Yum! Brands Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

Key Takeaways

  • Q1 system sales grew 8%, driven by 6% unit growth and 3% same-store sales, with a Q1 record of 997 gross unit openings and a digital sales milestone of $6 billion at over 40% mix.
  • Operations in Russia were suspended and ownership is being transferred to local operators, with profits redirected to humanitarian aid, reducing Q1 operating profit by 1 point and expected to cut full-year core operating profit by ~3%.
  • Pizza Hut U.S. comps fell 6% as delivery capacity was constrained by driver shortages, prompting integration of an outsourced delivery-as-a-service model and expansion into aggregator marketplaces to meet demand.
  • Excluding China, global same-store sales rose 6% (emerging markets +18%), and strategic pricing plus scale helped maintain Taco Bell’s company-owned restaurant margins at ~22%, in line with Q1 2019 levels.
AI Generated. May Contain Errors.
Earnings Conference Call
Yum! Brands Q1 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Welcome to the Q1 2022 Yum! Brands Earnings Conference Call. My name is Ruby, and I will be your moderator for today's call. I will now Over to our host, Jody Dyer, VP of Investor Relations to begin.

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 our 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 will find disclosures and definitions of non GAAP financial measures and other metrics that may be used in today's call as well as reconciliations of non GAAP financial measures. Please note that during today's call, all system sales and operating profit results exclude the impact of foreign currency. Additionally, as it relates to our Russia business, our operating results for the Q1 continue to reflect revenues and expenses related to Russia Within their historical financial statement line items and operating segments. However, we have reclassed net operating profit attributable to Russia For the month of March that has not yet been redirected to humanitarian efforts as of the end of the quarter from the operating In which it was earned to our corporate and unallocated segments.

Speaker 1

Such operating profit has been reflected within other income expense David and Chris will provide additional context in their prepared remarks. 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. Please be advised that if you ask a question, it will be included in both our live conference and in We would like to make you aware of upcoming Yum!

Speaker 1

Investor events and the following: Disclosures pertaining to outstanding debt and our restricted group capital structure will be provided at the time of our Form 10 Q filing. 2nd quarter earnings will be released on August 3, 2022 with a conference call on the same day. Finally, we will be hosting an in person Yum! Brands Investor Day on Tuesday, December 13, 2022 at the New York Stock Exchange. Stay tuned for more details.

Speaker 1

Now, I'd like to turn the call over to Mr. David Gibbs.

Speaker 2

Thank you, Jody, and good morning, everyone. Before I go over our Q1 results, I'd like to begin by sharing an update on our business in Russia and Ukraine. As a company that puts people first in Everybody that puts people first in every decision, I'm incredibly proud that we have made the safety and well-being of all those impacted by the tragedy in Ukraine the top priority. I want to personally thank our many dedicated team members and franchisees working hard to navigate through this deadly conflict and manage our business in the most complex And challenging geopolitical environment in recent history. I'm proud of how our people in the surrounding regions have banded together and are doing everything Both to support impacted Ukrainian refugees, team members and franchisees, some of whom have overcome incredible challenges and I've reopened a number of stores to serve food in communities where it is safe.

Speaker 2

Additionally, the Yum! Brands Foundation made a donation to the Red To support those affected by the crisis, we activated the Yum! Disaster Relief Fund to support Ukrainian franchise employees And our matching employee donations to organizations providing relief in Ukraine, including UNICEF, the Red Cross, The World Food Program and the International Rescue Committee. We previously announced the suspension of all and restaurant development efforts in Russia as well as operations of company owned KFC Restaurants and that we are finalizing an to local operators while in the interim, we continue to redirect any profits from Russia operations to humanitarian aid. This is not a decision we take lightly as I know that it will be a complicated process to execute these transactions.

Speaker 2

We will update you on this process during our Q2 earnings call. Chris will provide more details around the financial impact from Russia On the quarter. I'll now discuss our Q1 results, which illustrate the resiliency of our highly franchised diversified growth model. Our first quarter system sales growth of 8% driven by both unit development and same store sales growth It is a testament to our iconic brands and the unmatched operating capabilities of our world class franchise partners. We set a Q1 development record opening nearly 1,000 gross units supported by positive unit growth at each of our brands.

Speaker 2

Our continued same store sales momentum was fueled by our brands executing our recipe for growth strategy by providing relevant value, Access via new channels, distinctive products and a strong brand voice, all supported by our digital and delivery capabilities. Our digital channels continue to accelerate with digital sales of approximately $6,000,000,000 a new first quarter record Reflecting an increase of 15% year over year. Importantly, we set a new digital mix record now exceeding 40%. In this complex and highly inflationary operating environment, we and our franchisees remain focused on maintaining long term profitability By leveraging our scale and strategic pricing actions, while still offering our customers convenience and value, the many competitive advantages of our unrivaled talent, our Sophisticated franchise system and the power of our business model give me great confidence that we are well prepared to navigate these complexities and deliver robust Global Growth. Let me share a few global trends from the quarter.

