Yum! Brands, Inc. (NYSE:YUM) Q4 2022 Earnings Call Transcript

Yum! Brands, Inc. (NYSE:YUM) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Hello, everyone, and welcome to the Yum! Brands, Inc. 2022 Fourth Quarter Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. . I will now hand over to your host, Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations, to begin. Gavin, please go ahead.

Gavin Felder: Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering for Jodi Dyer while she is on maternity leave. 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, we elected to remove the Russia business from key performance metrics. For the purposes 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 our worldwide unit growth by 2 percentage points and our worldwide system sales growth for both the fourth quarter and the full year by 2 percentage points. These units were removed from our same-store sales calculations and thus did not impact same-store sales results for the fourth quarter or full year. All GAAP figures reported continue to include the impact of Russia operations for KFC for the full quarter and year, and for Pizza Hut prior to our transfer of that business to a local operator in the second quarter. These GAAP figures primarily include royalty revenues from continued franchise operations and G&A to support our Russia business. Additionally, our GAAP G&A includes expenses incurred relating to the transfer of ownership of the business.

As a result of our decision to exit our Russia business, we have reclassed net operating profits from the operating segments in which they are earned subsequent to the start of the conflict to corporate and unallocated and reflected those net operating profits as a special item within the other income and expense line. 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. Looking ahead, our first quarter earnings will be released on May 3, 2023, with the conference call on the same day. Now I'd like to turn the call over to David Gibbs.

David Gibbs: Thank you, Gavin, and good morning, everyone. 2022 truly was a landmark year for Yum!. In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, our world-class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record-breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net new units, beating our prior record set just last year and ending the year with over 55,000 restaurants globally. For the full year, system sales were up 8% and core operating profit was up 6%, which includes a 2-point headwind from the removal of Russia profits this year. Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same-store sales growth of 8%.

Taco Bell also bucked the industry trend on margins, holding company operated margins flat from last year despite elevated industry-wide cost pressure. KFC International delivered a record year, opening approximately 2,400 gross units and nearly 2,000 net new units, translating to 9% unit growth. Combined, these 2 parts of the business account for approximately 80% of our divisional operating profit. We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same-store sales growth and 6% unit growth, contributing to 22% core operating profit growth, which includes a 2-point headwind from the removal of Russia profits this year. Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us.

Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating system and master franchise rights to an existing KFC Russia franchisee. We expect the transaction to close following satisfaction of all closing conditions. Following the closing, we will have ceased our corporate presence in Russia. I also want to acknowledge the devastating impact of the earthquake that happened earlier this week, affecting our teams in Turkey. Our people remain our #1 priority, and I want to recognize the effort from our franchisee, Ilkem Sahin, as he and his team worked to prioritize people's safety as they navigate through this tragedy.

As we shared at our recent Investor Day, our strategy is guided by our Recipe for Good Growth. And today, we will discuss our 2022 results through the lens of that framework. I will talk about 2 of our growth drivers: namely our Relevant, Easy and Distinctive Brands, or R.E.D. for short; and our Unrivaled Culture and Talent. Then I'll provide an update on our efforts to drive the good agenda across our brands and our business. Chris will then share the details of our fourth quarter financial results before discussing our Bold Restaurant Development and Unmatched Operating Capabilities growth drivers. I'll start by discussing our iconic R.E.D. brands. Beginning with the KFC division, which accounts for 49% of our divisional operating profit.

KFC full year 2022 system sales grew 9%, driven by 7% unit growth and 4% same-store sales growth. Q4 system sales for KFC increased 10%, thanks to 7% unit growth and 5% same-store sales growth. Results were unfavorably impacted by COVID-related challenges in China. Excluding China, our KFC business continues to grow at an unbelievable pace with same-store sales growing 9% in the quarter, driven in part by our world-class franchisees and continued impressive momentum in our emerging markets. At KFC's International business, which represents 44% of our divisional operating profit, Q4 system sales grew 11%. Several markets showed stellar results. In Japan, for example, KFC is synonymous with the Christmas holiday family meal. And this year, Japan system sales over the Christmas period grew 16% year-over-year.

