Yum! Brands Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2021

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Third Quarter 2021 Yum! Brands Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Jody Dyer, Vice President, Investor Relations and CFO, Digital and Technology. Please go ahead.

Speaker 1

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, I would like to remind you that this conference 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.

Speaker 1

All forward looking statements are made only as of the date of this announcement and should be considered in conjunction with the cautionary statements in earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings releases and relevant sections of our filings with the SEC to find Please note that during today's call, all system sales results exclude the impact of foreign currency and references to temporary Store closures only include stores that were fully closed as of the end of the quarter, but have or are expected to reopen. For more information on our reporting calendar for each market, please visit the Financial Report section of our website. We are broadcasting this conference call via our website. Call.

Speaker 1

This call is also being recorded and will be available for playback. Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording. We would like to make you aware of upcoming Yum! Investor events and the following. Disclosures pertaining to outstanding debt and our Group capital structure will be provided at the time of the Form 10 Q filing.

Speaker 1

4th quarter earnings will be released on February 9, 2022, with the conference call on the same day. Now, I'd like to turn the call over to Mr. David Gibbs.

Speaker 2

Thank you, Jody, and good morning, everyone. I'm pleased to share our strong 3rd quarter results underpinned by record breaking unit development, continued strong digital sales and the adaptability of our brands to meet the needs of our consumers in an ever changing environment. During the Q3, we delivered 5% same store sales growth or 3% same store sales growth on a 2 year basis. Despite a challenging operating environment due to the ongoing COVID pandemic, I'm extremely proud that we opened 760 net new units, a Q3 record with broad based strength across our portfolio. While Yum!

Speaker 2

China continues to be a leader in development, we opened 3 79 net new units across The rest of our portfolio, roughly equivalent to our Q3 2019 global net new units, including China. Our continued positive development momentum this quarter is a testament to the strength of our iconic brands fueled by strong unit economics and a healthy, Well capitalized franchise system primed for sustained growth. Now, we'll discuss our Q3 results and 2 of the 4 growth drivers that Underpin our recipe for growth, our relevant, easy and distinctive brands or RED for short and our unrivaled culture and talent. I will also share an update on our ESG agenda, which we call our recipe for good. Then Chris will talk about Our other two growth drivers are unmatched operating capability and bold restaurant development in addition to providing more details on our Q3 financial performance and our strong balance sheet and liquidity position.

Speaker 2

First, a few highlights from the quarter. Overall, Yum! 3rd quarter system sales grew 8% led by same store sales growth of 5%. On a 2 year basis, Same store sales grew 3%, which includes the impact of around 500 stores or 1% temporarily closed due to COVID as of the end of Q3. COVID restrictions and limited mobility in a few markets, primarily in Asia, had a significant impact on sales.

Speaker 2

However, our sales momentum remains strong as evidenced by the fact that our global 2 year same store sales growth, Excluding Asia, accelerated since last quarter. Sales strength continued in many developed markets, including the U. S, UK and Canada with significant recovery seen across Europe as restrictions eased throughout the quarter. We've also seen pockets of strength in our portfolio of emerging markets, including the Middle East, Latin America, Africa and India to name a few. As we previously shared, looking across the more than 150 countries in which we operate, our recovery will neither be consistent from country to country Nor linear within a country, reinforcing the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off A key growth driver for our business remains the continued acceleration of our digital and technology strategy, including how we leverage our global scale with technology investments to enhance the customer and employee experience, strengthen restaurant unit economics and provide a competitive advantage for our franchisees.

Speaker 2

We're seeing strong and sustained momentum through our digital and off premise channels Across our global business, even as customers return to our dining rooms, we posted over $5,000,000,000 in global digital sales with a near 40% digital mix during June 3. We continue to expand delivery capabilities across the globe, setting a record this quarter with over 41,000 stores offering delivery to our customers. Most recently, we acquired Dragon Tail Systems which will allow us to tap into the power of artificial intelligence to streamline the end to end food preparation process and further enhance our delivery capabilities. Where we've deployed Dragon Tail's cutting edge technology, We found that it makes it easier for team members to operate and run a restaurant and helps our franchisees strengthen store operations, all resulting in a better customer experience. This is the perfect segue to talk about our 4 red brands.