Speaker 2

As Yum China shared on its Q1 earnings call last night, COVID related lockdowns impacted restaurant operations and depressed sales in that market, temporarily delaying an eventual recovery. However, our results outside of China remain strong. In fact, excluding China, both our KFC Division and Pizza Hut International same store sales were up 10%, which would result in consolidated Yum! Same store sales excluding China 6% for the quarter. We're pleased with the continued momentum in our developed markets as they last strong results from last year And we're excited about the continued resurgence of emerging markets with same store sales excluding China of positive 18% for the quarter.

Speaker 2

We continue to be encouraged by the global consumer recovery underpinned by returning consumer mobility, creating a tailwind for our on premise dining while we Our off premise business. Next, I'll discuss 2 of the 4 recipe for growth drivers, our Relevant Easy and Distinctive brands Or RED for short and our unrivaled culture and talent. Then I'll discuss the progress we've made on our recipe for good. Turning to our first growth pillar, our relevant, easy and distinctive brands. Starting with the KFC division, which represents 51% of our operating profit, 1st quarter system sales grew 9% driven by 8% unit growth and 3% same store sales growth.

Speaker 2

To illustrate the strength of the KFC brand around the world, I thought I'd highlight a few markets that showed meaningful improvement in the quarter, Specifically the Middle East, Latin America and Africa. Our Middle East market delivered 40% system sales growth fueled by robust Our marketing teams led with a healthy balance of new products with the launch of the Messy Burger as well as innovative value focused flavoring items such as The Twister blades. These items drove both value perception and new customer acquisition. Additionally, the team's focus on meeting the needs of our customers through digital and off premise channel growth while the dine in business bounces back fueled our strong results. Latin America is another standout market.

Speaker 2

This quarter system sales grew 34%, thanks to our team hitting on all fronts. All countries in the market deployed a balanced marketing calendar focused on value to drive velocity in transactions, while taste Campaigns continue to build brand strength. This came to life for consumers in January with the Genius menu Value Ladder that's helping recover the individual occasion. In March, the Latin American market launched the Kentucky Fried Chicken Sandwich for the first time, Which drove over 10% growth in the sandwich category. Another market worth highlighting is our Africa business, which has been incredibly resilient As system sales grew 25%, results were fueled by a continued traffic recovery Leading to transaction growth ahead of pre COVID levels and sign our value driven strategy that offers accessible price points resonated well with customers.

Speaker 2

Finally, in the U. S, our KFC team is working hard to maximize convenience for the customer And focusing marketing efforts on creating greater awareness of our off premise channels, including quick pickup services and our white label delivery offering. The incremental sales layers we've built over the past 2 years, including our digital ordering channels and the chicken sandwich platform contributed to top line growth this In the face of a difficult operating environment. Additionally, we offered Beyond Fried Chicken in the quarter, which elevated the brand and boosted relevance, Resulting in more media impressions than any other product launch in the brand's history. A consistent theme across each of these four markets is the continued growth of digital transactions and the ability to execute an

Operator

omni channel strategy.

Speaker 2

Moving to the Taco Bell division, which represents 32% of our operating profit. 1st quarter system sales grew 8% driven by 5 percent unit growth and 5% same store sales growth. Taco Bell U. S. System sales grew 7% driven by 2% unit growth and 5% same I thought I'd start by celebrating Taco Bell's 60th anniversary as a brand.

Speaker 2

Given the brand's role as a culture leader in the industry, it's Easy to forget, it's experience and heritage, all of which makes us even more confident in the brand's ability to navigate any economic environment. Taco Bell is executing on its strategy to inspire and enable the world to live mass by remaining relevant, easy and distinctive to its customers. On the relevance front, Taco Bell continued to champion customer value with new offerings to meet all occasions, including the introduction of $2 burritos On the new cravings value menu, adding to Taco Bell's existing $1 menu offering. The combination of Taco Bell's new cravings value menu with its box And combo offerings position Taco Bell well to serve the needs of all customers. Beyond value, Taco Bell was actively marketing craveable distinctive foods from its limited time crispy chicken wings to the return of our fan favorite nacho fries.

Speaker 2

Additionally, the return to the Super Bowl with Doja Cat marked a distinctive cultural moment in the quarter. We're building on this cultural moment with the long anticipated and much celebrated upcoming return of the Mexican Pizza, Which Doja Cat announced in April. Packable international systems sales grew 37% driven by 26% unit growth And 12% same store sales growth. We continue to build brand momentum in multiple markets including the U. K, Spain and India.

