Hello, and welcome to the Yum! Brands 2024 Second Quarter Earnings Call. My name is Lauren, and I’ll be coordinating the call today. There’ll be opportunity for questions at the end of the presentation. [Operator Instructions] I will now hand you over to Matt Morris, Head of Investor Relations, to begin. 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 statement in the earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and the 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. As a reminder, several of the Yum! Brands business units report on a period calendar basis including all US and Canada brands, KFC UK and KFC Australia. When forecasting 2024, please keep in mind this year will include an extra week in the fourth quarter for those entities. For more information on our reporting calendar for each market, please visit the Financial Reports section of the IR website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware of the upcoming Yum! investor events and the following. Our third quarter earnings will be released on November 5th with the conference call on same day. Finally, on our last call, we shared the timing for our talk about consumer date originally planned for December of this year. We are finalizing a revised date for early next year. Please stay tuned for more details and invitations to follow. Now I'd like to turn the call over to David Gibbs.

Thank you, Matt, and good morning, everyone. Despite continued challenging operating environment, I'm pleased Yum! was able to deliver 10% growth in core operating profit this quarter, thanks to our team's strong execution and progress on the initiatives laid out on our last call. While we take comfort in improving global trends and still expect the first quarter warrant the low for same-store sales growth, significant volatility remains, and we recognize sales in some markets are not where we want them to be. The impacts from the Middle East conflict, in addition to a more cost-conscious consumer, have presented headwinds to same-store sales. Despite these tougher waters, we are confident we will deliver on profit growth in line with our long-term algorithm for 2024 and are set up for continued strong growth in 2025. Fortunately, we are well-positioned to navigate these consumer headwinds given the strength of our brands and reputations for value no matter the environment. Nonetheless, ensuring we provide consumer’s affordable options has been an area of greater focus for us since last year with all of our brands having offered disruptive deals and introduced or reintroduced the track of everyday value with examples in the US such as KFC's Taste of KFC deals, Pizza Hut's $7 Deal Lovers, and Taco Bell's Cravings Value Menu. As a result, our brands experienced improving trends relative to the first quarter in the US market, and we continue to refine our offerings in international markets to recapture similar momentum. The second quarter offered signs of improving fundamentals. For example, at Taco Bell, we've begun to see sensitivities to check management stabilize to improve from Q1 into Q2, and have witnessed year-over-year check growth led by items per transaction. Internationally, KFC markets excluding China, that we believe were not impacted materially by…

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, our balance sheet and capital strategy, and provide an update on our outlook for the remainder of the year. Beginning with our second quarter results. System sales grew 3%, driven by 5% unit growth. Consumer sentiment relating to the conflict in the Middle East continued to pressure system sales growth in the quarter. The recovery trajectory we observed in Q1 for the Middle East, Malaysia and Indonesia, flattened in Q2. And while hard to precisely quantify, we continue to observe conflict-related impacts in a broader set of markets. Despite these pressures, Yum! delivered an impressive 10% core operating profit growth, reflecting the resilience of our scale, global, multi-brand business model, increasing benefits of our digital and technology strategy and the expert management of the business by our leaders around the globe. A prime example of factors underpinning our resilience was profitability in our 488 company-owned Taco Bell stores in the US, our single largest estate of company-owned stores, representing approximately half of our total global company-owned store revenue. Store level margins were 25.6% with mature stores achieving over 27%, reflecting the strength of the Taco Bell business model and its magic formula, which enables the brand to simultaneously deliver an outstanding consumer experience, tremendous consumer value and exceptional store-level margins for our franchisees and Yum! Importantly, Taco Bell operations leaders are taking advantage of the continued growth in digital sales mix, which is now 35% to further digitally enable our operations in ways that not only improve consumer and team experiences, but also improve labor productivity. Another contributor to profit growth was improved expense leverage. As we shared in January, we expected throughout the year to see…

[Operator Instructions] Our first question comes from David Tarantino from Baird. David, your line is muted. Please proceed with your question.

