Yum! Brands Q4 2022 Earnings Call Transcript

Presentation

[Operator]

Hello, everyone. Welcome to the Yum! Brands, Inc. 2022 Fourth Quarter Earnings Conference Call. My name is Charlie [Phonetic] and I'll be coordinating the call today. You will have the opportunity to ask your questions at the end of the presentation. [Operator Instructions] Please note, we will only be taking one question from each person to ensure we get around to everybody in the queue.

I will now hand over to your host, Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations to begin. Gavin, please, go ahead.

[Gavin Felder, Chief Strategy Officer and Interim Head, Investor Relations at Yum! Brands]

Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I'll be covering for Jodi Dyer while she is on maternity leave. 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, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and relevant sections of our filings with the SEC to find disclosures, definitions, and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. Please also note the following financial reporting treatment related to our exit from Russia. As a reminder, as of the beginning of the second quarter, we elected to remove the Russia business from key performance metrics. For the purposes of this call, all references to system sales growth and unit growth results for the quarter are adjusted to remove our Russia business from the prior year base. This negatively impacted our worldwide unit growth by two percentage points and our worldwide system sales growth for both the fourth quarter and the full year by two percentage points. These units were removed from our same-store sales calculations and thus did not impact same-store sales results for the fourth quarter for full year.

Full GAAP figures reported continued to include the impact of Russia operations for KFC for the full quarter and year and for Pizza Hut prior to our transfer of that business to a local operator in the second quarter. These GAAP figures primarily include royalty revenues from continued franchise operations and G&A to support our Russia business. Additionally, our GAAP G&A includes expenses incurred relating to the transfer of ownership of the business. As a result of our decision to exit our Russia business, we have re-classed net operating profits from the operating segments in which they are earned subsequent to the start of the conflict to corporate and unallocated and reflected those net operating profits 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 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. Looking ahead, our first quarter earnings will be released on May 3, 2023 with the conference call on the same day.

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

[David Gibbs, Chief Executive Officer at Yum! Brands]

Thank you, Gavin, and good morning, everyone. 2022 truly was a landmark year for Yum! In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, our world-class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record-breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net-new units, beating our prior record set just last year and ending the year with over 55,000 restaurants globally. For the full year, system sales were up 8% and core operating profit was up 6%, which includes a two-point headwind from the removal of Russia profits this year. Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same-store sales growth of 8%. Taco Bell also booked the industry trend on margins, holding company-operated margins flat from last year despite elevated industry-wide cost pressures. KFC International delivered a record year opening approximately 2,400 gross units and nearly 2,000 net-new units, translating into 9% unit growth. Combined, these two parts of the business account for approximately 80% of our divisional operating profit.

We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same-store sales growth and 6% unit growth, contributing to 22% core operating profit growth, which includes a two-point headwind from the removal of Russia profits this year. Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us.

Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating systems, and master franchise rights to an existing KFC Russia franchisee. We expect the transaction to close following satisfaction of all closing conditions. Following the closing, we will have ceased our corporate presence in Russia.

I also want to acknowledge the devastating impact of the earthquake that happened earlier this week, affecting our teams in Turkey. Our people remain our number-one priority and I want to recognize the efforts from our franchisee, Ilkem Sahin, as he and his team worked to prioritize people's safety as they navigate through this tragedy.

As we shared at our recent Investor Day, our strategy is guided by our recipe for good growth and today we will discuss our 2022 results through the lens of that framework. I will talk about two of our growth drivers, namely our Relevant, Easy, and Distinctive brands, or RED for short, and our unrivaled culture and talent. Then I'll provide an update on our efforts to drive the good agenda across our brands and our business. Chris will then share the details of our fourth quarter financial results before discussing our bold restaurant development and unmatched operating capability growth drivers.

I'll start by discussing our iconic RED brands. Beginning with the KFC division, which accounts for 49% of our divisional operating profit. KFC full-year 2022 system sales grew 9%, driven by 7% unit growth and 4% same-store sales growth. Q4 system sales for KFC increased 10%. Thanks to 7% unit growth and 5% same-store sales growth. Results were unfavorably impacted by COVID-related challenges in China. Excluding China, our KFC business continues to grow at an unbelievable pace with same-store sales growing 9% in the quarter, driven in part by our world-class franchisees and continued impressive momentum in our emerging market. At KFC's international business, which represents 44% of our divisional operating profit, Q4 system sales grew 11%. Several markets showed stellar results. In Japan, for example, KFC is synonymous with the Christmas holiday family meal, and this year, Japan system sales over the Christmas period grew 16% year-over-year. Africa drove double-digit same-store sales growth in the quarter and continues to benefit from several customer-facing digital initiatives. To build on that success, our South Africa team will continue to rol lout kiosks with a goal of installing them in 95% of our stores by 2023.

