removed guidance right now, but in general, the way we think about G&A is coming out of the transformation we were right-sized. We did a lot of work in the transformation to right-size the expense base. And so we were already fairly lean and of course our mindset is one that’s driven by lean. We’re going to invest in things that make sense and drive value for the customer and for the business. But we’re going to make sure that we’re reducing expense otherwise and managing those expenses carefully on things that aren’t driving value. And right now I think the main thing we’re doing on G&A is continuing to reallocate spend to things that will drive long-term growth. So we’re continuing to invest ahead in digital and technology, invest in our Recipe for Good. And so that’s our focus. At the same time, in order to create room for that investment, we are doing the things you’d expect us to be doing in terms of optimizing the way that we work, taking advantage of the cost reduction opportunities that COVID puts on the table. And so we’re trying to manage it very smartly. Obviously in the long run, some of those day-to-day expenses will start to come back, but we’ll continue to manage this in a lean way.

This concludes the question-and-answer session. I would now like to turn the conference back over to Chris Turner for closing remarks.

Great. I’ll actually let David give the closing remarks here.

Yes. Thanks for everybody’s time today. Obviously, we’re excited and proud of the results that we put up in Q3, showing strong sequential improvement on the recovery from Q2, driven by the things that we wanted to see. Our ability to adapt and pivot to off-premise, embrace digital, the billion dollars of extra digital sales in the quarter, just like we did in Q2 is incredibly encouraging. But yet, we know it’s a fluid environment, and that as we’re seeing in Europe, it’s just not an environment where we can predict and guide for 2021. We do have confidence in our team based on how they recovered so far, and that whatever thrown our way, we’ll be able to pivot to it. As we’ve gone into Q4, the trends from Q3 have continued, but we know that it’s an uncertain environment and that we’ll be faced with more challenges and excited about the way the business can pivot, meet those challenges and continue to thrive. So thank you for your time today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.