百勝餐飲集團 (YUM) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Yum!

Brands Third Quarter 2018 Earnings Release Conference Call.

(Operator Instructions)

I will now turn the conference over to Mr. Keith Siegner, Vice President of Investor Relations, Corporate Strategy and Treasurer.

Please go ahead, sir.

Thanks, Crystal.

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 David and Greg, 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.

And 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're 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'd like you to make you aware of the following changes in upcoming Yum!

investor events.

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

Second, fourth quarter earnings will be released on February 7, 2018, with a conference call on the same day.

And finally, the Yum!

Brands Investor and Analyst Day will be held on Wednesday, December 5, 2018, and will be available via webcast on our website at www.yum.com.

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 third quarter was 5%, with 2% same-store sales growth and 4% net new unit growth.

This achievement was largely attributable to the tremendous performance at Taco Bell as well as a solid quarter at KFC, delivering 5% and 3% same-store sales growth, respectively, as well as strong net new unit growth at each brand.

As a result of timing factors we've outlined all year and consistent with our expectations for the quarter, core operating profit growth was 2%.

Now I'd like to discuss our guidance for full year 2018.

Consistent with our communications after our second quarter earnings, we anticipate net new unit growth to be at the high end of the 3% to 4% range and same-store sales growth to be at the low end of the 2% to 3% range included in our original 2018 guidance.

We are also reiterating our full year core operating profit growth guidance of approximately flat.

However, we have a few items to note in the pieces that comprise core operating profit.

We now anticipate our underlying base operating profit growth to be at or slightly below the low end of the previously communicated high single-digit range, owing to the reduced contribution from Pizza Hut, particularly in the international business.

Offsetting this, we now anticipate the headwinds relating to the timing mismatch between refranchising and associated G&A savings to be slightly below the low end of the previously communicated 6- to 7-point range.

Our estimate of a 2 to 3 percentage point headwind related to the revenue recognition accounting standard is unchanged.

Before I begin with our key growth drivers, I want to thank and celebrate Roger Eaton for his many years of service.

Roger's imprint on Yum!

and the KFC brand over the last 20 years is vast.

He joined KFC in 1990 and held roles in operations, development and finance across Australia, New Zealand and the U.S. before finally taking over leadership of the global KFC brand in 2014.

Everyone who has met Roger knows that he always brings passion and energy for enabling world-class operations to his roles, encouraging markets to adopt and share the best ideas.

Roger's focus on ensuring excellence in operations, value and food innovation will leave a lasting impact for which we'll be eternally grateful.

With Roger's retirement comes a new opportunity for Tony Lowings, who is being promoted to CEO of KFC Global.

Tony has a long history of creating value for all of Yum!'s stakeholders, having helped build one of our strongest markets, KFC Australia; as well as LA&C, another KFC powerhouse.

From there, he served as Managing Director of KFC Asia Pacific, enhancing and expanding this emerging market.

And finally, Tony joined KFC global earlier this year as President and Chief Operating Officer and has provided wise counsel across Yum!

through our global leadership team.

We're excited for Tony and wish Roger all the very best in his retirement.

We are now 2 years into our 3-year transformation and are continuing to execute on the key items designed to accelerate growth.

The foundation of it 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 Bold Restaurant Development and Unmatched Franchise Operating Capability, along with details of our third quarter results.

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

KFC global delivered system sales growth of 7%, with same-store sales growth of 3% and net new unit growth of 5%.

KFC saw widespread growth, including particular strength in Africa, Russia, Eastern Europe, Thailand, the Middle East and India.

The success in these markets was primarily result of executing on value, innovation, delivery and digital.

In particular, I want to highlight KFC India, Thailand and Australia.

India continued to deliver results with 10 consecutive quarters of same-store sales growth.

It has sustained momentum through a focus on value, backed by noteworthy promotions.

This quarter, India posted 14% same-store sales growth supporting a year-to-date of 11%.

India has opened 34 net new units this year and has rapidly become an example of our Distinctive, Relevant & Easy growth driver in action.

