Ladies and gentlemen, thank you for standing by. And welcome to the Yum! Brands First Quarter 2019 Earnings Release Call. At this time, all participants have been placed in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. It is now my pleasure to turn the call over to Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us. On our call today are Greg Creed, our CEO; David Gibbs, our President, Chief Operating Officer, and Chief Financial Officer; 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 those 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 our earnings releases in relevant sections of our filings with the SEC to find disclosures and reconciliations of non-GAAP financial numbers that may be used on today's call. Please note the following regarding our basis of presentation for today's call. First, all system sales results exclude the impact of foreign currency. Second, Pizza Hut division and worldwide system sales and net new unit growth include the benefit of the increase in units in the fourth quarter of 2018 related to our strategic alliance with Telepizza. Same-store sales growth reflects the inclusion of Telepizza in the prior year base. Third, core operating profit growth figures exclude the impact of foreign currency and special items. Fourth, the lease accounting standard was prospectively adopted on January 1, 2019. As a reminder, this is a GAAP required change resulting in the recognition of operating lease assets and liabilities on the balance sheet. We did not expect to change in our income statement or cash flows as a result of this accounting change. And last, please note that 2019 results will include a 53rd week. 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 to make you aware of the following changes in upcoming Yum! Investor Events. Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing. Second quarter 2019 earnings will be released on August 1, 2019, with the conference call on the same day. Now, I'd like to turn it over to Mr. Greg Creed.

Thank you, Keith, and good morning, everyone. This quarter marks the start of the third and final year in our transformation of the Yum! Brands. We're pleased to report a strong start to the year, with first quarter system sales growth of 8% including 4% system sales growth and 7% net new unit growth. Focus on our four growth drivers increased collaboration and our unrivaled culture continue to fuel these results. As usual, David and I will walk you through the lens of these four key growth drivers. I'll provide an update on our relevant, easy, and distinctive brands or as we say RED for short as well as unrivaled culture and talent. Then, David, will discuss bold restaurant development and unmatched franchise operating capability. I'll begin with our three RED brands. In the first quarter, KFC division delivered system sales growth of 9%, with same-store sales growth of 5%, and net new unit growth of 6%. This global powerhouse saw widespread strength coupled with standout performances in some of our larger markets, as well as a tailwind from lapping the distribution disruption in the UK last year. Internationally call-outs for the quarter include Japan, Indonesia, Australia, Africa, and China. And you'll notice as I give some details, there are consistent themes value and innovation working well together. Japan and Indonesia led the way each with double-digit same-store sales growth. Japan's 15% same-store sales growth was driven by the well-received share pack as well as lunch value deals and Hot and Honey Chicken on-the-bone innovation. Indonesia’s 12% same-store sales growth was driven by value and innovation with Big Box value counterbalanced by the Combo Superstar Innovation. Australia' same-store sales grew 6% on the back of the dual layer value combined with core product news. And Africa where 10% same-store sales…

Thank you, Greg, and good morning everyone. Today I'll discuss our first quarter results, a remaining transformation initiative and two of our four growth drivers bold restaurant development and unmatched franchise operating capability. To begin, our first quarter results. Consistent with our expectations, core operating profit growth increased 12%. And as Greg mentioned, we delivered system sales growth of 8%, same-store sales growth of 4%, and net new unit growth of 7%. A major contributor to this success was KFC, our largest division in units and profit contribution with 5% same-store sales growth and 6% net new unit growth driving 9% system sales growth in the quarter. It's great to see KFC offer such a strong start under new CEO, Tony Lowings. They're leaning in on same-store sales growth on top of what is already a development machine. Contribution to the KFC strength this quarter were broad-based. Japan, Indonesia and Africa which together represent 9% of KFC system sales performed particularly well. Easier laps at KFC UK were also beneficial. And not to be left out, Taco Bell had another solid quarter with 7% system sales growth driven by 4% same-store sales growth including 5% in the U.S. As a reminder, our first quarter results are lapping the distribution disruptions in our KFC UK business in 2018. We estimated that 2018 same-store sales growth at KFC was negatively impacted by 1% in both Q1 and Q2 thereby having a full-year negative impact of 50 basis points for KFC and 25 basis points for consolidated Yum! Additionally, we estimated the negative impact on KFC 2018 core operating profit growth was 5% for the first quarter, 3% for the second quarter, and 2% for the full-year. For Yum! core operating profit, the impact was 3% for the first quarter, 5% for the…

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from the line of John Glass of Morgan Stanley.

