百勝餐飲集團 (YUM) 2018 Q2 法說會逐字稿

Good morning.

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

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

Brands Second Quarter 2018 Earnings Release Conference Call.

(Operator Instructions)

I would now like to turn the call over to your host, Mr. Keith Siegner, Vice President of Investor Relations, Corporate Strategy and Treasurer.

Sir, you may begin.

Thanks, Athania.

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

On our call today are Greg Creed, our CEO; David Gibbs, our President and CFO; and Dave Russell, our Senior Vice President and Corporate Controller.

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 in 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 for today's call.

First, system sales results exclude the impact of foreign currency.

Second, core operating profit growth figures exclude the impact of foreign currency and special items.

Third, the revenue recognition accounting standard was prospectively adopted on January 1. As a reminder, this is a GAAP-required change, adjusting the timing of recognition of upfront fees received from and incentive payments made to franchisees, the effects of which have no impact on cash.

In addition, it requires the gross up of revenues and offsetting expenses of advertising funds we consolidate within our income statement.

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.

(Operator Instructions) Thank you.

We'd like to make you aware of the following changes and 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.

Third quarter earnings will be released on October 31, 2018, with a conference call on the same day.

The remainder of our 2018 key earnings dates are available on our website.

Finally, save the date for the Yum!

Brands Investor and Analyst Day to be held on Wednesday, December 5, 2018.

We will provide greater details as we get closer to the day.

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

Thank you, Keith, and good morning, everyone.

System sales growth for the second quarter was 4%, with 1% same-store sales growth and 4% net new unit growth.

As we discussed on our earnings call last quarter, 4 items were expected to weigh on our second quarter core operating profit results.

These included the timing mismatch between G&A savings and refranchising, the revenue recognition accounting standard change, the KFC distributor disruption in the U.K. and the lap of some onetime benefits at KFC.

As a result and consistent with our expectations for the quarter, core operating profit declined 6%.

We are reiterating our 2018 full year guidance.

However, given the strong unit development in the first half of the year, we expect net new unit growth to be at the high end of our guidance of 3% to 4%; and same-store sales growth, given the softer first half of the year, to be at the lower end of our guidance of 2% to 3%.

It's also important to note that excluding the KFC distributor disruption in the U.K., first half same-store sales growth would have been 2%, within the range of our full year guidance.

As a reminder, our full year core operating profit guidance of approximately flat includes anticipated headwinds of 6 to 7 percentage points related to the timing mismatch between refranchising and the associated G&A savings, along with 2 to 3 percentage points related to revenue recognition accounting standard.

Looking at the second half of the year, we are confident in our plans and are performing on track with those plans thus far through the third quarter.

We are now 1.5 years into our transformation and are continuing to execute on the key items designed to deliver accelerated growth.

The foundation of this is our 4 key growth drivers, which David and I will talk to you about today.

I'll provide an update on 2 of these drivers: our Distinctive, Relevant & Easy Brands and Unrivaled Culture & Talent.

Then David will discuss the next 2: Bold Restaurant Development and Unmatched Franchise Operating Capability, along with the details of our second quarter results.

I'll start with our 3 Distinctive, Relevant & Easy Brands.

Beginning with KFC global.

System sales grew 6% with same-store sales growth of 2% and net new unit growth of 5%.

We continue to see strength in Australia; Russia and Eastern Europe; Latin America; the Middle East, including Turkey and North Africa; and our India markets.

The success in these markets was primarily a result of balancing the core, value, innovation and also ensuring the operational basics are executed well.

In particular, I want to highlight our KFC Australia market.

Year after year, this market continues to deliver, posting 4% same-store sales growth year-to-date for a 2-year stack of 11%, of which approximately 75% is transaction growth.

They have wrapped the KFC brand within the lovable larrikin Australian culture, distinguishing KFC and helping drive the consistently strong same-store sales growth.

I'm proud of the fact that transactions have been driven by their focus on core products.

We just celebrated 50 years in this market, and I look forward to many more years of continued growth.

Just last week, the KFC team from across the globe held their annual marketing planning meeting with record-breaking attendance.

The event focused on sharing know-how and facilitating collaboration by connecting our teams with each other.

The theme centered around building sales overnight and brand over time with the objective of making KFC more distinctive, relevant and easy.

The market teams bring so much passion for the brand, and I love this way of bringing best practices to life around the globe.

Shifting to the U.S. I'm proud that the innovation team has delivered, with the Crispy Colonel Sandwich, operational enhancements ensure the sandwich is delivered hot and fresh to each customer with options for a classic sandwich or one of the delicious flavor profiles of Nashville Hot, Georgia Gold or Smokey Mountain BBQ.

As a bonus, we introduced a new pickle flavor, which could be added to any Extra Crispy product, including the Crispy Colonel Sandwich.

This was a very limited-time offering as each store was only shipped 1 case of the new cult favorite.

Without any traditional commercials, pickled chicken spread by word-of-mouth and generated significant buzz for the brand.

