Good morning, and welcome to the Second Quarter 2021 Yum! Brands, Incorporated Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Jodi Dyer, Vice President of Investor Relations and CFO, Digital & Technology. 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 would 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. 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. All system sales results exclude the impact of foreign currency. Core operating profit growth figures exclude the impact of our currency and special items. All 2-year same-store sales growth figures are calculated using the geometric method. 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 would like to make you aware of upcoming Yum! Investor events and the following: Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing. Third quarter earnings will be released on October 28, 2021, with the conference call on the same day. Now, I'd like to turn the call over to Mr. David Gibbs.

Thank you, Jodi, and good morning, everyone. I'm excited to share our strong second quarter results as we delivered record second quarter unit development and 23% same-store sales growth. Importantly, each division reported positive same-store sales growth on a 2-year basis, a step-up from first quarter trends. This sustained momentum was underpinned by our investments in digital and off premise and the adaptability of our brands to meet the needs of consumers in an ever changing environment. Though COVID obviously creates a more challenged operating environment, our confidence is stronger than ever in our ability to navigate the resulting uncertainties and in the long-term growth potential of Yum!. As a result, we're reinstating our long-term growth algorithm with one important change, we are raising our previous guidance of 4% unit growth to between 4% and 5% unit growth. As a reminder, our long-term growth algorithm includes 2% to 3% same-store sales growth, and mid-to-high single-digit system sales growth, leading to high-single-digit core operating profit growth. The diversification of our global portfolio, the resilience of our business model, and the agility of our teams are allowing us to compete and win in a full range of market conditions, including both those markets with accelerated recovery and markets still heavily impacted by COVID. Looking forward, our iconic brands and unmatched scale, in combination with the world-class talent in our restaurant teams, franchisees, and above store leaders have uniquely positioned us for sustained growth. Now, we'll discuss our recipe for growth and our Q2 performance and the growth drivers that underpin it. To start, I'll cover two growth drivers, namely relevant, easy, and distinctive brands or RED for short; RED, for short; and Unrivaled Culture & Talent. Then Chris will share more details of our Q2 results, our Unmatched Operating Capability and Bold…

Thank you, David, and good morning, everyone. Today, I’ll discuss our second quarter results, our unmatched operating capability, and Bold Restaurant Development growth drivers, and our solid liquidity and balance sheet position. To begin, let’s discuss Q2. Overall, Yum! system sales grew 26%, driven by 23% same-store sales growth. On a 2-year basis, same-store sales grew 4%, which includes the negative impact of about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021. We delivered 2% unit growth year-over-year, which included a Q2 record of 603 net new units. EPS, excluding special items, was $1.16, representing a 41% increase, compared to ex-special EPS of $0.82 in Q2 2020. Core operating profit grew 53% in the second quarter, driven by accelerated same-store sales growth in several developed markets at KFC, the combination of strong sales and restaurant margin growth at Taco Bell, and a year-over-year benefit associated with reserves for franchisee accounts receivable. At Taco Bell, company restaurant margins were 25.9%, 1.4 points higher than prior year. Favorable sales flow-through was partially offset by labor and commodity inflation, as well as increasing semi-variable costs as we return to normal operations. As mentioned on our previous call, we expect these margins to return closer to historical pre-COVID levels later this year given inflationary pressures, along with increased staffing at our restaurants as a result of increases in dining room patronage and a return toward our historical day part mix. During Q2, we continued to see recoveries of amounts past due, primarily led by KFC International. These recoveries resulted in a $4 million net benefit to operating profit related to bad debt during the quarter, representing a $17 million year-over-year tailwind to operating profit growth as we lapped $13 million of expense in Q2 2020.…

Thank you. [Operator Instructions] Our first question comes from John Glass from Morgan Stanley. Please go ahead.

Thanks and good morning. Chris and David, I just wanted to, you know on your new unit development target, I’m wondering what signals you’re getting that prompted you to not only reinstate the guidance, but increase it from a pipeline perspective? What time frame is reasonable to expect? Could this become visible in 2022, for example? And just specifically on the KFC brand domestically, it’s doing very well on a same-store sales basis. I don’t think there’s been a lot of development, though, over the last several years. How do you think about domestic development specifically or generally playing into that? And the KFC brand, specifically, do you see opportunity here in the U.S. just given the repositioning of that brand? Thanks.