We also want to recognize Thailand.

From the first quarter to the third quarter, it has improved its same-store sales growth rate by 13 points, now positive 7%.

This impressive turnaround is attributable to 2 areas: a focus on limited-time offerings built around tremendous value and creating social media for the exciting extreme hot sauce.

Like India, Thailand has had similar development success, opening 39 net new restaurants through the third quarter.

And last but not least, Australia has now delivered 25 consecutive quarters of positive same-store sales growth.

Shifting to the U.S. During the quarter, we had several examples of distinctive marketing and product innovation.

First, KFC continued to be bold in their marketing as they introduced 2 new colonels.

They started with Jason Alexander, who helped promote $20 Fill Ups in 4 different and equally delicious options.

Next, KFC partnered with the world's strongest man, Hafþór Björnsson, also known as Mountain, to celebrate the colossal Double Crispy Colonel sandwich by setting the record for pulling the most number of chicken sandwiches at one time.

It was truly a strong effort, pun intended.

Now moving to Pizza Hut.

As you have probably seen, we had a leadership change at Pizza Hut International.

Vipul Chawla will be promoted to President in December.

He is a talented leader and a respected global marketer.

Vipul currently serves as Manager Director of Pizza Hut Asia Pacific, our largest Pizza Hut International market with over -- or nearly 5,000 restaurants across 16 markets.

Prior to his current role, he served as General Manager of Pizza Hut Asia.

Vipul truly leads with smart, heart and courage while bringing unrelenting focus to product excellence and the customer experience.

He has a proven track record of success, and I know the entire Pizza Hut International system joins me in welcoming him to this new role.

Regarding the quarter, we were pleased to deliver international net new unit growth of 5%.

However, we were disappointed in system sales growth of 1%, owing to a same-store sales decline of 3%.

We recognize that we still have work to do around same-store sales growth.

We will continue to focus on operations and digital, value and spreading consistent brand messaging.

And under Vipul's leadership, we're excited about the benefits to come from focusing on these essential initiatives.

Now Pizza Hut U.S. System sales declined 1%, with 1% same-store sales growth and a net new unit decline of 1%.

As we have consistently discussed, the Pizza Hut U.S. turnaround will be a slow build, and we're encouraged by the foundation that's been put in place and continue to make strides to improve the brand's position.

In the third quarter, Pizza Hut added emphasis on value, first by a continued and consistent focus on our $7.99 Large 2-Topping pizza.

Second, it ran a competitive promotion offering an unbeatable value in the Large 2-Topping pizza for just $5.99 carryout only.

This value and the operational improvements have made the brand more relevant and easy.

However, the messaging has not been distinctive enough to attract new customers, which is a key focus moving forward.

As we move into fourth quarter, we've been thrilled to be the official sponsor of the NFL and about the creative opportunities this provides.

Pizza Hut is also retaining a sharp focus on value as we recently kicked off our $5 lineup, featuring flavors like medium 1-top pizza, garlic knots, wings and our new Cinnabon Mini Rolls, giving customers Pizza Hut pizzas with unrivaled everyday value and add-ons the fans will enjoy.

Now Taco Bell, where system sales grew 8%, with same-store sales growth of 5% and net new unit growth of 3%.

With new leadership comes new ideas, and I couldn't be more proud of the Taco Bell U.S. team for improving the way they constructed the calendar in order to generate a more consistent performance and extend momentum.

During the quarter, Taco Bell offered customers 4 unique $5 boxes alongside innovative products like steak nachos, Double Cheesy Gordita Crunch and the fan favorite Nacho Fries.

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

In fact, more than 1 in 4 orders contained our beloved Nacho Fries during this promotion.

We picked up our movie trailer theme right where we left off with Web of Fries II: Franchise Wars.

Taco Bell also connected the Nacho Fries to the 25th anniversary of the cult classic Demolition Man.

In case you didn't know, in the movie Demolition Man, the only remaining restaurant is Taco Bell, which the brand celebrated with a truly unique activation at Comic-Con.

