百勝餐飲集團 (YUM) 2017 Q2 法說會逐字稿

Good morning.

My name Kim, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Yum!

Brands Second Quarter 2017 Earnings Conference Call.

(Operator Instructions)

Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer, you may begin your conference.

Thank you, operator.

Good morning, everyone, and thank you for joining us.

On our call today are Greg Creed, our CEO; and David Gibbs, our President and CFO.

Following remarks from Greg and David, we'll open the call to questions.

Before we get started, I'd like to remind you that this conference call includes forward-looking statements.

Forward-looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.

All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included with our filings with the SEC.

In addition, please refer to the Investors section of the Yum!

Brands website, www.yum.com, to find disclosures and reconciliations of non-GAAP financial measures that may be used on today's call.

Please note the following regarding our basis of presentation on today's call.

System sales results exclude the impact of foreign currency.

Core operating profit growth figures exclude the impact of foreign currency and special items.

We are broadcasting this conference call via our website.

This call is also being recorded and will be available for playback.

Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.

We would like to make you aware of the following changes in upcoming Yum!

investor events.

Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the second quarter Form 10-Q filing.

This year, we will be hosting brand days in place of our annual investor and analyst event.

Our second event will be KFC and Pizza Hut, September 13 and 14 in Dallas, Texas.

Third quarter earnings will be released on November 2, 2017, with the conference call on the same day.

The remainder of our 2017 key earnings dates are available on our website.

Now I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith, and good morning, everyone.

We are pleased our momentum continued through yet another quarter, driven by our continued focus on our 4 key growth drivers.

For the second quarter, Yum!

Brands delivered core operating profit growth of 19% and EPS excluding special items of $0.68, representing 21% growth over prior year.

System sales grew 6%, comprised of 2% same-store sales growth and 3% net new unit development.

The underlying base rate of growth in our business, both in terms of sales trends and profit contribution, continues to track in line with our plans and longer-term goals.

As such, we are maintaining our 2017 full year guidance.

Before I review our key growth drivers, I want to note that our core operating profit growth for the second quarter in our KFC division benefited from several items outside of our normal run rate, which David will discuss in more detail next.

Now to our 4 key growth drivers, which are at the forefront of every decision at Yum!.

I will talk to you about unrivaled culture and talent and our distinctive relevant brand.

Then David will discuss unmatched franchise operating capability and bold restaurant development.

First, unrivaled culture and talent, Yum!'s greatest asset for driving results.

This year, I'm continuing in my commitment to championing our culture and talent not only with our own employees but also throughout the franchise system.

I strongly believe that leading and investing in our culture is the best way to fuel better business results, and I'm excited to see our franchisees embracing these ideas and learning to grow our iconic brands.

I can tell you that our people and our franchisees are energized, our transformation agenda is taking hold and our culture is stronger than ever.

Next, let's talk about how this culture is fueling results in our 3 distinctive relevant brands, starting with KFC, which is truly a global powerhouse.

The brand continues to be Yum!'s most consistent, largest and fastest-growing concept, with a presence across 129 countries, providing the scale and diversification for a powerful business model.

Representing approximately 50% of Yum!'s operating profit, KFC has nearly 21,000 units across the globe.

During the second quarter, system sales grew 7%, with same-store sales growth of 3% and net new development of 4%.

We are proud to highlight that in 18 of our 20 KFC business units, across both emerging and developed countries, KFC reported positive same-store system sales this quarter.

In the U.S., the second quarter represented KFC's 12th consecutive quarter of same-store sales growth at a healthy 2% or 4% on a 2-year stack.

The $5 Individual Fill Up and $20 Family Fill Up are at price points that resonate with the consumers and leverage the core menu of finger lickin' good chicken and sides.

The team has truly embraced the idea of moving from food as fuel to food as an experience.

Just look at the Colonel drive-thru robot, the online retail store and the proof that KFC is literally out of this world.

Who else would send a sandwich into space?

As further proof KFC is back at top of the cultural conversation, the online retail store, KFC Ltd., was mentioned in media spanning from the Huffington Post to Golf Digest.

At the end of launch day, 18 of 29 products had sold out.

The standout item was a $20,000 400-year old meteorite in the shape of a Zinger chicken sandwich selling within 24 hours, with several other interested buyers as the sale was pending.

These are truly remarkable events and something no one would have believed possible 3 years ago.

Our KFC international markets, representing nearly 90% of KFC's profits, also performed well, in particular our Turkey and Australia markets.

In fact, our Australia market delivered 7% same-store sales growth, driven by the launch of frozen beverages and a strong value such as the $2.50 chips and gravy and 24 nuggets for $10.