Speaker 2

Our new strategy to reach scale to few key markets has driven brand awareness, thereby improving new unit returns that lead to accelerated growth. Next, the Pizza Hut division, which accounts for 18% of our operating profit, So our Q1 system sales grew 3% driven by 5% unit growth and flat same store sales growth. At Pizza Hut International, which represents 11% of our operating profit, system sales grew 10%, underpinned by 7% unit growth And 5% same store sales growth. We opened 283 gross units setting a Q1 record. With further easing in COVID restrictions, we saw strong contributions from India and Latin America Where system sales were up 44% 18%, respectively.

Speaker 2

At Pizza Hut U. S, which represents 7% of our operating profit, System sales declined 6% for the quarter attributable to a 6% decline in same store sales and flat unit growth. While consumer demand remains strong, sales softness in the quarter stems from our delivery channel where capacity constraints limited our ability to meet demand. This was driven by staffing challenges mainly from delivery driver shortages that have been felt across the industry. The team is prioritizing restaurant operations including the focus on improving staffing levels, restoring operating hours, Increasing online ordering availability and more effectively leveraging the use of our overflow call centers.

Speaker 2

Additionally, in early Q2, we completed the integration of delivery as a service into our point of sale system. This is leading to accelerated system adoption allowing us to leverage 3rd party aggregators To augment our own delivery driver. Another action item we're taking is expanding customer access to the Pizza Hut brand via Aggregator Marketplaces. We are excited about the potential incremental growth from Aggregator Marketplaces based on outperformance We're seeing from existing franchisees using this channel. Lastly, at the Have A Burger Grill, 1st quarter system sales grew 17% driven by 13% unit growth and 3% same store sales growth.

Speaker 2

To streamline restaurant operations for team members this quarter, We promoted operationally easy to execute customer favorites such as our Patty Melt and the Santa Barbara Charburger. We continue to lean into digital only promotions and saw a strong response to our delivery and app only campaigns in the quarter that ultimately drove an increase in app downloads And active app users. Even as consumer mobility improved in the Q1, our digital sales across multiple channels Increased sequentially continuing to demonstrate the stickiness of these ordering options. Moving on to our unrivaled culture and talent growth driver. We kicked off the celebration of our 25th year as a publicly traded company with several powerful forums that galvanized our top Talent around engagement and development.

Speaker 2

For the first time in 5 years, we brought our top 250 leaders from around the world together for our Global Leadership Summit. Our technology leaders at the Summit made up the largest functional group, which speaks to the investments we've made in differentiated We also showcased the progress our brands have made putting our recipe for good priorities at the center of our future growth, Not only with less carbon and less packaging and waste, but also by making equity and inclusion come alive across every aspect of our business from our talent To our brand marketing, to our suppliers and franchisees. Additionally, we were proud to take many of our aspiring leaders to the Women's Food Service Forum, where our Chief Operating Officer and Chief People Officer, Tracy Skeens serves as Chair. It was wonderful to see Yum! So prominently represented in a forum dedicated to growing women in our industry, something truly important to us As we're increasing the number of women in senior leadership globally and are on track to achieve gender parity in leadership by 2025.

Speaker 2

Finally, a group of our diverse leaders gathered in Washington DC to discuss how we inspire and advance equity, inclusion and belonging across all levels of our organization. When it comes to our recipe for good, we invest in critical work that's focused on our 3 priority areas of people, food and planet. Just last month and as part of our larger climate strategy, Yum! Joined the Supplier Leadership on Climate Transition Global Consortium, Which was created to accelerate climate action throughout supply chain. Our climate work is starting to take shape in markets such as KFC UK They have partnered with the University of Liverpool to develop a roadmap to achieve net 0 carbon and 0 waste.

Speaker 2

To wrap up, this continues to be an incredibly challenging operating environment, but my confidence in our future remains high given the resilience of our iconic brands Our unmatched global scale provides us unique competitive advantages Including our sophisticated supply chains with cross brand purchasing power, strong marketing and consumer insights, expanding digital and technology capabilities And are capable, committed and well capitalized franchisees that are willing to invest in the long term growth of the business. This quarter's results continue to demonstrate the power and sustainability of our business model, while we continue to deliver lasting value

Speaker 3

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers And our solid balance sheet and liquidity position. I'll start by discussing our financial results. Our first quarter system sales Grew 8%, driven by 6% unit growth and 3% same store sales growth, reflecting our continued global momentum. During the quarter, we opened 997 gross units, a Q1 record for Yum!

Speaker 3

Core operating profit decreased 5% for the quarter, including a negative impact from Russia of 1%. Special general and administrative expenses were $252,000,000 tracking in line with our expectations for $1,100,000,000 G and A expense for fiscal 2022 and return to our normal quarterly cadence. Despite inflationary headwinds, we maintained company owned restaurant margins of approximately 22% at Taco Bell In line with Q1 2019 pre COVID margins. Finally, EPS excluding special items was 1 point $0.05 representing a 1% decrease year over year. Next, I'll address the impact to our Q1 results From the Russia Conflict in Ukraine.

