Yahoo Finance Yum! Brands, Inc. (NYSE:YUM) Q1 2024 Earnings Call Transcript
Yum! Brands, Inc. (NYSE:YUM) Q1 2024 Earnings Call Transcript May 1, 2024
Yum! Brands, Inc. misses on earnings expectations. Reported EPS is $1.15 EPS, expectations were $1.2. YUM isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone and welcome to the Yum! Brands, Inc. 2024 First Quarter Earnings Call. My name is Nadia and I will be coordinating the call today. [Operator Instructions] I will now hand over to your host, Matt Morris, Head of Investor Relations to begin. Matt, please go ahead.
Matt Morris: 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, we will 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 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. On our last earnings call, we announced that we signed an agreement to acquire 218 KFC franchise restaurants in UK and Ireland. The transaction closed on April 29. As a reminder, several of Yum! Brands business units, report on a period calendar basis, including all U.S. and Canada brands, KFC UK and KFC Australia. For business units that report on a period basis, first quarter same-store sales growth excludes the benefit from the additional day of sales owing to Leap Day. 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 upcoming Yum! investor events and the following. Our second quarter earnings will be released on August 6 with the conference call on the same day. Finally, please mark your calendars for an in-person Taco Bell Consumer Day on December 10 at the Taco Bell headquarters in Irvine, California. Stay tuned for more details and invitations to follow. Now, I’d like to turn the call over to David Gibbs.
David Gibbs: Thank you, Matt and good morning everyone. I am pleased to report that Yum! grew core operating profit 6% this quarter despite a challenging operating environment, demonstrating the resilience of our business. As we communicated last earnings, 1Q should represent our most challenging sales quarter this year as we work through tough year ago lapse returned to a more normal inflationary environment and navigated discrete consumer demand pressures. While the impacts from the Middle East conflict have been scattered and difficult to measure, we have begun to see improvement in the most impacted markets. Taco Bell U.S. outperformed the industry on same-store sales and delivered industry-leading margins, while 1Q unit openings at KFC International set us up for a strong unit growth story in 2024.
We continued to make significant progress scaling our proprietary digital and AI-powered platforms and are excited by plans to accelerate deployment. Digital sales continued an upward trajectory approaching $8 billion and were up 11% year-over-year. Through continued kiosk deployment, greater adoption of click-and-collect and stable third-party aggregator sales, digital mix improved 5 points and for the first time ever, represented over 50% of system sales in Q1. We now have $30 billion in annualized digital sales, which by itself would represent one of the largest restaurant companies in the world. Overall, despite a more challenged operating environment, we have reached impressive new milestones and remain on track to deliver on our long-term growth algorithm target of at least 8% core operating profit growth for the full year.
Now I’ll discuss our Relevant, Easy and Distinctive brands, or R.E.D. for short, followed by our Unrivaled Culture and Talent and Good Growth strategy. Chris will then provide an update on our first quarter results, followed by our bold restaurant development, unmatched operating capabilities and balance sheet position. Starting with the KFC division, which accounts for 51% of our divisional operating profit. KFC grew system sales 4% this quarter, owing to an 8% unit growth and a 2% decline in same-store sales. The same-store sales pressure was partially attributable to impacts from the conflict in the Middle East, which have begun to ease and we expect a 2-year trend for KFC International overall to accelerate in the same quarter. We saw strong top line growth in other parts of the world, including Latin America, Africa and Greater Asia.
System sales in Latin America grew 22% on the heels of a strong marketing calendar and continued success of the KFC original nuggets. In Africa, system sales grew 11%, thanks to 5% same-store sales growth driven by product innovation and 6% net new unit growth. In Greater Asia where system sales grew 8%, we recently partnered with a new franchisee in Korea, who is driving transaction growth with a calendar focused on core, value and expanding consumer access, which resulted in a 26% growth in same-store sales. At KFC U.S., same-store sales were pressured from unfavorable weather events and chicken value promotions from QSR competitors. Moving on to the Taco Bell division, which represents 35% of our divisional operating profit and 75% of our U.S. divisional operating profit.