Africa drove double-digit same-store sales growth in the quarter and continues to benefit from several customer-facing digital initiatives. To build on that success, our South Africa team will continue to roll out kiosks with a goal of installing them in 95% of our stores by 2023. Moving on to our Taco Bell division, which represents 35% of our divisional operating profit. On a global basis, full year system sales grew 11%, driven by 8% same-store sales growth and 5% unit growth. This team continues to deliver industry-leading results, and coupled with the incredible array of talent in place and our strong franchisee partnerships, it should be no surprise that Taco Bell earned the top spot on Entrepreneur magazine's Franchise 500 Ranking for the third year running.

Moving on to our fourth quarter results. Taco Bell U.S. grew system sales 14%, underpinned by an exceptional 11% same-store sales growth. The powerful momentum from previous quarters continued with the relaunch of the cult classic Mexican Pizza for which we provided early access to our loyalty members. We ended the year with around 45 million Mexican Pizzas sold, an impressive number considering they were only available for 4 months of the year. We also made encouraging progress in our breakfast layer, building on high-profile branding partnerships such as Doja Cat in Q1 and Davante Adams in Q3. Taco Bell brought in Pete Davidson to help drive consumer buzz for breakfast. This led to 9% transaction growth for the daypart. Overall, Taco Bell did a terrific job this quarter at balancing both ends of the consumer spectrum by featuring premium products that our consumers crave, such as the Grilled Cheese Burrito with sharply priced items like Nacho Fries.

At Taco Bell International, Q4 system sales grew 23%, driven by 29% unit growth and 4% same-store sales growth. Q4 closed a truly breakthrough year for our international business, which has now crossed the 1,000-unit mark. To put this speed into some historical context, Taco Bell International has built 40% of its current estate within the last 2 years. It wasn't just our development engine on fire this year, many of our markets reached double-digit same-store sales growth in 2022, including some of our largest markets with India, up 33%; Thailand, up 36%; and Spain, up 20%. Next, at the Pizza Hut division, which accounts for 16% of our divisional operating profit, our full year system sales grew 3%, led by 4% unit growth and flat same-store sales growth.

Pizza Hut International, which accounts for 9% of our divisional operating profit, achieved system sales growth of 4%, driven by 6% unit growth and a 1% decline in same-store sales in the fourth quarter. Results were heavily impacted by the ongoing COVID-related challenges in China. Ex-China, our same-store sales remained healthy, growing 4%. Several markets showed noticeable strength, including Japan, where same-store sales grew 10%, owing to a strong holiday performance and recent product launch of Tuscani pasta bowls that featured a local flavored twist. At Pizza Hut U.S., which accounts for 7% of our divisional operating profit, Q4 system sales grew 5%, driven by 4% same-store sales growth and flat unit growth. The strength in the quarter was driven by a combination of factors that included new advertising to highlight both premium and value offerings, growth partnerships with aggregators and the success of the new Melts product.

Melts over-indexed to predinner time frames and individual occasion tickets and helped to recover the lower household income base due to its strong value proposition. Lastly, 5 distinct national marketing campaigns on Uber Eats and DoorDash helped aggregator transactions grow 30% in the quarter. Lastly, at the Habit Burger Grill, the team continues to make progress on setting up the business for long-term growth. Habit's burgeoning digital channel finished the year strong with digital mix ending at 35%, a truly impressive level after only launching in 2020. I'm pleased to share that Habit is now 18% franchised, which is up 5 points from last year. With $2 million average unit volumes and a compelling growth strategy, I'm confident in the long-term growth of our newest brand.

And now on to our Unrivaled Culture and Talent Growth drivers. Our hallmark at Yum! continues to be our people first culture, which drives retention and recruitment of amazing talent. Highlights in 2022 included bringing our top 250 leaders from around the world together for a Global Leadership Summit and celebrating the important role our world-class talent has played as we marked our 25th anniversary as a publicly traded company. Internally, we continued to promote talent naming a President of the Habit Burger Grill and a new President of KFC U.S. Externally, we attracted top talent, welcoming a new Global Chief Brand Officer for Taco Bell, a new Global Chief Operating and Transformation Officer for Pizza Hut and a new Chief Corporate Affairs Officer for Yum!.

When it comes to all the good we do, we released our 2021 Recipe for Good report during the year, detailing our strong progress around our 3 priority areas. With our science-based targets to decrease greenhouse gas emissions by 46% by 2030, we decreased emissions against our 2019 baseline by approximately 24% for company-owned buildings and our corporate restaurants, while our franchisees decreased emissions by 20%. Regarding better packaging, we published a new global harmonized packaging policy with a focus on eliminating unnecessary packaging, shifting to more sustainable materials and supporting better recovery and recycling systems. We increased the number of women in senior leadership globally to 42%, which keeps us on track to achieve gender parity and leadership globally by 2030 in alignment with Paradigm for Parity.