Hi, good morning. My question is on your outlook, given all the cross currents we're seeing in the macro environment. And I was wondering if you could maybe elaborate on how you're thinking the same-store sales could progress with the second half plays out. And I know you have easing comparisons, but there's a lot of a lot of uncertainty in a lot of markets that you called out. So just wondering, if you could provide some context on how you're thinking about it within your 8% profit growth or core profit guidance for the year? Thanks.

Yeah. Thanks, David. I think our thinking hasn't changed, although we learn more, obviously, every week. As I think we said beginning of the year, as we progress through the year, we see sequential improvement every single quarter in same-store sales growth. Obviously, Q4 becomes a much easier lap as we start to lap the Middle East conflict. Q3 is actually a slightly harder lap for Taco Bell, but in general, an easier lap for Yum! And, therefore, we are -- we continue to forecast an improvement quarter-to-quarter in same-store sales growth, tough to forecast. But we know we have all the right levers to pull, and our brands are performing well despite some of these challenges. I mean, KFC International, for example, is up 11% on a two-year basis despite the Middle East impacts. You saw what Taco Bell did in Q2, I think there's a lot of reasons to be optimistic. But as you say, a choppy environment. We know we can get through it this year and then obviously get to much easier laps next year.

Thank you. Our next question comes from Jon Tower from Citi. Jon, please go ahead.

Great. Thanks. I was hoping to dive a little bit in the G&A because obviously, that seems to be a mover on the core operating profit growth for the year. And I was hoping you can maybe provide a little bit more color on some of the puts and takes through the first half, and then what you see in the back half unfolding? And specifically, how we should think about this piece of the business growing into 2025, should we expect it to return back to normal cadence, especially if incentive comp resets again?

Yeah. Thanks, Jon. Look, I think what you're seeing happen this year is the plan that our management team has been driving is playing out as expected. If I were to kind of sum up what we're doing, we're reallocating and streamlining our G&A to drive faster and more efficient growth for Yum! and for our franchisees. And there's a few buckets of levers that are driving that. Of course, we've said that there are some one-time benefits this year on a net basis with the full year. The second, digital and technology is an important area here. So we talked about that this year, we're starting to bend the curve. And what we mean by that is, over the past few years, we invested ahead on behalf of our franchisees, which burdened the P&L a bit. But as we get more and more adoption of our platforms and we have fee income from that, it reduces that burden. We also acquired four companies, hired a lot of people in the last several years. Those capabilities are maturing. And as we mature, we find ways to operate more effectively internally to organize better, and that allows us to get more done at lower cost, which benefits Yum! and our franchisees. And we've got strong governance of tech spend in place. I think the third area is productivity in other parts of the business. We've been driving this resource optimization program. We're finding ways to operate more effectively in parts outside of D&T. Now in some cases, that's enabled by becoming a more digital company. And then finally, as we said in the remarks, our GMs are doing a really good job driving their plans as they see how the business is on pulling around the globe. So those are factors that are driving the G&A trends this year. Now it's important to note that we are reinvesting at the same time. We're putting investments into AI. We mentioned on the last call, 40-plus AI projects in motion. We're investing in areas like our marketing capabilities, supply chain and then culture and talent. So at the same time, we're driving the long-term health of the business. If you look to 2025 and beyond, we're going to continue to get leverage on the G&A line. You set aside year-over-year factors like changes in incentive comp, we expect to get good leverage on the G&A line, and I think you'll see a normal growth rate in terms of G&A for an asset like a company ours.

Thank you. Our next question comes from Andrew Charles from TD Cowen. Andrew, please go ahead.

Great. Thank you. I have a two-part question on Taco Bell. I'm looking to understand how you retain Taco Bell's US 2Q same-store sales strength as you shift promotional -- to new menu items away from Cantina Chicken while the remainder of the drive-through segment intensified the focus on value. And the bigger question is that can you share your confidence in the ability to hold Taco Bell's 2Q to your trends in the back half of 2024? Thanks.