System sales at Taco Bell U.S. grew 4%, led by 2% same-store sales growth and a strong outcome on top of last year’s 9% same-store sales growth. Sales improved throughout the quarter after difficult weather events in January. Taco Bell focused on key levers within its magic formula to drive growth, including building brand buzz, providing value to our consumers and expanding into new category entry points. We know that when we execute on this magic formula, Taco Bell puts itself at the center of the cultural conversation. There was no better example of this than the Live Más LIVE event Taco Bell held in Las Vegas to share its upcoming innovation calendar, an industry-first event. Of course, it was not surprising that Fast Company named Taco Bell the Most Innovative Company in Dining and #8 overall.
Early in the quarter, the team launched a new cravings value menu and ended the quarter with a successful launch of the Chicken Cantina menu. The cravings value menu features industry-leading value with 10 items priced under $3 providing consumers with craveable everyday value offering. Nearly one-third of transactions contain an item off the cravings value menu, and when purchased, 80% have at least one other item added, translating to a nearly 10% check uplift compared to non-cravings value menu checks. The impressive performance of such product launches is compounded by Taco Bell’s ability to deliver industry leading margins on top of a great consumer experience. At Taco Bell International, system sales grew 6% this quarter. The team is focused on building brand and category awareness globally.
This included markets such as Canada and Latin America, where the team elevated the core menu and launched the Chicken Cantina menu to expand their consumer base. Next, at the Pizza Hut division, which comprises 15% of our divisional operating profit. During the first quarter, system sales declined 4% with 5% unit growth and a 7% decline in same-store sales. The year-over-year growth rate in same-store sales was suppressed from difficult year ago lapse and the ongoing impact from the conflict in the Middle East. The team continued to focus on the individual meal occasion this quarter with the India market launching the Melts platform. At Pizza Hut U.S., same-store sales declined 6% as we lapped the launch of Melts and Big New Yorker Pizza. However, the 2-year trend was positive and improved from last quarter.
Lastly, at The Habit Burger Grill, for the first quarter, system sales declined 2% with 6% unit growth. Margin trends improved throughout the quarter with a combination of initiatives leading to a 60 basis point improvement in store level margins year-over-year. Now, I will turn to our Good Growth strategy, starting with our people pillar. Effective June 1, Alex Barsk will join KFC Global as the new Chief Financial Officer. Alex is joining from Pizza Hut, where she most recently served as Global CFO. Alex joined Pizza Hut in 2015 and has held several leadership roles across strategy, finance, development and supply chain. Alex’s transition is another great example of Yum! leveraging its talent across brands to help share unique learnings and experiences.
To round out our people pillar, I’d like to congratulate and thank Yum!’s Senior Vice President of Finance, Corporate Controller and my friend, Dave Russell, who recently celebrated his 25th anniversary at Yum! with today marking his 100th quarterly earnings announcement. Dave has been with the company since 1999, always serving as a trusted leader who brings his deep knowledge and analytical perspective to our finance and accounting function. Thank you, Dave, for your dedication to our growth over the last 25 years and I look forward to your continued partnership in the future. Before I hand it over to Chris, I would like to share a few thoughts on the future of our digital and technology strategy given we achieved an important milestone this quarter with more than half of our sales coming from digital.
You will recall that the first phase of our journey to become the leading global digital restaurant company began in earnest in 2019. That first phase focused on building or acquiring a comprehensive suite of owned platforms, spanning Easy Experiences, Easy Operations and Easy Insights and accelerating deployment of those platforms across our brands and markets. While we still have further to go in deploying these platforms, we have achieved critical mass in several areas. Taco Bell U.S., one of our twin growth engines, has achieved the most extensive deployment of key platforms, including the Poseidon POS system, the Yum! e-commerce platform and the AIM inventory management platform. Our other primary growth engine, KFC International, has been accelerating the rollout of those same platforms and is our leader in deploying in-store kiosk technology.