Our Turkey market delivered same-store sales growth of 23%, driven by balancing the promotional mix between high-end bucket promotions and low-end offerings, along with LTOs, which attracted new customers and grew transactions.

The market is also seeing growth in our delivery business, which grew nearly 35% over the prior year and now represents approximately 30% of sales.

Delivery remains a key growth driver for KFC, with $1 billion of sales for the brand as of today and the opportunity to significantly increase this as additional units and markets begin to offer delivery.

Our largest franchisee, Yum China, acquired a majority stake in an online aggregator platform, complementing their already robust delivery business and is an example of one of our markets with a long-standing history of delivery.

In addition, we have new markets testing with both online aggregators and in-house delivery all over the world.

In fact, across the entire Yum!

system, nearly 20,000 of our restaurants offer delivery, which is almost half of our total restaurants.

Delivery offers consumers a new occasion at typically higher check averages, and by leveraging the power of Yum!

to create repeatable models amongst the markets, this makes delivery a platform with huge growth potential.

Next, to Pizza Hut, which, as we have discussed, is a tale of 2 businesses.

First, the U.S. business, which represents approximately 10% of Yum!'s operating profit, signed the transformation agreement in May, demonstrating unity amongst the system and our commitment to a digital, delivery-centric model.

As a reminder, in return for additional media spend and funding from Yum!, the franchisees have committed to honor all advertised national price points through 2019 and to permanently increase their ongoing contribution to national advertising and digital fees.

An additional benefit of the increased advertising is that the funds will be used towards national advertising, allowing the brand to increase its share of voice as it works to build awareness of its efforts around digital and delivery.

The brand remains on track to effectively be on one point of sale system by the end of the year, which will allow Pizza Hut to drive efficiency in its ability to improve its operations around delivery and speed to market on digital implementation.

As an example, this week, Pizza Hut announced the launch of their first-ever U.S. loyalty program, Hut Rewards.

This program is the only national pizza loyalty program that rewards online guests with points for every dollar spent on food.

And as further proof that the brand is working to elevate their delivery-centric strategy, they recently announced the hiring of 14,000 drivers by year-end 2017.

While we do not expect the transformation agreement to yield results overnight, we do expect to see improvement over time.

In summary, I'm confident these bold steps will pay big dividends for the Pizza Hut brand over the long term.

Internationally, Pizza Hut system sales increased 7%, with 1% same-store sales growth and 5% net new development.

We recently met with 10 of our top global Pizza Hut franchise organizations at our Partners Council to gain delivery and digital-centric alignment to accelerate growth for the business.

This group of influential individuals represents some of our largest international markets and over 1/3 of our total net new units currently committed under development agreements over the next 3 years.

I am encouraged by the excitement these growth-minded leaders have for Pizza Hut, carrying an enthusiasm for the brand we haven't seen in a long time.

In addition to this, our U.K. business recently rolled out Pizza Hut Digital Ventures, an in-house model for digital technology that allows for consumer-led and fast-paced decisions.

Through continued testing and real-time iterating, Pizza Hut Digital Ventures is transforming the Pizza Hut U.K. website into an easier, faster and better experience for our customers.

Thanks to this agile capability and the improved site functionality, we are seeing increased conversion rates which drive digital sales growth.

Finally, the repeatable model for value and taste we have previously discussed is lapping its successful rollout, and the sales turnaround we saw in key countries like Malaysia and Korea continued in Q2.

All in, the international team is hard at work, and we are excited about these results and the long-term growth prospects for Pizza Hut.

Finally, Taco Bell, which represents approximately 30% of Yum!'s operating profit, posted another strong quarter of same-store sales growth, coming in at 4%, with 1% of that coming from transaction growth.

We remain confident in delivering another strong year of results by committing to the strategy, encompassing value and innovation with Mexican-inspired products such as the $1.49 loaded taco burrito you saw this quarter.

As I alluded to during the prior quarter, we introduced an additional naked product with the Naked Chicken Chips, a creative twist allowing us to expand on our chicken platform.

I know the Taco Bell team enjoyed meeting everyone and highlighting their growth story at their Analyst Day in May, and I hope you appreciated hearing their story and got a good taste of their world-class products and innovation.

As further evidence that Taco Bell continues to be a distinctive and relevant brand, news from Taco Bell saying, "I do" to weddings at the Las Vegas store appeared in top-tier national food and lifestyle outlets.

Since the initial wedding announcement in February, coverage of this campaign has created 1.7 billion impressions for the brand.

Our customers now have a new and unique way to show their love for each other and this iconic brand.

Additionally, last week, Taco Bell announced a partnership with Lyft to launch Taco Mode.