Lastly, we want to send a big congratulations to the entire Taco Bell system for ranking as America's #1 favorite Mexican restaurant in the distinguished Harris Poll.

Taco Bell's ability to innovate and elevate around both their marketing and products highlights the fact that 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 growth -- the brand grow and expand.

We saw momentum and enthusiasm in India, Spain, the Philippines and Canada.

Taco Bell India's year-to-date same-store sales growth is 10%, driven by the innovations such as the Naked Chicken taco and Crispy Potaco.

In Spain, one of our more established international markets, year-to-date same-store sales growth of 6% was fueled by value innovation.

Guatemala, Taco Bell's largest international market, continues to grow as it recently opened its 57th restaurant.

I'm proud of the work Taco Bell International is doing to lay the groundwork for exponential growth to feed people's lives with más.

Now to Unrivaled Culture & Talent.

Part of our transformation is ensuring that we have diverse talent and an inclusive culture to achieve greater gender parity in senior leadership, which we know generates better growth.

This commitment aligns with the Paradigm for Parity coalition: to have an organization in which women and men have equal power, status and opportunity.

Yum!

is intentional about diversity, and this is especially evident in the leadership teams of our brands.

This past month, Forbes released a series on Pizza Hut's female leaders, which highlighted the careers of 5 C-suite leaders.

While the Forbes article highlights Pizza Hut, we are proud of the focus on diversity and inclusion at all our brands.

Here at Yum!, we are constantly cultivating great talent.

It is a true competitive advantage to have a deep bench of this quality.

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 as we lay the foundation of our transformation strategy to maximize shareholder value.

And with that, 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 third quarter results; progress towards our transformation initiatives; and 2 of our 4 growth drivers, Bold Restaurant Development and Unmatched Franchise Operating Capability.

Let's start with our third quarter results.

As expected, Q3 was better than the first half.

Our consolidated same-store and system sales growth rates improved, reaching 2% and 5%, respectively.

In fact, I'd like to note that system sales growth ex FX was 8% at Taco Bell and 7% at KFC, both impressive accomplishments.

As a reminder, the following 2 items weighed on our third quarter core operating profit results: first, the timing mismatch between G&A savings and refranchising; and second, the revenue recognition accounting standard change.

As a result, and consistent with our expectations, core operating profit increased 2%.

I'd like to follow up on Greg's comments related to our full year 2018 guidance and then 2019 EPS.

Consistent with our communications after our second quarter earnings, we expect net new unit growth to be at the high end of the 3% to 4% range and same-store sales growth to be at the low end of the 2% to 3% range included in our 2018 guidance.

We are also reiterating our full year core operating profit growth guidance of approximately flat.

Subject to a few adjustments in the components that comprise core operating profit, we now anticipate our underlying base operating profit growth to be at or slightly below the low end of the previously communicated high single-digit range, owing to reduced contribution from Pizza Hut, particularly in the international business.

Offsetting this, we now anticipate the headwinds related to the timing mismatch between refranchising and the associated G&A savings to be slightly below the low end of the previously communicated 6 to 7 percentage point range.

Our estimate of a 2 to 3 percentage point headwind related to the revenue recognition accounting standard change -- accounting standard is unchanged.

Regarding our goal to deliver at least $3.75 in EPS in 2019, there have been a number of significant variables that have influenced this since we introduced it 2 years ago.

Some of these variables are tax reform, revenue recognition and our cash investments in Grubhub and the Pizza Hut U.S. Transformation Agreement.

In addition, we have had strong performances at both KFC and Taco Bell and clearly, weaker than originally anticipated performance at Pizza Hut.

That said, we remain on track to deliver this goal, and we plan to provide more context around 2019 during our December analyst and investor event and webcast.

Lastly, as a reminder, the $3.75 target does not include any benefit from the 53rd week, the impact of changes in FX rates nor any gains or losses associated with our Grubhub investment.

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

First, being more focused means we are maniacal about our 4 key growth drivers as they are the key to achieving our bold aspiration of 7% system sales growth.