Before moving on to Pizza Hut, I wanted to provide an update on the KFC U.K. business, which suffered a setback as a result of disruptions in supply when we changed distribution partners in the first quarter.

As expected, all stores were fully up and running by mid-May.

We've turned the national advertising back on and are seeing good customer response.

I'm very thankful to and proud of the team who have worked tirelessly since the disruption began.

It is because of their hard work, collaborative spirit and dedication that customers in the U.K. are now able to enjoy the KFC they love and missed.

Now to Pizza Hut.

In the U.S., system sales declined 1% with flat same-store sales and net new unit decline of 2%.

During the second quarter, we launched an innovative product with our double cheesy crust Pan Pizza that customers enjoyed and mixed well in our menu offerings.

However, this campaign shifted marketing away from the value offering, which we believe weighed on same-store sales growth in the quarter.

We know consistent value is of the utmost important and at the core of our brands, and so we've adjusted our marketing for the balance of the year to remind customers we're a brand offering everyday compelling value.

Regarding our Transformation Agreement investments, we continue to gain traction with our commitment to hot, fast and reliable experience.

Our investments in digital, delivery, operations and loyalty are generating improvements in internal metrics.

In fact, our delivery times have improved by 3 minutes versus prior delivery times to the Transformation Agreement.

Customer satisfaction scores have also significantly increased as was recently reported by the American Customer Satisfaction Index.

Pizza Hut customer satisfaction score increased 5%, the largest gain in the category, making Pizza Hut tied for fourth amongst limited service restaurants.

Lastly, we recently announced a new partnership with advertising agency GSD&M and could not be more excited about the creative opportunities that await this powerful brand and look forward to an exciting activation of our football partnerships, including our new NFL agreement and the extension of our NCAA agreement.

We still believe the Pizza Hut U.S. turnaround will be a slow build, but we're encouraged by the foundation that's being put in place and continue to make significant strides to improve the brand's position.

Internationally, system sales grew 1% with same-store sales decline of 2% and net new unit growth of 6%.

The strong net new unit growth represents an acceleration over last year as our delcos continue to generate healthy unit-level economics, keeping franchisees excited and motivated to continue building the footprint of our brand.

Additionally, we were very excited to announce our landmark international growth alliance with Telepizza back in May.

This alliance will double Pizza Hut's footprint in the regions covered, place Pizza Hut in the #1 position in the category across Latin America and the Caribbean in terms of unit count and confirm Pizza Hut's position as the world's largest pizza restaurant company.

Please note, completion of the alliance is subject to certain conditions, including regulatory approvals.

Upon approval and deal closure, Telepizza units will be included in our unit count.

Outside of unit development, we have significant work to do around same-store sales growth.

Many markets are experiencing similar issues to those faced in the U.S., and we are taking the learnings from the U.S. market and applying them internationally.

In particular, I want to elaborate on the 3 key steps I outlined last quarter which are designed to reignite same-store sales growth.

First is ensuring we have strong operations and digital execution in place to deliver on being the easiest, fastest, tastiest pizza.

Secondly is making sure we have compelling value at each of our markets with examples such as the MXN 69 Pan Pizza in Mexico, GBP 5 favorites value in the U.K. and medium 2-topping online deal in Canada.

Third is a consistent communication of our FOR THE LOVE OF PIZZA brand position.

Overall, we are utilizing the repeatable model to roll out these 3 key initiatives across each of our international markets, and we'll continue to update you as we progress.

Now to Taco Bell, where system sales grew 5% with same-store sales growth of 2% and net new unit growth of 3%.

The quarter began with our $1 Nacho Fries followed by the $1 Triple Melt Burrito and Nachos.

Also available in the $5 box, the Triple Melt Burrito and Nachos featured a delicious blend of melted cheddar, mozzarella and pepper jack cheeses.

We also brought back the Naked Chicken Chalupa, an innovative take on the taco shell, made of fried chicken, now in both a wild and mild flavor.

And as we move into the third quarter, Nacho Fries are back for a sequel.

The PR buzz around the follow-up faux movie trailer, Web of Fries II: Franchise Wars.

The record-breaking launch in the first quarter had customers asking for more, and we are happy to bring them back.

Taco Bell's ability to innovate and elevate around both their marketing and products highlights the fact the brand proudly stands in a Category of One.

Internationally, this is only the beginning for Taco Bell, and I'm excited to see the brand grow and expand.

I'd like to highlight 2 examples of this exciting international growth: first being our Canadian business, which continued to build on its 4 consecutive years of at least high single-digit same-store sales growth, with 11% same-store sales growth year-to-date.

This was supported by the introduction of the Bacon Ranch Naked Chicken Chalupa, making use of the repeatable model from the U.S.

India has leveraged weekday value as well as innovation to deliver 14% same-store sales growth year-to-date.

As an example of their innovation, they introduced the Crispy Potaco, a taco with a shell made from hash browns.