For the first time, Lyft has created an integration within their app that enables consumers to ride through a Taco Bell on the way to their final destination.

The ride is designed to be as much an experience as the end benefit of capping a night with Taco Bell cravings.

This partnership highlights the forward thinking at Taco Bell to provide access to our customers in new ways enabled by technology.

Weddings and Taco Mode are just a few examples of the cultivation of the brand into consumers' lifestyles.

Internationally, we also continue to accelerate our presence of Taco Bell.

During the quarter, Taco Bell opened 15 international units in 7 countries.

In particular, in our 4 key growth markets of Brazil, India, China and Canada, the team opened 6 units, bringing our total unit count in those countries to 54.

We are very excited to have opened our first stand-alone unit in Canada in nearly 20 years.

This restaurant is hugely popular on social media, with 98% positive sentiment and plans to start serving beer soon.

In India, the team's defined a category-of-one positioning by offering a differentiated customer experience through elevated assets, table service and unique product offerings like hard shakes that have unlocked opportunities for accelerated expansion of this brand in this huge potential market.

In summary, aligning Yum!

by brands several years ago highlighted the potential for Taco Bell internationally.

And as you can see, the team is working diligently to bring the cult of Taco Bell to everyone across the globe.

In conclusion, Yum!'s 3 distinctive relevant brands delivered another successful quarter.

We are on track to further unlock the potential of Yum!

through our bold transformation initiatives and look forward to updating you on our journey.

And now it gives me great pleasure to introduce our President and CFO, David Gibbs.

Thank you, Greg, and good morning, everyone.

Today, I will discuss our second quarter results and full year outlook.

I'll then provide an update on our transformation initiative and 2 of our key growth drivers: bold restaurant development and unmatched franchise operating capability.

I'll close with more detail on recent capital markets transaction.

Yum!

delivered another successful quarter with 19% core operating profit growth and 21% EPS growth excluding special items, including a 2 percentage point negative impact from foreign currency.

As Greg mentioned, our core operating profit growth for the second quarter included the benefit of approximately $9 million within our KFC division as a result of several items outside of our normal run rate.

Some of these items include higher renewal and transfer fees as well as lower closure and impairment fees.

We do not expect these items to recur in the future.

As we expected, there will be noise on a quarterly basis as we continue to execute our transformation.

This is why we continue to believe the best way to evaluate Yum!

is to focus on 2019, our first clean year post transformation, and our target for $3.75 or more in EPS in 2019.

I am pleased we remain on track with this target as well as our other aspects of our transformation strategy, including our goals of at least 98% franchise ownership, reducing G&A to 1.7% of systems sales, and achieving run-rate CapEx of $100 million in 2019.

We are confident this transformation will allow Yum!

Brands to be more focused, more franchised and more efficient, ultimately delivering more growth to you, our shareholders.

With respect to our guidance, the first half of the year saw limited impact from net refranchising dilution.

However, for the full year, we now anticipate the net impact from refranchising dilution to be towards the high end of the 1 to 2 percentage point range we've previously discussed.

Combined with the lap of 2016's 53rd week, these 2 items are the drivers of the difference between our underlying base operating profit growth trend of high single digits and 2017 guidance of mid-single digit core operating profit growth.

As Greg said, the underlying base rate of growth in our business, both in terms of sales trends and profit contribution, are tracking in line with our plans and longer-term goals.

As such, we remain on track to deliver at least 5% system sales growth this year versus our 2016 system sales growth of 4%, excluding the 53rd week impact.

The 2017 system sales growth guidance includes 2 to 3 percentage points of same-store sales growth and approximately 3% net new unit development.

Specific to the fourth quarter, we would note that, in aggregate, we anticipate the net impact of refranchising dilution and the impact from lapping the 53rd week to be approximately a 10 to 12 percentage point headwind before any underlying core operating profit growth.

Regarding the Pizza Hut U.S. transformation agreement this quarter, Yum!

incurred $12 million of costs primarily related to digital investments, which were recorded as a special item.

As a reminder, $37.5 million of incremental media spend related to the transformation agreement will be reflected in our core operating profit.

$25 million of this will be expensed in the third and fourth quarters this year and has already been incorporated into our full year guidance.

The remaining $12.5 million is expected to be expensed in 2018.

Next, our transformation initiatives, including reduced G&A, refranchising, capital returns and increased leverage, are all on target for completion.

G&A excluding special items as a percent of system sales was 2.0% this quarter, and we remain comfortable with our target of 1.7% by 2019.

With regards to refranchising, during the quarter, we sold 244 units, including 40 KFCs, 163 Pizza Huts and 41 Taco Bells, finishing the quarter at 94% franchised, on our way to becoming at least 98% franchised by year-end 2018, with the majority of the refranchising expected to be completed in 2017.