Moving onto our Taco Bell division, which represents 35% of our divisional operating profit. On a global basis, full-year system sales grew 11%, driven by 8% same-store sales growth and 5% unit growth. This team continues to deliver industry-leading results, and coupled with the incredible array of talent in place and our strong franchisee partnerships, it should be no surprise that Taco Bell earned the top spot on Entrepreneur magazine's Franchise 500 ranking for the third year running.

Moving onto our fourth quarter results. Taco Bell U.S. grew system sales 14%, underpinned by an exceptional 11% same-store sales growth. The powerful momentum from previous quarters continued with the relaunch of the cult classic Mexican Pizza, for which we provided early access to our loyalty members. We ended the year with around 45 million Mexican Pizzas sold, an impressive number considering they were only available for four months of the year.

We also made encouraging progress in our breakfast layer, building on high-profile branding partnerships such as Doja Cat in Q1 and Davante Adams in Q3. Taco Bell brought in Pete Davidson to help drive consumer buzz for breakfast. This led to 9% transaction growth for the day part. Overall, Taco Bell did a terrific job this quarter at balancing both ends of the consumer spectrum by featuring premium products that our consumers crave, such as the Grilled Cheese Burrito with sharply priced items like Nacho Fries. At Taco Bell International, Q4 system sales grew 23%, driven by 29% unit growth and 4% same-store sales growth. Q4 closed a truly breakthrough year for our international business, which has now crossed the 1,000 unit mark. To put this speed into some historical context, Taco Bell International has built 40% of its current estate within the last two years. It wasn't just our development engine on fire this year; many of our markets reached double-digit same-store sales growth in 2022, including some of our largest markets with India up 33%, Thailand up 36%, and Spain up 20%.

Next, at the Pizza Hut division, which accounts for 16% of our divisional operating profit, our full-year system sales grew 3%, led by 4% unit growth and flat same-store sales growth. Pizza Hut International, which accounts for 9% of our divisional operating profit, achieved system sales growth of 4%, driven by 6% unit growth and a 1% decline in same-store sales in the fourth quarter. Results were heavily impacted by the ongoing COVID-related challenges in China. Ex-China, our same-store sales remained healthy, growing 4%. Several markets showed noticeable strength, including Japan, where same-store sales grew 10%, owing to a strong holiday performance and recent product launch of Tuscani pasta bowls that featured a local flavor twist. At Pizza Hut U.S., which accounts for 7% of our divisional operating profit, Q4 system sales grew 5%, driven by 4% same-store sales growth and flat unit growth. The strength in the quarter was driven by a combination of factors that included new advertising to highlight both premium and value offerings, growth partnerships with aggregators, and the success of the new Melts product. Melts over-indexed to predinner time frames and individual occasion tickets and helped to recover the lower household income base due to its strong value proposition. Lastly, five distinct national marketing campaigns on Uber Eats and DoorDash helped aggregator transactions grow 30% in the quarter.

Lastly, at The Habit Burger Grill, the team continues to make progress on setting up the business for long-term growth. Habit's burgeoning digital channel finished the year strong with digital mix ending at 35%, a truly impressive level after only launching in 2020. I'm pleased to share that Habit is now 18% franchised, which is up 5 points from last year. With $2 million average unit volumes and a compelling growth strategy, I'm confident in the long-term growth of our newest brand.

And now, on to our unrivaled culture and talent growth drivers. Our hallmark at Yum! continues to be our people-first culture, which drives retention and recruitment of amazing talent. Highlights in 2022 included bringing our top 250 leaders from around the world together for a global leadership summit and celebrating the important role our world-class talent has played as we marked our 25th anniversary as a publicly traded company. Internally, we continued to promote talent naming a president of The Habit Burger Grill and a new president of KFC U.S. Externally, we attracted top talent welcoming a new global chief brand officer for Taco Bell, a new global chief operating and transformation officer for Pizza Hut, and a new chief corporate affairs officer for Yum!. When it comes to all the good we do, we released our 2021 Recipe for Good report during the year, detailing our strong progress around our three priority areas. With our science-based targets to decrease greenhouse gas emissions by 46% by 2030, we decreased emissions against our 2019 baseline by approximately 24% for company-owned buildings and our corporate restaurants, while our franchisees decreased emissions by 20%.