Speaker 2

Starting with the KFC division, which accounts for 52% of our operating profit, Q3 system sales grew 11%, driven by 6% same store sales growth and 7% unit growth. On a 2 year basis, Q3 same store sales were up 1%, which included the impact of 1% of the stores being temporarily closed due to COVID. At KFC International, same store sales grew 6% during the quarter. Same store sales declined 1% on a 2 year basis. As previously mentioned, increased COVID case counts and limited mobility in a few key Asia markets Pressured top line trends in the quarter.

Speaker 2

This quarter, several Western European markets joined the group of resilient markets leading recovery where sales have fully recovered to pre COVID levels. Strong digital and off premise growth, newsworthy products and doubling down on value Earnings have fueled top line growth in these markets, coupled with the continued strength of the chicken category across the QSR segment globally. Next, at KFC US, same store sales grew 4% during the quarter, while same store sales increased 13% on a 2 year basis. The continued success of our chicken sandwich and the strength of the group occasion remain significant drivers of our same store sales growth. Additionally, as of July, our year to date digital sales in the U.

Speaker 2

S. Surpassed our full year 2020 digital sales, which speaks to the results we're seeing from our investments in this critical growth channel. Now on to the Pizza Hut division, which accounts for 17% of our operating profit. Q3 system sales grew 4% driven by 1% unit growth and 4% same store sales growth. For the division, 2 year same store sales grew 1% during the quarter, which included the impact of 1% of stores being temporarily On a 2 year basis, same store sales declined 4%, while our Pizza Hut International business continues to be pressured given our substantial Dine Index, The sustained strength in our off premise business as reflected by 21% same store sales growth on a 2 year basis bodes well for the future of the brand and continues to fuel franchisee interest in investing in assets focused on serving the off premise occasion.

Speaker 2

Our markets continue to demonstrate what it means to be red by focusing on strong value propositions and innovative partnerships, including Beyond Meat product offerings in 2 markets this quarter. At Pizza Hut US, we continued to see positive momentum with 2% same store sales growth. On a 2 year basis, same store sales grew 8% and the off premise channel grew 17%. Pizza Hut continues to delight customers by bringing only from Pizza Hut premium innovation with the launch of the Edge Pizza and the return of the successful Detroit style pizza in Q3. Additionally, we promoted the Big Dinner Box during back to school season to offer an easy Our solution for our Pizza Hut customers.

Speaker 2

Moving on to Taco Bell, which accounts for 31% of our operating profit, 3rd quarter system sales grew 8%, driven by 3% unit growth and 5% same store sales growth. 2 year same store sales growth was 8% for the quarter. Taco Bell continues to focus on long term growth opportunities by during the quarter. Meanwhile, Taco Bell International remains focused on their mission to make tacos cool around the world, while also ensuring the brand is culturally relevant in each market. In the UK, we gave away free tacos We saw system sales grow 19% during the quarter, driven by 11% same store sales growth and 7% unit growth.

Speaker 2

On a 2 year basis, same store sales grew 7%, which included the impact of about 1% of stores being temporarily closed as of the end of Q3. We continue to see strong results through our digital channels even as customers return to our dining room. During the quarter, we launched a Now I'll discuss our unrivaled culture and talent growth drivers. The hallmark of Yum! Is our people first culture.

Speaker 2

We have tremendous leaders across our organization that have been developed internally to lead our brand and because of our culture, we're able to attract world class external talent. This quarter, we had the opportunity to announce some exciting internal promotions with planned leadership transitions. First, Tony Lowings, CEO of KFC will be retiring on March 1, 2022. I want to thank Tony for his more than 25 years working at Yum! He has embodied what it means to be a people first leader throughout his career and will no doubt leave a lasting legacy on the KFC brand.