Gross refranchising proceeds totaled $136 million this quarter and $320 million year-to-date.

As part of our refranchising commitment, we continue to expect $2 billion in post-tax proceeds.

As I mentioned on our last call, we continue to aggressively leverage our renewed focus on bold restaurant development by attaching development agreements to our refranchising deals.

This will enable us to elevate Yum!'s historical new unit development run rate to one that will help us achieve our goal of 7% system sales growth over the long term.

To highlight our bold restaurant development, we opened 487 gross new units and 174 net new units this quarter, for net new unit growth of 3%.

I'm especially proud of our Taco Bell Brazil market, where they opened 15 Taco Bells in 9 months.

Demonstrating the flexibility of the asset types, one of the Brazil units is 38 square meters or about 400 square feet and is on track to generate average annual unit volume over $1 million.

Entering new markets presents its own challenges; however, the Brazil market has embraced this challenge with success by thinking creatively about solutions to supply chain and unit economic obstacles.

Frankly, this may be the most successful early entrance of a new brand into a new market that I've seen during my career here at Yum!, reflective of our new mindset to unlock growth.

As another example of bold restaurant development, our KFC U.S. business continues to update their assets to the American Showman design imaged through their remodels and new restaurants.

The remodel is affordable with an average sales increase of mid to high single digits, and both the design and results to date have been well received by our franchisees, customers and teams.

To date, KFC U.S. has over 500 American Showman restaurants, representing over 10% of their assets, and we are excited about the potential overall market impact.

Unmatched franchise operating capability has always been of utmost importance, and I'm excited to see the progress we are making.

For example, at Taco Bell, an operational speed initiative improved drive-thru wait times by 10 seconds in the quarter.

In addition, Pizza Hut UAE made significant improvement in their online overall satisfaction scores, which are now approximately 25 percentage points higher than the 2016 scores.

This is driven by speed initiatives, promise time improvements and a restaurant engagement strategy focused on bettering the underperforming restaurant.

We discussed Pizza Hut Korea on our last earnings call, and I'm pleased the market is continuing to see improvements in their overall satisfaction scores, driven by improving speed and taste scores.

At the Pizza Hut Partners Council that Greg and I attended, one of the partners in attendance was our new franchisee in Japan who was working with his management team and employees to implement growth strategies, improve the value of Pizza Hut and bring capital and a commitment to growing the brand.

Additionally, we met the new Taco Bell franchisee in Brazil this quarter who has opened the 15 restaurants in 9 months, which I previously mentioned.

This franchisee is an example of how to develop the brand in the right way, investing in people and world-class assets to bring the cult of Taco Bell to an entirely new population.

In total, Taco Bell added 12 new franchisees over the last 12 months.

Six of these are domestic, with the brand strength in the U.S. allowing us to be highly selective when adding new franchisees, ensuring they have extensive operations experience, a deep understanding of their markets and the desire for meaningful development.

We are also pleased to continue returning capital to our shareholders, including repurchasing 5.6 million shares this quarter at an average price of $68, for a total of $384 million.

We also paid a quarterly dividend of $0.30 per share for $105 million, bringing our total capital return to $489 million this quarter and over $1 billion year-to-date.

As a reminder, we plan to return between $6.5 billion and $7 billion from 2017 to 2019.

I'm also excited to share some good news regarding the financial markets' continued support of our business transformations and capital markets strategies.

First, in June, we repriced our Term Loan A and Revolving Credit Facility, reducing the interest rate by 75 basis points to adjusted LIBOR of plus 1.5% and extending the maturity to 2022.

This will reduce our annual cash interest by approximately $6 million, with approximately a $1 million benefit in 2017, net of fees and other expenses.

Second, consistent with our stated intentions to maintain a targeted leverage ratio of about 5x, and in anticipation of a $325 million bond maturity due in March 2018, we executed a $750 million 10-year bond offering with a coupon rate of 4.75%.

The deal was multiple times oversubscribed and was one of the lowest rates in high yields in any sector in the last 4 years.

Our total debt outstanding is now $9.8 billion.

Our current average interest rate is now 4.5%, and the average maturity is 7 years.

Additionally, approximately 90% of our total debt is at fixed rates.

In conclusion, we have built upon our first quarter results with a successful second quarter.

We are pleased to be on track with our 2017 guidance and our strategic transformation initiatives.

Our 4 key growth drivers, distinctive relative brands, unmatched franchise operating capability, bold restaurant development and unrivaled culture and talent, allow us to be more focused, more franchised and more efficient.

In the end, this will deliver strong steady growth, and we look forward to updating you along the way.