Speaker 3

We previously announced the suspension of all investments and restaurant development efforts in Russia As well as operations of company owned KFC Restaurants and that we are finalizing an agreement with our Pizza Hut master franchisee To suspend all restaurant operations in that brand. In addition to these actions, we pledged to redirect Profits from operations in Russia to humanitarian aid. Our core operating profits in Russia declined Versus the Q1 of last year, negatively impacting our Yum! Core operating profit growth by 1 percentage point. Finally, as David previously shared, we have begun a process aimed at transferring ownership to local operators.

Speaker 3

We will plan to provide additional updates on the process on our next earnings call. Given the rapidly evolving operating environment, We wanted to provide our latest thoughts on full year results and the shape of the year. We remain confident in the strength of our business And our ability to achieve our long term growth algorithm in future years. In 2022, the underlying momentum

Speaker 2

of the business Gives us

Speaker 3

confidence that we can still deliver on the same store sales, unit growth and system sales aspects of our long term growth algorithm. Were it not for the loss of Russia profits, we would deliver on all elements of our long term growth algorithm in 2022. However, losing 3% of full year core operating profit from the exclusion of Russia profits puts us outside of our high single digit core operating profit range this year with our current forecast Closer to mid single digit core operating profit growth. With strength in many key markets, continued emerging market recovery And strong development momentum, our teams will continue to strive to over deliver against our current forecast. We'll keep you updated as the year progresses.

Speaker 3

As a reminder, given the shape of our anticipated G and A spend in 2022 In comparison to 2021, we expect our G and A expense to remain a headwind to Q2 core operating profit growth And a tailwind to second half core operating profit growth. Additionally, we expect continued softness in China And a full quarter impact from the exclusion of Russia province. Therefore, we now expect Q2 2 core operating profit trends to be similar to Q1 and we remain on track with our prior expectations for high teens core operating profit growth in the second half of the year. While our system sales and operating profit results Shared during today's call exclude the impact of foreign currency. We wanted to provide a brief update on the impact in the quarter And the anticipated impact on both our second quarter and full year results.

Speaker 3

For Q1, our reported Operating profit was unfavorably impacted by $14,000,000 due to foreign currency translation. Based on current exchange rates, we expect FX to reduce 2nd quarter reported operating profit by approximately $12,000,000 to $14,000,000 and reflect a headwind to full year reported operating profit Of approximately $30,000,000 to $45,000,000 This is directional guidance as rates will likely change as

Speaker 2

we move through the year. Moving on

Speaker 3

to our bold restaurant development growth driver, I'm excited to share that we had another quarter with each of our brands reporting strong During the quarter, we opened 997 gross units resulting in 628 net new units, A Q1 development record for Yum! Contributing to 6% unit growth over the last 12 months. We wouldn't be able to achieve these record breaking results without broad based contributions from multiple markets across each of our brands. In fact, we had over 500 gross units and 261 net new units opened outside of China, Contributing to 5% unit growth in the rest of world year over year, both KFC division and Pizza Hut International Delivered another exceptional development quarter with 587283 gross units opened respectively. While Yum!

Speaker 3

China continues to be our lead developer, there were significant contributions from each of these brands in India, Asia, the Middle East and Latin America. Taco Bell remains on track for another record development year with growth in next gen assets in the U. S. And additional markets reaching scale internationally. On that front, we're excited to share that Yum!

Speaker 3

China has committed to expanding the Taco Bell brand, Which will allow even more people to live Mas as we build our brand identity globally and grow our footprint in that market. To that end, we now expect to have 3 more markets cross the critically important scale threshold of 100 units By the end of 2022, joining Spain, which reached that milestone in 2021. The global development landscape is increasingly complex, but the sophistication, scale and capabilities of our teams and franchisees Now I'll discuss our unmatched operating capability and the 3 key elements we're leaning into: Easy experiences, easy operations and easy insights. Before I provide an update across our easy pillars, I want to comment briefly on our global supply chain. Our supply chain teams continue doing an amazing job building supply chain contingencies And acting as needed to secure product availability, including restaurant equipment, which is necessary for new store openings.

Speaker 3

Additionally, I'm proud of how our sourcing teams are leveraging our scale and cross brand purchasing power to help our franchisees and equity stores manage costs In this highly inflationary environment as an important lever in maintaining long term profitability. This scale combined with our operating experience And learnings from exposure to over 155 markets around the world create a unique competitive advantage for us As we navigate these inflationary pressures. Starting with easy experiences, with continued reopening trends in markets around the globe, A frictionless experience remains front and center for the consumer. With that in mind, we are constantly adding new convenient ways for our customers to access our brands. KSC US and The Habit Burger Grill have made digital ordering even easier.

