Yum! Brands Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2022

There are 9 speakers on the call.

Operator

Hello, everyone, and welcome to the Yum! Brands 2022 Second Quarter Earnings Call. My name is Seb, and I will be the operator for your call today. Please note there will be an opportunity to ask questions. Please only ask one question to allow all participants equal chance to ask their questions.

Operator

I will now hand the floor over to Jody Dyer, VP, Investor Relations.

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 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.

Speaker 1

In addition, please refer to our earnings releases and relevant sections of our filings with the SEC to find disclosures and definitions of Non GAAP financial measures and other metrics that may be used on 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. Next, I'll provide an update on the financial reporting treatment related to the exit of our Russia business. During the second Quarter, we completed the transfer of the Pizza Hut business to a local operator who had initiated the process of rebranding to a non Yum! Concept.

Speaker 1

Given the transfer of Pizza Hut and our progress towards the full exit from Russia for KFC, we have elected to remove the Russia business from key performance metrics. Specifically, 1165 units in Russia and their associated system sales were removed from our total unit count And total system sales respectively as of the beginning of the second quarter. This negatively impacted our reported 2nd quarter unit growth by 2 percentage points and our reported system sales growth excluding foreign currency by 2 percentage points. Additionally, these units were removed from our same store sales calculations and thus do not impact our same store sales results for the Q2. However, we continue to include Russia in GAAP measures in the Q2 for Pizza Hut prior to the date of transfer And for KFC for the entire Q2, including royalty revenue and all expenses to support the business and one time expenses related to the transfer Ownership of the business.

Speaker 1

As a result of our decision to exit the Russia business, we have reclassed net operating profits from the operating Segment subsequent to the start of the conflict to our corporate and unallocated segment and reflected as a special item within the other income and expense line. For more information on our reporting calendar for each market, please visit the Financial Report 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 We would like to make you aware of upcoming Yum!

Speaker 1

Investor events in 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. 3rd quarter earnings will be released on November 2, 2022 with a conference call on the same day. Finally, as a reminder, we'll be hosting an in person Yum! Brands Investor Day on Tuesday, December 13, 2022 at the New York Stock Exchange. Please stay tuned for more details.

Speaker 1

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

Speaker 2

Thank you, Judy, and good morning, everyone. Our second quarter results are a testament to the resilience of our iconic brands and the power of our highly franchised business in this complex operating environment. System sales grew 5% after adjusting for the exclusion of our Russia business, driven by sustained development momentum. We opened 781 gross new units in the quarter with broad based contribution from each of our brands. Additionally, we delivered positive same store sales growth while lapping last year's growth of 23%, The strongest quarter of same store sales growth in Yum!

Speaker 2

History. We are pleased with the continued growth in our digital business with sales of nearly $6,000,000,000 fueled by the adoption of our global platforms and capabilities. Our unmatched global scale and digital capabilities are Key differentiators in the restaurant industry and these competitive advantages that enable us to thrive in any environment. I'll now share a few global trends from the quarter. As Yum China shared on its earnings call last week, COVID related restrictions continued throughout the quarter significantly impacting second quarter results.

Speaker 2

However, Trends outside of China remain strong. Our consolidated same store sales excluding China grew 6% for the quarter. Despite a complex consumer landscape in the U. S, Taco Bell U. S.

Speaker 2

Knocked it out of the park with 8% same store sales growth. The team achieved these results through exceptional execution of a well balanced marketing agenda that sustained brand buzz, distinctive product news And compelling value offerings and that was all supported by operational improvements and a focus on elevating the digital experience. Additionally, emerging markets excluding China continued to recover to pre COVID level, driven by the reopening of dining rooms and growth in our digital business. In fact, same store sales growth for emerging markets excluding China was up 22%, A 4 point acceleration from the prior quarter. We remain confident that we are well positioned to win in this environment given our iconic brands that customers love, strong consumer value proposition, scale advantages, expanded digital access And sophisticated franchise partners with unmatched operating capability.

Speaker 2

Before I provide an update on our growth drivers,

Speaker 3

I'd like to share

Speaker 2

an update on our ongoing process to exit Russia. Last month, we shared that we completed the transfer of ownership of our Pizza Hut business in Russia to a local Rader, who has initiated the process of rebranding locations to a non Yum! Concept. As for our KFC restaurants in Russia, we are in advanced stages of transferring ownership, operating systems and master franchise rights, Including the network of franchise restaurants to a local operator who will be responsible for rebranding locations to a non Yum! Concept.