Regarding better packaging, we published a new global harmonized packaging policy with a focus on eliminating unnecessary packaging, shifting to more sustainable materials, and supporting better recovery and recycling systems. We increased the number of women in senior leadership globally to 42%, which keeps us on track to achieve gender parity and leadership globally by 2030 in alignment with Paradigm for Parity. We were pleased Yum! received industry-leading rankings on the carbon disclosure project and inclusion on the 2022 Dow Jones Sustainability Index North America, the 2023 Bloomberg Gender Equality Index, and Newsweek's list for America's Most Responsible Companies and America's Greatest Workplaces for Diversity.

To wrap up, I'm thrilled with our 2022 performance, particularly given many of the unpredictable obstacles our team had to navigate. Our results continue to reflect a resilient, diversified business and the strength of our portfolio, led by our iconic brands. I'm confident we will continue to execute with superior performance and deliver industry-leading growth, all of which will help to maximize value to our shareholders.

With that, Chris, over to you.

[Chris Turner, Chief Financial Officer at Yum! Brands]

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development, and unmatched operating capability growth drivers, followed by our capital strategy. As David mentioned, 2022 was a year of huge milestones for Yum!. The resilience and winning mindset shown by our teams around the world helped us open a record-breaking 4,560 gross units, or 3,076 net new units on a full-year basis. These development numbers put full-year unit growth at 6%. System sales for the year grew 8%, driven by strong international same-store sales growth for KFC, and another stellar performance from Taco Bell. Full-year core operating profit grew 6%, which includes a two-point headwind from the removal of Russia profits this year. Fourth-quarter system sales growth of 10% was in line with the update we shared at our Investor Day, driven by 6% same-store sales growth and 6% unit growth. Core operating profit grew 22%, which includes a two-point headwind from the removal of Russia profits this year. Reported operating profit included a negative $42 million foreign currency translation impact in the fourth quarter, and a negative $118 million impact to the full year. Ex-special general, and administrative expenses came in at $357 million and approximately $1.1 billion for the full year.

Taco Bell store-level margins were 23%, flat year-over-year. Taco Bell paid additional discretionary bonuses to its store-level employees, given the strong performance for the year, which impacted quarterly margins by approximately 50 basis points. Taco Bell's full-year store-level margin was 24%, near the upper end of its 23% to 24% historical pre-COVID margin range. Fourth-quarter ex-special EPS was $1.31, a 29% increase versus the prior year. EPS growth was positively impacted by core operating profit growth of 22% and a lower current year tax rate. This was partially offset by the year-over-year impact of a current year mark-to-market loss on our equity investment in a franchisee in India, lapping a prior year gain, as well as the aforementioned negative impact of foreign currency. The ex-special tax rate in the quarter was 12%, due in large part to the release of a valuation allowance associated with deferred tax assets that we now believe we will be able to utilize. Our full year ex-special tax rate was 21%, in line with our full-year expectations of 21% to 23%.

Now, let me share greater detail on our fourth quarter unit growth in the context of our bold restaurant development growth driver. This quarter, we opened 1,830 gross new units, resulting in 4,560 gross units opened for the full year, or the equivalent of more than one new restaurant every two hours. Nearly 90% of new store openings in 2022 occurred outside the United States, across 112 countries, proof that our diversified development engine is stronger than ever. Starting with KFC, the team opened 997 gross new units in the fourth quarter with China, India, and Thailand leading the charge. The Pizza Hut division had incredible development results, opening 571 gross new units in Q4 with five countries contributing more than 25 units, namely India, Indonesia, Canada, China, and Turkey. The Taco Bell division opened 253 gross new units in Q4 and 496 restaurants for the full year. In fact, Taco Bell U.S. opened 250 gross new units this year, the second highest annual amount ever. For 2022, Taco Bell International set a record with 246 gross new units, exceeding the prior record of 179 units set last year. I'm thrilled to report we crossed the 1,000 Taco Bell unit threshold internationally, and we soon expect to have four countries that have over 100 units with China joining Spain, India, and the U.K.