Speaker 2

Tony's successor will be Sabra Sami, KFC's Global Chief Operations Officer, who is an incredibly well respected and experienced leader who has played a pivotal role in the KFC global business. Sabra's promotion to CEO of KFC provided an opportunity to elevate another internal talent with Dyke Schiff stepping in as President of KFC after serving as KFC's Global Chief People and Development Officer. With their combined experience of over 40 years with Yum! Both, Sovra and Dike will assume their new roles effective January 1, 2022. I couldn't be more confident in our ability to continue to unleash the Power of this iconic brand with both Sovereign and Dike leading KFC.

Speaker 2

Next, we recently announced that David Graves, Pizza Hut U. S. General Manager will be promoted to President of Pizza Hut U. S. Effective January 1, 2022.

Speaker 2

Alongside Kevin Hochman, David has helped architect the Pizza U. S. Strategy and is the right person to lead the way forward for the brand by continuing to partner with our franchisees. With this promotion, Kevin Hochman, Interim President of Pizza Hut US and President of KFC US We'll return full time to KFC US. I would like to thank Kevin for his unwavering commitment and leadership over the past 2 years As he led the Pizza U.

Speaker 2

S. Business and franchisees through a critical turnaround that has shown tremendous progress Today, all while simultaneously taking KFC US to new heights. These internal promotions demonstrate that our deep bench of We recruited significant external talent with the appointment of Aaron Powell as Chief Executive Officer at Pizza Hut. Aaron joins us from Kimberly Clark where he most recently led their Asia Pacific business. We're thrilled to have Aaron join our team with the seasoned CPG executive experience and believe his leadership alongside Nipple Chow and David Graves will help fuel the brand growth strategy.

Speaker 2

Equally as important as our recipe for growth is our recipe for good. I could not be prouder of the progress Yum! And our brands have made this year in sharpening the focus and execution of our ESG agenda, particularly on climate action and sustainable packaging, alongside our global unlocking opportunity initiatives to tackle inequality. We are advancing our plans to reduce greenhouse gas emissions across our global system and supply chain by nearly half by 2,030, While we work to implement, learn from and scale pilots for reusable, recyclable and compostable packaging in the front of our to meet our 2025 public commitment. Across all of our brands, we're focused on building a resilient business for the future with purpose and sustainability at the core.

Speaker 2

Our iconic brands and unmatched scale put us in a class of our own. We're competitively advantaged given the size and capabilities of our franchise system And I'm thrilled with our teams as we continue to be nimble and meet the consumer where they are. Overall, I'm proud of how our business is performing and I'm confident that we're positioned to win in a post With that, Chris, over to you.

Speaker 3

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our unmatched operating capability and bold restaurant development growth drivers and our solid balance sheet and liquidity position. I'll start by discussing our financial results. Our results Year to date through Q3 highlighted by 15% system sales growth translating into strong core operating profit growth of 26% demonstrate the resilience and strength of our economic model. The continued momentum reflected in our results reaffirms our confidence in delivering on an annual basis the long term growth algorithm we reinstated on our last call, Specifically 2% to 3% same store sales growth, plus 4% to 5% net new unit growth, translating to mid to high single digit system sales growth and high single digit operating profit growth.

Speaker 3

In the Q3 specifically, Yum! System sales grew 8% driven by 5% same store sales growth or 3% on a 2 year basis, which includes the impact of about 1% of stores being temporarily closed as of the end of Q3. We delivered 4% unit growth year over year, which included a record of 760 net new units this quarter. Core operating profit increased 3% for the quarter, in line with our internal expectations when accounting for one time items that impacted comparability. The largest of these items was the lap of last year's bad debt recoveries, which accounted for a 5 point headwind to core operating profit growth.