We're confident the focus on these 4 capabilities is the catalyst for increasing the growth rate in our system sales over the long term, and we're already seeing the benefits, most notably in net new unit growth, which I'll talk more about shortly.

Second, we continue to make progress towards becoming more franchised, selling 134 restaurants this quarter.

We are nearly 98% franchised and are on track to have less than 1,000 equity units by the end of the year.

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 is designed to maximize growth for our shareholders.

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

During the third quarter, we repurchased over 6 million shares for a total of $527 million and paid over $113 million in dividends.

Since the beginning of 2017, we have returned over $4.3 billion to our shareholders.

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

At KFC, they again proved they are a powerhouse brand, opening nearly 270 net new units across 49 countries this quarter, demonstrating that there continues to be significant enthusiasm for capitalizing on the ample whitespace that exists for expanding this brand.

This August, KFC held their inaugural global development summit.

With an emphasis on unlocking unit growth through data-driven market plans, franchise partner capabilities and new asset sizes intended to unlock untapped markets, our franchise partners have many years of profitable expansion ahead.

Just as encouraging, this development is occurring at the same time our franchisees upgrade and modernize existing assets.

At Pizza Hut, international delivered 5% net new unit growth over the prior year.

Franchisees continued to invest in our delco and fast casual delco assets, owing to healthy unit-level economics and cash paybacks.

And these assets will represent over 90% of our net new unit openings in 2018.

One particular market that deserves special recognition is Pizza Hut Japan.

It has opened 27 net new units so far this year, which is more than we opened in any of the past 15 years, and has plans to open a total of approximately 100 units by 2020.

Our master franchisee there is a perfect example of a 3C partner.

They are committed to providing consistently bold value and successfully expanding with a delivery-based development strategy.

They are capable, able to deliver great customer experience, having earned a record in customer satisfaction, including a plus 9 percentage point improvement in Pan Pizza taste.

And finally, they have capital, both to grow new units and modernize existing assets.

I'd like to spend a minute discussing the challenge Pizza Hut faces given its large dine-in sales mix, specifically the drag dine-in is having on our reported same-store sales, which masks the relative health of our delivery and carryout business.

You're all aware of this headwind in the U.S. where dine-in sales are down to less than 10% of the total, but the same issue applies to our international business, where dine-in sales represent approximately 50% of the total.

The gap between dine-in sales and sales from delivery and carryout is significant, with both the U.S. and international seeing a roughly 10-point differential.

Dine-in is waning in relevance in a lot of markets and, importantly, complicates pricing decisions and our ability to offer disruptive delivery value, especially in international markets with a high percentage of dine-in sales.

We have a long way to go given some of the challenges in legacy dine-in markets, such as Europe and China.

However, the good news is the estate is shifting towards delivery/carryout given that 90% of net new unit openings and 80% of all replacement units are delivery/carryout-focused.

At Taco Bell U.S., we have opened 59 net new units through the third quarter of 2018.

We recently opened our 30th domestic urban concept, which includes walk-ups and Cantinas, and are excited about the opportunity to tap this near-greenfield market.

This quarter, we celebrated openings in New York, Chicago and Raleigh, and look forward to more high-profile openings later this year, including our first company Cantina in Manhattan.

So stay tuned.

In becoming more franchised and more focused, our refranchising initiative has fueled bold development, with nearly 220 new development commitments in the U.S. through the third quarter since 2016.

In international markets, Taco Bell has developed 34 net new units in 2018, with a strong fourth quarter pipeline yet to come.

Lastly, as we know, unit-level economics are essential to stimulating development.

I had the privilege of attending the Taco Bell franchise convention last month, and there's a lot of excitement, especially for our urban and Cantina models, where early returns have been encouraging and the development pipeline continues to build.

In aggregate, accelerating unit growth across our 3 brands is a driving factor as we strive for a bold aspiration of 7% system sales.

Now on to our final growth driver, Unmatched Franchise Operating Capability.

I'd like to spend a minute highlighting our partnership with Grubhub.