Lastly, Habit added 33 gross new units in 2022, representing a year-over-year growth rate of 10%. This level of growth, which includes a significant number of company-owned units, creates some short-term noise in company-owned restaurant margins due to the inclusion of preopening expenses and the depressed margins that are normal during the initial months of operations before new stores reach maturity. Average margins for Habit stores opened more than a year remain much stronger than our overall reported Habit company store margin.

To finish with development, as we head into 2023, we remain confident that we will maintain our strong momentum. We exited 2022 with record site registrations for new units at Taco Bell U.S., and we have over 80% of 2023 planned units at KFC and Pizza Hut outside of China committed with well-capitalized, growth-ready franchise partners.

Next, I'll discuss our unmatched operating capabilities and the three pillars of our digital strategy: Easy Experiences, Easy Operations, and Easy Insights. I'll start with an update on our Easy Experiences pillar, which focuses on delivering seamless customer experiences through proprietary technology and dedicated operational programs. In 2022, we expanded the rollout of Tictuk, our conversational commerce and e-commerce platform, across our network and finished the year with Tictuk in over 3,200 stores across 49 markets. We processed millions of digital orders in 2022 with Tictuk continuing to prove it can bring in incremental customers and drive digital sales. This is evidenced by the chat ordering launch in KFC Mexico, where more than 90% of users who transacted on the chat channel had previously not placed a digital order on other channels. We plan to roll out Tictuk to more than 1,000 new stores in 2023, including its white label e-commerce platform which went live in Pizza Hut Chile and Taco Bell Canada in Q4 2022.

Moving on to our Easy Operations pillar, which centers on the team member and franchise partner experience. The rollout of Dragontail is ramping up in Pizza Hut U.S. with over 450 stores onboarded by the end of 2022 and plans to reach up to 1,000 stores by the end of Q1. Globally, we expect to have Dragontail in over 7,000 stores by the end of 2023. At Pizza Hut U.S., we have completed the integration of two major aggregator channels into our point-of-sale system. And at Taco Bell U.S., we have fully integrated our delivery as a service partner into our stores technology system. These integrations are important in helping our team members process delivery orders with new levels of ease.

Lastly, I'll cover our Easy Insights pillar, which leverages the power of data and analytics to allow our teams to make smarter decisions. I want to highlight two key initiatives that our Yum! Decision Sciences team have been working on, namely recommended ordering and cook schedule. Recommended ordering is an artificial intelligence, machine learning module that predicts and recommends the quantity of product for a restaurant manager to order each week with the goal of reducing product waste and intra-store transfers of inventory. The product has been rolled out to 3,000 U.S. stores across Taco Bell and KFC. Cook Schedule is a similar module that helps predict the correct amount of food and timing to cook product to accurately meet demand. The team is working primarily with KFC on this initiative with plans to pilot in an international market soon.

Finally, I'll provide an update on our balance sheet and liquidity position. Our net leverage ratio ended the year at 5 times, including a small balance on our revolving credit facility that was used to support share repurchases in the fourth quarter. We will enter 2023 with no significant maturities until 2026 and approximately 94% of our debt fixed, excluding our revolving credit facility balance. I will reiterate that our capital priorities are guided by maximizing shareholder value. This includes investing in the business, maintaining a resilient balance sheet, offering a competitive dividend, and continuously evaluating the optimal use of our excess cash. To that end, I'm also pleased to announce that this week, our board of directors approved an increased quarterly dividend of $0.605.

Our capital expenditures for the quarter, net of refranchising proceeds, were $99 million. Our net capital expenditures for the year came in at $206 million, reflecting $73 million in refranchising proceeds, and roughly $279 million in gross capex. With regard to our share buyback program, we repurchased 4.1 million shares in the quarter at an average share price of $119 per share, totaling approximately $486 million. For the full year, we repurchased 10 million shares at an average price of $119 per share and totaling $1.2 billion. Overall, we're extremely pleased with these results given the complexities our teams faced. Navigating such challenges with industry-leading performance affirms the confidence we have to deliver our recently raised long-term growth algorithm of 5% unit growth, 7% system sales growth, and at least 8% core operating profit growth.

Looking to 2023, we wanted to provide a few guardrails for modeling purposes. First, we expect to deliver on our long-term growth algorithm with healthy unit growth momentum continuing into 2023. We expect Taco Bell company-operated margins to be in line with full-year 2022 margins and we expect our 2023 G&A to be approximately $1.15 billion, in line with the guidance provided at Investor Day. In terms of the shape for the year, the year-over-year growth in G&A will be highest in the first half, largely owing to the timing of our G&A expense plan across the year. Based on rate expectations as of today, we expect our interest expense to be up approximately 10% year-over-year and for our leverage ratio to drift modestly lower in 2023. Finally, we expect our full-year tax rate to be 21% to 23%.

