Hello, everyone, and welcome to the First Quarter 2023 Yum! Brands Earnings Conference Call. My name is Bruno, and I'll be the operator of today. [Operator Instructions] I would now like to hand over to your host, Jodi Dyer, Vice President of Investor Relations. 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 CFO; 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, please note that this call includes forward-looking statements that 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 call 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 release and relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. Please also note the following financial reporting treatment related to our exit from Russia. As a reminder, as of the beginning of the second quarter of 2022, we elected to remove the Russia business from key performance metrics. For the purpose of this call, all references to system sales growth and unit growth results for the quarter are adjusted to remove our Russia business from the prior year base. This negatively impacted both our worldwide unit growth and worldwide system sales growth by two percentage points. These units were removed from our same-store sales calculations and, thus, do not impact same-store sales results for the first quarter. All GAAP figures reported continue to include the impacts of Russia operations for KFC for the full quarter. These GAAP figures primarily…

Thank you, Jodi, and good morning, everyone. Our first quarter results provide further proof of the power of our portfolio of iconic brands. Both the diverse nature of our global footprint and the advantages of our business model enable us to thrive in any environment. Our incredible teams and franchise partners delivered another strong quarter with 13% system sales growth driven by 8% same-store sales growth and 5% unit growth. A strong set of commercial strategies that balance compelling value and craveable, distinctive products fueled our first quarter sales momentum. We continue to execute on our digital strategy to create more seamless, personalized experiences to drive greater customer engagement and easier access to our brands. These efforts resulted in broad-based acceleration in digital sales growth, leading to a record quarter for both digital system sales of nearly $7 billion and a digital sales mix that exceeded 45%. Importantly, our core operating profit grew 11% in the first quarter, including a one point headwind from the removal of Russia profits, giving us great confidence in delivering on our long-term growth algorithm this year. Before I discuss our first quarter results, I wanted to provide an update on Russia. In April, we announced the completion of our sale of the KFC Russia business to Smart Service Ltd., including all Russian KFC restaurants, operating systems, master franchise rights and the trademark for the Rostik's brand. As part of the sale and purchase agreement, Smart Service has agreed to retain our company employees in Russia. With the completion of this transaction, we have ceased our corporate presence in Russia. Now I'll discuss our first quarter results through the lens of our Recipe for Good Growth framework. I'll begin by talking about our Relevant, Easy and Distinctive brands or R.E.D. for short, and our Unrivaled…

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers followed by our capital strategy. I'll begin with our first quarter results, which reflects strong fundamental performance across all of our core financial metrics. We delivered 13% system sales growth driven by 8% same-store sales growth and 5% unit growth. Core operating profit growth for the quarter came in at 11%, which includes a one point headwind from the removal of Russia profits. Reported operating profit includes a $27 million negative impact from foreign currency translation. We expect foreign currency translation to be a $10 million to $20 million headwind to second quarter operating profit. Our digital sales accelerated across our three global brands, leading to a record quarter with nearly $7 billion in digital sales. We are confident our digital strategies are working, considering we reached a new high in our digital sales mix, exceeding 45% this quarter. Taco Bell store level margins were 22%, flat year-over-year, ex special, general and administrative expenses were $278 million, in line with our expectations. As we previously mentioned, we expect our year-over-year G&A growth will be higher in the first half of the year. The ex special tax rate for the quarter was 19%. Our first quarter EPS, excluding special items, was $1.06, roughly flat over the prior year. First quarter EPS was negatively impacted by unrealized investment losses of $0.07 relating to our investment in Devyani and foreign currency translation impact of $0.08. As David mentioned, we completed the sale of our Russia business last month. Beginning in the second quarter, the Russia business will no longer be reported in our GAAP results, including franchise revenue and G&A. For modeling purposes, KFC Russia's quarterly franchisee fee revenue and…

[Operator Instructions] Our first question comes from Gregory Francfort from Guggenheim Securities.

The first one I had, I update your comments on staffing environment and the labor environment getting better sounds like globally, but also definitely the U.S. Are you seeing changes in wage inflation in your core markets and in the U.S. market? Or is it mostly staffing? I'm just curious. Any more details you can provide there would be helpful.

Yes, good question around the labor environment. If you step back at a macro level, we think about this in developed versus emerging markets. And in our developed markets, we have had some labor challenges that have been well publicized, not only in the restaurant sector, but in all sectors over the last couple of years. Those labor challenges are abating. We're seeing application rates increase, retention rates continue to increase, and our staffing levels are back to at or near 2019 levels. And we've seen labor inflation abate in those markets which is helping our franchisees from a margin standpoint. If we go globally, because of the position of our brands and the employment markets in those emerging markets, we really haven't had big labor challenges there. And we've seen less labor inflation throughout the last three to four years, and that trend continues. I'm sure there's some pockets for franchisees who are dealing with that, but in general, the Yum!'s culture and focus on talent, plus the way that our franchisees have led their teams during the last couple of years, plus our digital innovations in our Easy Operations area, which make running the restaurants easier, are all contributing to an improving labor environment.