At the beginning of the year, we announced our partnership with Grubhub to drive sales at KFC and Taco Bell through online ordering for pickup and delivery.

We are pleased to share that 1,200 KFC restaurants now offer delivery through Grubhub, covering 30% of the U.S. system in just 7 months.

We are seeing above-average customer ratings on the Grubhub KFC experience and expect this to improve once POS integration is complete later this year.

As per Taco Bell, in September, we launched a fully integrated solution between the Taco Bell POS and Grubhub marketplace, rolling out this integrated delivery solution to over 2,100 stores across the nation, covering 30% of the U.S. market.

We are adding stores at a rapid rate and expect to make healthy headway through the end of the year.

We have seen positive early results along with valuable operations learnings.

Franchisees are very excited about delivery as an opportunity to drive incremental sales and are all in on delivery as a major brand initiative.

Wrapping up on Grubhub, while we are in very early stages of our partnership, the check growth and incrementality of sales that we see is encouraging and supporting expansion throughout franchise systems.

To wrap up, our third quarter 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) Our first question comes from the line of John Ivankoe with JPMorgan.

The question was on Pizza Hut.

Obviously, looking at the U.S. and the Transformation Agreement that's been put into place there.

It does seem like you're identifying that many of your bigger international markets are having the similar type of issues that the U.S. was having a year or so ago in terms of what products are promoted at what price and basically serving the dine-in store versus the delco store.

So are we now beginning a position -- or are you alluding to that maybe some of the international markets need some of the capital and operating costs and attention that the U.S. was really -- really talked about, about a year or so ago?

Yes, John.

I think one important difference between the U.S. and international is our international dine-in stores are actually in fairly good shape.

These are good assets in good locations, and in many countries, we actually have a very strong dine-in business that we have confidence in for the future.

That's quite a contrast to the U.S., where we have a lot of Red Roof restaurants that are in the wrong part of the trade area, haven't been remodeled and clearly need to go away.

So there's a lot of capital required to get out of the Red Roof restaurants in the U.S. It's not a similar situation internationally.

So no, we don't anticipate any kind of capital investment needs from Yum!

going into international dine-in business.

And is there, I mean, I guess, a similar type of conversion opportunity over time?

Given that -- if the assets are in good shape, that makes them actually easier to convert, to integrate some of the delco or fast casual-type developments within the existing Red Roof type of -- or full-service type of estate that exists internationally.

I mean, are we at the point where not just 90% of new units are delcos but you need to begin to convert many of those legacy assets over to something that is more flexible for the overall business model?

Yes, that's exactly right.

I think I shared 80% of the stores are -- that are being replaced -- so when we have a dine-in unit that does need to be replaced, it is being replaced with one of the fast casual or delco assets.

We think when this transition will occur, it won't happen overnight, but it is planned to occur over time.

And with half of our sales coming -- roughly half of our sales coming from dine-in today, we think that number will be closer to 1/4 of our sales within 3 to 4 years, just from the natural shift of, for example, closing on the Telepizza deal, adding all of those delivery sales, building all these net new unit delcos that are in the pipeline and then all the work that's being done to replace dine-in stores with delivery stores.

So we want to give everybody the clear signal that we do have a plan to migrate out of those dine-in stores, but we thought it was important to highlight the -- frankly, that the delivery/carryout business at Pizza Hut International is actually fairly healthy.

That business is doing well, but the results we report don't show the success that we're having in that part of the business.

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

My question is on the core operating profit guide.

I know the guidance update today was just based on '18.

As I look at the refranchising and the G&A savings benefit, that's more of a timing mismatch that would have worked itself out anyway.

But are you concerned that the underlying issues with Pizza Hut International would impair the core operating profit growth over the longer term?

Or do you think that those issues are more just isolated to this year?

Yes.

I think the beauty of Yum!, obviously, is that we do have a diverse portfolio of brands and countries.

And yes, the Pizza Hut business is underperforming our expectations when we started this transformation journey.