Speaker 2

Upon the completion of this process, we will have fully exited from Russia. Our franchisees and team members in Ukraine continue to demonstrate incredible fortitude through this conflict, and I'm proud to report that nearly all of our stores have reopened to serve the people of Ukraine while ensuring the safety of our team members. Now I'll talk about 2 of our growth drivers, Our relevant, easy and distinctive brands or RED for short and our unrivaled culture and talent. Then I'll provide an update on our recipe for good. Chris will share the details of our Q2 financial results, including an update on our capital strategy Before providing an update on our unmatched operating capabilities and bold restaurant development growth chart, Let me begin with our relevant, easy and distinctive brands.

Speaker 2

Our KFC division, which accounts for 49% of our operating profit, Cruise Systems sales 1% this quarter, driven by 3% unit growth and a 1% decline in same store sales. Adjusting last year for the exclusion of Russia, KFC division system sales growth was 4% with 7% unit growth. Continued sales weakness in China contributed to significant year over year pressure in the quarter. Excluding China, Our same store sales grew 7%. Though China remains difficult to forecast, pressures gradually improved throughout the quarter.

Speaker 2

However, as Yum China said last week, given the recurrence of COVID outbreaks, the sales recovery will likely be non linear and uneven. It's been well noted that many developed markets experienced increasing macro pressures and headwinds to consumer spending this quarter. In addition, the U. S. And UK markets faced tough compares due to government stimulus last year.

Speaker 2

While KFC U. S. Faced difficult laps from stimulus and the successful launch of the chicken sandwich platform, we're pleased to share that same store sales growth improved Sequentially throughout the quarter, however, the macro pressures were not felt consistently across all developed markets in our portfolio. For example, Australia grew system sales 7% as same store sales growth doubled from the prior quarter. This strong demand has followed the introduction of modern menu, which highlights our uniquely craveable products and contemporary value offers.

Speaker 2

Turning to our emerging markets, which delivered remarkable results in the quarter. I'd like to highlight India, the Middle East and Latin America. In India, where system sales grew 103%, the team continued to advance their digital ecosystem and provide consumers with Disruptive value offering. System sales grew 41% in the Middle East driven by accelerating digital sales that grew Approximately 70% year over year even as dine in sales continue to recover. The launch of click and collect functionalities, including QR code ordering via the KFC app in several of our Middle East markets helped drive these results.

Speaker 2

The Latin America market achieved 32% system sales growth propelled by a well balanced marketing strategy including a focus on product and dedication to value offerings while advancing digital capabilities following the launch of the KFC mobile app and kiosks. Our diverse global portfolio is one of the many reasons we have great confidence we're well positioned in the current environment. Turning to our Taco Bell division, which accounts for 36% of our operating profit, Systems sales grew 10% driven by 4% unit growth and 8% same store sales growth. Taco Bell continues to fire on all cylinders as evidenced by the broad based strength of its 2nd quarter results. For Taco Bell U.

Speaker 2

S, system sales grew 9% driven by 8% same store sales growth and 2% unit growth. Taco Bell remains a culture leader in the industry, successfully executing on its strategy to inspire and enable the world to live mass Through innovative marketing campaigns, buzzworthy brand news, distinctive products and strong value offering. Despite significant inflation, Taco Bell maintained restaurant margins by leveraging its pricing power for premium products and craveable LTOs, While still providing consumers with everyday value through a broad range of price points such as those items featured on the cravings value metric. The return to the Mexican Pizza as an LTO this quarter is a prime demonstration of these strengths. Taco Bell's most loyal fans were granted early access, Increasing the average loyalty registrations 15 times during the 2 days of early access and fueling 10% growth in loyalty members in the quarter.

Speaker 2

Demand for the Mexican pizza was 7 times previous levels, reaching over 20,000,000 pizzas sold nationwide With some stores selling out within a week, creating a sustained positive halo for the brand. Given the overwhelmingly positive reaction from We're excited to bring back the Mexican Pizza in the fall when it will become a permanent fixture on the menu. At Taco Bell International, system sales grew 31% owing to 27% unit growth And 9% same store sales growth. 5 of our 7 European markets saw double digit same store sales growth, Thanks for the balanced execution of everyday value and disruptive value, while also continuing to grow brand awareness. Taco Bell International is building on its development momentum and now meaningfully contributes to the division's total unit growth.