Thanks, John. Yes, obviously, we’re excited about net new development. And as you know, we do have a lot of visibility into the pipeline of our development because it takes about 12 months to plant the seed of development before you get the opening. So, we’re working with our franchise partners around the world to get that visibility, understand what’s coming down the pike, and that’s what gives us the increasing confidence, but really that all starts with the unit economics. When our unit economics are good, it’s an attractive proposition for our franchisees to build. You saw Yum! China last night talk about that. We’re seeing that in the vast majority of the world right now, which is what gives us the confidence to make that commitment to 4% to 5% net new unit growth. And just to clarify, that would apply to 2021, as well as 2022 and beyond. As far as domestically, we do think we’ve talked about this past on calls. We do think that there’s upside for KFC and Pizza Hut, particularly in the U.S. Taco Bell is starting to accelerate the development. So that went all – that trend is moving, but KFC and Pizza Hut haven’t historically been growing in the U.S., and we think there’s every reason in the world they should be net growers and they’re shifting into that in 2021 and we think that will continue.

Our next question comes from Dennis Geiger from UBS. Please go ahead.

Great. Thanks for the question. Maybe just a follow-up on that impressive unit growth target acceleration, David and Chris. As it relates to kind of where that might be coming from, as you contemplated that acceleration, Chris, I think you spoke to all brands would be seeing the increase. Is it any in particular over the next few years or longer-term where you feel like you’re really seeing something interesting where one brand more so than others might be driving that acceleration, and how to think about the timing of that over the next few years perhaps, just curious if any additional insights to share there? Thank you.

Yes. Thanks, Dennis. Just to elaborate, our development engine is working and we expect it to work across all four of the brands, as David said. KFC has historically been our development leader. And if you look at what they did in Q2, it was very broad-based growth across a number of countries in the KFC system, I think north of 60 countries in the KFC system. And we expect them to continue to be the leader. But we have high expectations for the other brands. You’re seeing Taco Bell with strong domestic growth, but you also saw a strong international growth in Taco Bell development. And they are now back on track running ahead of where they were in 2019. We expect to get to 100 units, for example, in Spain this year and have other markets that are getting to scale. And then you’ve seen a market trajectory change in Pizza Hut. We took last year to drive our asset transformation strategy. We made some closures that helped accelerate that. And now you’ve seen the trajectory change and plus 99 in Pizza Hut this year. So, we have high expectations for growth across all the brands.

Our next question comes from John Ivankoe from JPMorgan. Please go ahead.

Hi. Thank you. I think these are all related questions. Just for clarification, I may have missed this or just didn’t catch it. Is there a quarter coming up maybe over the next eight or so, where you do expect to be in that 4% to 5% net unit growth? Your kind of parameter or goal that you’ve set out, I mean, if you can maybe point to a specific quarter that will get us all on the same page? And secondly, how many of the units that you are opening in 2021, whether you want to talk about the first half or you want to talk about the full-year, are units that are still catch-up units from 2020? In other words, you now is 2021 a year where it’s 2021 development and 2020 combined and 2022 doesn’t necessarily increase much from 2021, or am I thinking about that the wrong way that the actual development pipeline is so robust that 2022 development will exceed that of 2021? Thank you.

Thanks, John. And just to clarify, obviously when we report quarterly results that has the trailing 12 months in it, which we had some closures last year. So, when we’re talking about our 4% to 5% net new unit growth algorithm now, we’re talking on an annual basis starting in 2021. So that’s what we’re expecting for 2021, 2022, and beyond. As far as the second question on catch-up units, certainly, there were some units that were put on hold in 2020 that have opened in 2021, no doubt. And that’s helping us get to the number for 2021, because we had to restart the development engine. But by issuing the guidance on – as part of our long-term algorithm, we’re obviously clearly trying to signal that we think that will continue into 2022 with organic growth, again, based on the factors I mentioned earlier: strong unit economics, healthy franchisees. We’ve got strong brands all around the world, in general.

The next question comes from Brian Bittner from Oppenheimer. Please go ahead.

