Yum! Brands, Inc. — 2024 Q1

Encouraging to see the G&A curve bending. I was hoping you could maybe drill into some of the puts and takes there. Obviously, there were some offsets this quarter with some charges. But curious if you could give us a little bit of context around what's flowing through that line to help move it lower and maybe where you anticipate this moving over the long term for the business. I think historically you've talked about the idea of potentially reaching -- or at one point in time, having that sit at about 1.7% system-wide sales. Is that still a target that you think is reasonable? Or do you feel like you can even move that further as we continue to grow this digital business over time?

Yes. Thanks, Jon. Good question. First, let me just reiterate a couple of details on the G&A guidance. So we expect that ex special G&A on a 52-week basis will be flat to slightly down. As we mentioned on the last call, that assumes a target level of incentive compensation. So that's one factor that could move as we go through the year. But on the factors and levers that help us to achieve that plan first, there are some onetime factors at play. Examples of that include lapping the cyber event last year, a couple of small remnants of the Russia overlap and some lapse of incentive-based compensation last year. Now on the other side, we do have some expenses related to the acquisition of the stores in the U.K. We expect that will add just under $10 million to our G&A in year. But those are the [ best ] set of factors.

You reiterated your 2024 target to grow core operating profit in line with your long-term algorithm of at least 8%. And that's impressive given the first quarter where comps were negative and core operating profit growth was below the full year outlook. And I'm assuming this was always built in the plan because of the tough comparisons, and I realize you have a lot of G&A flexibility to hit your operating profit targets. But the question is what's the global same-store sales base case that you're thinking is required for the rest of the year to comfortably reach your operating profit goals.

Appreciate the question, Brian, and I agree. Hitting 8% in this choppy environment, we're proud of our ability to expect that kind of a result. And I think it speaks to the resilience of our business model and the talent of our leaders. As you know, we don't provide quarter-to-quarter same-store sales guidance, particularly in an environment like this. We're preparing for various scenarios to get to the 8% number. Obviously, one of the lever -- one of the strong levers we have to pull to get to the number is on the development front. And we feel really good about the pipeline that we have in place in development from our partners around the world, and that's something much more so than same-store sales because we can count on to get to the 8%. But as far as forecasting same-store sales growth in this environment, obviously, it's very difficult given the impact that we're seeing.

I was just hoping to get some more color on international, KFC International, Pizza Hut International. What were some of the highlights and lowlights on same-store sales trends in terms of your brand geography combinations? And more importantly, I'm curious about your reality for 2024 given the exit rates of brand geography combinations. Has any of these changed for the better or worse? How are you feeling about things versus perhaps just a few months ago?

Thanks, David. Yes. Look, we feel great about our twin engines of growth, right? 80% of our profit comes from Taco Bell U.S. and KFC International. In the international business, to your question, 85% of our profit from KFC International. And if you look at the areas of the world that are less impacted by the Middle East, like Africa, for example, our system sales, you'll see in our release, was up 22%. Latin America, less impacted, really no impact, up 11% -- I'm sorry, Latin America, up 22%; Africa, up 11%. I recently actually made a trip to Africa this quarter with our team and was just blown away by the progress we're making on the ground there, where we're the leader in the industry, and we're widening our margin in terms of that leadership.

I was hoping to get maybe just a little bit more color on bending the curve on digital and technology spend, especially how it might influence '25 and '26 type of total G&A growth. I mean, I think this has been one of the more kind of debated topics of this -- on the Street as -- are we just talking about a lower rate of growth? Or might we actually see declines in dollars in '25 and '26 as you leverage the platform?

Thanks, John. Look, if you go back over the last few years, we saw the importance of digital and technology to Yum's! future and we invested ahead on behalf of the system to build those capabilities and put them in place across Easy Experiences, Easy Operations and Easy Insights. We thought that was the right thing to do for the business, and it did create some pressure on the G&A line as we did it. As we deploy our platforms to more and more markets and we get increased adoption, of course, that happens when our franchisees see the business cases coming to life and the improvements in their economics and the way the technology impacts their consumers and their team members.

Maybe just following up on that. You spent a lot of time discussing all of these tech initiatives. I think it's probably a little bit harder for us to sort of observe that in terms of comp impact, margin impact. Obviously, we don't kind of see franchisee profitability. But are there any examples you can give of, for example, e-commerce was deployed in certain restaurants and you saw a certain uplift in sales or franchisee profits, what happens to those when you deploy that tech bundle that you just mentioned? I think that would just sort of bring it to life more for us.

Yes. Great question. Look, in all of these deployments, this is us partnering with our franchisees and, of course, they co-invest to bring these platforms to their businesses and they only do that when they see a strong business case. So if you take Taco Bell U.S., which is the one market where we deploy the most of our platforms in combination, I think the tremendous sales results there as they've gone from essentially no digital sales in 2018 to well into the 30% mix now demonstrates the power of the combination of those platforms. In every market around the globe, as we shift sales from nondigital to digital channels, we see increases in check size, we see increases in frequency.

Yes. And just to get in, if you're looking for specifics, as you can imagine, when we move people to digital ordering, we see an uplift in check in almost every case, whether it's kiosk or online. When we move people to things like Dragontail, we know we get a -- for Pizza Hut, we know we get a 4-minute savings on delivery time of pizzas and we know we can get drivers to deliver more orders per hour by using it.

Specific to the U.S., I'm wondering if you could speak a bit more to how you think about the trajectory of the brands with some of those tougher comparisons and the weather headwinds behind you, even if it's at sort of a higher level. And sort of maybe how do you think about how the brands are positioned in the U.S. in a seemingly difficult environment and whether there's sort of any notable strategy shifts that you guys contemplate in an environment like this, be it on value or otherwise?

Yes. Thanks, Dennis. I think we referred to this somewhere but I'll -- just for completeness, so in Q1, obviously we had a lot of impact by the weather during the quarter. Our business generally improved sequentially during the quarter. Taco Bell, as you know, is 75% of our U.S. operating profit. Taco Bell improved throughout the quarter. And into Q2, we are seeing an acceleration of same-store sales growth trends. So we're feeling good about how Taco Bell is positioned. Remember, they just launched the Cantina Chicken menu at the end of Q1. So we're excited to share the results of that. But suffice to say, it's been well received by consumers.

First, a quick follow-up and then a question. Just about the impact from the Middle East, you said it was dissipating. I was just curious if you're doing anything specific to do that like brand marketing, that type of thing, or if it's just a matter of time?

Sure. Thank you, Sara. The first part of your question, no, I don't think we're doing anything special. We've obviously had a lot of experience in the past being -- with the global footprint we have of dealing with different issues around the world, and we have a sense for how these things recover. But everyone is different and time is usually the answer to most of those problems.

My question is on your results in the context of the sales performance. I think you mentioned that the operating profit in Q1 was slightly better than your expectations. I was curious to know how the sales are progressing relative to the expectations you might have had when you gave the guidance originally. And then in particular, I guess, was Q1 about what you expected, better than what you expected?

Thanks, David. Obviously, we didn't anticipate the weather impacts in the U.S., for example, in Q1. So it generally was in line with what we expected, perhaps just a tad weaker. But to the point of your question, as we go into Q2, as I mentioned earlier, the Taco Bell business is picking up strength. We are generally on track with our projections for the year, which is why we feel comfortable with our operating profit commitment and the long-term algorithm. But it is going to be a challenging year, and we have a great team out there tackling the challenges. And in any one of these challenging years, it's always an opportunity to grab market share as well. We're doing that through development with the pace of development that you're seeing.