Finally, we're building momentum with delivery, which is now available in over 40% of our international stores.

I'm proud of the work Taco Bell International is doing to lay the groundwork for exponential growth, and we'll continue to update on their progress.

Now moving on to Unrivaled Culture & Talent.

The executive leadership team and I just completed a trip to Africa, an exciting and growing market for Pizza Hut and one of our larger and most dominant KFC markets.

The trip reminded me just how contagious our culture is and how it can be leveraged to fuel results.

Pizza Hut entered Sub-Saharan Africa just 4 years ago and now has nearly 100 restaurants across 12 countries, a remarkable rate of growth, and with the goal of being in 25 countries with 250 restaurants by 2020.

Through the second quarter this year alone, we've already entered 2 new markets: Ethiopia and Zimbabwe.

The team has leveraged the experience of the KFC Africa team, growing at a very fast clip and flipping to cash flow positive this year.

The team is building the cultural foundation necessary for explosive growth, and we believe there's an opportunity for thousands of additional units in Africa.

I also want to highlight the huge heart our KFC Africa team has.

As part of our trip, we visited the Hulani preschool, where our Add Hope program provides nutritious meals for preschoolers.

I was proud to learn that only the South African government provides more meals to children in South Africa than KFC does.

I'm energized by the enthusiasm and passion both teams have for each of our brands.

Their culture is reflective of the country's culture and values, and I'm confident it will continue to drive fast-paced growth at Pizza Hut and long-term sustainable results at KFC.

Thanks to the team for hosting us, and I look forward to celebrating your continued growth.

Finally, we take our role as a global citizen and our impact on society and the environment seriously.

We've recently released our 2017 Global Citizenship & Sustainability Report called our Recipe for Good.

It outlines our public commitments over the last 2 years concerning food, planet and people.

I'm proud of how our brands are simplifying ingredients, providing more balanced options, making strides in our sustaining sourcing and using these practices in our restaurants, giving back in our communities and unlocking potential for all types of people, as I've already discussed.

Our Recipe for Good will unite our employees, franchisees and suppliers on the priorities that matter and will keep us focused on socially responsible growth, managing risks and serving more goodness to our customers, shareholders, communities and the planet.

In conclusion, I'm proud of the work we are doing around the world, focusing on our 4 key growth drivers to build a world with more Yum!

We remain confident in our full year 2018 guidance as we lay the foundation to our transformation strategy designed to maximize shareholder value.

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

Thank you, Greg, and good morning, everyone.

Today, I'll discuss our second quarter results, progress towards our transformation initiatives and 2 of our 4 growth capabilities: Bold Restaurant Development and Unmatched Franchise Operating Capability.

Let's start with our second quarter results.

We continue to execute against our transformation strategy while, as we explained in our first quarter earnings call, the following 4 items weighed on our second quarter core operating profit results: the timing mismatch between G&A savings and refranchising, the revenue recognition accounting standard change, the KFC distributor disruption in the U.K. and the lap of some onetime benefits at KFC.

As a result and consistent with our expectations for the quarter, core operating profit declined 6%.

We are reiterating our full year 2018 guidance and remain committed to delivering at least $3.75 in EPS in 2019.

As a reminder, our full year 2018 guidance of approximately flat core operating profit growth incorporates headwinds of 6 to 7 percentage points related to the timing mismatch between refranchising and the associated G&A savings and 2 to 3 percentage points related to the revenue recognition accounting standard.

Given the strong unit development in the first half of the year, we expect net new unit growth to be at the high end of our guidance of 3% to 4%; and same-store sales growth, given the softer first half of the year, to be at the low-end of our guidance of 2% to 3%.

We are confident in our plans for the second half of the year and are seeing good progress against these plans thus far in the third quarter.

Before moving on to our transformation initiatives, I'll discuss the impact of the distribution disruptions in our KFC U.K. business.

We estimate second quarter same-store sales growth of 1% at Yum!

and 2% at KFC would have been 2% at Yum!

and 3% at KFC after adjusting for the impact.

We continue to expect the impact on full year same-store sales growth to be 25 basis points for Yum!

and 50 basis points for KFC.

Regarding core operating profit growth, we estimate declines of 6% at both Yum!

and KFC would have been declines of 5% at Yum!

and 3% at KFC after adjusting for the impact.

We continue to expect the impact on full year core operating profit growth to be a 2% impact on KFC and 1% impact on Yum!.

All of our stores in the U.K. opened for business offering their full menus beginning mid-May, with advertising beginning at the end of May.

Please keep in mind that the KFC U.K. business reports on a period basis, with their second quarter ending on June 11.

Consequently, the second quarter saw limited benefit as a result of the return to advertising at the end of May.

We do not expect this issue to have further impact on our results going forward.

Now turning to our transformation initiative to be more focused, more franchised and more efficient in order to deliver more growth to our shareholders.