Speaker 3

EPS excluding special items was $1.22 representing a 21% increase compared to ex special EPS of $1.01 in the Q3 last year. Reflected in our ex special EPS this quarter is an investment gain on our approximate 5% investment in Deviani International Limited, an entity that operates KFC and Pizza Hut franchise units in India. Our minority stake Endevyani was acquired in lieu of cash proceeds upon the refranchising of approximately 60 KFCs In India during 2019 2020, during the Q3, Devyani completed an initial public offering and we began reflecting the change in fair value of our investment in our results during the quarter. This resulted in $52,000,000 of pretax Investment gains on our approximate 5% stake, which added $0.16 to EPS, but did not impact our core operating profit. During Q3, we had bad debt expense of $3,000,000 As a reminder, we had large quarterly swings in bad debt last year Due to COVID and we're lapping $21,000,000 in bad debt recoveries in the Q3 of last year, resulting in a year over year headwind of We negatively impacted again in Q4 as we lap bad debt recoveries of $8,000,000 in the Q4 last year.

Speaker 3

Our general and administrative expenses on an ex special basis for the quarter were $249,000,000 On a full year basis this year, We now estimate consolidated G and A will be approximately $1,050,000,000 An increase of about $60,000,000 above our incoming expectations for the year, driven entirely by our above target incentive compensation based on our strong business performance. Our commitment to be an efficient growth company that leverages fixed costs With our unique scale benefits is unchanged. We expect our G and A to system sales ratio to move back to 1.7% next year a full year basis. Finally, we know that Taco Bell Company store margins have begun to normalize in the back half of this year due to increased staffing in our restaurants as we return to our historical daypart mix, wage investments and recent commodity inflation. While there will be quarterly variability due to the dynamic environment, we are confident in our ability to consistently deliver Taco Bell company store margins in line with our historical pre COVID levels for full year 2021 and beyond.

Speaker 3

Next, I'll discuss our unmatched operating capabilities. We continue to invest in our technology strategy to expand both our digital capabilities and Restaurant Technology Solutions. We're prioritizing making it easier to operate a restaurant, ultimately driving efficiencies in our stores to enhance Franchise unit economics, while also improving the customer experience. To that end, during the quarter, we closed on the acquisition of Dragon Tail Systems, A restaurant technology company that enhances both the team member and customer experience. Dragon Tail uses innovative technology that streamlines the order management process in the restaurant and optimizes delivery routes for drivers, resulting in our customers receiving the freshest Across the Pizza Hut system, many Pizza Hut restaurants leveraging Dragon Tail's platform have already seen a positive impact on sales, Order fulfillment and customer satisfaction scores, including product freshness and delivery times.

Speaker 3

I recently participated in virtual Another example of how our technology investments yield enhanced operating performance is Taco Bell's continued execution of its all access This connected suite of core restaurant technology solutions is used to optimize operations and create a frictionless These strategic efforts contributed to Taco Bell's 7th consecutive quarter with drive thru times below 4 minutes, Enabling the brand to serve more customers through the drive thru while also delivering a great customer experience. Moving on to our old restaurant development growth driver, I'm thrilled to discuss how we delivered another record development quarter with 760 net new units, including meaningful contributions across multiple geographies at our KFC Pizza Hut and Taco Bell mobile brands. While we continue to see strong development from Yum! China, Our brands are also seeing broad based development across other markets. The widespread strength in our store level economics And cash on cash returns improving relative to pre COVID levels are key drivers contributing to the acceleration and development we're seeing around the world.

Speaker 3

Our KFC international markets have seen impressive development as China, Russia, India, Latin America and the Middle East continued to deliver strong unit development during the Q3. Additionally, over the past year, Pizza Hut International has driven a significant inflection in their unit growth, going from negative net new units in 2020 to opening nearly 200 net new units during the Q3. We expect this momentum to continue, a further testament to the confidence our franchisees have in the future of the brand. At Taco Bell International, We continue to see strong development as key markets are approaching scale. Not only are we seeing strong development across our brands, Given the continued strength of digital and off premise growth, our teams continue to evolve the asset types being developed into more digitally enabled format.

Speaker 3

As an example, we now have 23 Go! Mobile locations at Taco Bell U. S. These technology forward restaurants, which include dual drive thrus with a dedicated mobile pickup lane, mobile pickup shelves and a faster Bellhop experience, Among other things, have been a big hit and we have more in our development pipeline. Next, I'll provide an update on our strong balance sheet and liquidity position.