To close, we are extremely proud of the performance of our brands over the past year and look forward with excitement to deliver another year of compelling growth and shareholder value in 2023.

With that, operator, we are ready to take any questions.

Questions and Answers

[Operator]

Thank you. [Operator instructions] Please note, we'll be only taking one question from each person to ensure we get around to everybody in the queue.

Our first question comes from David Tarantino of Baird. David, your line is open. Please, go ahead.

[David Tarantino, Analyst at Robert W. Baird and Company]

Hi. Good morning. My question is about the profit outlook for 2023. And I was wondering how you're thinking about the puts and takes related to potential upside or offsetting factors. And in particular, I was curious about the China business. It seems like there's potential for China to recover and be additive to your overall profit algorithm for this year. And I was curious to get your view on whether that would be an upside lever, or you would think about potential offsets to that factor for this year. Thanks.

[Chris Turner, Chief Financial Officer at Yum! Brands]

Yeah. Hey, David. Thanks. Good question. As we look forward to next year and beyond, we're still confident in the future. As we shared at Investor Day with the raised algorithm, we feel confident in the trajectory of the business, and nothing has changed in that outlook as we come into 2023. And as you mentioned, the China component of our sales, you heard Yum China talk last night about being cautiously optimistic. So, we'll continue to work with them in the long run. We are very bullish on the China market as it comes out of COVID. But, of course, the timing of that is uncertain as they shared on the call last night. Of course, to the extent that we have rebound in that China sales, it does come at a lower royalty rate as you factor that into the plan for the year. The other elements, I think, are in line with the -- with what we shared in the algorithm. You heard the guidance that we shared on G&A for next year. And so, our focus is on driving that growth. And, of course, every day, it's our mission to come in and over-deliver on that algorithm if we can.

[David Tarantino, Analyst at Robert W. Baird and Company]

Thank you.

[Operator]

Thank you. Our next question comes from Dennis Geiger of UBS. Dennis, your line is open. Please, go ahead.

[Dennis Geiger, Analyst at UBS Group]

Thanks, Chris, for that color on G&A for the year. Helpful. Wondering, David or Chris, if you could speak just a bit more to the strength that you're seeing from a sales momentum perspective globally and the resilience really across the brands in the current macro and how that guides sort of how you're thinking about 2023 if consumer pressure increases, I mean, strength at Taco Bell, KFC non-China, International, Pizza Hut U.S. even momentum building. Just any additional color given the last several months' momentum for how you think about '23, particularly, if globally, the macro situation gets worse. Thank you.

[David Gibbs, Chief Executive Officer at Yum! Brands]

Yes. Strength is a good word, Dennis, and it really was widespread, as you mentioned. We feel great about the fact that all of our brands are really on a roll right now. You saw that in the results for the quarter. And the consumer environment, much like my comments last quarter, remains a positive environment for us generally globally. Obviously, there are pockets of challenges when you have things like lockdowns in China last year, but that flips to be a more -- potentially a positive for this year. But the consumer in the U.S., on the high end, we're actually seeing more frequency from that consumer and we're seeing possibly driven by a little trade down into our brands, which is all good. And then on the lower end, as I mentioned last quarter, consumers are starting -- there's a little bit more interest in value, which our brands are perfectly positioned to deliver on. You're seeing that with our menu offerings. Taco Bell with the Cravings Menu and $2 burritos, the new Melts product at Pizza Hut, which is screaming value. KFC just rolled out wraps, as you guys are probably aware of, at a great value price point. So, I think the environment sets up well for us. From a consumer demand standpoint, more of the same.

And then on the labor side, we're seeing an increase in applications, stores returning to their pre-COVID operating hours, which is great that we're able to staff the stores now appropriately. So, when you mix it all together -- and we like the environment we're in. I also saw some data about grocery inflation in December being pretty high. So, I think relative to alternatives, we're still a very attractive option.

[Operator]

Thank you. Our next question comes from Andrew Charles of Cowen. Andrew, your line is open. Please, go ahead.