Speaker 3

Customers can now order via the app Pick up their food from a specific cubby or shelf within the restaurant. This enables a quicker and more seamless experience That eliminates the need to wait in line at the counter or in the drive thru. Quick Pickup is fully deployed across KFC U. S. System and roughly a third of The Habit stores currently have dedicated pickup shelves with plans to expand more broadly in the coming months.

Speaker 3

In addition, Taco Bell U. S. Recently launched a similar program in their equity stores and will continue to deploy across their systems more broadly in the coming quarters. Both delivery and early tests of quick pickup Continue to free up drive thru capacity for the Taco Bell system, which helps fuel their 9th consecutive quarter of average drive thru times under 4 minutes, With a sequential improvement from their 4th quarter drive through speed. Internationally, we had exciting projects in early stages, Including our KFC Australia business, which is piloting a drone delivery program that gets our finger licking good products to our customers' Home or office in less than 15 minutes on average from when it's ordered.

Speaker 3

Next, I'll move on to easy operations In which we are focused on streamlining operations for our team members and franchisees. We are installing a new kitchen display system and smart hub And leveraging our cloud based point of sale system in our Taco Bell locations with the goal of modernizing the employee experience And providing more digital capabilities within our restaurants. These systems separate out delivery orders from standard drive through orders, allowing for improved visibility and execution in the restaurant by our team members. At KFC US, We're improving back of house operations by expanding our Mobile Manager, a back of house suite of applications, Which simplifies ordering, inventory management and digital order fulfillment, enabling our team members to spend more time focusing on the customer experience. Pizza Hut continues to make progress putting technology in the hands of its team members through continued global expansion of DragonTail, HotBot and the 360 Coach Platforms.

Speaker 3

Given the driver staffing challenges we're experiencing in the Pizza Hut U. S. Business, We're piloting the Dragon Tail platform in over 100 of our U. S. Stores to improve the efficiency of our delivery network.

Speaker 3

We're excited by the early results and the platform is working as we hoped given the outstanding performance we've seen in other markets around the world. We're in conversations with our franchisees to expand this cutting edge platform across the U. S. System. 3rd, I'll discuss Easy Insights In which we focus on using data and analytics to drive more effective marketing and leverage our insights to enhance the customer and team member experience.

Speaker 3

At Taco Bell US, we continue to experiment with new and innovative ways to engage with our consumers through LTO programs such as the Taco Lovers Pass, Which helped fuel growth in loyalty memberships during the quarter and which drove customer frequency. Quantum continues to scale its media mix marketing tool, which was recently used in several Pizza Hut international markets to drive incremental sales for the more efficient use of marketing spend. Additionally, we continue to build targeted artificial intelligence and machine learning based tools, including an exciting new pricing tool that is being piloted Next, I'll provide an update on our strong balance sheet and liquidity position. We ended the quarter with cash and cash equivalents of $365,000,000 excluding restricted cash. On April 1, we called our $600,000,000 7.75 Percent YBI Bonds due in 2025.

Speaker 3

The repayment was funded by the issuance of a new $1,000,000,000 5.375 percent YBI bond due in 2,032. We were especially pleased with the strong demand and execution In light of the rate environment and volatility in the financial markets, with the recent bond offering, which closed subsequent to the quarter, Our consolidated net leverage is roughly in line with our target of 5 times. 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. Capital expenditures net of refranchising proceeds during the quarter were $18,000,000 We continue to expect net capital expenditures of approximately $250,000,000 for the full year, Reflecting roughly $100,000,000 in refranchising proceeds and up to $350,000,000 of gross CapEx. With respect to our share buyback program, during the quarter, we repurchased 3,400,000 shares At an average share price of $121 per share, totaling approximately $407,000,000 In closing, I'm pleased with the results of the quarter.

Speaker 3

We opened a record number of units for the Q1, driving impressive system sales growth. We remain committed to advancing our digital and technology capabilities, leading to enhancements in both the team member and customer experience. And I'm confident in our teams and franchisees' ability to win in a dynamic and complex global landscape. With that, operator, we are ready to take any questions.

Operator

Our first question is from Dennis Gurger of UBS. Your line is now open. Please go ahead.

Speaker 4

Great. Thanks for the question and good morning. I was wondering if you could talk a little bit more about the brands in the U. S, how they're positioned right now? And I guess really What you're seeing from the customer in recent months, have behaviors changed at all?

Speaker 4

Anything that you would call out there? And I guess most importantly, Looking ahead, David, I think you spoke to the resiliency and how Taco Bell and some of the brands can navigate a tough consumer spending environment. So just wondering if you could speak a little bit more That please. Thank

Speaker 5

you. Sure. Thanks for the question, Dennis. Just as far as the consumer, I would say that U. S.

Speaker 5

Demand It is generally strong, but this is a really complex environment. I know a lot of people have talked about the K shaped recovery and bifurcated It was higher income consumers in better shape than lower income. I think that's true, but I think that's probably a little bit of an oversimplification. I don't know in my career if we've seen a more complex environment to analyze consumer behavior than what we're dealing with right now. From an economic standpoint, you've got inflation, rising wages.