First, being more focused allows us to devote our attention to our 4 key growth drivers in order to elevate system sales growth to our bold goal of 7%.

We're confident that focus on these 4 items is the catalyst for sustainably growing our system sales over the long term.

Second, we continue to make progress towards becoming more franchised, selling 51 restaurants this quarter.

We are 97% franchised and are on track to be 98% franchised by year-end.

Third, we are becoming a more efficient company by reducing our CapEx and G&A spend.

We are on track with 2018 CapEx guidance of $200 million to $250 million and 2019 run-rate CapEx of $100 million.

In addition, we expect to deliver on our G&A savings, resulting in G&A representing 1.7% of system sales in 2019.

Each of these initiatives are designed to maximize growth for our shareholders.

We are maintaining our 2019 EPS target of at least $3.75.

We also remain committed to returning between $6.5 billion and $7 billion to our shareholders between 2017 and 2019.

During the second quarter, we repurchased nearly 8 million shares for a total of $643 million and paid $116 million in dividends.

Since the beginning of 2017, we have returned over $3.7 billion to our shareholders.

Now let's discuss our growth drivers, beginning with Bold Restaurant Development.

As Greg mentioned, we recently announced an alliance with Telepizza, which involves Telepizza opening at least 1,300 new stores over the next 10 years and at least 2,550 stores total over 20 years.

While this deal is expected to be EBITDA-neutral in the short term, we believe this strategic alliance will be accretive over the long term.

It will provide us with a foothold in key European markets, something which would have taken decades to achieve on our own, as well as consolidate the majority of our Latin American markets under one master franchisee.

In addition to immediately expanding our restaurant base, this agreement should accelerate our unit growth and allow us to leverage Telepizza's incredible depth and capability in delivery operations and supply chain management.

Please note completion of the alliance is subject to certain conditions, including regulatory approvals.

Upon approval and deal closure, Telepizza's units covered by this agreement will be included in our unit count.

We are excited about the potential the alliance with Telepizza brings to the Pizza Hut brand.

Importantly, net new unit development remains a strength of Pizza Hut International, with 6% net new unit growth over prior year.

In contrast to the current asset base, which has a heavy reliance on dine-in, we expect at least 90% of our net new unit openings this year to be the delco model, which generally boasts healthy paybacks and strong unit-level economics.

With a focus on 3 -- on the 3 key areas Greg mentioned, operations, value and communication; and a shift in our asset base, I am confident Pizza Hut is laying the foundation for long-term success.

At Taco Bell, we opened another 9 international units this quarter, including a new market entry in Peru.

We also continue to see growth in our domestic urban walk-in and Cantina restaurants, opening 3 new units in New York, part of the 34 gross new U.S. units Taco Bell opened this quarter.

As for KFC, they again proved they are a global powerhouse, opening nearly 200 net new units this quarter.

Through the first half of 2018, KFC has opened over 100 additional net new units than the first half of 2017.

There remains significant whitespace for the brand, and we are excited to grow our presence across the globe.

In aggregate, accelerating unit growth across our 3 brands is the driving factor supporting our long-term bold goal of 7% system sales.

We remain committed to this goal and are confident there is significant potential for continued global unit growth for each of KFC, Pizza Hut and Taco Bell.

Now on to our fourth growth driver: Unmatched Franchise Operating Capability.

First, as Greg mentioned, the American Customer Satisfaction Index report noted Pizza Hut U.S. as having the highest percentage increase in customer satisfaction scores amongst all restaurant companies.

This is firsthand evidence the customer is noticing our investment in and commitment to a hot, fast and reliable experience at Pizza Hut U.S.

Second, at Taco Bell, to continue our momentum and focus on speed, we launched a unique after-dark program aimed at driving performance improvement after dark, our fastest-growing daypart.

As a result of the launch, Taco Bell has seen a 1 percentage point improvement in customer satisfaction both before 5:00 p.m.

and after 5:00 p.m.

and an improvement in overall system speed performance after 5:00 p.m.

by 2 seconds.

Some franchise organizations have improved their speed by as much as 30 seconds, resulting in over a 1% increase in transaction growth.

Third, both KFC and Pizza Hut held their international franchise conventions this quarter, and both events had a strong emphasis on building long-term operating capability.

For KFC, with over 1,000 attendees from across the globe, the convention reinforced the Always Original brand positioning to bring clarity and consistency around building a relevant and distinctive brand.

But the convention also had a big focus on building easy brands specifically targeting delivery, digital technology and leveraging data.

The franchisees share a passion for the brand, and we are working together to ensure our efforts around easy apply not only to our customers but also to our team members and restaurant operators.

We will keep you updated as we continue to innovate around our digital platform.

At Pizza Hut's international franchise convention, the focus was around the unfinished agenda on same-store sales growth.

We shared the recipe for growth with our franchisees, which Greg outlined for you today, including strong operations and digital execution, value and consistent communication, along with showcasing our fast casual delco.

Finally, we were excited to announce a few new master franchise agreements last quarter.