Speaker 2

Moving on to the Pizza Hut division, which accounts for 15% of our operating profit. Q2 system sales were flat driven by 4% unit growth and a 3% same store sales decline. At Pizza Hut International, which represents 8% of our operating profit, system sales grew 3% led by 7% unit growth and a 2% decline in same store sales. As I mentioned before, COVID lockdowns in China led to sales softness in the quarter. Excluding China, Pizza Hut International same store sales grew 6%.

Speaker 2

I'd like to highlight 2 of our leading markets for the quarter, India and Latin America. India system sales grew 79%, a 35 point acceleration from the prior quarter, driven by further recovery in dine in sales and home meal replacement strength. System sales grew 18% in the Middle East, where the team has successfully executed a balanced strategy of offering everyday value and customized products with particular success from the MyBox offering. MyBox offers a compelling entry price point that is well positioned to serve the individual eater And launch occasion and is now live in nearly 50 markets. At Pizza Hut US, which represents 7% of our operating profit, Systems sales declined 3%, driven by flat unit growth and a 4% decline in same store sales, driven in large by continued operational challenges in our delivery business.

Speaker 2

We made progress expanding system wide adoption of 3rd party delivery as a service to help address our delivery driver capacity constraints to meet consumer demand. As of the end of Q2, 50 5 percent of our U. S. Locations have implemented delivery as a service, up from 40% at the beginning of the quarter. Additionally, we're leaning into our aggregator partnerships by joining 3rd party marketplaces so our consumers can access our craveable food wherever they shop.

Speaker 2

As of the end of Q2, roughly 70% of eligible stores have opted into using at least 1 aggregator marketplace, Up from approximately 45% at the beginning of Q2. Finally, the team shifted promotional focus towards compelling value to address the needs of the consumer. Lastly, the Habit Burger Grill grew system sales 10% driven by 15% unit growth and 4% same store sales decline. During National Burger Month, Habit provided exclusive offers through its mobile app, resulting in a 10% increase in mobile app installs, While also highlighting its culinary inspired innovation, which included the spicy green beans, a spicy twist on its signature tempura battered green beans. Moving on to our unrivaled culture and talent growth driver.

Speaker 2

We continue to see growth of our unrivaled talent with Tarun Lal being named President of KFC US and Shannon Hennessy taking on a new role as President of the Habit Burger Grill. Tarun is a prime example of growth from within, joining our organization 25 years ago and serving in various leadership positions. He is not only a best in class operator known for driving breakthrough results, he is also a driver of our culture. I'm confident Tarun's leadership and winning partnership mindset with Our franchisees will be an asset as we drive the next chapter of growth for the KFC U. S.

Speaker 2

Business. Shannon joined Yum! A few years ago as a KFC Global CFO and immediately hit the ground running. She has the unique ability to work across functions and bring people together to solve problems, Drive change and deliver meaningful results for our business. She's also a standout culture leader with a commitment to growing talent and to advancing equity inclusion and belonging.

Speaker 2

When it comes to our recipe for good, we recently published our annual Global Citizenship and Sustainability Report, which highlights our strategic investments in socially responsible growth and stewardship of our people, food and impact on the planet. The report includes updates on our key commitments, including our social purpose and how we've awarded more than $50,000,000 in grants Nearly 30 social impact programs globally. This is accomplished through Yum! Unlocking opportunity initiative The champions equity and inclusion, education and entrepreneurship for frontline restaurant teams and communities around the world. It reinforces our industry leading commitment to food safety as well as our efforts to respond to customers' evolving preferences And improve the nutritional value of our menu item.

Speaker 2

Finally, the report also highlights our environmental commitments, including our science based targets To reduce greenhouse gas emissions nearly 50% by 2,030 as well as a newly harmonized policy across our brands that commits to moving all consumer facing plastic packaging to be reusable, recyclable for compostable by 2025. To wrap up, our performance continues to demonstrate the power of our unmatched global scale in a challenging operating environment. Thanks to the advantages of our unrivaled talent, global development capabilities and expanding technology platforms and capabilities, Our iconic brands continue to drive consistent growth. Our best in class teams and franchise partners are committed to serving up the most loved, Trusted and fastest growing restaurant brands in the world. With that, Chris, over to you.