But obviously, we're also seeing great strength at the much bigger parts of our business at Taco Bell and KFC, and we did reiterate our guidance for 2019 today.

So I think you never get there the way you plan when you start the journey, and we'll talk more about this when we get to December Analyst Day, but we feel good about the state of the business.

Obviously, the results this quarter and the fact that we are very demonstrably ramping up net new unit development certainly helps this earnings model of ours.

Just as another fact on that front, year-to-date, now we have 892 net new units opened for the quarter -- for the year.

Compared to 2017, at the same point, we had 677, so we're 215 units ahead of the pace we had last year.

And remember last year, we were well ahead of the pace from the prior year, so that's all quite positive.

And typically, the fourth quarter of the year is the biggest year on development by far.

So a good story on the development front that helps the earnings model.

Our next question comes from the line of Sara Senatore with Bernstein.

I'll ask my follow-up first, and then I'll ask my question.

The follow-up is on Pizza Hut U.S. I know you said the turnaround is a slow build, but I think this is the second quarter where you said maybe the messaging wasn't as effective even though you did pivot to value.

So could you talk about what can be done here?

Because, as you know, this isn't a dine-in issue since that's such a small piece of the business in the U.S. at this point.

So I guess, what is the strategy from here if really the only issue is messaging?

And then I have a second question.

Yes, sure.

Look, if I answer it in its totality, we're now the NFL partner.

It's with us and not a competitor.

Is that a good thing?

Yes, it is.

We know what the right price points are to be successful in the marketplace.

Do we have all of our franchisees on those price points right yet?

No, we don't.

But are the stores that are on the right price points doing better?

Yes, they are.

And as we said, I personally feel that we just got to do a better job of communicating this compelling value.

We've got a new agency there onboard.

The team is all over it.

And I think you'll see us going forward with what I'll call sharper and more distinctive advertising and communication around this compelling value that we offer.

Yes.

And just one thing to add on that.

Although the dine-in sales in the Pizza Hut U.S. business are only 10% of the business or so, remember, about half the assets are dine-in assets.

Those assets are very often in the wrong part of the trade area to deliver.

They're not set up in the back of house to deliver.

So although the sales mix is now down to a much more manageable level, we still have work to do.

That should give you confidence over time, once we move those assets, we'll be in a much better shape.

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

David, just going back to the 2019 comments.

Do you believe 2019 is a year you can still deliver on the high single-digit operating profit growth?

Or are you signaling that there are different pieces, you get to the EPS number but maybe not the operating profit number you'd once envisioned?

And related to that, I think your G&A as a percentage of system sales is at your target rate of 1.7% this quarter.

So is this the right sort of baseline to think about G&A and then it grows in line with system sales from here?

Or are there additional opportunities you've identified as you've gone through this year?

Look, I think we'll talk a lot more about 2019 guidance when we get to the December analyst event.

But we weren't trying to imply that there was any change to our high single-digit core operating profit growth model in future years with any of the comments today.

The business and the models all generally remain intact, but we'll provide a lot more color on that when we get to 20 -- to the December event.

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

Just a follow-up on Pizza Hut since KFC and Taco Bell are -- seem to be cranking along here.

The U.S. business, you've invested a lot this year.

And obviously, to this point, you're going to have the big fall push here with the NFL.

But to this point, the momentum has not been as strong.

You mentioned creative, but next year, you're going to be lapping some of those investments.

Do you feel like that this is in a fragile position, where you really got to get brand momentum going here in the near term to start to lap some of those investments?

I mean, how should we think about the state of Pizza Hut U.S. heading into 2019 in particular?

David, the way I think about it is that the foundations of Pizza Hut U.S. are in a much better place.

I think our delivery times, the quality of the food we're delivering, the price points, all of those are fundamentally in a better place, so our foundations are definitely in a better place.

Have we made it easier for our customers to access?

Yes, we have, through both digital, through both our apps, through the pricing.

The point I was making, and I think it's one that the team is very aware of, is that we have to bring that sort of sharpness of what we're now delivering and doing so we attract new customers.