Sforza Holdings is now our master franchisee for all 3 of our brands in Brazil.

Sforza has proven they are one of our 3C franchisees, already bringing capital, capability and commitment to the Taco Bell brand by being the first franchisee who's set a Taco Bell development record with the opening of 15 new restaurants in the first year.

The master franchise agreement for each brand includes significant development agreements, and we are excited to see our brands grow in Brazil under Sforza's control.

Sforza is 1 of the first 2 master franchise agreements for Taco Bell.

Taco Bell has also signed a master franchise agreement with Casual Brands Group in Spain.

Casual Brands Group currently owns and operates 40 Taco Bell restaurants throughout Spain and won the prestigious Taco Bell International Franchisee of the Year Award.

Collectively, Sforza and Casual Brands Group are committed to opening more than 400 Taco Bell restaurants over the next decade.

In Russia, Pizza Hut has partnered with AmRest as their master franchisee to accelerate growth.

AmRest has proven to be a valued partner with both our KFC and Pizza Hut brands already, and we look forward to the opportunities they will bring to Pizza Hut Russia.

Each of the franchisees mentioned signing our master franchise agreements are valuable partners who represent our 3C requirement of being capitalized, capable and committed.

After attending the KFC and Pizza Hut International franchise conventions, I'm reminded just how strong our franchise base is at all 3 of our brands.

As a highly franchised company, the relationships and alignment we have with our franchisees is paramount.

Through these partnerships, we are confident we will continue delivering a world with more Yum!.

To wrap up, our second quarter core operating profit results were as we expected.

We remain confident in delivering on our transformation initiatives.

And while there may be noise between quarters, we are pleased with the progress to date.

Now the team and I are happy to take your questions.

(Operator Instructions) And your first question comes from the line of Brian Bittner with Oppenheimer & Co.

My one question is going to be on the unit growth.

I know you're getting to that 4% rate now.

And if you sustain this 4% unit growth, is -- the composition of the growth that we're seeing across the brand now, how you would expect it to continue with KFC now growing above 4%, Pizza Hut and Taco Bell both performing kind of slightly below 4%.

And if you were to somehow accelerate growth from here -- from this 4%, what of the 3 brands would drive that in your view?

Great question, Brian.

I am really excited about what's going on in development.

Just to put some numbers around it.

Year-to-date, we've opened 482 net new units versus 317 at this point last year, so we're up 165 units.

As for the composition and what that might look like going forward, obviously, KFC and the level that they are performing on and the gross number of units that they're opening is fairly significant, but they still have enormous runway to keep going and take their numbers up.

But Taco Bell and Pizza Hut starting from lower numbers, I think, can -- have even more room to improve their percentages and their growth rates.

The Pizza Hut model with the delcos, as we said, we're getting 90% of our growth through delcos.

It's a really efficient way to build new units with great returns for franchisees in most cases, so we see ramping that up fairly significantly.

And we -- and you're seeing that right now around the world.

And then Taco Bell, as we've said many, many times, is really just scratching the surface internationally.

So my guess is, as we go forward, you'll see the composition change a little bit with Pizza Hut and Taco Bell becoming a bigger and bigger part of unit growth and KFC taking their already very impressive numbers up further as well.

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

Congrats on that move towards 4% unit growth.

A question on delivery.

With your investment in Grubhub, you're in a great position to see what's going on in U.S. delivery these days.

Obviously, you have a big play there in pizza.

And it looks like the big 3 pizza players in aggregate are weaker than they were in the past.

Do you attribute this to non-pizza delivery hurting pizza?

And could you talk about your lift today, how delivery is going with KFC and Taco Bell and what you think that might be as you look ahead with Grubhub?

Yes.

I think we're in, obviously, the early days of testing with Grubhub.

I think that's -- I think the key thing is that we've got the systems integrated.

So we're in the very early days.

We are seeing what you'd expect us to see, which is incremental transactions, we are seeing higher check.

We've not unleashed the marketing muscle behind it, so we think there's a lot more transaction growth to get, but the transactions appear to be incremental at a much higher check.

So I think, in that sense, we feel good about delivery.

And obviously, I think that we'll obviously work with Grubhub in order to grow this opportunity.

Nothing better than a new occasion and a higher check.

That's all good for us.

And we'll obviously continue to support that and make that a big deal going forward.

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

On the Pizza Hut business globally, you talked about some operational tweaks you need to make, some marketing, but there's also a fair proportion of stores that currently don't offer delivery.

So is there some sort of unlock that you can achieve early on in terms of getting some of those dine-in stores to deliver?

Is that a key piece to driving incremental same-store sales?

And I did want you maybe just to address the prior question about delivery maybe impacting particularly some of your global Pizza Hut markets.

Is there evidence in some markets with delivery ex pizza or aside from pizzas impacting the delivery business in certain markets?

Yes.

I mean, on the question of the dine-in stores at Pizza Hut and their ability to deliver, we actually do have some dine-in stores that deliver out of the dine-in stores.