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 capital strategy. I'll begin with an overview of our Q2 financial results. Adjusting last year For the exclusion of Russia in our reported results, system sales grew 5%, underpinned by 6% unit growth And 1% same store sales growth. Despite more severe inflation this quarter, our teams achieved strong performance demonstrating the resilience of Yum!

Speaker 3

Business model. As you may recall, we shared during our last earnings call That Q2 core operating profit growth would look similar to Q1 given continued softness in China, A full quarter impact from lost Russia profits and a headwind from normalized G and A spend in comparison to 2021. I'm pleased to report that we exceeded our previous guidance with core operating profit down 1% for the quarter Owing to outperformance at the Taco Bell division, ex special general and administrative expenses were $252,000,000 Tracking in line with our expectations for $1,100,000,000 of G and A expense for fiscal 2022, consistent with our previous guidance. Despite double digit labor and commodity inflation in the U. S, Taco Bell company owned restaurant margins of 26% were in line year over year and 200 basis points ahead Of the pre COVID Q2 twenty nineteen margins, this is a testament to the brand's pricing power And the operational efficiencies the team continues to achieve both contributing to best in class unit economics.

Speaker 3

The FX impact to reported operating profit was $23,000,000 nearly double our expectation shared on our Q1 earnings call. We now expect the full year FX headwind to reported operating profit To be approximately $70,000,000 to $90,000,000 and expect similar amounts in Q3 and Q4 as those reported in Q2. Finally, EPS excluding special items was $1.05 a 9% decrease year over year. However, there was a $0.13 impact to EPS driven by items that are non operating in nature, including higher foreign currency exchange, an increase in our effective tax rate and a decrease in the value of our investment in Deviani International Limited. I'm pleased to report that given the strength across our diversified portfolio, We are reiterating our fiscal 2022 guidance that we shared on our Q1 earnings call.

Speaker 3

As a reminder, Other than core operating profit growth due to the removal of Russia province, we expect to deliver on all parts of the long term growth algorithm this year. With this impact, we anticipate full year core operating profit growth of mid single digits. And as we previously mentioned, That profit growth is weighted to the second half of the year, especially the 4th quarter, largely owing to timing of G and A in comparison to 2021. Next, I'll discuss our unmatched operating capabilities through the lens of our digital strategy, Easy experiences, easy operations and easy insights. First, I'll provide an update on our efforts to create easy experiences for our customers.

Speaker 3

This quarter, Taco Bell franchisee Border Foods, owned and operated by the Engler family, Open one of the most revolutionary restaurant formats in the industry's history, Taco Bell Defy. Taco Bell Defy features one of the most innovative drive through experiences yet. It's a first of its kind 2 story restaurant design, Featuring a proprietary vertical lift to transport iconic craveable Taco Bell menu items straight from the kitchen to fans. This is on top of unique digital check-in screens for mobile orders that enable a differentiated, fun And seamless experience for consumers. Taco Bell Despied boasts many features that could show up in future Taco Bell restaurants given it is a hit with consumers and performing well.

Speaker 3

At KFC Africa, the team doubled kiosk penetration in its store footprint With significant commitments to further deploy across the majority of the system by year end, kiosks serve to modernize our assets, Improve customer experience and drive greater insights into customer behavior. Additionally, we continue to deploy TikTok's Chat and e commerce products across our global portfolio and surpassed 2,400 stores in 43 markets this quarter, serving KFC, Pizza Hut and Taco Bell. Earlier in the year, Pizza Hut Germany launched its new e commerce website Fully powered by Tuktuk. Germany has seen impressive early results, including a 15% increase in conversion rate And a €2 increase in average ticket when compared to previous performance on aggregator platforms in the market. We are seeing similar success stories across the markets where Tuk Tuk is live.

Speaker 3

Next, I'll provide an update on our efforts to enhance The team member experience as part of our easy operations initiative. Pizza Hut International reached 25 markets using the Dragon Tail system, Bringing global adoption of this platform to 28 markets across both KFC and Pizza Hut brands. We also made significant progress during the quarter in the rollout of digital order pickup shelves, including adding shelves at 100 more Habit Burger Grille stores. Approximately 2 thirds of our Habit Burger Grill stores are now equipped with pickup shelves. Taco Bell also has joined our other brands in the U.