Speaker 3

In August, we completed our 3rd whole business securitization issuance at Taco Bell in the past 5 years issuing $2,250,000,000 of new securitization notes. The weighted average yield of the new notes was approximately 2.24% and the proceeds were used to opportunistically repay $1,300,000,000 of existing higher coupon Taco Bell securitization notes and to support our share buyback program. We still expect our 2021 interest expense to be approximately $500,000,000 In line with 2020, we ended the quarter with cash and cash equivalents of $1,000,000,000 excluding restricted cash. Due to our continued recovery in EBITDA, our consolidated net leverage continues to be temporarily below our target of approximately 5x. With respect to our share buyback program, during the quarter we repurchased 2,600,000 shares at an average share price of $127 per share, totaling approximately $330,000,000 Year to date, we've repurchased $860,000,000 of shares at an average price of $117 Capital expenditures net of refranchising proceeds during the quarter were $49,000,000 We now expect net capital expenditures Approximately $175,000,000 for the full year, reflecting roughly $75,000,000 in refranchising proceeds and $250,000,000 of gross CapEx.

Speaker 3

Lastly, our capital priorities remain unchanged. Invest in the business, maintain a healthy balance sheet, pay a competitive dividend and return the remaining excess cash to shareholders via share repurchases. Before wrapping up, I'd like to take a moment to address both labor and cost inflation pressures and how Yum! Is well positioned to navigate these challenges. U.

Speaker 3

S. Labor availability remains tight across most industries, Driving wage inflation and staffing challenges that have resulted in a small number of our stores, limiting operating hours, particularly during the early morning and late night dayparts. While our franchisees are not immune to these market pressures, We believe the power of our scale and the larger average size of our franchisees relative to those of our QSR peers enables our system to manage the inflationary environment better than most. For example, while many small chains and independent restaurants Accelerating investments that help widen their strategic advantage. Additionally, our people first culture is a true competitive advantage in both attracting and retaining team members.

Speaker 3

We're confident in the ability of our brands to respond to dynamic market conditions and are working closely with our franchisees to assess strategic opportunities to take price as and when needed, while ensuring we continue to offer compelling value to our customers. While store level margins have moderated, Franchisee unit economics generally remain incredibly healthy. Overall, I'm pleased with our performance this quarter, driven by impressive unit growth and sustained digital sales. We continue to invest in our digital ecosystem to scale technologies and provide a unique competitive advantage for our franchise operators while enhancing the customer and team member experience. Our franchise system is healthy and well positioned to invest through the near term pressures, fueling our development engine and future unit growth.

Speaker 3

Our unit growth and sustained sales momentum despite lingering COVID impacts only make us more confident in our ability to deliver on our long term growth algorithm. With that, operator, we are ready to take any questions.

Operator

We will now begin the question and answer session. The first question comes from John Glass with Morgan Stanley. Please go ahead.

Speaker 4

Thanks and good morning. I'm wondering if you could just comment a little bit more about Taco Bell's performance this quarter. While it was strong on a 2 year basis, there was some deceleration. Stimulus may have played a role last Quarter, so maybe that was a false read. That would also seem to be the brand just given your comments on staffing in early morning and late night that may have been impacted.

Speaker 4

So is there any Notable impact to sales just from staffing shortages there. So if you could just sort of talk about the overall trends in staffing in particular and why maybe you saw some deceleration on a 2 year basis?

Speaker 5

Yes. In terms of staffing, obviously, we're pressured in our restaurants just as everybody else is. But I think our we're doing an amazing job in the field of Being focused on retention, we won't have a staffing problem if we don't have any open jobs, if we retain the employees that we have. And Given the culture that we have in our restaurants across all of our brands and the kind of environments that our franchisees create for their employees With Paychex and in pathways to advancement, I think we're getting through this better than most. We're really proud of the results we put up across all of the brands this quarter.