And with that, the team and I are happy to take your questions.

(Operator Instructions) Our first question comes from Dennis Geiger with UBS.

Lots of exciting developments at Pizza Hut clearly, lots of good color there.

But as far as key priorities go, maybe you could just talk a little bit more about the technology, the operations and the asset pieces, what you kind of see as the easiest to address and where the biggest opportunities lie.

And then just building on that, on the asset piece specifically, any additional color you can provide on the Pizza Hut delco units?

I think it's probably about 20 that you've got opened at this point only, but anything more on the economics, the feedback, et cetera?

Well, I'll start with the piece on the assets.

I think you're referring to the fast casual delco model that we've been rolling out over the last few years with pretty good success.

Yes.

The good news is that we've offered an incentive for our franchisees to accelerate the fast casual delco model, and we've seen a number of franchisees sign up.

In fact, we were hit with 100 submissions to participate in expanding the test.

So I think the fast casual delco initiative is off to a good start.

That's not just an initiative, by the way, that we're doing in the United States.

That is also a big part of our international growth strategy.

Yes.

We actually shared that with the international Partners Council when we were with them in London probably 3 weeks ago, and I think there was true excitement about fast casual delco as a global opportunity for Pizza Hut.

Yes.

And then on the other items that you asked about, Dennis, like technology, assets, operations, obviously, all are very critical, all part of the overall transformation agreement with the U.S. franchisees.

As one piece of evidence of the progress we're making on technology, you heard Greg reference the loyalty program that we've just launched.

You can expect to see those kinds of improvements to our technology platforms coming out.

But obviously, we're not going to share much in advance of revealing them to the consumers.

And then on the operations front, I know the team -- you've also seen our messaging start to reference hot and fresh and the way that we're going to make sure that our consumers get the absolute best product.

We know we have the best product in the category when we deliver it hot and fresh, but we're doubling down and making sure that we have the capability, the drivers and equipment to make that happen on a consistent basis.

Your next question comes from the line of John Glass from Morgan Stanley.

My first question just has to do with your system sales goal of 7%.

You got close to it -- or closer to it this quarter.

And if you look at just the sum of comps and units, it's actually 5%.

Maybe that's rounding, but is there a new store productivity story here, either in the new stores you're opening by brand around the world or market mixes that may actually help you get to the system sales goal even if the sum total of the 2 growth numbers that we add up typically don't add up to 7%?

It's a good question, John.

I wouldn't read too much into it.

For example, the same-store sales growth for the quarter of 2% was a very strong 2%.

So there is some rounding that's happening there and a little bit of mix issues, a little bit of timing of when new units open.

So when you put it all together, yes, it rounded up, and we like that.

But there's a number of different miscellaneous factors that contributed to it.

I think there's also -- as we've been -- David and I have been around, I've been in Brazil, U.K., Poland, Japan, Hong Kong in the last quarter.

I think it's a couple of things.

One is the small box concept is definitely taking -- getting traction, and that small box is allowing us to penetrate places like in Africa, into places we would not have been able to traditionally penetrate with our existing sort of asset base.

And then, I think, Cantina.

I was up in Chicago the other day with one of our franchisees in Chicago.

We have -- he has one opened in Wicker Park, and he showed me where he's going to open another 4 or 5. There's no trade-off with any of our existing Taco Bell stuff.

So I think the whole opportunity for us to get into small box Cantinas urbanizes the brand -- that'll help us drive net new units.

Could I just follow up with a question on the Pizza Hut loyalty program.

That is -- do you have loyalty anywhere else in the world?

Is there a model you're following?

Or is this the first one?

And are there models out there that do transaction-driving loyalty and others that do ticket-driving loyalty?

What kind of program is this?

Does it require the app to use?

Or can anyone use it?

How widespread do you think the use is?

And how do you think it impacts sales ticket versus transactions, for example?

Just on the prevalence of programs in our system, yes, we do have loyalty programs, and we have some in parts of Asia that are executed quite well and a big part of driving their business.

So we've certainly gone to school within our own system on leveraging learnings.

We actually engaged an outside party also to help us understand the loyalty landscape.

And in a lot of cases, being the last to the party on loyalty in the pizza category is a good thing because we get to offer the best program and learn from the experiences of others.

Your next question comes from the line of Matt McGinley from Evercore ISI.

I have a question on the franchise revenue versus the franchise expense.

As we would expect, as you sell off the restaurants, your franchise revenue is going up.

But when we exclude the Pizza Hut transformation expense, it looked like the franchise expenses are actually dropping.

Was that $9 million favorability reference in KFC in that line item there?

Or are you just finding more favorability in franchise expense in addition to the ongoing G&A reductions?