Speaker 3

S. To deploy pickup shelves, which are now fully deployed across company operated stores with plans to roll out across the rest of the system by early 2023. Expanding options and ease for off premise consumption improves the customer, Delivery driver and team member experience. Finally, I'll discuss our efforts around Easy Insights. Our data and analytics experts Along with Quantum, the AI based marketing analytics team we acquired last year, continued to scale the Quantum Media Optimization tool, while also developing additional AI and machine learning products that drive performance for Yum!

Speaker 3

And our franchisees. As an example, they are currently partnering with Taco Bell and KFC US to test and deploy An inventory management tool that helps our restaurant managers more accurately forecast food and supplies. The tool is driven by our cutting edge demand forecasting platform. Based on encouraging early results, we plan to scale this platform throughout the remainder of the year. Moving on to our bold restaurant development growth driver.

Speaker 3

We sustained our robust development momentum this quarter. At KFC, we opened over 400 gross new units, reaching nearly 1,000 gross new units opened year to date. China, India and the Middle East led development this quarter, each opening more than 40 gross new units. It's worth noting that the year to date development pace is attributable to a broad contribution from our emerging markets outside of China. At Pizza Hut, we opened nearly 300 gross new units, leading to over 600 gross new units opened year to date.

Speaker 3

The Pizza Hut division remains on pace to set another development record this year with significant contributions from India, China and Indonesia. For the 3rd consecutive quarter, Taco Bell International Development Outpaced Taco Bell U. S. Development, Opening 46 net new restaurants in Q2 and 67 year to date. For the first time, Full year Taco Bell International Development is on pace to surpass U.

Speaker 3

S. Development this year. Our broad based development Continued to be driven by healthy unit economics, significant white space and our world class franchise partners who are committed to growth. This global development momentum coupled with the visibility we have into our development pipeline gives us line of sight to deliver unit growth within our long term growth algorithm range of 4% to 5%. Next, I'll provide an update on our balance sheet and liquidity position.

Speaker 3

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. We ended the quarter with cash And cash equivalents of $412,000,000 excluding restricted cash. On April 1, we closed on a new $1,000,000,000 5.375 percent YBI bond due in 2,032. The majority of the proceeds were used to call our $600,000,000 7.75 percent YBI bond due in 2025.

Speaker 3

We closed the quarter in line with our net leverage target of 5 times. We have a well positioned capital And debt's guideline for a high inflation environment considering approximately 94% of our debt is fixed with no significant maturities for the next 3 years. Capital expenditures for the quarter net of refranchising proceeds were $38,000,000 Our full year expectation for $250,000,000 in net capital expenditures remains unchanged, Now reflecting $65,000,000 in refranchising proceeds and up to $315,000,000 in gross CapEx. With respect to our share buyback program, during the quarter, we repurchased 1,300,000 shares At an average share price of $118 per share totaling approximately $150,000,000 In closing, I'm pleased with the resilience of our performance in the quarter. The structural advantages of our globally diversified, Highly franchised business model and our unmatched scale uniquely position us to navigate complex and uncertain macro environments With incredible stability, I remain confident that our global portfolio provides investors a high quality defensive growth Our

Operator

Our first question comes from David Tarantino from Baird. David, please go ahead.

Speaker 4

Hi, good morning. My question David is about just the overall macro environment You're seeing and I know there's a lot of talk about pressures on consumer spending and potentially a global recession. And my question for you is, 1, if you could share your thoughts on where we stand due to that debate. And then, any insights on how you're planning the business now versus maybe you were at the start of the year in light of some of those pressures.

Speaker 2

Sure. Thank you, David. I commented on the last earnings And I think it remains true today. This is truly one of the most complex environments we've ever seen in our industry to operate in Because we're not just dealing with economic issues like inflation and lapping stimulus and things like that, but also the social issues of people returning to mobility After lockdown, working from home and just the change in consumer patterns, Ward, I think just to mention a few. So against that incredibly complex backdrop, I think these issues play out differently in each market, so it's very hard to talk about generalities with the consumer.

Speaker 2

But one generality we're seeing internationally Really, the emerging market consumer is returning. We mentioned a 22% increase ex China in our emerging markets. Obviously, that's a flip from early in the pandemic because when those markets were hit hard, we like that tailwind in our business And I think that that's going to help lift us as we go. And developed markets are fairly stable on overall performance as well. But in terms of the global consumer, we do think they're getting more cautious.