Sure. Obviously, Taco Bell is a lot of really positive results coming in, in Q2, and we feel good about we feel good about Taco Bell for the balance of the year. Why do we feel so good about the brand? First of all, in this environment where the consumer is probably pulling back a little bit, being the always on value brand. Remember, Taco Bell's Cravings Value menu is always on. It's got 10 items. They're unique items that nobody else in the industry has. And they're not like junior-sized versions of a core item. They're unique. They stand in their own right. They're incredibly craveable. That has served us well, and it really put a moat around when it comes to value. In addition, we have onetime offerings like the Luxe Box at a $7 price point, which is an incredible amount of great tasting food for that price. So we have a great way to play value that makes it hard for others to compete. And then when you couple that with things like the Cantina Chicken launch in Q2, which is really a platform that we'll continue to innovate off of as we move forward. You saw in Q3, we just launched the Cantina Chicken Cheesy Street Taco Chalupas that are off to a good start. That's an example of what we can do with that menu. We'll probably rehit Cantina Chicken in Q4. And then you've got all sorts of other great things going on at Taco Bell like speed of service, improving loyalty program launches. So hopefully, again in the sense of confidence we have in Taco Bell as we move forward. And in this environment, I think we're really seeing Taco Bell stand out from the crowd, outperforming the QSR industry by a wide margin.

Thank you. Our next question comes from Brian Bittner from Oppenheimer. Brian, please go ahead.

Thanks. Good morning. Congrats on navigating a challenging backdrop. You delivered 8% core operating profit growth year-to-date, despite negative same-store sales year-to-date. And this operating profit growth in the first half is on par with the full year guidance, of course. And I know the environment is still challenged, but there reason to believe that overall, Yum! will have better sales trends in the second half versus the first half as comparison these as we've talked about on this call. And G&A is going to remain favorable in the second half. I know there's some timing differences between the third quarter and fourth quarter. But is there an opportunity for profit growth to accelerate in the second half? Is the guidance for 8% now that you've already had that in the bag in the first half, possibly conservative? Or is there anything maybe I'm not looking at in the second half versus first half that I should be more aware of?

Yeah, Brian, as we said on the call, we remain confident in delivering at least 8%. Of course, as you mentioned, it's a complex operating environment. There are lots of unknown still yet to unfold in the back part of the year. But as David said, we do have sequential improvement in the forecast quarter-to-quarter from a sales standpoint. And as we said, we expect full year G&A to be balanced. We're going into the back half of the year with a good starting point here at the midpoint. And it's our job to deliver as much profit growth as possible, while still investing in the long-term health of the business. And so that's what our management teams are focused on doing, driving the short-term and the long-term simultaneously.

Thank you. Our next question comes from Dennis Geiger from UBS. Dennis, please go ahead.

Great. Thank you. I wanted to ask a little bit more about the strength of global unit development. Obviously, some macro pressures out there, but impressive growth, even still, particularly at KFC. Could you talk a little bit more about how the brands and the franchisees are effectively managing the challenges, continuing to open restaurants at a solid rate? And specifically, if there's anything else to offer on visibility that you've got into development looking ahead, including how that pipeline looks, et cetera? Thank you.

Yeah. Thanks, Dennis. The development picture is really one that is strongly encouraging. When you think about the impact of the conflict on sales in particular markets, we are still seeing quite widespread growth all around the world. I think I mentioned in my remarks, about two-thirds of our brand country combinations over the last 12 months have built a store. There's a lot of countries that are quite small that don't even have an opportunity to build a small store. So that is impressive right there that it's widespread. As we mentioned, our ability to open gross units looks like going to be very similar to what we did in 2022 and 2023. Now we would like that number to go up every year. So there's probably some small impact from the Middle East that's showing up in that gross unit line. And potential for some, as Chris mentioned in his remarks, potential for some additional closures, perhaps greater than normal the second half of the year. But any stores that would close, particularly in the Middle East markets would have been lower volume stores that people are just pruning their portfolio. We expect the full year impact from development in terms of the ability to drive additional system sales to be very similar this year to last year. So the development story is good. Why is that? Because I think the franchisees have a lot of long-term confidence in the strength of our brands and their businesses around the world and they're getting good paybacks. We meticulously track the paybacks in every market around the country to make sure that our franchisees are getting good returns on their investments.