Speaker 5

You've got the funkiness of the stimulus lap We're lapping from last year, but you've also got all these societal issues like mobility coming out of COVID, consumer reaction In the war in Eastern Europe, working from home, changing consumer patterns, all of this makes for a pretty complex environment Figure out how to analyze it and market to consumers. And that's the great part about Yum! We've got the scale and the talent to do that better than Thank anybody else in the industry and navigate that complexity with our internal divisions like Collider, which is an expert on consumer behavior Quantum, helping us How to navigate the media landscape to market to those consumers and all of our marketing talent and leaders in the U. S. And around the world.

Speaker 5

So complex environment, but as usual, convenience and value matters in this environment, and we believe we're leaders Across our brands in that regard, you're seeing that result really in all the brands in Q1 in the U. S. The challenge, obviously, at Pizza Hut with less of sales performance is simply just due to demand. The demand is there, but simply due to our ability to meet that demand with drivers as has been documented by others. But Generally, as you mentioned, resiliency is a key feature of our brands.

Speaker 5

And going forward, we actually feel really good about our ability to navigate this environment and Continue to prosper.

Speaker 6

Thank you very much.

Operator

Our next question is from John Glass of Morgan Stanley. Your line is now open. Please go ahead.

Speaker 7

Thanks. Good morning. Chris, just inside your new mid single digit or Core operating profit ex with the impact of Russia, what are you assuming China does in that? I suspect that's another pivotal piece. What gives you confidence in that reacceleration in the back half?

Speaker 7

I understand comparisons are easier. And just when you look at that guidance, 6% unit growth is above that long term Reset target, is that a realistic view for this year or was the Q1 just unusually good and that's not necessarily the right run rate? Thanks.

Speaker 3

Yes. Thanks, John. On the profit side, we feel really good With the profit plan for the year, we laid out the shape on our last call. We said the first half was going to be roughly flat. Of Of course, we now have a Russia impact.

Speaker 3

That was one point in Q1. And of course, if you think about the lost profit And as you mentioned, the China impact, as you heard on their call, the business there is softer So that's had a bit of an impact. And we expect that going into Q2 as well. But so Q2 is going to land about where Q1 is, but those are the 2 primary drivers. And of course, when we think about the full year, we still think Russia is the one driver that takes us off of our algorithm from a profit standpoint For the year, of course, we're going to work hard to try to over deliver against that plan.

Speaker 3

So in general, we feel really good about the profit Plan with a little bit of noise there on those two factors. In terms of development, We feel great about the pipeline. Our Q1 was strong, but the pipeline looking to the rest of the year remains strong as well. And of course, it's our job every day to come in and find ways to over deliver against that 4% to 5% unit guidance. Of course, keep in mind, we had 100 net new units from Russia last year.

Speaker 3

Even without the 100 net new units, we still feel good about delivering on that part of the algorithm.

Speaker 7

Thank you.

Operator

Our next question is from Jon Tower of Citi, your line is now open. Please go ahead.

Speaker 8

Great. Thanks for taking the questions. Just two real quick for me. Just going back That unit growth piece specifically, can you talk about perhaps how management incentives across the company may have been realigned in recent years to kind of Focus more on this growth aspect of the business unit growth side, specifically across the brands. And then secondarily, drilling down specifically into Pizza Hut U.

Speaker 8

S. In the move to 3PD, using it as a sourcing and fulfillment platform. Can you comment on the decision to Move that way specifically, why do the fulfillment side using 3PD and potentially giving up that competitive advantage that The brand holds from a delivery standpoint. Thank you.

Speaker 5

Thanks, John. I'll take the first question. Chris will comment on Pizza Hut. As far as unit development, obviously, we're very proud of the progress that we've made. And yes, we have actually introduced some new incentives Companywide around development, we thought it was important to just unite ourselves and our franchise partners to take advantage of, frankly, an environment It's really favorable to us.

Speaker 5

Our brands have gotten stronger over the last 2 years in general. Our business model is stronger, and there are really great Opportunities to expand our footprint in a lot of economies around the world where there have been some discounts to available real estate. And you're seeing all of that come together through the use of incentives with our team and in some cases, in franchise markets. And that's all leading to an increase in pace of development that we're proud of. And as Chris mentioned, we have visibility into the pipeline and believe it will continue.

Speaker 3

Yes. And Dave, on the second part around Pizza Hut U. S. And the shift to using 3rd party delivery, As David said earlier, we still see strong demand in the Pizza Hut U. S.