I think our current customer base is very happy with the foundational improvements they're seeing in the brand.

The opportunity for us is to bring in new customers by communicating and messaging better this compelling new proposition that Pizza Hut U.S. has to offer, which is an operating improvement, an ease improvement, a value improvement.

We just got to do a better job of communicating that.

And I'm confident that once we do, do that and when customers have a new Pizza Hut experience, they'll be very happy with the experience that they have.

And I -- on that basis, I feel good about the momentum that's there.

And as David said earlier, our performance in delivery and carryout is better than our overall performance.

So have we got work to do?

Yes.

Are the foundations in place?

Yes.

Can we do a better job of communicating?

Yes.

And we know what the task is.

And when you know what the task is, you go chase it and you deliver it.

On the question of lapping, all of the transformation initiatives were really designed to help the business for the long term.

There really isn't a lapping issue.

We invested in media.

You'd think that could be a lapping issue, but that was done so that then the franchisees' ongoing contribution in media would jump up.

So we will have that additional media in future years.

So there's -- it's not like that creates a lap issue.

And then the other investments in things like pouches and different standards for the brands, launching the loyalty program, we should continue to reap the benefit of those investments over time.

Our next question comes from the line of Dennis Geiger with UBS.

David, just wondering if you could talk a bit more about the accelerated unit growth potential for the business going forward maybe following another strong quarter at KFC, maybe specifically about your confidence in the accelerated growth there, generally which regions you see that coming from and just how you're thinking about the U.S. getting back to positive based on the strong returns that the franchisees are seeing.

Yes.

Look, again, we'll go into a lot of the future guidance and we'll actually have the leaders from each of the brands talk about their development plans when we get to the December analyst event.

I think I want to celebrate the fact that we've made meaningful progress to date.

During this transformation, as we've been doing all these things like cutting G&A and getting the business more focused, we're starting to see the benefit from development.

It's showing up in the numbers, which is why I'm trying to highlight that every quarter.

Do we think -- and are we pushing to take the numbers higher from here?

Yes.

Do we think there are opportunities in almost every market, whether they be the mature markets in the U.S. or the international markets?

Yes.

KFC U.S. is very focused on getting to be a positive net new unit grower.

And just as a preview, I think we can get them there next year.

So that is something that's really quite additive to the model when you think about how many units they've been closing over time.

But yes, we're excited about unit growth.

We'll never stop pushing for more because when the returns are healthy, you should be capitalizing that and building more.

And the franchisees love it.

It's a way for them to grow their business.

But we'll give you even more color on that when we get to December.

Our next question comes from the line of Jeffrey Bernstein with Barclays.

Just a question broadly on the franchisee health and profitability.

I'm not sure whether you can slice it U.S. versus international, but however you look at it.

I mean, in the past, you used to use restaurant margin as a proxy for the franchisees' health and profit, but obviously, that margin is no longer representative as the base is so small.

So just wondering if you can offer any directional thoughts on the franchisee health at each brand, maybe how you're suggesting they best manage through the labor cost headwinds they presumably are all facing and whether or not any of them have concerns about access to capital with rising interest rates.

Yes, that's true, Jeff, that now we -- you really can't judge the margins that we report and use that as a proxy for the franchise unit economics since we're down to some small numbers with a lot of noise in them.

I guess, a general comment on franchisee health is when you operate in as many different combinations of brands and countries as we do, there are always pockets of issues.

We've got 2,000 franchisees.

There's always going to be some that are having challenges that we're working with.

But the vast majority of our franchise system around the world is quite healthy.

The areas where we would have more issues that you would expect would be in businesses where we're trying to transform the business a little bit, like Pizza Hut U.S. We're trying to make sure we have the healthiest system of franchisees that we can.

Some of the stuff we did in the Transformation Agreement was designed to give us some strength to manage out underperforming franchisees, and you may see some change in the franchise system there.

But in general, I think our franchise health around the world is quite good and the unit returns that we're reporting are strong.

You heard Yum China yesterday on their earnings call talk about 2-year cash paybacks on brand-new KFCs.