Speaker 5

You guys probably saw it's on a 2 year basis, we're positive on all four brands. On a 1 year basis, we're positive on all four brands. And then obviously the big news is the 760 net new units that we opened for the quarter. So very strong quarter. We've got pluses and John, if you're talking about in the U.

Speaker 5

S, KFC was up 13 on a 2 year basis, Pizza Hut's HMR business, home meal replacement business was up 17. Taco Bell was a little bit softer. For them, late night and breakfast Become a little bit more of a challenge and they skew a little bit more towards individual meals. And I think that's what you're seeing. Every brand has a different set of attributes as we go through this.

Speaker 5

Some will play better in this environment than other, but all of our brands are really doing quite well, which is contributing to this great quarter.

Operator

The next question comes from David Palmer with Evercore ISI. Please go ahead.

Speaker 6

Thanks. Just a quick follow-up on John's and then I have one on unit growth. The Taco Bell result 8% 2 year, that's below the industry's comp. Taco Bell has been a long term share gainer. If you have a big picture comment about Maybe sources of weakness, whether supply chain, the Midwest, something like that.

Speaker 6

Also just bigger picture, why you think Taco Bell on a And then on unit growth, do you The results are very strong and it's hard to see weakness or holdbacks from a development standpoint from a macro sense, but We would expect there to be that, that there would be some friction out there given all the macro challenges around COVID. Do you believe that there is some

Speaker 5

7.60 net new units in 3rd quarter is a record for Yum! We're at 1800 net new units year to date basically, Which is closing in on the record we set for Yum! In 2019 for full year development. And I think you're right, there's probably some friction that we're We haven't been able to open all the units that we could because of some challenges. But this is where the big advantages of Yum!

Speaker 5

Come in, our Scale, our purchasing capability, the size of our franchisees, their access to capital, we've been anticipating some of the supply chain challenges, ordering ahead of I'm securing the inventory we need on equipment, for example, to get through this without having equipment delays to open restaurants. So I do think there's further upside to the numbers we're putting up. And I you think if we continue these trends, we'll obviously set a record for Yum! In the Q4 and we probably have a shot at setting A record for the restaurant industry all time for a number of units open in 1 year. I look forward to reporting back on that in our Q4 call.

Speaker 5

As for Taco Bell, the Taco Bell sales are up 15% system sales are up 15% on a 2 year basis. We make no apologies for that. The business is doing quite well, very strong. It does have its own unique challenges since it skews a little bit more towards Jewel meals versus family occasions, you're seeing the brands like Pizza Hut and KFC that's skewed towards family occasions performing even better, But Taco Bell performance is strong. In Q3, we made some investments on the marketing side that weren't designed to pay off On the top line such as relaunching breakfast, we know those will have benefits for us down the road.

Speaker 5

So we're proud of what's going on at Taco Bell Some sales growth like that, unit growth like we're seeing all across Yum! And at Taco Bell, I'm excited about the future for all our brands.

Operator

The next question comes from David Tarantino of Baird. Please go ahead.

Speaker 7

Hi, good morning. I have another question on development. And first, I just wanted to see if you thought this year's development strength Was due in part to some pent up activity from delays that you saw last year And or just underlying strength. And then, Chris, I think you mentioned in your comments That you're seeing improved cash on cash returns in a lot of markets and I was hoping that you could elaborate and what you meant there specifically? Thanks.

Speaker 3

Yes. Thanks, David. As David mentioned, We are very excited about the momentum in development. And if you think about the drivers, the number one driver is unit economics. So that sort of gets at both parts of your Around the globe, in general, our franchisees are seeing strong EBITDA And they are seeing that translate to improved returns whenever they build restaurants.

Speaker 3

Remember, these are our franchisees Putting their capital to work and that's where I think the strength of the brand and the larger average size of our franchisees Really matters. They're able to see through near term fluctuations related to COVID around the globe and invest for the long term. The second Driver on development is the strong development teams that we have who are Focused and incentivized to go create great results on the development front and they have an improved set of capabilities. We're now bringing analytics to bear in how we set our development plans in a number of markets around the globe. We're bringing new prototypes to bear.