Our next question comes from Brian Bittner from Oppenheimer.

As it relates to your core operating profit in the first quarter, it was very strong 11%, very strong start to the year. And interestingly, it actually doesn't really incorporate yet a strong recovery from China. So as it relates to your guidance core operating profit of at least 8% for the year, kind of in line with your long-term algorithm, I'm wondering if you can unpack whether this is possibly tilting a bit conservatively after your strong results in the first quarter? Or maybe you can guide us through the puts and takes as the year unfolds with your core operating profit.

Yes. Thanks, Brian. Obviously, it was a strong quarter from a core operating profit standpoint. And as you say, we have further upside as we step through the year if China's results continue. As you know, our long-term algorithm is just that. It's a long-term algorithm over many years, and we don't revise it every quarter. But clearly, we have -- we've gotten off to a strong start to the year, and we feel good about how the year is shaping up. Importantly, we just raised that algorithm last year at our investor conference, and I love the fact that we've started off the year beating all the components of the algorithm.

Our next question comes from Jon Tower from Citi.

I was hoping you could offer some insights from your end on what's going on in the franchisee environment, specifically in the U.S. I think there's a growing concern, particularly with what's happening with regional banks, that franchisees might have difficulty accessing capital and therefore perhaps having challenges growing in the U.S. I think your brands are positioned differently and you guys are in a different spot than smaller competitors, but I was hoping you could kind of dive into that a little bit, please.

Yes. Thanks, Jon. Good question. I'm going to step back and start at a global level. And if you think about our development, keep in mind more than 90% of our development is outside of the U.S. And when you think about where that development is driven, we shared at the Investor Day that 60% of our global development is driven by 15 publicly traded franchisees. If you go look at the financial factors on those franchisees, you see that they've got, on average, less than one turn of leverage. The two largest have significant cash on hand with no debt. So the financial health, in general, of our 3C franchisee base around the globe is very strong and we think gives us a competitive advantage in this sort of environment to continue to strengthen development ;whereas competitors whose franchise systems aren't as strong, we think, will be at a disadvantage. If I drill into the U.S., keep in mind that Taco Bell is the vast majority of our development in the U.S. Our margins at Taco Bell U.S. have continued to be strong. You saw our restaurant margins this year were a slight improvement versus last year. So we continue to drive strong growth at Taco Bell with strong margins. Those are strong returns on those new units. So we feel like we're in a very competitively advantaged position relative to that issue.

We really haven't heard anecdotes and stories of franchisees getting concerned about accessing capital.

Our next question comes from John Ivankoe from JPMorgan.

I think a pretty consistent theme that's emerging for 2023 are some of the bigger, well-capitalized, more desirable brands that are really coming back and focusing and enforcing on operational standards that maybe were back to '19 levels or even maybe even better than '19 levels as their systems are so desirable and so many people want to be a part of them. So it's always hard to talk about multiple brands across the global business, but can you kind of grade, if you can, your operational execution across the brands? Do you see any big pockets of opportunity? And not really problems, any big pockets of opportunity that you see out there of just saying, hey, execution is obviously a very important part of the Yum! business and you have some significant pockets of opportunity that could really move the needle from this point going forward as we're now post crisis.

Yes, Jon, I'd say, in general, we all know that providing a great customer experience at the restaurant is critical to our business. And if you look at our sales growth results, double-digit growth in -- from a system sales standpoint for all three of our big global brands, we feel like, in general, we're doing a very good job of that. Are we always looking to improve? Of course. I go to our digital capabilities as one example of how we're elevating operations. You go to that Easy Operations pillar, one of three areas of our digital strategy, and we talked about we continue to implement tools that make the restaurants easier to operate and then improve the customer experience. Dragontail being a great example. David and I were in the U.K. just a couple of weeks back, and we got to see in Pizza Hut how Dragontail times the pizzas coming out of the oven, with the delivery drivers getting to the restaurant, that's translating to better customer experience. They're getting hotter, fresher pizzas faster. So that's just one example of how we elevate on that front. Where we do have small pockets of significant improvement opportunity, we manage those situations, and we referenced that on the call. We talked about the Pakistan situation where we felt it was the right move to make a move in our franchise base. The strength of our overall global development gave us the room to do that. But that's just one example of where we made a targeted change to improve our operations.