So that kind of thing at least to help the franchisees.

Our next question comes from the line of David Tarantino with Baird.

My question is on Taco Bell, which did have impressive performance in Q3.

And I just wanted to see if you can elaborate on the drivers of that and whether the reintroduction of Nacho Fries had a big impact on that or whether you think there's something more structural or sustainable that you have that's driving that trend.

Yes.

I think Taco Bell is just doing everything really well, obviously, to report 5% system sales growth.

The calendar was incredibly strong.

The team adjusted the calendar, which I was really proud of the fact that they weren't happy with how they got out of the gate so they adjusted the calendar.

I think the product innovation continues to be well thought, so I still believe that there's no better product innovation that comes out -- that doesn't come out from Taco Bell.

The restaurants are being incredibly well run.

The value price points are spot on.

The communication is distinctive and cut through.

And to deliver a system sales growth of 8%, that is really at the top end -- definitely at the top end of what happened in the Mexican category and, I would argue, at the top end of what's happened in QSR.

And then, I guess, to top it all off, the prestigious Harris Poll to make Taco Bell the #1 Mexican brand in the country was, I think, just the icing on the cake.

So I think this brand is set up for continued success.

Our next question comes from the line of Chris O'Cull with Stifel.

I had a follow-up to a prior question and then a second.

David, just going back to your Pizza Hut comment.

Is there a compelling financial argument that could be made for the company to increase its support to accelerate the Pizza Hut conversions?

I think we've done a lot to support the franchisees as we move out of the dine-in asset base into the delivery base.

By compelling arguments, there are some incentives that we've done to do that, that we haven't talked about a lot on these calls.

So I think we've looked at those things and we've worked with the franchise community to help support them in that regard.

Remember that building a new delivery/carryout unit is a very good economic proposition in general.

It's a low-cost investment, and it generates a 3-, 4-year cash payback in general.

So the economics are there to make it happen, but when you're dealing with over 3,000 dine-in restaurants, it's just going to take some time.

Our final question comes from the line of Brian Bittner with Oppenheimer & Co.

Just 2 questions: one on KFC, one on Pizza Hut.

On KFC, same-store sales accelerated there, particularly on a 2-year basis, so super strong performance there.

I know we had Yum China's comps last night, but what's driving the improvement elsewhere at KFC?

Is the momentum of delivery growth in some of these markets really gaining momentum?

Or anything else that you can point out there?

And just on Pizza Hut, the $5 lineup you announced, is this a sustainable value offering?

Are franchisees able to operate at this price point?

Well, yes, I think the -- as I said, the KFC performance and the acceleration is down to a number of things: great value, delivery, digital, very good execution.

And as we've said in the commentary, it's widespread.

We've had really good across-the-board performance in the quarter from KFC.

So it's -- what I liked about it was, geographically, this was a really strong across-the-board sort of quarter.

So I think they're doing all the things right.

Value is great, delivery, digital and really good execution, focusing on the core.

And they're doing that across a broad range of markets, and we're seeing the benefit.

And then on your question on the $5 lineup, yes, it is sustainable.

It's been designed to be sustainable.

And even the things that I'm not going to talk about that are coming out, that will go on the menu in the future are also designed to sustain the $5 price point.

So I feel very good.

We've got the right price points, we communicate it in a compelling way and we will see an improvement in Pizza Hut U.S.

Okay.

So first of all, I just want to thank everyone for being on the call today.

We remain confident that we are going to deliver on our transformation to be more focused, more franchised and more efficient, all of which will deliver more growth.

Q3 was a strong quarter.

We obviously have work to do on the top line at Pizza Hut International, but I am happy with their new unit development.

However, it is great that 2 of our brands, which represent over 80% of our operating profits, are delivering on all 4 of our key growth drivers.

The high single-digit system sales growth at both Taco Bell and KFC was impressive, I think, by any standard.

And we look forward to discussing this more in December, and thank you for being on the call with us today.

This concludes today's conference call.

You may now disconnect, and have a wonderful day.