[Andrew Charles, Analyst at Cowen]

Great. David, a little bit of segue to my question. Can you talk about your philosophy for how you plan to balance pricing versus value for Taco Bell U.S. in 2023? If I recall from the Investor Day, you tend to take most of the price on new menu innovation as largely premium. I was wondering for what it -- to perhaps get more aggressive on value, if you need it, while preserving the strong margins the brand has reached, and, perhaps, you can just remind us as well what was the level of pricing for Taco Bell U.S. in 4Q as well?

[David Gibbs, Chief Executive Officer at Yum! Brands]

Yeah., As far as Taco Bell and the amazing job that they do, segmenting their consumers and providing each consumer what they want, that's what we talked about on Investor Day. And, obviously, Taco Bell has some amazing value offerings that have been in their menu now for quite some time on the Cravings Value menu. But it doesn't -- it's targeted to a certain set of consumers and halos the entire business. So, as the environment gets more competitive, we're already in the value game at Taco Bell, and we're already doing a great job. I don't see us changing anything. Well, we're connecting and we're winning because of value. That's why you saw the great numbers that we just put up in the quarter. But the brand with amazing margins, steady year-over-year, just has all the tools at disposal to navigate any kind of environment and deliver great margins, great top-line sales growth, and a great proposition to consumers.

[Operator]

Thank you. Our next question comes from David Palmer of Evercore. David, your line is open. Please, proceed.

[David Palmer, Analyst at Evercore ISI]

Thanks. Congrats on the very strong unit growth. I wonder how you're thinking about EBIT margin over time. In 2022, it was 32%. It's been near 35% before, but business mix is always changing. I wonder though, how you think about that margin over time. Do you think you could get back to 35% or so in the next few years? And I'm thinking about certain flow-through like China license fee recovery could be very good incremental margins. And so, I'm just wondering how you're thinking about the potential for that EBIT margin. Thanks.

[Chris Turner, Chief Financial Officer at Yum! Brands]

Yeah. Thanks, David. I think in general, we focus on delivering the algorithm and the profit growth that's embedded there. If you think about puts and takes on EBIT margin, obviously, from a core operating profit standpoint, you do have to consider the royalty rate mix, I mentioned earlier, to the extent if any of our lower royalty rate markets were to grow faster than the others, you have to take that into the account in the modeling. We did talk about, at Investor Day, our philosophy on G&A and how we're going to have a lower G&A growth rate going into next year than we've had the last few years. So, we're going to be managing that carefully in 2023. And then, of course, when you go to reported profit -- reported operating profit, you have to take into account FX. And FX was a headwind this past year. Pretty hard to predict. Nobody has the crystal ball on that. I will share that right now, as we look to 2023, FX will continue to be a headwind for us based on our current estimates, primarily in the first half. But we think on a full-year basis, our best estimate is between a $30 million to $40 million headwind going into the year. We'll continue to update that as things change. So, it's our push to drive the strong profit growth implied in the algorithm. And that's where we're focused.

[Operator]

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

[Jon Tower, Analyst at Smith Barney Citigroup]

Great. Thanks for taking the questions. Just two quick ones. G&A came in a bit higher than, I think, guidance had -- or you guys have been targeting for guidance. I just wanted to confirm, maybe there were some one-timers in there or is there something else that might have hit that line. And then outside of that, we've heard from another -- number of other operators that 2023 started off on some strong footing in the U.S. and, frankly, across the globe. So, I guess I'm asking if there's any reason to believe that Yum!'s brands wouldn't have been participating in that strength globally.

[Chris Turner, Chief Financial Officer at Yum! Brands]

Yeah. First, on G&A. In Q4, we had reported G&A of $1.140 billion. But that included special expense. We had approximately $20 million in special expense. So, we landed broadly in line with our full-year plan, a little bit to the high end of our planned range. There were a number of small items. None of them major, but I'll give you one example. As we had to split out the Russia business to prepare for sale, we lost some of the fixed cost leverage in our European G&A. But, again, going into next year, as I mentioned earlier, the philosophy that we shared at the Investor Day still holds. We are focused on having a lean G&A model while investing in the things that drive long-term growth and health and we'll have a lower G&A growth rate into 2023. In terms of how 2023 is shaping up, as I said earlier, there's nothing that we're seeing at the start of the year that dampens our confidence in delivering our long-term growth algorithm this year and beyond.

[Operator]

Thank you. Our next question comes from John Ivankoe of J.P. Morgan. John, your line is open. Please, go ahead.