The only thing I would add is the last few years have obviously been a challenging operating environment. I think at the end of the day though, it has made us stronger as an operator, and I feel better about the quality of our ops around the world today than I have at any point in my long career. We're clearly headed in the right direction. We have leaders at the brands such as Sabir Sami at KFC, who was the Chief Operating Officer of KFC. So we're putting a very strong emphasis on operations. We know that, that can pay off. The other component of this is, as Chris mentioned, getting the right franchisees in. In the U.S., as you know, we had a big change in terms of the ownership of our largest Pizza Hut franchisee, that's having a very positive payoff for us at Pizza Hut because they're running the stores better and a great reminder of how important it is to have the right franchise partners.

Our next question comes from Dennis Geiger from UBS.

Given the momentum that you've got in the business and across the brands, eve in a tough environment, I'm just wondering if you could talk a little bit more about the momentum that you expect to continue going through the rest of the year, particularly in the U.S. And within that, just wondering if you could touch high level at least on pricing presumably rolling off some in the U.S. and sort of how you think about the traffic outlook and, therefore, the overall outlook for sales momentum to continue. If you could touch on that.

Yes. Thanks, Dennis. Obviously, we had a strong start to the year with Q1. And we don't normally comment on trends intra-quarter, but what I will say is we're off to another strong start in Q2. No significant change in momentum from Q1. Of course, the puts and takes will look different. Some businesses are doing a little bit better than in Q1. Some have tougher laps. But it gives us a lot of confidence that our teams are doing all the right things to connect with consumers. And this environment is a healthy environment for us, particularly with our brands. When you talk about the U.S. consumer, Taco Bell is just so well positioned to weather any kind of -- there was some kind of pullback, as you saw from the strength they had in Q1, their ability to offer value menu offerings under the Cravings Value Menu, but also offer innovation like the Grill Cheese Burrito for people that might be trading into the category if the economy started to soften. So from where we sit, we feel really good about the momentum in the business. And the pricing actions that you referenced were -- will probably start to roll off a little bit. But at the same time, we've seen inflation abate. I'll give you another good fun stat. In Q1, KFC, as you know, rolled out those $5 wraps. The strongest sales that they saw in a customer segment in Q1 were with the lowest-income consumers. So the part of the business -- the part of the consumer base lifting sales was from low-income consumers because they did a great job connecting with them through that offering. Same thing could be said with Pizza Hut under 6.99 melts. So we know we have all the tools in our arsenal to win in these competitive environments.

Our next question comes from David Palmer from Evercore.

Wondering if you could provide any details on the ongoing sales recovery versus pre-COVID levels for key KFC International markets. We don't often get to see some of the country-level statistics. And I'm wondering how you're thinking about that multiyear recovery. Where is it still accelerating? And perhaps if it's slowing in certain places, why would that be, maybe shifting patterns between delivering at home or other consumer weakness perhaps cropping up here or there.

Yes. Just talking in terms of trends, David. You saw from the sales breakouts in our release that we've got widespread system sales growth at the numbers that we report. In fact, the vast majority of the businesses that we track are up double digits. I think we identified early on in the pandemic that developed markets were doing a little bit better than emerging markets. And then that sort of flipped more recently as emerging markets have recovered. They've been the one sort of leading the charge. And we're now entering a phase in which I think we're sort of more back to the normal cadence of developed markets and emerging markets contributing to our growth. So obviously, we have 300 brand country combinations we could talk about a lot of different ones, but I think that gives you a pretty good sense of what the landscape is like. And that's why we've talked a number of times today already about returning more to a normal cadence in the business, which is good for us.

Our next question comes from Andrew Charles from TD Cowen.

Great. I recognize that 1Q is a season-light development quarter, but can you speak to the sequential cadence of growing 5.9% net restaurant growth in 4Q that fell a bit to 5.3% in 1Q, excluding Russia. 1Q certainly exceeded the 5% ongoing guidance, but it was perhaps a bigger step down than we were expecting. So you guys spoke about the robust development commitments. And so I'm just curious, I mean, do you expect that the percentage of year-over-year growth is going to pick up perhaps as 2023 progresses?