Speaker 3

We talked about the Go Mobile concept, which Primed for digital growth with Taco Bell, we have similar examples in other brands. So it's a broad set of drivers that are supporting this growth. And you've seen this trajectory change, in particular in the Pizza Hut business. That's been an important driver of where the numbers are. Pizza Hut International, Putting up plus 200 in the quarter, that's more than 300 better than where they were a year ago and you've seen Pizza Hut U.

Speaker 3

S. Stabilize. Those are also important drivers. So broad based strength in development right now.

Speaker 5

Yes. As far as the issue of pent up demand, I'm sure there's some units that spilled over from 2020 into 2021, but we do believe that these trends and development will continue. We think We've got into a new level on development. That's why we raised our development guidance on the last earnings call. And look, we're talking about net new units.

Speaker 5

Let's talk about gross new units for the quarter. In the quarter, we opened over 1,000 gross new units. That's a store every other hour All quarter long, pretty amazing. And when you think about just the side effect of that, how we're modernizing the estate with that kind of development, it's really encouraging.

Operator

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

Speaker 8

Hi, thank you very much. I think a lot of us on the call know kind of what the U. S. Issues are in terms of construction labor and permitting and even equipment. But I wanted you to kind of give us A rest of the world view in terms of how supply chains are around equipment and your ability to I guess keep this current of the stores that opened in the Q3 benefited from what was ordered 6 months ago or even longer.

Speaker 8

Do you expect this basis?

Speaker 5

Yes. Thanks a bunch, John.

Speaker 3

It's a good question. And I think this is where the strength of our Operating model and our capability set around sourcing really shines. We saw some of those supply chain challenges related to equipment are sort of a global challenge. We saw those on the horizon early this year and our supply chain teams were building Our resiliency plans at that point and they worked with our franchisees around the globe to get ahead on purchasing For those equipment and reserving capacity with suppliers, there's certainly going to be some local challenges here and there related to permitting. But again, this is where that capability set helped us get ahead, plus our larger, more sophisticated franchisees who invest ahead.

Speaker 3

They have Sophisticated teams who are driving their development, and that's a big asset here as well. So, yes, we've probably left a few units on the table, this year as a result of that. But in general, we don't see that as a constraint on our long term development patent.

Operator

The next question comes from Jon Tower with Wells Fargo. Please go ahead.

Speaker 9

Great. Awesome. Thank you for taking the question.

Speaker 6

Just real quick in terms

Speaker 9

of thinking about the value proposition to the consumer and obviously the inflation that's Curious to know how your franchisees are handling the pricing situation now and then heading into 'twenty two with Obviously, wage rate inflation as well as commodity cost inflation. How are you messaging to the franchisees The best way to handle it to the extent, obviously, you can have influence on it. And in terms of new product news, are you Constructing items, say, at Taco Bell or KFC for next year that will allow them to at least maintain some of the penny profits, so they're not getting squeezed too much in this inflationary environment? Thank you.

Speaker 3

Yes. Thanks, Obviously, inflation is a story not just in our industry, but across sectors. And again, I think this is a situation where Yum! Operating model sets us and our franchisees up to deal with those challenges really well. And I think of 3 things.

Speaker 3

1, keep in mind our footprint, 60% of our sales are outside the U. S. And these inflation Our most acute in the U. S. And we see it in a few pockets around the globe, most acute in the U.

Speaker 3

S. 2nd, in the U. S, Think about our scale. We purchased across all four brands together with RSCS. We have a professional team of Highly talented strategic sourcing experts, they're working away right now.

Speaker 3

I can tell you throughout this inflationary trend, they saw it coming. They've got plans on finding ways to offset that. So we're leveraging our scale to help manage costs in those against those pressures. And then 3rd, to your point, we pull a number of levers to manage margin with our franchisees. Our brands are working proactively with the franchisees.