Pizza Hut, of course, has been our leader in deploying Dragontail to thousands of restaurants around the globe. Behind the scenes, our global data hub houses data generated from these platforms. The deployment of our capabilities in this first phase of our journey has driven the dramatic increase in our digital sales from approximately 20% in 2019 to over 50% now. The impact of this growth has been significant. To share just a couple of examples of impact, our consumers enjoy more convenient and frictionless experiences, leading to high frequency and check sizes. Our franchisees enjoy significant productivity benefits as their team members no longer spend time taking orders and payments for half of all transactions, leading to stronger unit economics.
We believe we are still only scratching the surface of the full value creation potential of our capabilities. While the first phase of work in deploying our platforms will continue, given the critical mass we have achieved, we have initiated a second parallel phase in our technology journey. This second phase will focus on maximizing the value creation potential of our platforms through the acceleration of AI capabilities in combination with fully leveraging the immense data assets we now own. With our platform-driven approach, we can now more easily integrate AI capabilities across our digital ecosystem. We currently have more than 40 AI initiatives in progress across the company spanning marketing, operations, insights, engineering and our internal back-office functions.
While many of these initiatives will remain confidential for now, one example that we have shared publicly is Voice AI to enhance our consumer experience. We have been testing this capability at the drive-thru in 5 Taco Bell stores in California. We are expanding that test to 30 stores in Q2 based on positive consumer feedback. Another example is our piloting of AI-powered technology in our SuperApp restaurant general manager support tool, making it even easier and faster for managers to access critical operational information to make better decisions. Of course, our Dragontail platform was the first AI-enabled next-gen restaurant operational system to enhance the consumer and team member experience in a multi-channel fulfillment environment.
As an example of how we are elevating the use of our data assets, in Q1, we launched the R.E.D. 360 U.S. Consumer Data Insights system. As of Q1, both Pizza Hut U.S. and Taco Bell U.S. have integrated into the system and KFC U.S. will integrate in the second quarter. This system allows us to leverage insights into consumer behavior across our brands in the U.S. After full deployment, R.E.D. 360 will be the first scaled cross-brand U.S. restaurant consumer data engine in the quick service industry and will pave the way for unique insights and personalization opportunities on digital and social channels. For those who may have missed it Joe Park, our Chief Digital and Technology Officer, was recently interviewed in The Wall Street Journal, bringing to life many of these plans as we become more focused on pursuing AI and data-driven innovation.
As we do all of this, we are also continually innovating how our technology teams work internally to better leverage our scale so that we can continue to bend the curve on the net investment impact of these digital and technology initiatives. To sum it up, we are excited about having ramped up this second phase in our journey and are doubling down and pursuing the ultimate goal of our digital and technology strategy, which is to better serve our franchisees, providing them with more, better, faster, cheaper and safer technology while simultaneously delighting consumers and maximizing Yum! shareholders’ returns. We will continue to provide updates on both phases of our journey on future calls, organized around our easy capability framework.
In closing, as I look back over the quarter, I am proud of our teams and their ability to navigate any environment as our brands stand for unmatched value and convenience, providing a range of products and price points to meet any consumers’ needs. Our resilient business model, coupled with our strategy to leverage our technology platforms on a global scale, gives me confidence we will continue to improve both franchisee and Yum! economics. Looking ahead, our initiatives to become an even more nimble and data-driven organization are underway and I am excited for the shareholder value we will create. With that, Chris, over to you.
Chris 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 an update on our balance sheet and capital strategy. Starting with our results. First quarter system sales grew by 2% driven by 6% unit growth. As we communicated on our last call, we expected the first quarter to be our most challenged from a same-store sales perspective due to prior year lapse, a return to a more normal inflationary environment and discrete consumer demand pressures, including markets impacted by the Middle East conflict. We believe the markets most impacted by the conflict collectively created a low single-digit headwind on Yum!’s overall Q1 same-store sales.