We were pleased Yum! received industry-leading rankings on the carbon disclosure project and inclusion on the 2022 Dow Jones Sustainability Index North America, the 2023 Bloomberg Gender-Equality Index and Newsweek's list for America's Most Responsible Companies and America's Greatest Workplaces for Diversity. To wrap up, I'm thrilled with our 2022 performance, particularly given many of the unpredictable obstacles our team had to navigate. Our results continue to reflect a resilient, diversified business and the strength of our portfolio, led by our iconic brands. I'm confident we will continue to execute with superior performance and deliver industry-leading growth, all of which will help to maximize value to our shareholders. With that, Chris, over to you.

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Christopher Turner: 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. As David mentioned, 2022 was a year of huge milestones for Yum!. The resilience and winning mindset shown by our teams around the world helped us open a record-breaking 4,560 gross units or 3,076 net new units on a full year basis. These development numbers put full year unit growth at 6%. System sales for the year grew 8%, driven by strong international same-store sales growth for KFC and another stellar performance from Taco Bell. Full year core operating profit grew 6%, which includes a 2-point headwind from the removal of Russia profits this year.

Fourth quarter system sales growth of 10% was in line with the update we shared at our Investor Day, driven by 6% same-store sales growth and 6% unit growth. Core operating profit grew 22%, which includes a 2-point headwind from the removal of Russia profits this year. Reported operating profit included a negative $42 million foreign currency translation impact in the fourth quarter and a negative $118 million impact to the full year. Ex special general and administrative expenses came in at $357 million and approximately $1.1 billion for the full year. Taco Bell store level margins were 23%, flat year-over-year. Taco Bell paid additional discretionary bonuses to its store-level employees, given the strong performance for the year, which impacted quarterly margins by approximately 50 basis points.

Taco Bell's full year store level margin was 24%, near the upper end of its 23% to 24% historical pre-COVID margin range. Fourth quarter ex special EPS was $1.31, a 29% increase versus the prior year. EPS growth was positively impacted by core operating profit growth of 22% and a lower current year tax rate. This was partially offset by the year-over-year impact of a current year mark-to-market loss on our equity investment in a franchisee in India, lapping a prior year gain as well as the aforementioned negative impact of foreign currency. The ex special tax rate in the quarter was 12%, due in large part to the release of a valuation allowance associated with deferred tax assets that we now believe we will be able to utilize. Our full year ex special tax rate was 21%, in line with our full year expectations of 21% to 23%.

Now let me share greater detail on our fourth quarter unit growth in the context of our Bold Restaurant Development growth driver. This quarter, we opened 1,830 gross new units, resulting in 4,560 gross units opened for the full year or the equivalent of more than 1 new restaurant every 2 hours. Nearly 90% of new store openings in 2022 occurred outside the United States across 112 countries, proof that our diversified development engine is stronger than ever. Starting with KFC, the team opened 997 gross new units in the fourth quarter with China, India and Thailand leading the charge. The Pizza Hut division had incredible development results, opening 571 gross new units in Q4 with 5 countries contributing more than 25 units, namely India, Indonesia, Canada, China and Turkey.

The Taco Bell division opened 253 gross new units in Q4 and 496 restaurants for the full year. In fact, Taco Bell U.S. opened 250 gross new units this year, the second highest annual amount ever. For 2022, Taco Bell International set a record with 246 gross new units, exceeding the prior record of 179 units set last year. I'm thrilled to report we crossed the 1,000 Taco Bell unit threshold internationally and we soon expect to have 4 countries that have over 100 units with China joining Spain, India and the U.K. Lastly, Habit added 33 gross new units in 2022, representing a year-over-year growth rate of 10%. This level of growth, which includes a significant number of company-owned units create some short-term noise in company-owned restaurant margins due to the inclusion of preopening expenses and the depressed margins that are normal during the initial months of operations before new stores reach maturity.