We call them restaurant-based delivery.

And with aggregators, it does make it easier to add dine-in stores to the delivery world and have the aggregators deliver from our dine-in stores.

I think Yum China has taken advantage of that opportunity.

So for us, the dine-in asset base, though, is very different around the world for Pizza Hut.

In some cases, it's nearly white tablecloth.

In other cases, it might resemble more of a fast casual kind of asset.

And you have to take into account, on the delivery side, "Is the back of the restaurant actually set up to deliver?" In some cases, it is.

In some cases, it isn't.

In some cases, the menu is something that could be delivered.

In other cases, it's more of a dine-in menu.

So we are -- where there are opportunities, we are taking advantage of the ability to add dine -- add delivery to our dine-in assets.

And as I mentioned in the opening remarks, the vast majority of the stores we're building, the Telepizza stores that we're adding, they're all delivery-capable stores, and so you'll see our asset base become more and more delivery-capable over time.

As far as the trends on delivery...

Yes.

I think if you look at our international pizza business, there's a distinct difference between our performance in dine-in and our performance in off-premise.

And so we feel good about our off-premise performance in our international Pizza Hut business.

It's got some very good numbers, and as I said, there's quite a difference between that and our dine-ins.

So we've still got some strong dine-in markets, Hong Kong, Indonesia, that are performing well.

But clearly, as David said, we're building the future, which is delcos, and we are still seeing good growth in international in our off-premise business.

I mean, both U.S. and internationally, our delivery business is in growth mode.

Our delivery and carryout business is in growth mode.

So back to the earlier question of are we seeing other people getting into delivery impacting us, it'd be hard for us to say that since we feel pretty good about our Pizza Hut delivery and carryout business today.

Your next question comes from the line of John Ivankoe with JPMorgan.

I was hoping to get an update on delivery, specifically at KFC and Taco Bell.

In the U.S., how many units have been fully integrated into the Grub platform from a delivery perspective on the front end?

But how much of that work has already been done on the back end as well?

And if there is a possibility to talk about your comps in the U.S. specifically, which might be the future indicator of Taco Bell and KFC stores that have received delivery, how much of an incremental boost to the business that's been.

Yes.

Look, I think, as we've said a couple of times, we're pleased with the initial results that we're seeing by adding delivery into Taco Bell and KFC.

Remember, Taco Bell had already had a decent-sized pool of stores, and they experimented with delivery with another aggregator partner.

Behind the scenes, we're doing all the work to integrate the systems with Grubhub so that we can make this the fastest, most seamless process for consumers and for our store employees.

And we feel good about how that work is going.

We're not throwing out numbers and targets and when certain number of units are going to be opened because there are several milestones we have to get through as we go on this journey.

In fact, we're still trying to finalize the specific terms of the agreements that our franchisees will sign with Grub.

And then until some things like that happen, we don't have complete visibility to a time line around certain units and when they will all be on.

But as far as initial results, I think we're pleased with how things have gone.

Your next question comes from Karen Holthouse with Goldman Sachs.

Another question on the delivery front.

Where you have been testing delivery, do you have any early data you can share in terms of delivery times that you're accomplishing or achieving?

Yes.

I mean, look, I think the key is, as we've been trying to say, this is very early.

We're in test.

We haven't unleashed the marketing muscle of each of the brands in order to drive it.

So I think we are seeing times that we're really happy with it.

So we've obviously got a very big Pizza Hut delivery business.

We know what the expectations of the customer are.

So I think we feel good about the delivery times that we're delivering to the customers.

The transactions per restaurant are still small, but I believe that with all the work we've got from our Pizza Hut knowledge on how to deliver, that we are meeting the customer's expectations.

So I feel good about that.

The tests are very early, small number of stores.

And I think, as David said correctly, getting these -- getting both KFC and Taco Bell integrated in the POS system, that will make -- we don't want to be going to a tablet to order -- to place an order because then you get speed issues, you get accuracy issues.

We know all of that.

So we would rather get the integration done right, test the integration, then unleash the marketing dollars and then drive the incrementality that we know we'll get.

And in a good way, I guess, we're fairly sophisticated when it comes to the subject of delivery.

We know delivery well from our Pizza Hut business.

So getting Taco Bell and KFC in, we have very high standards for what we -- where we want to ultimately get to.

And while, as Greg said, we're pleased with where we're at right now on the journey, we know what ultimately the kinds of times and accuracy that you need to deliver in delivery.

We're not there yet, but we're on that path to getting there with Grub right now.

Your next question comes from Matt McGinley with Evercore ISI.

My question is on the interplay of comp and unit growth.

If, over the long run, your units gravitate more towards that 4% growth range, why wouldn't your comp naturally gravitate more towards that 2% over the long run?

Given you have 45,000 units around the world and growing at that higher rate just adds that many more units so you're going to have more cannibalization, it probably is a distraction to execution.