I think that there's mostly some timing issues that would contribute to that.

The $9 million -- we called out the $9 million on the KFC line just because KFC had a very strong quarter this year and I wanted to make sure everybody understood this.

But a small portion of it was more onetime, related to U.S. fees that we collected earlier than normal that contributed to an outsized quarter when it came to U.S. fee -- U.S. KFC franchisee fee income.

That was close to $6 million.

But I wouldn't read too much into the second part of your question.

Okay.

And on the CapEx for the year, you're running well below the $300 million to $350 million that you had discussed earlier in the year, and you're obviously doing more refranchising in the back half.

Is this kind of the run rate we should expect for the rest of the year?

Do you have a, I guess, corporate capital plan that will require you to have a step up in CapEx in the back half?

Yes.

We're not revising our guidance on CapEx spending, and obviously, we're laser-focused on getting the overall rate down to $100 million by 2019.

In terms of how the spending's going this year, it's sort of in line with the targeted number.

Maybe there's a little upside there, but I wouldn't read too much into that either.

Your next question comes from the line of John Ivankoe from JP Morgan.

As part of the 7% system-wide sales growth longer term, there's meant to be a step up in unit development effect because up 4% to 5% longer term.

So could you put the current, I think, 3% into the context of that 4% to 5%?

Do you see a step up by brand in '18 or '19 in terms of new units?

Or I guess, just as important, for other [size]?

Or do you think we're going to see a particular slowing in (inaudible)?

Sorry, your question -- you're breaking up.

We can't get the question.

Yes.

I don't know if we lost him or not.

But, John, just to address the point you made on unit development.

We haven't released any specific targets for unit development.

So you referenced 4% to 5%.

Certainly, we'd like to get to levels like that, but we've been focused on the overall mission of getting to 7% system sales growth over the long term.

A big part of that will be increasing our development because we know when we plant that development pipeline, over the long term, we can count on it to deliver that growth every single year.

Yes, and so -- and you should be looking for us to continue to be ramping up development in the years to come, but we haven't released any future guidance on that.

Okay.

And my apologies for the transcript, I think I just assumed 2% to 3% comp and the rest from unit development.

But can I ask, if the connection's better right now, do you see step ups in '18 or '19, either in terms of new unit openings or in closures?

And if you could just give us a little more color or confidence that, even as we think about '18, you could get better net results than '17?

Yes.

I think one of the features of the Pizza Hut transformation agreement is actually a limitation on the U.S. stores, making it harder to close stores in the U.S. So we should get a benefit from that in '18, if you're thinking about broader issues that may be working in our favor.

But beyond that, I think we've said this on many calls, we got our management team together in the spring.

The mission in this company has been to hammer home this focus on development.

Bold restaurant development is one of our 4 key growth drivers, and I think we've seen a mindset shift all around the country that is real -- all around the world that is really contributing to much more focus on development than we've ever had.

Greg mentioned different formats.

There's just a lot of good stuff going on in development.

Now it takes time to plant a development pipeline and get it to grow, but we do expect to see an increase in development in 2018.

Yes.

I mean I think we -- if you think about it, we've been closing KFC U.S. stores for a number of years -- for quite a number of years.

Hopefully, with the now 12th consecutive quarter of performance at KFC, there'll be some change there as well.

I think, as David said, the development agreements sort of go with refranchising, so as the refranchising occurs, the development agreements kick in.

And then, obviously, these new units, small box, new formats, Cantinas, the 38 square meter we saw in Brazil, I think all of these provide us opportunities to penetrate and continue to grow our net new units.

Your next question comes from the line of Jeff Farmer from Wells Fargo.

I've got one more on the Pizza Hut transformation agreement in the U.S. Can you guys provide some -- at least some base-level numbers for where the concept is right now in terms of things like delivery as a percent of sales mix or digital orders as a percent of sales mix?

Just give us some context as to where you're beginning this journey and make it easier for us to track the progress moving forward.

We won't provide very specific numbers, but our digital mix is around 50%.

Our business -- even though we have more than half of our stores in the U.S. are dine-in stores, our business is very heavily reliant on carryout and delivery.

I don't know, maybe 10% to 15% of sales are dine-in, and the rest of the sales, just in broad terms, are split between carryout and delivery.

Your next question comes from the line of David Palmer from RBC Capital Markets.

Just to follow up on John's question on unit development.

Maybe just a qualitative answer on this would be helpful.

You mentioned Brazil.

You mentioned the stabilization of Pizza Hut U.S. But if you were to think about your global business and looking at your pipeline of franchisees and licensees, where do you anticipate the biggest wins from a development standpoint as you look out 1 and 2 years?