Average margins for Habit stores opened more than a year remain much stronger than our overall reported Habit company store margin. To finish with development, as we head into 2023, we remain confident that we will maintain our strong momentum. We exited 2022 with record site registrations for new units at Taco Bell U.S., and we have over 80% of 2023 planned units at KFC and Pizza Hut outside of China committed with well-capitalized, growth-ready franchise partners. Next, I'll discuss our unmatched operating capabilities and the 3 pillars of our digital strategy: Easy Experiences, Easy Operations and Easy Insights. I'll start with an update on our Easy Experiences pillar, which focuses on delivering seamless customer experiences through proprietary technology and dedicated operational programs.

In 2022, we expanded the rollout of Tictuk, our conversational commerce and e-commerce platform across our network and finished the year with Tictuk in over 3,200 stores across 49 markets. We processed millions of digital orders in 2022 with Tictuk continuing to prove it can bring in incremental customers and drive digital sales. This is evidenced by the chat ordering launch in KFC Mexico where more than 90% of users who transacted on the chat channel had previously not placed a digital order on other channels. We plan to roll out Tictuk to more than 1,000 new stores in 2023, including its white label e-commerce platform, which went live in Pizza Hut Chile and Taco Bell Canada in Q4 2022. Moving on to our Easy Operations pillar, which centers on the team member and franchise partner experience.

The rollout of Dragontail is ramping up in Pizza Hut U.S. with over 450 stores onboarded by the end of 2022 and plans to reach up to 1,000 stores by the end of Q1. Globally, we expect to have Dragontail in over 7,000 stores by the end of 2023. At Pizza Hut U.S., we have completed the integration of 2 major aggregator channels into our point-of-sale system. And at Taco Bell U.S., we have fully integrated our delivery as a service partner into our store's technology system. These integrations are important in helping our team members process delivery orders with new levels of ease. Lastly, I'll cover our Easy Insights pillar, which leverages the power of data and analytics to allow our teams to make smarter decisions. I want to highlight 2 key initiatives that our Yum! decision sciences team have been working on, namely Recommended Ordering and Cook Schedule.

Recommended Ordering is an artificial intelligence, machine learning module that predicts and recommends the quantity of product for a restaurant manager to order each week with the goal of reducing product waste and intra-store transfers of inventory. The product has been rolled out to 3,000 U.S. stores across Taco Bell and KFC. Cook Schedule is a similar module that helps predict the correct amount of food and timing to cook product to accurately meet demand. The team is working primarily with KFC on this initiative with plans to pilot in an international market soon. Finally, I'll provide an update on our balance sheet and liquidity position. Our net leverage ratio ended the year at 5x, including a small balance on our revolving credit facility that was used to support share repurchases in the fourth quarter.

We will enter 2023 with no significant maturities until 2026 and approximately 94% of our debt fixed, excluding our revolving credit facility balance. I will reiterate that our capital priorities are guided by maximizing shareholder value. This includes investing in the business, maintaining a resilient balance sheet, offering a competitive dividend and continuously evaluating the optimal use of our excess cash. To that end, I am also pleased to announce that this week, our Board of Directors approved an increased quarterly dividend of $0.605. Our capital expenditures for the quarter, net of refranchising proceeds, were $99 million. Our net capital expenditures for the year came in at $206 million, reflecting $73 million in refranchising proceeds and roughly $279 million in gross CapEx. With regard to our share buyback program, we repurchased 4.1 million shares in the quarter at an average share price of $119 per share, totaling approximately $486 million.

For the full year, we repurchased 10 million shares at an average price of $119 per share and totaling $1.2 billion. Overall, we are extremely pleased with these results given the complexities our teams faced. Navigating such challenges with industry-leading performance affirms the confidence we have to deliver our recently raised long-term growth algorithm of 5% unit growth, 7% system sales growth and at least 8% core operating profit growth. Looking to 2023, we wanted to provide a few guardrails for modeling purposes. First, we expect to deliver on our long-term growth algorithm with healthy unit growth momentum continuing into 2023. We expect Taco Bell company operated margins to be in line with full year 2022 margins, and we expect our 2023 G&A to be approximately $1.15 billion, in line with the guidance provided at Investor Day.

In terms of the shape for the year, the year-over-year growth in G&A will be highest in the first half, largely owing to the timing of our G&A expense plan across the year. Based on rate expectations as of today, we expect our interest expense to be up approximately 10% year-over-year and for our leverage ratio to drift modestly lower in 2023. Finally, we expect our full year tax rate to be 21% to 23%. To close, we are extremely proud of the performance of our brands over the past year and look forward with excitement to deliver another year of compelling growth and shareholder value in 2023. With that, operator, we are ready to take any questions.

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