Speaker 3

Business, but it's primarily a challenge of being able to fill it With the labor challenges around drivers in particular, that's the most pronounced challenge that we have from a labor perspective in the U. S. So that's part of the driver for continuing to shift to additional modes of being able to deliver and we're doing that By adding in both delivery as a service, which is basically still having sales through our website and apps, but then fulfillment, Leveraging those 3rd party drivers during peak periods when we need extra capacity and to help us address some of those hiring challenges for drivers. But as we mentioned, we're also working with the aggregator partners on the marketplaces. And that's just part of our strategy for wanting to be Ubiquitous, be everywhere that our company our customers want to do business with us, and we're seeing in the early going on that incremental growth from those channels.

Speaker 3

In fact, we've got one of our leading franchisees who has already Moved on to those platforms and is running 4 points or so ahead of the system, which is primarily driven by the And of course, the way we negotiate the economics in those deals In the U. S, we really are indifferent in terms of where the sales fall. We ensure that our economics are roughly the same across channels. So we want to be there wherever our customers want to do business with us.

Speaker 9

Thank you.

Operator

Our next question is from David Palmer of Evercore. Your line is now open. Please go ahead.

Speaker 6

Thanks. That was an interesting comment just right then. You said it was the franchisee It was 4 points better than the average, so down low single digits as opposed to down 6%. Is that the Type of thing you were seeing when they did that 3rd party collaboration?

Speaker 3

Yes, yes, running 4 or 5 points ahead of the system and the vast majority of that we attribute to The incremental customers that they're finding through the platform.

Speaker 6

And do you think that that's going to be the Majority of the system will be doing something similar to that franchisee by the end of the year. And I guess I'm wondering if this is a little crystal ball ish, but Do you think that the 3rd party delivery adoption will be fairly universal within the U. S? And do Do you anticipate on top of that some sort of labor easing being a path forward here to flat to positive comps for the

Speaker 3

In terms of the strategy to address these challenges, David Graves And our pal, who are doing a great job dealing with this very dynamic environment, those are a couple of key parts of their strategy for dealing with this. And we'll be implementing the delivery as a service, as we mentioned in the earlier comments, over the next 2 to 3 quarters. And then, of course, the franchisees each have a decision on how to work with Aggregated, but we do that under our umbrella agreements and we expect that if those kinds of gains continue to show up in the results, Obviously, I think more and more are going to be choosing to move in that direction. So the implementation will take a while, But it's certainly part of the strategy for dealing with this really dynamic environment.

Speaker 6

And then just one last question is, What is the sort of mix that you get like that franchisee for example, what sort of mix do they get from 3rd party when they get that type Improvement and I'll pass it on. Thank you.

Speaker 3

It's still too early to tell this is something that has just been implemented over the last Few months. So still too early and still too limited to sample size, I think, to draw conclusions on a broad basis. But as we said, if you look at our business, there is this fulfillment challenge. Our carryout business was actually up In the quarter, so the primary challenge was on the delivery business. And so these strategies are directly pointed at that biggest root cause It's getting in the way of being able to serve and fulfill full cost customer demand.

Speaker 6

Thank you.

Operator

Our next question is from John Ivankoe of JPMorgan. Your line is now open. Please go ahead.

Speaker 9

Hi, thank you. I did want to revisit some of the comments on economics. Clearly, I mean, these brands have Been around long enough in the U. S. And globally that I guess there are enough maybe previous experiences that we can maybe pick and choose from historically.

Speaker 9

So in environments where a consumer's costs have risen faster than their incomes and obviously there are so many costs that are rising For the consumer, where does the consumer or where might the consumer typically cut back? Is it in visitation Or is it in ticket? And I guess this is kind of the first point. And secondly, if it is ticket, when you guys look back, 2022 versus 19. How much of that average ticket gains do you think was actually frothy, the consumer that maybe traded up or added on or larger sizes, what have you, to Sustainable levels versus how much average ticket do you think may naturally come out of the business as the consumer still uses The QSR brands for all the obvious reasons, but can just find back ways that you basically revert to the mean in terms of what they actually buy and how they use for various brands.

Speaker 5

Yes. Thanks for the question, John. Obviously, on The ticket, I think the biggest driver of the ticket increase over the last few years has actually been party size Rather than premiumization, although they're both drivers, so as we see mobility return, individual meals That could bring down ticket without necessarily implying consumers trying to cut back on cost per reader. But as far as the consumer and how their behavior in this environment, some of the other things to think about are the fast casual category has grown a lot. We expect that if there's cutting back that there'll be some trade down from fast casual back into QSR, which will be favorable for us, Particularly, Taco Bell, which I think is well positioned to capture some of those visits.

Speaker 5

But

Speaker 2

it all comes back

Speaker 5

to this theme of The QSR industry is built on convenience and value. Convenience and value win in any environment, particularly when you couple it with our great brands and innovative Products that we're constantly introducing. And you saw Taco Bell's performance in Q1 in the Plus 5, one of the better numbers for the major QSR chains. And then you saw the growth that we're getting just at Taco Bell internationally. So I think we feel like we've got momentum and this environment is not going to get us off of it, but we're going to have to do what we always do, We just continue to pivot and evolve our offerings to meet consumers' needs.