Despite these challenges, I’m pleased to report Yum! delivered 6% core operating profit growth exceeding our internal plan and demonstrating the resilience of our profit model. First quarter ex special general and administrative expenses were $265 million, down 4% year-over-year, a continuation of the G&A momentum we had in the fourth quarter. Reported G&A was $286 million and includes $21 million in special expense related to ongoing resource optimization, which we expect to generate additional savings in the second half. Reported operating profit included a 2-point impact in the quarter from foreign currency translation. First quarter ex-special EPS was $1.15, which includes negative after-tax impacts of $0.08 from investment losses and $0.03 from foreign currency translation.
As a reminder, we shared on our last call the intent to purchase 218 KFC UK and Ireland stores. We’re excited to report we officially closed this acquisition at the end of April. These stores have average unit volumes above $2 million and healthy store level cash margins. We expect the addition of these units to provide approximately $40 million of incremental EBITDA in the 12 months after acquisition while the benefit to our operating profit will be largely offset over the next several years due to depreciation and amortization, including amortization of reacquired franchisees. Now let me share greater detail on our first quarter unit growth in the context of our Bold Restaurant Development growth driver. Yum! opened over 800 units in the first quarter.
We reached the incredible milestone of opening KFC’s 30,000 restaurant globally. As the number one brand on Entrepreneur Magazine’s Top Global Franchise rankings, KFC continues to demonstrate strong desirability among global franchisees with a new store opening every 3 hours. We continue to see an incremental store opportunity of 50,000 KFCs over the long-term. Across the global system, the outlook for development in 2024 is strong. We expect to continue to open units in a broad range of markets, which last year included over 100 markets, and to cross the 60,000 unit milestone. Further solidifying Yum!’s position as the world’s leading multi-brand restaurant franchisor. There are several reasons we remain confident in these trends. First, we entered 2024 with broad-based development momentum.
In Q1, we grew units across 81 brand-country combinations. Second, we have large, committed franchisees who have entered into more unit development commitments for 2024 than in each of the prior 2 years. Approximately 80% of 2024 exceeded new builds for KFC outside of China are part of development commitments. Third, the development white space remains massive. We have just 6% of the global QSR market. China is a prolific developer and serves only one-third of the China population. In India, which is the fastest-growing global economy, KFC and Pizza Hut have been the fastest and third fastest-growing QSR chains, respectively, since 2019. Finally, our brands unit economics remain attractive across key markets where scale and first-mover advantages put our franchisees in a position of strength.
Scale leads to unique advantages including access to alternative financing solutions, dedicated development teams and in-depth market knowledge. Scale also offers operating advantages. For instance, our largest partner, Yum China, has AI-enabled digital tools to allow its restaurant general managers to oversee multiple restaurants, creating unmatched savings that can be passed to consumers. The Serrano Group based in Latin America and Ramcar based in the Philippines run their own poultry processing facilities in addition to distribution capabilities, giving them cost and reliability advantages. At a brand level, KFC has food innovation kitchens in Canada, the U.S., Latin America and the Caribbean, United Kingdom, Thailand, Australia, South Africa, India and Singapore.
Perhaps underappreciated, our global innovation capabilities are real sources of differentiation. Moving now to the digital and technology front. Recall that our vision is to empower our franchisees with leading-edge technology solutions with advantaged economics. As David put it, we want to deliver more, better, faster, cheaper and safer technology to our franchise partners. We are advantaged by owning important foundational platforms such as our Poseidon POS system, Yum! e-commerce, Dragontail, SuperApp and our global data hub, and the impact of these platforms will grow exponentially as we deploy more of them to more stores. Data is becoming a crucial differentiator, enabling us and our franchisees to generate better insights and make better decisions.
On this front, quick service restaurants will benefit disproportionately because of the high frequency nature of our consumer visits, which results in more data. Within quick service, a few characteristics will separate us from our competitors, including our multi-brand portfolio, our scale and global footprint, our ownership of key platforms and the increasing integration between our platforms. We will leverage our data for insights and to drive more effective marketing and loyalty engagement, and we will deploy advanced AI tools to all aspects of our business. As we leverage our scale more and more in these areas, we can be faster, cheaper and safer through consistency and standardization across our environment. Let me now discuss the digital and technology accomplishments for Q1 across our Easy Experiences, Easy Operations and Easy Insights pillars.