And then also, on delivery, globally, you mentioned that that's going to be an important sales layer.

I know you've talked about that in the past.

How significant can that be?

And when do you see wins from that accelerating?

Well, I think there's obvious markets like China where we'll continue to see a lot of new unit growth.

I think, as we said, Taco Bell focusing on 4 big markets, China, India, Brazil and Canada.

As we said, we've opened our first freestanding drive-thru in Canada.

The second one is under construction.

In that one market, we think we can open 6 or 7. We've got U.S. franchisees for Taco Bell now sort of doing development in Canada.

They're now doing development in Korea.

So I think that where we've seen growth, which will be Asia, Africa, Central and Eastern Europe, we've got a lot of these locked in to long-term development agreements.

As David and I said, we were with the pizza franchisees last week.

We have a new franchisee for Pizza Hut in Japan.

Very impressed that he has got a real growth mindset, and I think we can accelerate opportunities in Japan as well.

So I see it on that side.

On delivery, as we said in the prepared remarks, about 20,000 restaurants currently deliver, obviously mostly Pizza Huts, but a large number of KFCs and, obviously, Taco Bells as well.

I do think that delivery is going to grow.

We like the benefits of delivery, higher check, incrementality, new users, new occasions.

And I think what we're doing right now is testing in a number of places just user aggregators, doing it ourselves.

But I think we all see really a lot of potential growth there.

Encouraged by some of the tests that are going on in -- like a U.K. test for KFC, where we're actually doing a test with both aggregators and by ourselves.

We're seeing good incrementality, good check growth.

So I think even the KFC team believes that adding another $1 billion in sales in the next few years is not without its possibilities.

So -- and then Taco Bell, obviously, where we are doing delivery with DoorDash, I think it's now in 1,000 restaurants, and it can get bigger as well.

So I think our brands are well established with 20,000 restaurants doing it.

We have the expertise of Pizza Hut to help us.

I think brands like KFC are ideally set up to be delivered with large buckets, $5 boxes, $10 chicken shares and $20 buckets.

It's almost like the Colonel 60 years ago decided -- realized one day we'd be delivering this stuff.

So I think we're in a really good place to take advantage of it.

We do think there's growth there for us.

And, to some extent, we're actually -- KFC China is hosting a delivery summit this month, where everyone from around the world will be going to a delivery summit in China so we can learn best practice from them but also share best practice that we're doing from around the world.

So we're all in on delivery.

And one other point on development, which I think Greg alluded to earlier, but just to expand on.

The KFC U.S. business for many years was a net closer of stores, north of 100 unit -- 100 closures every year.

The KFC U.S. team, given the strength in the underlying business now, feels really confident that they can get themselves to be a net opener of stores and that can get to north of 100 openings per year.

So you think about a 200-unit swing alone just in KFC U.S. That'll obviously take time to implement.

That obviously would be one of the contributors to the increase in development.

Your next question comes from the line of Sara Senatore from Bernstein.

I have just a couple of follow-up questions, if I may.

The first is on, again, Pizza Hut.

And I think, Greg, you said it wouldn't be kind of an immediate turnaround, results won't show up overnight.

But I think, in the past, we've seen that Pizza Hut can do things to drive sales in the short term in a pretty meaningful way, in particular around value messaging.

So maybe you could just share a little bit about what you're doing in 3Q in terms of marketing and price points?

And a related question is, what are you seeing in the demand environment in the U.S. and the competitive environment?

I think we've heard a lot about heavy discounting by hamburger restaurants in particular.

I was wondering if you're seeing that have an impact on any of your brands.

KFC and Taco Bell, still comping well, but maybe a little slower sequentially.

Well, I don't want to get into Q3 in the pizza category given the competitive nature of it.

I think what I can say is we've said it's a slow build.

The incremental media didn't happen in the first half.

It'll happen in the second half.

Obviously, we've just rolled out loyalty.

So I think you will hopefully see a slow build, and we see the results obviously paying off in 2018 and beyond on Pizza Hut.

From a demand environment point of view, I think the great thing about our category is -- or the great thing about food is you've got to eat it.

And I think there'll be winners and losers.

I think the people that have the most distinct and relevant brands, the people that do the best job of executing operations, the people that open new units and the people who are driven by culture and talent, that's why they're the 4 things we're focused on, because we believe by focusing on those 4 things, we can be successful in both the U.S. and on the global scale.

So that's, I think, the -- sort of the way I'd see the market at the moment.

So no increased intensity around discounting or value?

No, I think -- I mean value is always going to be important.

So I don't see any renewed focus.

I mean, if you think about it, the question is -- I think we've got very good everyday value.

