Yum! Brands, Inc. (YUM) Earnings

Management highlights

- Raise the Bar priorities include battling for the future consumer, accelerating restaurant unit economics, and reaching the full potential of Byte. - KFC is elevating menus through collaborations and innovation, expanding sauces platform, using Global Innovation Pantry, and achieving 7% unit growth in Q1 with new stores in 45 countries. It's working with franchisees to accelerate restaurant economics, e.g., a franchisee in Brazil innovating store formats. - Taco Bell U.S. had 8% same-store sales growth, outperforming the industry, with value menu success and expanded use occasions. It unveiled over 20 menu innovations at LiveMoss Live event, improved consumer satisfaction scores, and has operational improvements. Internationally, it had 16% system sales growth in Q1 with strong performance in key markets. - Habit Burger & Grill has new partnership with LA Dodgers to enhance brand positioning in Southern California. - Yum is investing in beverage innovation testing, with Taco Bell piloting Live Moss Cafe and unique drinks, and KFC scaling quench beverage platform. - Byte by Yum technology platform is expanding, with Taco Bell UK being the first international market to roll out digital ordering and smart ops bundles, and AI being embedded in consumer-facing technologies and enterprise operations.

Guidance

- Taco Bell U.S. restaurant-level margins expected to be between 24.5% and 25.5%. - Full-year ex-special G&A growth, excluding Pizza Hut, is expected to be up mid-single digits. - Q2 expected to reflect high single-digit growth year-over-year ex-special, ex-Pizza Hut GNA due to project spend timing. - Approximately $5 million of non-cash closure expenses anticipated for Habit. - Pizza Hut Q2 core operating profit expected to be approximately $70 million.

Segment performance

KFC represents 53% of divisional operating profit. In Q1, KFC delivered 6% system sales growth, 7% unit growth, and restaurant-level margins were 10.3% (up 100 basis points year-over-year, with a 240 basis point increase in UK restaurant margins). Taco Bell represents 39% of divisional operating profit. Taco Bell U.S. reported 8% same-store sales growth, and international system sales were up 16% in Q1. Same-store sales growth in the U.S. reflects transaction growth from the Lux value menu. Habit Burger & Grill has topline momentum from enhancing value and innovation but is impacted by inflation, particularly beef prices. Digital mix increased to 63% and digital sales approached $11 billion in the quarter.

Risks & headwinds

Middle East conflict has caused short-term delays in obtaining government permits and procuring equipment in select markets such as the UAE and Turkey for development.

Analyst Q&A

• Q: Your first question comes from the line of David Palmer with Evercore. You know, we're pleased with the progression in KFC International. If you look over the last four quarters, we've seen acceleration on a two-year same-store sales basis. In each of those quarters in KFC International, lots of good things happening. As you said, if you look across those markets, you've got plenty of double-digit system sales growth markets. And we gave a few examples in the speeches. UK is at the lead of bringing to life a more vibrant consumer proposition, leveraging innovation, expanding consumer use occasions. Korea, I was with the Korea team from KFC earlier this week. They have doubled their system sales over the last few years. They've reached the highest rate of unit development last year, nearly three to four times their previous pace. In Latin America, as the Serrano Group moves into Brazil, we're seeing great things. But if you step back and say, what's driving that? Scott Misvinsky has now been in the business for a year. He, of course, was part and parcel of building the Taco Bell strategy that we laid out last year, and he's bringing the same things. He's setting a very high aspiration. He's creating some specific targets, and then he's building the strategies that will bring that to life. Of course, given 150 markets, that's going to take some time to come to life, but those countries that I mentioned are proof points that his strategy is working, and we're excited about the momentum ahead.

  A: Yeah, thanks, David. You know, we're pleased with the progression in KFC International. If you look over the last four quarters, we've seen acceleration on a two-year same-store sales basis. In each of those quarters in KFC International, lots of good things happening. As you said, if you look across those markets, you've got plenty of double-digit system sales growth markets. And we gave a few examples in the speeches. UK is at the lead of bringing to life a more vibrant consumer proposition, leveraging innovation, expanding consumer use occasions. Korea, I was with the Korea team from KFC earlier this week. They have doubled their system sales over the last few years. They've reached the highest rate of unit development last year, nearly three to four times their previous pace. In Latin America, as the Serrano Group moves into Brazil, we're seeing great things. But if you step back and say, what's driving that? Scott Misvinsky has now been in the business for a year. He, of course, was part and parcel of building the Taco Bell strategy that we laid out last year, and he's bringing the same things. He's setting a very high aspiration. He's creating some specific targets, and then he's building the strategies that will bring that to life. Of course, given 150 markets, that's going to take some time to come to life, but those countries that I mentioned are proof points that his strategy is working, and we're excited about the momentum ahead.

• Q: Your next question comes from the line of David Tarantino with Baird. Hi, good morning. Chris, another question on international, and I guess mine's more focused on the franchisee appetite for unit growth, given all the geopolitical issues that are out there. And I know you mentioned on the call that that there was still a good pipeline for this year, but thinking more into next year or the next few years, are you seeing any signs of pause related to the unit growth, either for KFC or Taco Bell? I know Taco Bell International is a big opportunity for you, so if you can comment on that as well, that'd be great. Thanks.

  A: Yeah, thanks, David. As we look at our unit development outlook, we have high confidence. We just set a new record for Q1 unit development in KFC. The Taco Bell international unit development story continues to grow. If you think about KFC, as we mentioned on the call, we're actually with our KFC franchisees and our development leaders here this week in Plano. We're talking about the elements of the raise the bar strategy. Of course, the first part of that is battling for the future consumer, which should lead to higher same-store sales growth and higher AUVs. The A is accelerating restaurant economics, and the R is reaching the full potential of Byte. But that accelerating restaurant economics is about leveraging those higher AUVs over time and leveraging our scale and supply chain in prototype design and the scale that Byte provides us to improve unit economics. And that will ultimately help us to broaden the number of markets from which we get strong unit developments. have incredible unit economics in our biggest unit development markets today china india middle east but we know there is so much white space that we can get to if we can improve paybacks in broader markets europe is a prime example of that our team and our franchise partner in italy has shown us that that is possible if we go to taco bell international You know, we're continuing to see great growth. You look at those system sales numbers and those same store sales growth numbers that Roy shared, a lot of great things happening there. You know, it was in 2021 that we had 100 units in Spain. We're now at 180 units today. 2022 is when we had 100 units in India and the UK. We're now at 156 and 142 in those two markets. Canada will probably be the next market that gets to 100 units, and we're adding new markets all the time. So we're pleased with the progress there. Our long-term aspiration is to sustain or even accelerate our pace of unit development. And David, I'll just add to that. If you look at history in KFC, there's no more consistent unit developer than KFC global over time because it's underwritten by a really strong investment case in many markets around the world and amazing well-capitalized franchisees. So if you look in times of disruption in the past, 2021 and 2022, you had a lot of supply chain disruption. KFC grew net new units 8% and 11% in those years. In 2024 and 2025, you're talking about the Middle East crisis and its aftermath. We saw 7% net new unit growth in both years when you exclude the impact of Turkey and Russia exits. And as for the current conflict and its relevance to unit growth, the entire Middle East represents you know, less than 150 units in our current pipeline. And as of today, our partners in that region expect no change to plans. And so we have a lot of confidence in KFC, both based on track record as well as what we're seeing on the ground.