Speaker 2

We are leaning more in on value offerings all around the world, And that also is playing out in the United States. If you look at the U. S, I think what's happened over the last quarter is this The low income consumer pulling back has become more pronounced. We've seen that in our business, And we're reacting accordingly. So we know the formula to win in any environment for us is to have a lot of brand buzz, To have product news and to have great value.

Speaker 2

You got to you can't pick 1 of those things. You got to deliver on all three. So when you ask how we're planning, that's how we're planning and making sure, in that we have the value offering. Taco Bell is a great example of it this quarter when they obviously had a great brand buzz with the Mexican Pizza LTO, and that was also great product news. But not to be left behind, you did a great job on value with the cravings menu and the $2 burrito offerings, all of that added up to a blowout quarter for Taco Bell, obviously.

Speaker 2

And we think we can win and thrive in any environment. So the changes in consumer behavior Arnd, really, I'm going to get us off our game. If we stick to our formula, we know we can win.

Speaker 1

Next question, please.

Operator

Our next question comes from Sarah Senatore from Bank of America. Please go ahead.

Speaker 5

Okay. Thank you very much. I just wanted to ask a bit about some of the technology that you mentioned, and in specifically, having some of these systems in other markets. Could you just talk about the value of having global platforms? Is it that you can leverage some of the development costs?

Speaker 5

Or are there other operational benefits? And then Specifically to Dragon Tail, is this something that can help you partner with 3rd party aggregators to help solve Some of the delivery bottlenecks that you have in terms of allocating orders between in house delivery and aggregators.

Speaker 2

So just a

Speaker 5

little more color on that and So just a little more color on that and the labor shortage. Thank you.

Speaker 3

Yes. Thanks, Sarah. Our digital strategy continues to work. We like just about everything about those nearly $6,000,000,000 in digital sales. And we continue to progress.

Speaker 3

That nearly $6,000,000,000 even came after removing the Russia sales. Russia had a strong digital market. So it gives you a sense that our digital business continues to thrive. The 40% digital mix tells me that the customers Are seeing the value in the easy experiences that we're providing. So even as they're starting to come back to the dining rooms more and more, they're continuing to interact with us In a digital manner.

Speaker 3

And then you touched on the operational benefits, which is really part of our easy operations plank In our digital strategy and how technologies like Dragon Tail are helping us to operate better. Dragon Tail, we mentioned, Continues to expand. Our franchisees continue to adopt Dragon Tail in a number of markets. We're now up to 28 markets north of 3,300 stores that employ Dragon Tail. Whenever we implement, we see a significant improvement in customer experience.

Speaker 3

And you hit on the exact one of the exact places where we see that benefit. It is coordinating those delivery orders and ensuring that we have Fresh product coming right out of the oven or the fryer because we're now in 3 KFC markets right at the time when the delivery driver gets to the restaurant. That's what helps us to get a fresher, hotter product to the customer. But there are other benefits from Dragon Tail as well. You see that it helps to communicate the team members in the back of house We're reaching a peak period in the restaurant, for example, and they can move into different operating modes to respond to that.

Speaker 3

We've been doing lots of piloting in additional markets, Including here in the U. S, and we're going to continue to push Dragon Tail. Of course, that also speaks to the fact that our franchisees see the value in it. They only implement this when they see the value working in their stores and in their restaurants. So we continue to be very confident in our digital strategy And continue to invest, but believe we're getting a high return on that investment.

Speaker 1

Next question, please.

Operator

Our next question is from David Palmer from Evercore ISI. Please go ahead.

Speaker 6

Thanks. Phenomenal quarter from Taco Bell. I wanted to ask about Pizza Hut and KFC in the U. S. That quarter probably would The peak for family meal demand comparisons and stimulus comparisons and I would also guess that The food costs would be peaking in that quarter as well, making it correct me if I'm wrong, but I just wanted to you made some commentary about how the quarter But I wanted to get your maybe you could add some more detail about the outlook for those domestic brands, both in sales And also franchisee cash flow.

Speaker 6

Thanks.

Speaker 2

Thanks, David. Yes, obviously, we had a difficult lap In the U. S, in Q2, basically lapping stimulus. KFC was also lapping the launch of the chicken sandwich. I think we did comment in the prepared remarks that the cadence during the quarter for KFC got better as the quarter evolved.