Thanks. Good morning. I’m going to ask my question on the KFC International business. When you adjust for the store closures, the two-year same-store sales for KFC International were positive. They turned positive in the quarter. This was despite what we heard from China last night, your largest international market, where sales do still remain below pre-COVID levels. So, can you again highlight where you are seeing this offsetting strength KFC International? And maybe, if possible, could you give us a glimpse of how those better markets are performing on a 2-year basis relative to the whole international business?

Yes. Great question. The KFC International business obviously showed quarter-over-quarter improvement in the 2-year trends which we are excited about and we think reflects the strength of the brand across its markets. You do see differences depending on the COVID situation in the state of each of those markets in that business. More developed markets where we’re seeing recovery advance are running further ahead where you’ve got more customer mobility and fewer restrictions on operating hours, those sorts of things for our restaurants, and where the footprint is more off-premise-ready. And so, if you look at markets like the U.K., for example, running incredibly strong, north of 40% growth in the quarter. The emerging markets have a bit of a longer tail on recovery. And so that’s what you’re seeing, but in general, great trend and improvement over the entire KFC International business.

The next question comes from David Palmer from Evercore ISI. Please go ahead.

Thanks. A question on digital sales. I think you mentioned that digital sales was up 35% in the quarter and that you believe it’s incremental. I’m wondering if that’s an interesting reason why multi-year growth might be higher coming out of COVID as the headwinds from COVID directly ease. For example, I think the digital order mix was 20 points higher at global KFC versus pre-COVID levels at least earlier in this year. So, I’m wondering what brands and maybe broken out by U.S. versus International, do you see the digital step-up proving to be the biggest help to multi-year sales growth in 2022 and beyond or whenever we finally have COVID headwinds ease? Thanks.

Yes. Thanks, David. I’m glad you asked about digital. Obviously, it’s something we’re really excited about as we are now on track for trailing 12-month $20 billion of digital sales. We’ve been making investments and developed a long-term strategy for how to win in digital for many years now. So this is starting to pay off, not something that happened overnight. You’ve seen us make investments in things like Quick Order, Quantum, Tictuk, Dragontrail now more recently, and then investments in people. So, this is something where we’ve been building up the capability in all aspects. We developed a road map to win in digital and now we’re implementing that, and it’s actually been accelerated by COVID. But it’s all the things that we were expecting to happen to the business are happening. It’s really hard to single out which part of the business is going to benefit most from digital, because all of our brands are very rapidly becoming digital brands. You’re seeing that in the numbers. Obviously, the brands like Pizza Hut that tend to – that started with a bigger digital base of customers, launched loyalty first. They’re getting a benefit because it’s central to what they do. But really on a growth basis, it’s the brands like our other brands that started up from a smaller base that are really getting a big benefit, and it is both the U.S. and an international play. It’s widespread and we do think it can fuel the business for a long time to come, part of the reason why we confidently reinstated our long-term growth algorithm.

The next question comes from Jeffrey Bernstein from Barclays. Please go ahead.

Great. Thank you very much. Just a question on the broader inflationary topic, which you mentioned in your prepared remarks. Clearly, the franchise model insulates corporate, which is a good thing. But I am just wondering how you think about the outlook maybe for the system in terms of both commodities and labor over the next 12 months or so? I’m assuming the pressure is outside and I was wondering how you respond in conversations with franchisees. I guess, qualitatively, whether you prefer to take the hit to margin or suggest they would take a hit to margin or are there maybe incremental cost savings or incremental menu pricing, maybe you can share the current pricing by brand to help us understand how the franchisees are managing? Thank you.

Yes. This is clearly a topic that is top of mind right now. We are seeing inflationary pressures primarily in the U.S., much more mark there than in our global footprint outside the U.S. represent 60% of our business. In the U.S., it is a topic that we and our franchisees are collaborating closely on. We are well-positioned to deal with this. First, when we had commodity inflation, as we mentioned in the remarks, we have greater purchasing scale than most players in the industry. RSCS, which leverages purchasing across the brands, gives our franchisees advantaged cost and negotiating capability from a sourcing standpoint. We are also seeing some wage inflation, as you mentioned. But when we think about dealing with both of those, the next lever that our franchisees and our brands pull is pricing. And so, we are confident that our brands have strong pricing power and our franchisees, who are the ones who actually make those decisions in their restaurants, are being very thoughtful about how to do that. They use analytics, they tend to layer these in over time, so that they don’t get too far ahead of the consumer. And our brands, obviously, are very smart about how they create mix in the menu. I would say, we’ve been very thoughtful and have increased pricing moderately across the brands in the U.S. to deal with this. But we’re confident in the ability to continue to pull those levers to deal with this tactfully.