Speaker 5

Taco Bell is a great example. 70% of our U. S. Profit, They've been leaning in on the cravings value menu, which is $1 $2 price points, and that's working to meet the needs Consumers with less money to spend, but at the same time they've been able to take price across the rest of the menu on their combos and more premium offerings And that's working as well.

Speaker 9

Thank you. And if it's appropriate to comment, is there any near term change just In the last month or 2, from consumers that are closest, geographically closest to the crisis In Russia and Ukraine, obviously thinking about some of the Central Western or European markets in terms of how that consumer You may have reacted, digging into some of these terrible events.

Speaker 5

Yes. No, surprisingly, our business in Europe, and you can see it from the numbers, It's doing quite well. So we're not seeing to the point of your question, we're not seeing an impact on adjacent businesses. We're seeing the prevailing factor there is just sort of return to mobility in Europe and the recovery of our businesses that were Suffering more at this time last

Speaker 9

year. Understood. Thank you.

Operator

Our next question is from David Tarantino of Baird. Your line is now open. Please go ahead.

Speaker 10

Hi, good morning. Chris, I wanted to come back to your profit guidance for the year and I think you mentioned multiple times that you're working hard to Deliver versus that plan. And I wondered if you could just elaborate on what factors That you see could drive upside to the plan. If you were to see upside, where would it come from in your view? And then Secondly, I guess to balance the discussion, where do you see the greatest risk to the current plan?

Speaker 3

Yes. Thanks, David. As with all elements of our algorithm, we're always working to To find ways to over deliver, we called out the one primary driver, which on profit creates a headwind this year, which Going into Q2, Q3, Q4, we're going to lose 3 points of operating profit plus the planned growth in Russia As we exclude those from the results and direct any profits from Russia towards humanitarian efforts. So that's the big Hedland, of course. In the early going, as we said, this China softness is probably a little bigger than expected.

Speaker 3

I don't know the long term trajectory there. You would think at some point in the long term, China will rebound and that business should see Growth, but I'm sure the timing on that is uncertain. If you think about other puts and takes, I think emerging market strength. If you look at our 18% same store sales growth in emerging markets, that's a great sign of recovery And a big important part of our business. So that's a place where you might see upside.

Speaker 3

Of course, on the flip side, we'll continue to navigate the really dynamic environment around inflation, pricing and How those are playing out in each of our markets around the globe. Right now, we think we're dealing with those incredibly well. Our scale gives us advantage and gives our franchisees Advantage in dealing with those, but very dynamic environment, but we feel really good about the overall profit engine of the business.

Speaker 1

Operator, we have time for one more question this morning.

Speaker 9

Thank you.

Operator

Our final question this morning is from Brian Mullen of Deutsche Bank. Your line is now open. Please go ahead.

Speaker 11

Thank you. Just kind of a big picture question, but do you see any Potential one day for a cross brand loyalty program at Yum! Is that something that you think could potentially work in the quick service restaurant industry in the U. S? More conversely, are there some reasons why that wouldn't work or wouldn't be a good idea maybe from a consumer perspective or a franchisee perspective?

Speaker 3

Yes. So Brian, good question. Loyalty is becoming an increasingly important part of our business, increasingly important part of our digital experience that we provide to customers. Part of our digital experience that we provide to customers, more than half of our restaurants around the globe are part of a loyalty program. Taco Bell in the U.

Speaker 3

S. Is a great example of how we're driving excitement through loyalty. That's what we did with the Taco Lovers Pass, and that's helped to drive app downloads and people signing up into the program, and we continue to see Significant growth in membership in that program. Pizza Hut, obviously, in the U. S.

Speaker 3

Has a large and very impactful loyalty program, and KSC has Great loyalty programs in a number of markets around the globe. So we're going to continue to focus on that, implementing it in markets where it makes sense. Interesting question. Obviously, we thought about it in terms of cross Brand loyalty right now we're focused on maximizing the value of our brand focused loyalty programs. But obviously as our data and analytics capabilities continue to evolve, All sorts of possibilities are out there in the future, but for the time being, we'll remain focused on brand specific loyalty programs.

Speaker 5

So thank you everybody. I appreciate your time. Just to wrap up, it was another strong quarter obviously with good top line sales growth, all brands growing. The development numbers, obviously, we continue to set records, which we're very proud of. And that's widespread, right?

Speaker 5

All of our brands Grew at least 5% on a net new unit basis in the quarter. Another digital sales record, which we keep setting on every call and we just keep on delivering on, and then this We passed that important milestone of 40% digital mix. And I just think in total, the quarter represents our brands all around the world are Healthy and can perform in any environment. This is certainly one of the most challenging ones we've ever had to deal with, Improving the resiliency of

Speaker 2

our business model. Thank you for your time.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your line.

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