At KFC, we have $5, $10 and $20, and that really does resonate; I think $7.99 at Pizza Hut; I think the $1 and the $5 boxes at Taco Bell.

So what I like about the way we're set up is that we've got everyday great value.

What we don't have to do is to get into this deep discounting and sort of cutting the price on core products, which you never want to get into because, one day, you're going to raise those prices.

So I really like the way the 3 brands have constructed their value equation in the marketplace.

I think you see that it's working on the whole.

And what I appreciate is the franchisees' commitments to staying on those price points so that our customers know day in and day out they can always get not just the best tasting food but the best value in the marketplace.

Your next question comes from the line of Karen Holthouse from Goldman Sachs.

Seeing -- more Pizza Hut questions.

Sort of going back to the initial reacceleration in comps in Taco Bell that has been really built for many years.

That was kind of kicked off with the Doritos Locos pretty singularly, iconic viral product.

Do you think there's a similar opportunity at Pizza Hut to really kick start things with a product?

Or are you more focused on sort of fundamental building blocks around technology, digital, asset base, et cetera?

I think the answer -- the answer's and.

You've got to -- we've got to make it easier and better.

We do believe we have the better pizza.

We've got to continue to make sure that we deliver a better pizza in the marketplace.

But better is also making sure that our piping-hot pizza gets delivered to you on time and, therefore, obviously, tastes better.

So I think the answer is, it's like everything in life, we have to be easy and we have to be better.

So we're working on the easy components, whether that's all the technology, the digital play, whether that's loyalty.

And at the same time, we're obviously continuing to work on making sure we have the best pizza in the marketplace.

And I think a combination of both of those will see us sort of build the Pizza Hut brand back into the brand we want it to be.

Your next question comes from the line of Brian Bittner from Oppenheimer.

I want to talk about the 2019 target of at least $3.75 in EPS.

I think the $3.75 is an attractive target on its own.

But the question I have is, what's the key in your internal model to unlocking that wording of "at least" within that stated target?

Is the achievement of your goal to get to 7% systemwide sales growth help you unlock that word "at least"?

Or is there something else that we should be focusing on?

No.

I mean, as we've said in past calls, we've built the model on reasonable assumptions.

We don't have to be heroes to get to that number.

So the kinds of things that would contribute to outperformance would be an acceleration of system sales growth, a turnaround in the Pizza Hut U.S. business.

We're not counting on any of those things to get there.

So the "at least" is only there to indicate that we certainly have room to go beyond that if we see an acceleration in development, system sales growth beyond historical rates, Pizza Hut U.S. getting back to growth.

Okay.

And just the follow-up question I have is on Taco Bell.

It's a great comp for the quarter relative to the industry or any metric really.

The question I have is, what were the biggest differences that you saw in the business and the growth of the business this quarter when analyzing the sales versus the 8% comp you achieved last quarter?

I mean, well, the way I look at Taco Bell is, look, we are just really enthusiastic about the long-term fundamentals of the business, whether it's the consumer metrics, the ops metrics, the financial metrics.

Obviously, the brand has delivered consistent, healthy same-store sales growth over the long term.

And I think, the icing on the cake, Dave and I happened to spend 2 days with the FRANMAC group, which is the franchise leadership group for Taco Bell, in June.

And I think to say they were happy with where the brand is, happy with where the brand's going and happy with the Taco Bell leadership team would be an understatement.

So I just feel good about where the brand's going.

And what happens in -- quarter by quarter, I think you'll see us continue to deliver.

The long-term fundamentals for this business are in great shape.

Your next question comes from the line of Andrew Charles from Cowen and Company.

Going back to your Investor Day.

You guys set out plans to refranchise about 2,000 stores for at least $2 billion in proceeds, so it's about $1 million per store.

Now obviously, with the 244 franchises in 2Q, you've looked at a gain on sale, but the implied proceeds per store of $560,000 were a little lighter than the implied targets.

Is the way to think about this is that it was driven -- the lower proceeds per store driven by an outsized amounts of Pizza Hut were franchised during the quarter?

Yes, absolutely.

The Pizza Huts, obviously, with smaller investments in the smaller box units, typically garner less proceeds, lower volumes versus, for example, our Taco Bells, which is our highest-volume concept that we're selling stores of any scale on.

So very much, you'll see that number move around from quarter-to-quarter depending on the mix of the units.

Okay.

So thank you all for being on the call.

As we said, we believe we had another successful quarter, 6% system growth, 21% EPS growth, 19% core operating profit growth, and we look forward to updating you as we work the brands, as we go through the rest of the year.

So thanks for being on the call.

Appreciate it.

This concludes today's conference call.

You may now disconnect.