Speaker 3

You mentioned product design. I'm sure we're doing a little bit of that. We've done some menu management. We'll Think about how to optimize promotions and of course pricing is a lever that's available, but our franchisees and our brands They manage and they balance the short term and the long term. In the short term, they want to make sure we're I think strong value to the customer and that we don't get too far ahead of the consumer.

Speaker 3

But in the long run, whenever I talk to our franchisees, they're confident that Long term margins in the restaurants will be sustained and we can continue the momentum we've seen on restaurant profit coming through the last couple of years.

Operator

The next question comes from Brian Mullen with Deutsche Bank. Please go ahead.

Speaker 10

Hey, thank you. Just a 2 part question on Habit. Just number 1, as you look to eventually refranchise some company owned stores there, can you talk about what you'd be looking for in any franchise partner for that brand? Maybe anything you could share about how far along you may or may not be or operational goalposts that you would like to achieve first? And then just number 2, David, I'm curious, are you spending any time yet looking for international partners?

Speaker 10

Or is it just too early for that for Habit?

Speaker 5

We appreciate the question on Habit. We're really excited about Habit's performance. If you think about it, they started Pre pandemic 60% dine in sales, so they had the biggest hill to climb in this environment and just put up a Plus 7 on a 2 year basis. So the way they've pivoted has been truly impressive. I think it hasn't gone unnoticed.

Speaker 5

We've had lots of Demand from franchise from potential franchisees both in the Yum! System and outside the Yum! System to enter. We've now started closing on A few deals we closed on 2 already with Yum! Franchisees entering the Habit system and we have more in the hopper.

Speaker 5

So we're seeing strong demand And interest in becoming Habit franchisees because the unit economics are great, all the reasons why we bought them. As far as international goes, Same story there. As you know, they're already in a couple of countries. Just was on a call yesterday where we were evaluating a new potential partner to enter in another country. So We've built up a little bit of capability and a team internationally to focus on Habit International and see every indication that that can become a growth driver for Yum!

Speaker 5

Down the road.

Speaker 1

Operator, we have time for one more question.

Operator

Thank you. And that will come from Dennis Geiger with UBS. Please go ahead.

Speaker 11

Great. Thanks for the question. Just wondering if you could talk a little bit more about Pizza Hut U. S, Both kind of near term momentum and then your thoughts on longer term positioning. I guess just first on the near term, any more details, Current impacts, maybe driver staffing challenges, if there was a bit more of an outsized impact there versus staffing challenges at the other brands across the portfolio?

Speaker 11

And then more importantly, bigger picture, just any more color on the broader strategic shifts, the benefits you're seeing and specifically how the work that you've done across asset base, digital, new product development, etcetera, impacts how you're thinking about improved brand health and positioning longer term for Pizza Hut in the U. S?

Speaker 5

Yes. Look, Pizza U. S. Is obviously a bright spot for us right now and will be for the long term as the work that we've been doing over the last few years investing in digital and capabilities and working with our franchise partners has really started to pay off. This quarter, Pizza Hut U.

Speaker 5

S. Sales were up 17% on an off premise basis, which is the heart of the business and the future of the But it's not immune to the same staffing challenges that everybody is facing. So we had I'm sure those sales were held back to some degree by The challenges of getting drivers, we actually saw our carryout business is now starting to grow faster. When we don't have the ability to get drivers, we're still able to pivot to carry out. But so we know that there's a lot of demand It was really one of our leading investments in the world of digital.

Speaker 5

That's one of the advantages that Yum! Has is our Knowledge of digital through the Pizza Hut business, I hope you guys all picked up on the fact that we had over $5,000,000,000 of So from Q2 to Q3, we did see a return to dine in, yet we saw digital sales go up And we saw digital mix go up, which is proving that not only is it sticky, that it's still something that's going to continue to grow for us, which is a great sign for all of our brands as we move forward. With that, I just want to thank everybody for the time We're obviously excited about what's going on with digital and what's going on with net new unit development, widespread same store sales growth on a 1 year and 2 year basis across All of our brands, a lot of momentum in the business right now, a lot of enthusiasm from our franchise partners with record profits

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Yum! Brands Q3 2021
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