The next question comes from Jon Tower from Wells Fargo. Please go ahead.

Great. Thanks. I was just kind of following up on the question about digital and specifically how it ties into development. Is this higher digital mix that you’re seeing across your brands across the globe allowing you to, kind of penetrate in the markets and specifically urban versus suburban at a different rate than you had once thought? And specifically, how is the digital mix impacting the type of future development that you’re thinking for these brands, meaning, our footprint is a little bit smaller than you had previously thought, say, two to three years ago, because digital mix is higher. Just curious to get a little color there.

Yes. Look, digital is one of those things that had no downside. Obviously, the customers are – you have a better experience when it’s a digital experience. The average check is higher. There’s labor savings from processing orders on digital. So, the link to development is probably pretty – is pretty clear, right? It’s going to give you better unit economics when you have higher check and less labor associated with the check and stickier customers by the way. So, we do think digital as part of our upside for development as we go forward and you’re also seeing our brands develop new assets that take advantage of that, Taco Bell is best example of that, is the Taco Bell Go Mobile asset, which is, as you mentioned a smaller footprint, more on digital and should give our franchisees better unit economics. Obviously, this all starts and ends with franchisee unit economics, and to the extent that digital improves that, it’s going to drive development.

Operator, we have time for one more question.

Okay. Our next question is from David Tarantino from Baird. Please go ahead.

Hi. Good morning. My question is on Pizza Hut, and I wanted to specifically ask about the transformation or asset transformation that you’ve been going through there. And whether your unit growth guidance now assumes that you’re largely completed with that transformation, the closings that would be tied to that? And then I guess secondarily, can you just kind of frame-up how you’re thinking about growth for that brand globally? Do you think Pizza Hut can get closer to your overall average on growth as you think about the next several years?

Yes. Thanks, David. The Pizza Hut strategy, as we’ve talked about over the last few years, has been to revitalize the brand and driving asset transformation. But it’s focused on a modern off-premise business. And through COVID, both Pizza Hut U.S. and Pizza Hut International has continued to drive progress on that front. If we take Pizza Hut U.S. specifically, if you saw last year that we drove a number of closures in the system that did move our mix of [Delco assets] by a few percentage points. So, we’re continuing to make progress on that transformation. There is still further to go. So, we’re going to continue to drive that. But in terms of net unit count, you’ve seen a change in that trajectory. We were actually slightly positive this quarter in Pizza Hut U.S., which we think reflects the improved unit economics in the U.S. that stem from the strength of the brand. And then across both Pizza Hut U.S. and across Pizza Hut International, you’re continuing to see strong growth in off-premise, roughly 20% [indiscernible] I think we were 18% in Pizza Hut U.S. on a 2-year basis and 21% in Pizza Hut International. So, we think the strategy is working. We think the brand is strengthening. Still more work to go on continuing to transition the asset base, but we’ve seen a change in trajectory on unit counts. I think with that, we’ll wrap up. I just want to thank everybody for the time on the call. And obviously, you sense that results are strong. But underlying those results, what’s really encouraging for us is that all four brands are performing well. You saw that on a global 2-year basis they were all positive. They were all positive on a global basis in the U.S. Those all four brands had improved trends from Q1, which really bodes well for the future. And a lot of it is being fueled by digital obviously with $5 billion of digital sales in the quarter and on-track for over $20 billion on an annual basis. But it’s not just the top line story, it’s also on the net new units side with 603 net units in the quarter, a record no matter how you slice it. And all of that obviously adds up to great confidence in the business and the way forward and which is why we reinstated our guidance and raised our net new unit target. We know we have a lot of work and a lot of exciting work ahead of us to continue to grow and accelerate the brands. The team is fired up for it and it’s a great quarter, but there’s a lot more to come. Thanks for your time, everybody.

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