Speaker 2

And then at the end of the quarter, they launched Mac and Cheese Balls to more directly address the value issue I talked about earlier. Same thing with Pizza Hut. As I went on, they introduced the 699 Ferris deal. Both of those have launched well. And look, it's hard to predict anything, but I I tend to agree with your statement that we're probably past peak inflation.

Speaker 2

And obviously, The lap that we had in the quarter was one of the most difficult we've ever had at Yum! We were lapping to +23 on a global basis. So the fact that we came out of that quarter with positive sales is really encouraging.

Speaker 1

Next question, please.

Operator

Our next question is from Andrew Charles from Cowen. Please go ahead.

Speaker 7

Great. Thank you. David, excluding Yum! Exit from Russia, it was another robust quarter Global Development 6%. And as you sit here today with long term annual guidance for 4% to 5% development and speaking of the broad based strength and diversity of historic development, Do you need to see to help raise more guidance?

Speaker 2

Look, I appreciate you highlighting the development piece. Have been talking about a lot, and obviously, we just continue to put up great numbers on the development front. One of the things I am really encouraged about in the quarter and really for Here is first of all, we're up year over year on net new unit openings for the first half of the year. We're also up in terms of the mix of where those openings are coming from with more development coming from outside of China, has historically obviously been our biggest developer. So the development is becoming more widespread, to answer your question about what do we need to see to think about raising guidance.

Speaker 2

We want to see a continuation of that trend, continuation of building the pipeline for future years. But certainly, development, A real highlight of the quarter, it was widespread in terms of the number of countries. And we're also seeing the Pizza Hut and Taco Bell Start to play a bigger role in our development formula as well as have it down the road. So we think we're going to have even more diversity in our development As we move forward, we're obviously cautious in this environment, though, as we've learned over the last two and a half years in terms of What it means for our business. So at the appropriate time, we'll relook at our guidance.

Speaker 2

Obviously, the other impressive thing for the quarter is not only did we lose the Russia units that are in Our unit count. But we also lost the planned development for Russia, which I don't think people think about. We were supposed to open over 100 units this quarter, But yet we're still sticking with being able to hit our range and being inside of hitting the range of 4% to 5% unit growth Despite all of those enormous headwinds.

Speaker 1

Next question please.

Operator

Our next question is from John Glass, Morgan Stanley. Please go ahead.

Speaker 8

Thanks very much. On Taco Bell, if you're willing, can you talk about either the benefit to comps from the Skin pizza or the percent mix or something so we can get a sense of how that contributed to the sales? And how do

Speaker 1

you think

Speaker 8

about sustainability once that promotion's ended? Maybe you could talk about dayparts. Have you seen strength or weakness in certain dayparts? And maybe if there's been a change in usage of the value menu, maybe you're Benefit from trade down to those value items. Any other color just on how we think about sustainability of Taco Bell beyond this quarter?

Speaker 2

Sure. Thanks, John. I mentioned this earlier, but really the benefit of things like the Mexican Pizza is The connection it has with consumers, the love they have for the product and the halo it provides to the brand, it's just as much about the buzz that, that And the relevance it creates for our brand as it is about the discrete amount of sales that we had during the week or so, too, that we had the product in store. And I think that is really our formula. We have got to be the most relevant brands in the industry and Connecting with consumers the way Taco Bell has done in Q2, and you can see the results when that happens.

Speaker 2

So to answer your question, it really wasn't about the exact sales during that period of time Contributing to the quarter as much as it was just how relevant and connected to pop culture and our consumers, Taco Bell is the way they brought the Mexican Pizza back, the way they marketed it. But certainly, there's a love for the product, and we know when we introduce it in the fall That we will get an actual discrete sales benefit that might translate into a couple of points of sales.

Speaker 1

Next question please.

Operator

Our next question is from Jon Howard at Citi. Please go ahead.

Speaker 7

Hey, great. Thanks. I just had a question on the expansion on the 3PD with Pizza Hut U. S. I'm curious, Obviously, the number of restaurants opting in has moved up quarter over quarter.