Hi, thanks very much. David, can you just go back and just clarify the CapEx increases this year and potentially next year and what the difference between gross and net would be, do you expect franchisee to contribute something to that or do you expect to get returns from that capital and technology because you're going to pay an incremental fee. And what is the metric if you could describe a little bit more just what the nature of those capital -- incremental capital investments are? That would be helpful. Thanks.

Sure, John. We talked about this a little bit at the Investor Day, when I presented what the $100 million of run rate CapEx and noted that we were contemplating an increase in equity development and also that we were seeing good opportunities to invest further capital to create more shareholder value and improve the strength of our business. That's pretty much how this is playing out. So the original $100 million of run rate capital hasn't really changed. What's changed is our interest in building a little bit more equity units, all of which will be -- the capital for that will all be generated by refranchising a comparable number of units. In fact the math on that is such that and this is why it's such a great shareholder value enhancing move. We get more money when we sell a store than it costs to build a new store. So we might get on average $2.5 million every time we sell a store and it costs more like a $1.5 million or less to build a new store. So we're seeing sort of an arbitrage opportunity there to help spur development in certain parts of the country particularly with Taco Bell where we do own a decent amount of equity stores. Some of the best examples are in your backyard in New York City where I was a couple of weeks ago visiting some of those great new Taco Bell's that have opened those stores are worth substantially more than what we paid to build them. So we're going to build probably more 40 maybe 50 equity stores this year when the original plans were only to build five to 10. So that's driving some of the incremental CapEx. And then on the other side of the equation…

Thank you. Next question.

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

Thanks. Good morning. I want to talk a little bit more about KFC, such an impressive comp, 5% driven by that international strength. Greg, you drove into a couple of drivers in your prepared remarks lapping the UK issues and we also heard from Yum! China this week. But I'm really trying to figure out more about this inflection and why it happened now and how sustainable it is. Are you really seeing the consumer outside the U.S. start to inflect here and is your delivery initiatives you've talked about for a couple of years outside the U.S. really starting to drive some incremental momentum for you now. Just any other color you can add to that KFC momentum?

Yes, sure, Brian. I think it really, fundamentally starts with our focus on what we call RED, Relevant, Easy, and Distinct. As I travel the world and meet with the KFC teams, they are amazingly focused on making sure the KFC brand is more relevant, it's more easy, and more distinct. Now in some markets, we may go as distinctive and not as good as relevant and others we go as relevant and they're not as good as distinct. But I think the fact that we got absolute just laser like focus on making sure that each KFC Brand in each country delivers on RED. I think that's certainly helping. I think secondly, as I did say in the prepared remarks, I think the value like a pound of food for $3 which KFC U.S. run, that that may sound like simple communication. It's both distinctive and it's relevant. So I think that's great, the innovation that's happening. We're seeing a lot of great innovation, flavor innovation on existing forms and new form innovation also occurring. And then, Brian, as you rightly said, we've got delivery in click-and-collect and equally in the U.S. we're excited that later this year we'll obviously do what Taco Bell has just done which is put marketing muscle and effort behind delivery which we think we will accelerate that. So it's -- there's no silver bullet. It is really doing RED incredibly well; value incredibly well; innovation incredibly well; and a growing contribution from delivery. I think all of that is sustainable going forward and that's why we remain very positive about the KFC brand.

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

Great, thank you. I have a question about Pizza Hut and it's sort of a two-part question. One is I know that you're repositioning the State and it sounds like dine-in is still quite a bit softer to go. But I guess I'm -- when I think about the U.S. so much a carry out and delivery business that the implication is that even that business might still be sort of muted in terms of comps. And I guess I'm trying to understand, is there a scenario where you're repositioning the state that's happening at a time when aggregators are taking away some of the growth that the Pizza category has had kind of to itself for so long. And then the related question is what are you seeing in terms of the customers on Grub find you through Grub versus the Pizza Hut App, is it -- I assume a very different customer base as we've heard from other restaurants but given that Pizza Hut is so well known for delivering Pizza, I was just trying to figure out to what extent the Grub orders are incremental? Thanks.