I'm just kind of curious why the long run wouldn't look like your guidance for this year.

Look, I think that being at the low end of 2% to 3% is not where I want us to be.

I think we have every capability to be closer to the high end of the range.

And it -- probably not a surprise to anybody that, based on our first half performance, even accounting for the KFC performance in the U.K., we have strengthened the back-half calendars on all the brands.

We happen to have a thing called -- as David said, the marketing planning meeting last week for KFC, I sat through every one of those brand presentations.

I've seen the calendar adjustments.

I think that there are -- there is still opportunity for us to grow closer to the 3% than the 2% we are delivering.

And I can assure you we're very focused on, obviously, continuing to grow the net new units that David spoke about and which we are obviously happy about, but I do believe we can still accelerate our growth closer to 3% than to 2%.

Yes.

On the specific question, it was a fair question.

As we expand, will we end up with more and more cannibalization impacting same-store sales growth?

Actually, if you think about where we're growing, they're mostly very much wide-open spaces.

We talked in our opening comments about how Pizza Hut is just entering Sub-Saharan Africa.

There's new countries to enter.

There's hundreds of units to build.

I mean, in many ways, the units that you build start to produce more marketing dollars, which help you grow your top line more.

Certainly, at some point, you'll hit the saturation and you'll deal with more of the impact issues that are a little bit more common in the U.S. Both -- we have a very big presence in emerging markets, where the markets are growing, where our unit counts are growing along with the population and with the purchasing power of the population, and we really don't see a lot of concern about cannibalization from the development folks on where we're building stores.

Your next question comes from Andrew Charles with Cowen.

David, you called out core operating profit growth in 2Q is expected to be the softest of the year.

But you showed pretty good traction on G&A savings, which is at 1.8% of system sales in the quarter, it's brushing up against that 1.7% target, as well as franchise and property expenses.

Does the full year guidance for flat core operating profit embed accelerated levels of savings in these 2 line items as we look out to the back half of the year?

I wouldn't necessarily say accelerated.

Obviously, as we're getting towards the end of the refranchising and most of the -- we have 2 kinds of G&A cuts obviously: the organic cuts that were independent of refranchising and those related to refranchising.

The vast majority of the organic cuts were made earlier in this journey, and then we're coming to the end of the G&A reduction coming from refranchising.

We do have some annualization of G&A savings, but you're absolutely right to point out, look, we're almost at the 1.7% target.

If you look at the first half number, sort of double that, you get a sense for we can get to where we want to go -- want to get to fairly comfortably as we keep growing the top line.

So yes, we're in a good shape on G&A.

That's why we reiterated all the elements of the transformation and our commitment.

Your next question comes from Jeffrey Bernstein with Barclays.

My question is on Pizza Hut, I guess, specifically on the U.S. It just seems like the comps maybe aren't yet seeing the acceleration you had anticipated.

So wondering maybe if you could talk a little bit about the challenges.

I think you mentioned, most recently, the move away from value maybe with a -- more of a noticeable headwind.

Or maybe you can share any metrics related to the loyalty program and membership and how your $130 million contribution would -- where it would see the greatest benefit.

Just trying to see if there are any laterals to the -- maybe the relative weakness we're seeing in China or whether it's just more U.S.-specific.

Sure.

I think there's no doubt that all 3 brands have to be on value.

That's a given.

And obviously, getting back on value is critically important.

I think the exciting opportunity for Pizza Hut in the U.S. is how -- is to activate our NFL partnership.

And obviously, as we said, we renewed our NCAA partnership.

And the way we look at it we'll be sort of owning football Thursdays through Mondays.

And I think there's nothing that brings America together more than football and pizza.

So I think all -- as we said, all the internal metrics which we talked about are improving: 3-minute speed of -- speed improvement; obviously, customer satisfaction improving.

And I'm looking forward to us activating this partnership as football season gets underway and, obviously, hopefully using that to drive our brand to be more relevant, to be more distinct.

And then, obviously, the functional foundational stuff is helping us make this more easy, so I think we're doing all the right things.

We've got to deliver the results, sort of show me time, but we feel good about what we've got for the back half of the year on Pizza Hut in the U.S.

Your next question comes from Dennis Geiger with UBS.

Wondering if you could just talk a little bit more about the competitive environment you're seeing in the U.S. and, I guess, through that value lens specifically and sort of what impact it's having on the brands.

Just following up on your commentary, Greg.

Just Pizza Hut and the pivot towards value in the back half, just curious how easy it is to differentiate within the category on value and if the combination of all the enhancements you're making to the brand right now can sort of enhance those benefits from pizza value.

And then just on Taco Bell, just a bit more about how all the innovative and differentiated value items that you had in the quarter, how they performed relative to your expectations and how you see the back half shaping up, given the calendar, if this value cycle continues.

Sure.

Well, yes, you're right.

I mean, value has become an important part of the industry.

It's become an important part of every brand's positioning.