Beginning with our Easy Experiences pillar. We continued to onboard Pizza Hut U.S. to the Yum! e-commerce platform with a full cutover planned by Q3, followed by three Pizza Hut international markets by year-end. For Taco Bell U.S., where the Yum! Commerce platform is fully operational, we have accelerated viral promotions and have seen Taco Bell’s digital ordering capacity increase tenfold relative to the legacy system. Within Easy Operations, the expansion of our world-class technology products and platforms continued. We expanded Poseidon to 1,800 Taco Bell U.S. restaurants, bringing our total to over 7,000 restaurants. We onboarded over 500 Pizza Hut restaurants onto the Dragontail AI platform, bringing our system total to over 7,000 restaurants.
In the near future, we plan to nationally roll out Dragontail’s kitchen display system and Poseidon to our KFC U.S. restaurants. Finally, our custom-built SuperApp, which provides smart, automated routine management tools for our restaurant managers, is now used in nearly 9,500 Pizza Hut and KFC restaurants with significant expansion plans underway for KFC. For the third pillar of our Easy strategy, Easy Insights, KFC and Pizza Hut have continued to scale a new experienced management program allowing the brands to draw insights from an expanded source of consumer reviews across digital channels, including third-party aggregators and social media in addition to guest survey responses. KFC is now live in 10,000 restaurants and has seen a fivefold increase in per-store data point.
Pizza Hut expanded this service to 7,000 restaurants across more than 50 countries. Talking about all of the tremendous advancements underway excites me about the future. This work will be vital as we embark on further innovation behind voice AI, restaurant automation and better leveraging our loyalty programs. Next, I’ll provide an update on our balance sheet and liquidity position. Net capital expenditures for the quarter were $38 million, reflecting $49 million in gross CapEx and $11 million in refranchising proceeds. Our net leverage ratio ended the quarter at 4.1x. In the quarter, we sold our minority investment in Devyani for $104 million, representing a $73 million increase in value since acquisition. Our cash balance ended at $652 million, reflecting proceeds from the Devyani investment sale and modest accumulation in cash to finance the KFC UK acquisition.
With the KFC UK deal behind us, our cash balance will return to a normalized rate of around $400 million, excluding the unrepatriated Devyani proceeds. Thereafter, with no significant debt maturities in 2024 or 2025, we plan to use our excess free cash flow primarily to fund share repurchases, absent accretive investments we choose to make. 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 returning excess cash to our shareholders. Subsequent to the quarter end, we renewed our pro rata credit facility, including our revolving credit facility and Term Loan A. We were pleased to renew the $2 billion facility with the same pricing and terms that we achieved in 2021 while also increasing the revolver from $1.25 billion to $1.5 billion.
Now let me discuss our latest outlook on full year 2024. We are confident that 2024 will showcase a strong unit development story at or above 5% unit growth, led by KFC International as franchisees capitalize on our brand’s attractive paybacks. In the U.S., Taco Bell continues to balance core everyday value to cater to a more discerning consumer across income groups with premium innovation to attract new consumers. We expect full year Taco Bell company-operated margins to be in the range of 23% to 24%. Excluding the 53rd week, we now expect ex special G&A to be flat to down slightly for the year, including incremental G&A associated with the KFC UK acquisition. Finally, we are confident we will deliver at least 8% core operating profit growth excluding the benefit of the 53rd week.
To close, I am incredibly proud of the progress we have made over the last few years in the areas to which we dedicated our focus and internal resources. Our team continues to manage through industry challenges to position us for a strong year and deliver our long-term operating profit plan, reinforcing the resilience of our business, strength of our talent and commitment to our shareholders. Going forward, we are moving to solidify ourselves as the multi-brand franchisor of choice through a more efficient adaptable, data-driven organization. We are only in the early innings of unlocking the value of our unmatched data, which will help power our aspirations and deliver sustained above-market shareholder returns. With that, operator, we are ready to take any questions.
Operator: Thank you. [Operator Instructions] Our first question goes to Jon Tower of Citigroup. Jon, please go ahead, you line is open.
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