Yes. Thanks. Good question. If we talk about Q1 specifically, I think all the factors that David mentioned around our confidence in long-term development trajectory still hold. We've got strong new economics. We've got tremendous franchise partners. We've got lots of white space out there. And we've got the best development teams in the business. If I go into Q1, keep in mind, don't read too much. We said that this year would be more weighted towards later parts of the year. But in Q1, we put up 746 gross new units. That's our second-highest total ever. That reflects that our franchisees are investing to build restaurants. And that was despite what you heard on the Yum! China call yesterday, which is they were dealing with delays related to the Chinese New Year, delays in contract signing and building permitting that were tied to COVID. And they talked about their view on the strength of their pipeline going forward. If I go to the net new unit side, one of the things that we're doing is we're using our strength in growth development to advance our assets to strengthen our global asset base. I talked about how we, in certain cases, strengthen the franchisee base with the Pakistan situation. Another thing we're doing is continuing the Pizza Hut asset transformation where when we close a unit, we're opening another one in the same trade area that is a stronger, higher-performing unit. And the third thing we're doing is when we have a few low-volume units that need to be cleaned up, we'll take advantage of opportunities to do that. But in general, we remain really confident about the long-term trajectory. And as I said, we expect this year to look similar to 2021 and 2022.

Yes. I mean the only thing I'll add is we know how important development is to our growth algorithm. Obviously, this is a big focus of ours. We think we have upside. Any numbers that we set out, throw out there, and that's our focus is how do we keep on trying to beat these numbers. And obviously, we've been pretty clear that don't draw too many conclusions from one data point at the beginning of the year historically is not correlated. And it was a strong quarter. It was a really strong quarter. So we're proud of what happened in Q1 and feel good about 2023 looking just like '21 and '22.

Our next question comes from Jeffrey Bernstein from Barclays.

Noticing, as I think about your brands, the single customer serve opportunity, it feels like Taco Bell has always been about serving individuals rather than big portions of big families. But does seem like there's been a major change in menu strategy elsewhere. KFC, just recently between the sandwiches, the nuggets and the wraps, all for individuals and Pizza Hut seemingly doing well with the Melts. I'm just wondering if you can maybe just talk about the mix of business for each of your brands for family versus single-serve and maybe whether these new products change your mix of sales by daypart. I would think that would help build the lunch business, especially at Pizza Hut. But presuming this is a conscious decision at all brands, just wondering if you can give some high-level thoughts on the mix of business or family versus singles and daypart opportunity.

Yes. A good question. And you're spot on, obviously. Our goal obviously is to be there for our customers for every occasion, not just for family meals or just for individual meals. Pizza Hut has a very conscious strategy through Melts in the U.S., which has gotten a lot of the headlines, but also an offering that they have called My Box, which is an individual meal offered around the world to go after more individual occasions. Pizza is obviously traditionally a family-sharing occasion. So Pizza Hut and KFC with buckets tend to skew more towards family sharing. And Taco Bell with their multiple individual items that you can piece together for your own meal, skew more towards individual meals. And that's why at the beginning of the pandemic, you saw Taco Bell rolling out family meal options because that became the preferred way that people were accessing our brands early in the pandemic during lockdown. So they're continuing to lean in on ways that they can capture more of the family sharing occasion. And then Taco Bell -- and then Pizza Hut and KFC are leaning more on individual meals. Obviously, nuggets, the $5 wrap deal and other offerings we have around the world, the launch of sandwiches more recently, are all designed for individual meals.

Our last question comes from David Tarantino from Baird.

Just a couple of clarifications, Chris, on the outlook. First, on the unit growth commentary, you said you expect this year to look a lot like the last two years. Are you talking about net unit growth or gross opening? So I guess your net unit growth has been close to 6% ex Russia in the past few years. So I just wanted to clarify that. And then secondly, I was wondering if you have an update on your G&A guidance for the year.

Yes. Thanks, David. First, on development. Of course, our long-term growth algorithm specifies 5% net new unit growth. We've been a little ahead of that. And we're working hard to continue our development momentum. And as we've said multiple times on the call, we continue to have real confidence in our ability to deliver that type of net new unit growth into the future. On G&A, just a couple of things. First, note that about $4 million of our reported G&A in Q1 was classified as special. So then when you look at the ex special year-over-year increase, we had said on the last call that this year, our year-over-year increases would be weighted a little more to the beginning of the year. There are really two factors that drove that. So coming into the year, we had obviously planned to make some targeted investments in G&A in specific parts of the business to support our long-term growth strategies. The second part, we did encounter some expenses that we were not anticipating prior to the year primarily related to the cyber event that we had in January. But still, when we step back and we look at the plan for the full year, we still expect full year G&A to land at approximately $1.15 billion, and we'll provide further updates on the Q2 call as needed.

Well, thanks, everybody. I appreciate all the good questions. And obviously, we're excited about the strong start to the year, the momentum that we have continuing into Q2 and the fact that we've raised our algorithm and are beating it on all measures today. Look forward to updating you on our progress on our Q2 call.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.