Thank you. Our next question comes from Brian Harbour from Morgan Stanley. Brian, please go ahead.

Yeah, thanks. Good morning guys. I think you mentioned in your prepared remarks just some broader impacts of some of the Middle East issues. I was curious what markets you're referring to with that. And I guess, just more broadly, could you comment on like Europe or some of the other markets that you sometimes highlight has been stronger or weaker? And if there is anything to call out there?

Look, I think in general, we've highlighted, obviously, the Middle East markets have been impacted in addition to Indonesia and Malaysia in terms of significant markets for us. Beyond that, we're not going to -- first of all, it's very hard to pull out the impact because it can be trade area trade area by in a given market. But you can imagine the types of markets that would be further impacted. And it's not -- but it's not a precise science. We just know them from the stories that we're hearing from the field some of the data that we see trade area by trade area in markets that the impact is a little bit broader than just the Middle East and Indonesia and Malaysia, but very hard to measure. I think the important thing is, despite all that, I mentioned it at the start -- the Q&A, we've seen 11% two-year same-store sales growth for KFC around the world. If we back out and just take a look at some of the markets where we know there's very little impact from the Middle East, we're seeing mid-single-digit growth for KFC. And then places like LA&C, which really are a clean read on our business ex-Middle East, no impact at all, we're seeing -- they put the second -- KFC put up a second consecutive quarter of plus 13% same-store sales growth that's on top of 10% last year. So it's 23% same-store sales growth in Latin America for KFC. You can tell that the foundation of our business is really quite strong. And we're getting through this headwind from the Middle East really as best as could be imagined.

Operator, we have time for one more question.

Thank you. So our final question comes from Danilo Gargiulo from Bernstein. Danilo, please go ahead.

Thank you. I have a question on the sustainability of margins at Taco Bell. So the margins are quite impressive in the context of the labor pressures you're seeing in California, the value -- spend from consumers. So how sustainable do you think these margin improvements are at Taco Bell? And what incremental levers do you expect to deploy going forward? In other words, wouldn't be able to talk about maybe 26%, 27% margin in the next two to three years? Thank you.

Yeah. Thanks, Danilo. Look, I think the Taco Bell margin story is very impressive in the context of a value-oriented environment. The Taco Bell business is serving consumers, creating buzz in the market, bringing great innovation to bear and delivering value when consumers need it. And yet you're seeing us maintain these industry-leading margins. That comes from leveraging our scale on our food purchases and our franchisees take advantage of that scale. And I think in the long run, you'll see us continue to be more and more productive in terms of how we operate the restaurants. As we become more and more digital, 35% digital mix, you heard us talk about Voice AI, which is accelerating at a faster pace than we expected just three months ago. And that is just one more example of a digital lever that allows us to provide a great a great customer experience, team member experience and be more productive in back of house. Lots of other things happening on that front, I think it sets up well for us to continue to be able to provide strong value to consumers and great margins for -- for our franchisees and our company stores going forward.

Well, thank you, everyone, for your time today. I appreciate all the questions. Obviously, we're proud of the results we put up this quarter despite headwinds but we're even more proud and excited about the future as we go into the second half of this year and into 2025. Inflation is moderating, margins are getting stronger, our brands are getting stronger in this environment, Taco Bell putting up really good numbers. The work that we're doing behind the scenes to reinvent how we run the business, to reallocate G&A, to really lean in on our digital leadership and our investments in the AI, the laps are getting easier. We talk about our twin growth engines and how they performed this quarter. But also this quarter, I spent some time with our international Taco Bell franchisees at Taco Con, where we get everybody together from around the world to talk -- compare marketing calendars and the excitement at that convention about the future of Taco Bell was incredibly strong, the quality of the partners that we have for that brand, and although we're not calling that one of the growth -- the twin growth engine today, it's clear that the future for Taco Bell International is quite bright and another reason to be excited about the future. So a quarter that I think demonstrated the resilience of our business model and the strength of our brands and excitement about the future as we go into Q3. Thank you, everybody, for your time.

This concludes today's conference call. You may now disconnect your lines.