As we talked about last week at the MPMs, I think there's also 2 ways to how you can communicate value.

One is to apologize, and one is to celebrate.

I believe that we should be celebrating the fact that we can offer great value to our customers.

Each of the 3 brands has a very clear value road map.

If you -- I'll use U.S. dollars to talk of it because it will be easier.

But if you think about KFC, they've got $5, $10, $20.

And in some of the markets where we're seeing really good performance, they've got disruptive value as well.

Taco Bell has got $1, $5 boxes.

To your point, they're all performing very well, in line with our expectations.

To give an example, the fries -- the Nacho Fries, which we launched essentially à la carte in the third quarter, we've been able to put them in the $5 box.

I think that will enhance the appeal of the $5 box by putting one of the most popular new products we've launched.

And then on Pizza Hut, it's about consistently staying on everyday value and making sure that we deliver great-tasting pizzas at a great price.

So I think everyday value will be important.

And I think the occasional hit of disruptive value will be important because we've seen that where we deliver consistent everyday value, it doesn't matter what the brand or what the country, with the occasional disruptive value, that's the places we are winning and delivering the best same-store sales growth.

Your final question comes from the line of Sara Senatore with Bernstein.

Just a quick, I guess, 2-parter.

One, not to belabor this, but on the value piece, are you getting any pushback from franchisees?

Just because that's been such a characteristic of the market for so long, I'm surprised that you would have pulled back on that kind of marketing last quarter, so I wasn't sure if it was driven by franchisees.

And then, I guess, if you could just quickly comment.

You mentioned disruption in the U.K., really to KFC, but you -- I guess you didn't allude to China.

Had you expected some deceleration there?

Because the fact that you were able to get to the comp even with that, I think, was impressive.

But I'm just trying to understand, going forward, with such a big market, are you confident in the ability to offset with strength elsewhere?

Sure.

Well, I think franchise economics are critical, right?

I like to say, if you had great economics from -- for the franchisee and great enthusiasm from the customer, you've got a winning combination.

So we're obviously very conscious of franchise economics.

I think a good example would be Taco Bell took à la carte fries from $1 to $1.29.

But they put them in the $5 box, and we're going to sell a lot more $5 boxes.

And so I think each of the brands has done a very good job of being conscious of the unit-level economics impact.

The other great thing is these businesses run off momentum and volume.

And our ability with these disruptive value offers, which are essentially protein-only offers -- as an example, in Australia, which, as I said earlier, 2-year stack of 11%, of which 7% or 8% is transaction growth, they run a 9.95 -- 9 pieces for $9.95 on a Tuesday because of the -- and it's only chicken, so obviously, all the sides are bought at full margin.

So there's a lot of smart thinking that's gone into all of this, and obviously, we've got our franchisees onboard.

We've got them supporting this, but we are very conscious of their economics.

And I think you also saw in the quarter results that our Taco Bell margins improved despite the fact that we obviously were doubling down on $1.05, $1 offering.

So I think we've got a very good way of working with our franchise partners, delivering great unit-level economics for them and great customer enthusiasm.

On your question on China, I think the way I want to think about it is that, obviously, they talked last night, we listened to their call, about their new unit growth, which we're excited about, continuing to grow new units and the returns that they're getting on those units.

So I think there's 2 units on KFC and 3 to 4 on Pizza Hut, so that's exciting.

And the other great thing is the KFC China team and the Pizza Hut team were at the MPMs last week.

So they sat in for a whole week as every country shared what they are doing to drive same-store sales growth.

So the China team got to see what the Australia team is doing and all those sort of things, and I think that's the beauty of a global business like Yum!, which is we can share, we can cross-collaborate.

So I'm excited that they'll be able to take those learnings, go back, adjust their calendars just like we've adjusted the calendars in the rest of the business, and obviously, hopefully deliver stronger same-store sales growth in the back half of the year.

Okay.

So let me just say, first of all, I want to thank everyone for taking their time during our call today.

Like any business, there are things that you're proud of and happy about, but there's always this unfinished business, as we all know.

I'm really proud of the entire organization's efforts and results on our transformation to be more focused, more franchised and more efficient.

These were really bold goals, and it's clear that we're going to achieve them.

I'm also particularly proud of how we've step-changed our new unit development, which we talked about today, across the globe and across the 3 brands, and we've moved from consistently delivering 3% to now 4% net new unit growth.

And I think David and I believe we have the opportunity to eventually even do better than that.

So where do we have unfinished business?

Same-store sales growth, obviously.

If I take out the impact of the KFC distributor issue, our numbers aren't bad.

But I have to be honest and say I'm not content, and I know we can and will do a lot better.

The brands have all adjusted their back half calendars, which I've seen, and I know now we have to deliver, not just talk about it.

That's my focus, it's our focus for the second half.

So thanks again, and I look forward to publish -- updating you on our journey to deliver a world with more Yum!.

Thank you.

This concludes today's conference call.

You may now disconnect.