Sure. Well I just say dine-in does lag by that seven points on the sales growth between off-premise and on-premise and so that is obviously a headwind that we continue to have to work with. I do think that the Pizza Hut brand particularly in the U.S. and internationally is doing a much better job at the foundations or the fundamentals. As David pointed out in his prepared remarks, temperatures improving, delivery times are getting lower. I think all of that is working, we're sustaining and we've got franchisee support to sustain obviously great value, so the $5 line-up. Adding Pizzone which is both great innovation and at $5 obviously I think will continue to help and you will see that play out I think later in the year. With regard to your question on aggregators, I think it's -- there's obviously a negative impact but it's hard to measure what the cannibalization effect is of aggregators on Pizza Hut, on the Pizza category. I think what's exciting for us is that we still think there's obviously a huge opportunity for Pizza Hut in the $40 billion Pizza delivery business to do better. But at the same time, the non-Pizza delivery market in the U.S. is worth about $100 billion. It's growing at 15% and now we're going to leverage Taco Bell and KFC to take advantage of that opportunity. So, yes, a little bit of negative impact but I see this whole opportunity of growth and delivery to be an upside for us not a negative. And as we've only got about 200 stores at the moment which are actually going through the Grubhub marketplace, it's not having a massive impact on our business. But I think the point you made is we are excited by the incremental customers we're seeing come through that marketplace. But obviously the vast majority of the business is still coming through Taco -- through our Pizza Hut traditional business.

Yes, I mean and on the Grubhub piece, I think we are encouraged that there are different customers on Grubhub versus many of the customers that use Pizza Hut directly, so we are accessing customers through their platform in many cases where we wouldn't be able to access. That's why we're excited about the test. Back to the other part of your question, Sara, on the dine-in in the State, yes, Pizza Hut in the U.S. is the vast majority of our business comes through the delivery carry out channels but still close to half the assets are dine-in assets and there is still a long process to take those assets often which are in the wrong part of the trade area and reposition them to the right part of the trade area or if they're in the right part of the trade area and oftentimes upgrading the assets to modern standard. So the challenges of the dine-in in the state are very different internationally versus the U.S. In the U.S., we already have 90% of our business is off-premise but the assets are still a problem. Internationally, half of the assets are dine-in and the business has more of a 50/50 split to it so very healthy assets in most cases around the world though. Before we move on to the next question, I just want to correct a comment from the prepared remarks, some of you probably caught, there was a typo. As far as the 2018 impact from the KFC, UK supply disruption to Yum! that impact was 1% on core operating profit in the second quarter, not the 5% that was stated. So I just want make sure we all set the right number there.

Next question, please?

Our next question comes from the line of John Ivankoe of JPMorgan.

Hi, thank you. At first and there are two I think relatively small questions, in terms of Telepizza, I mean it has been discussed before that this transaction would be net neutral to earnings. It actually does look like it was accretive in the first quarter. So could you make a comment on that? And if there's some type of thought of what Telepizza will mean to operating income growth in fiscal 2019?

We continue to believe that Telepizza will be neutral from an earnings standpoint. What you may be seeing is the increase in franchise revenues relative to expenses, some of that's more related to QuickOrder than it is to Telepizza. But again we think Telepizza from a long-term standpoint, it's a great acquisition for us, we love their management team and their ability to leverage them over our existing markets and we're excited about how the integration is going and what it means for us from a growth potential. But the impact in Q1 was flat. There really was a profit impact from Telepizza.

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

Good morning, thank you. I'm wondering if you could talk a bit more about the QSR promotional or the QSR value environment that you're seeing in the U.S. And if that's had any impact on your value strategy for the balance of the year depending on whether you think the industry becomes less promotional or not. It seems like your brands remain as focused on value as ever currently. So do you think there could be greater benefits as that gap appears on value increases? And I guess just kind of related to that maybe if you could quickly comment just on the importance of franchisee buy-in on value that you're seeing which it seems like your system is seeing better buy-in from franchisees here than most? Thanks.