Speaker 7

Just curious if you can give us some sort of insights as to how that's Performing for the brand with respect to contribution from a same store sales standpoint or even getting the message Got there to consumers more broadly about the brand's value. And then separately, I believe the company is pushing a the brand is pushing a $6.99 carryout Promotion right now, is that something that the company views as an LTO or more of a Permanent fixture on the menu to address value.

Speaker 3

Yes. Thanks, John. I'll take first the expansion of The delivery partnerships, as we said in Q1, we saw a similar dynamic in Q2 where we believe we've got Not as much of a demand problem. Demand remains strong. Our carryout business was up strongly, but we saw declines again in the delivery business.

Speaker 3

And so that's what we're focused on addressing is the availability of drivers to deliver the product whenever a customer wants to order through that channel. We talked about last quarter, we were starting to implement changes. Some of those are internal where we're changing things like our hiring practices To make a faster hiring process because that's what folks who are in the market for driving jobs look for. But we also talked about how the partnerships with Aggregators can help us as well. So if you think about the 55% where we ended the quarter on delivery as a service, That was an expansion throughout the quarter.

Speaker 3

The 70% on marketplaces, that number represents 70% who were on at least One marketplace. We only have about 35% who are on multiple marketplaces. So we still got further to go on implementing marketplaces Across the business. But if we look at the franchisees who've been implemented both of those, they're running mid single digits ahead of Those who haven't. So we're continuing to see an impact here from reaching incremental customers and from giving us that delivery capacity that we need to serve that channel.

Speaker 3

On the $6.99 promotion, really what that reflects, going back to David's point on The state of the consumer in the U. S, we know we've got to have value options and more full range pricing on the menu. And this was a move by the team to give that value to the customers who needed it and to just give us a little bit more breadth and range On menu prices, we still have great craveable products that they can trade up to, but we also want to have value there for the customers who are looking for it.

Speaker 1

Operator, we have time for one final question, please.

Operator

Thank you. Our next question comes from Dennis Geiger, UBS. Dennis, please go ahead.

Speaker 3

Great. Thanks very much. Just wondering if you could speak a bit more to the international business And perhaps at a high level, where you think you are now from a recovery standpoint relative to thinking about some of the macro challenges out there, particularly in the emerging markets ex China. Thank you.

Speaker 2

Yes, I think we're excited about the growth in international and the For international business, in particular, Taco Bell, you saw they put up over 30% system sales growth. The development machine at Taco Bell is really hitting And we're proving that with focused effort, the right team against it, Julie Masino and her team are doing an amazing job, the right franchise partners, That we can get the scale in these Taco Bell International Markets and they can be massive growth drivers for Yum! We should get to the end of the year with over 4 markets At the 100 plus unit count, which that's what we know to be the tipping point for really accelerated Growth down the road. But in general, international is really a tale of a lot of different stories, And you're seeing that best exemplified by China is still in lockdown, and we're it's hard to sell product when You have a lot of the market locked down. But as I mentioned earlier, the exciting thing is that we've got 20% of our businesses in emerging markets like China.

Speaker 2

That business is on fire. As we anticipated, it's recovering from COVID and lockdowns with increased mobility And new capabilities on the digital front that Chris talked about, and that's really driving our business there, and that should be a growth driver. And we should see the same thing play out In China, down the road, all the while, our developed markets remaining stable and growing and even coming off of some tough laps As they were doing better in previous years. So I think it all sets up to be a nice growth driver for Yum! For many years to come.

Speaker 2

Yes. And so with that, I'm going to just close the call thanking everybody for their time. Obviously, reiterate, it was a strong quarter despite all these well documented headwinds. If There is ever a quarter to demonstrate how resilient Yum! Is and how our business model is stronger than ever, this is it.

Speaker 2

The same themes continued from previous quarters with digital and development, both being really strong, and those teams are doing an amazing job. We've got this emerging market tailwind now that I just talked about. And then Taco Bell, one of the things we didn't mention is They grew sales. They delivered 26% margins, and they did it with essentially flat trans. So all that pricing that they took, clearly Still value for consumers, which bodes well for the future, up 20% versus pre pandemic, up 20% at Taco On a 3 year basis.

Speaker 2

So when you get 26% margins and you're up 20%, you got a lot of happy franchisees. And once again, amazing resilient business. This quarter demonstrates we can thrive in any environment. Thanks, everybody, for your time today.

Operator

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your

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Earnings Conference Call
Yum! Brands Q2 2022
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