[John Ivankoe, Analyst at JPMorgan Chase and Company]

Hi. Thank you so much. I was looking for a little bit -- a more detailed color in terms of what's happening at a consumption level in some of your major markets between your dine-in or in-store type of traffic, delivery traffic. Are you actually seeing consumers trade down in your opinion to your brand? Are you seeing your core customers come more often? Is there any slippage at all on the lower income consumer? Just kind of, I guess, a little bit more color in terms of -- I know it's always hard talking about a big global business with three, and now, four brands. But if there's anything that you can really provide some more detail in terms of what's going on below what's obviously very good aggregated results? Thanks.

[David Gibbs, Chief Executive Officer at Yum! Brands]

Yes. Thanks, John. It is hard to talk about a business where we have 290 different brand country combinations versus 290 different stores. But in general, we obviously saw a shift to off-premise consumption during the pandemic. We've seen some of our on-premise consumption come back, but really for none of our brands is it back to where we were, which isn't a bad thing given the efficiency of operating an off-premise model, our ability with new unit development to build slightly smaller stores that are more efficient with better returns for franchisees. As far as the consumer, I've mentioned this earlier, but I'll -- it does depend -- if we're looking at the U.S. or other developed markets, the environment is still positive, just very similar to what we saw last quarter.

We are seeing some increase in our higher frequency customers -- or, higher income customers coming more frequently. And some of that is no doubt due to trade down into our brands. On the lower end, we're not seeing the low income consumer drop out of our business. What we're seeing is probably a little bit more focus on value. And that's been the trend that's been continuing throughout 2022 into 2023. And we're there for them -- with our brands with perfect offerings for them.

And in emerging markets, obviously, earlier in the pandemic, were a challenge. They've come back now and our emerging developed markets are performing roughly similar around the world.

[Gavin Felder, Chief Strategy Officer and Interim Head, Investor Relations at Yum! Brands]

Operator, we have time for one more question.

[Operator]

Of course. Thank you. Our final question of today comes from Gregory Francfort of Guggenheim. Gregory, your line is open. Please, go ahead.

[Gregory Francfort, Analyst at Guggenheim Partners]

Hey. Thanks for the question. I just want to ask about Pizza Hut U.S. It seems like the business has picked up the last few quarters. And I'm curious if you're seeing share gains or increased pricing, or just -- any thoughts on what's going on there would be helpful. Thanks.

[David Gibbs, Chief Executive Officer at Yum! Brands]

Yeah. I'm glad you asked about Pizza Hut U.S. We're actually really proud of what the team is doing and the success they had in the quarter and the momentum they're building in the business. I know the franchisees and the team are working incredibly collaboratively and I do believe getting share gains in the category and attracting new consumers. They're doing that a couple of different ways. Number one, how they're playing aggregators with the partnerships with the aggregators and how we've integrated into our IT systems, we're seeing a significant lift in our transactions with aggregators. We started the year with about five transactions per store through aggregators. Now, we're up to close to 50 by the end of the year. That's a massive progress, and obviously, helping us access some consumers that weren't using the brand. But it's also the look, tone, and feel of the advertising. You'll notice that that's changed. It's a much more modern contemporary approach, which is connecting well with consumers. And then, finally, it all comes down to the product. The launch of Melts has been very successful for the brand, attracting younger consumers to different occasions than would traditionally use Pizza Hut. So, that all adds up to a very positive story for the Pizza Hut U.S. business. And thank you for the question.

I think with that, we'll wrap it up, and I think the numbers speak for themselves. It was another incredible quarter and wrapping up a great year despite many challenges. I'll point out, we actually closed the year with over 4,500 gross new units being built. Take the 4,100 we built last year, that's 8,600 gross new units. That means one out of every six locations you see around the world was built in the last two years for our brands. I think that shows the momentum that we've got in the business. Our Yum China team talked about the great returns they're getting from their new unit development last year, coupled with the top-line growth that we're seeing in existing stores, and there's a lot to be excited about as we head into 2023. Thank you for your time today.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Gavin Felder, Chief Strategy Officer and Interim Head, Investor Relations
• David Gibbs, Chief Executive Officer
• Chris Turner, Chief Financial Officer

Analysts

• David Tarantino, Robert W. Baird and Company
• Dennis Geiger, UBS Group AG
• Andrew Charles, Cowen Inc
• David Palmer, Evercore ISI
• Jon Tower, Smith Barney Citigroup
• John Ivankoe, JPMorgan Chase and Company
• Gregory Francfort, Guggenheim Partners