Yes, sure. So there are two parts to the question, look obviously the U.S. economy is in pretty good shape. We also, the GDP numbers for Q1 from the government, look I also do think though there is some sort of bifurcation going on in the marketplace which is there are certainly people that are making a lot of money and there are certainly people where value will always remain incredibly important. And so I think that our focus on as we've said earlier building these relevant, easy, and distinct. Part of being relevant is to make sure we've got the right value proposition for every customer we run in the marketplace. So we're going to focus on value. We're going to focus on innovation. We're going to focus on delivery and click-and-collect as we -- as we've talked about. And it really is sort of how that gets to your second question which is the ability for us to sustain value on all three brands is predicated on our ability to get franchisee alignment. And I think what David and I are fundamentally focused on is making sure that at the core, franchise unit level economics are getting better. And as they get better then obviously franchisees will hang-in on value, they will invest in new assets, refurbishing assets, they'll support innovation. And so, yes, I think the economy is in pretty good shape in the U.S. There are people who are benefiting, people who are not benefiting. We're going to stay on value, we're going to stay on innovation, we're going to stay on building these relevant, easy, distinct brands. And I'm really excited that the brands have worked incredibly hard with their franchise partners to ensure that we can sustain this sort of what I call really strong model going forward.

Next question, please?

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

Hi, good morning. Just one clarification, then a question. On the clarification, David can you tell us what tax rate you've embedded in your $3.75 plus target and whether that's changed. And then my real question is on KFC development globally that number was very strong. If I look back at the history, it's usually Q1 tends to be the low point for the year for the number of units opened. So I wanted to ask is this kind of a timing issue where you're starting to smooth out the openings across the year or is this kind of real momentum in the development cycle. And can we expect that kind of step-up to continue as we look at the rest of the year? Thanks.

Sure, David. On the tax rate question, the guidance for 2019 is 20% to 22% and despite the low tax rate in Q1, we still feel like that's the appropriate guidance for the year. If you look back in past years, we do have a little bit of a cadence of having a lower tax rate in Q1 that's driven mostly by share-based compensation that tends to get exercised in the first quarter. Then on the second question on the KFC Global development, I mean we've been consistent in saying our goal is to ramp up the pace of development. We're pleased with the progress we've made. Obviously, Q1 in recent history was a record quarter for us in terms of net new units. And I do think the development momentum is widespread and will continue. We're confident that we can hit new highs this year versus last year. It isn't really sort of a timing issue. There is a good pipeline of deals for this year and for future years. You saw lot of the upside as in most previous quarters driven by Yum! China. And as I've talked about they're happy with the returns they're getting for KFC China so lots of reasons to be optimistic about global development.

Operator, we have time for one more question, please.

Thank you, sir. Our final question will come from the line of Chris O'Cull of Stifel. Chris O’Cull: Thanks. Could you guys talk about how customers are using the KFC delivery in the 2,200 stores in the U.S.? I mean what day parts are consumers using, is it more large party orders, individual orders, is it over under indexed with bone-in or boneless product. Any insights into how U.S. consumers are using delivery at KFC could be helpful.

Sure, Chris. It tends to be more focused, the dinner it tends to be larger packs. I always jokingly said, I think the Kernel 60 years ago invented the bucket realizing that one day we'd be delivering it because it's the perfect delivery vehicle. So I think what we're seeing is what we expected to see which is sort of a focus on dinner, a focus on big packs bone-in, and obviously it's incremental. And as I said, I think the bucket is a incredible delivery device. It really delivers piping hot, great tasting food. And I think that's also a benefit that the KFC customer is currently seeing which is getting restaurant quality food delivered to your house. So all going well. I'm looking forward to the launch of KFC delivery in the U.S. later in the year which I think will be an exciting time and we think obviously positive things will come out of that as well.

Okay. Just some closing remarks. First of all, I want to thank you, thank everyone for being on the call today. Second, I'm pleased that we're off to a strong start in 2019. In fact when I look at the metrics that best indicate the underlying health of the business, so those without noise some special items or mark-to-market on our Grub, our investment in Grubhub. I think there's a lot to be excited about. We delivered 8% system sales growth, 12% core operating profit growth, and 18% EPS growth. So I'm very confident that our enviable business underpinned by unrivaled culture will deliver lasting growth that maximizes shareholder value in 2019 and beyond. Thanks for being on the call with us today.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.