Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Yum! Brands Second Quarter 2019 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Keith Siegner, Vice President, Investor Relations, Corporate Strategy and Treasurer. Sir, you may begin.

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 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 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 are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Please be advised that if you ask a question it will be included in both our live conference and in any future use of the recording. We'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. Third quarter 2019 earnings will be released on October 30, 2019, with the conference call on the same day. Now, I'd like to turn the call over to Mr. Greg Creed.

Thank you, Keith, and good morning, everyone. We are pleased to report another strong quarter with system sales growth of 10% including 5% same-store sales growth and 7% net new unit growth. Focus on our four growth drivers, increased collaboration and our unrivaled culture continues to fuel these results. As usual, David and I will talk you through the lens of our four key growth drivers. I'll provide an update on our relevant, easy, and distinctive brands or RED for short, as well as unrivaled culture and talent. Then, David, will discuss bold restaurant developments, unmatched franchise operating capability and some additional and exciting news on talent. I'll begin with our three RED brands. I am thrilled to report that KFC delivered its 16th consecutive quarter of positive same-store sales growth. Encouragingly, this global powerhouse is seeing broad based strength across the world with standout performances across many of our largest markets which translated into a truly impressive, global system sales growth of 10% with same-store sales growth and net new unit growth of 6% each. Now, many of you have been asking, what’s fueling the recent broad based performance? Well, there are a number of factors including the consumer is healthy, KFC has a robust digital and delivery strategy globally with over 12,000 restaurants delivering on just one metric. And broadly speaking, at Yum!, I’ll focus on being a world-class franchisor has led us becoming more intentional about fostering collaboration and leveraging the power of Yum!. A perfect example of this is the KFC Annual Market Planning Meeting, which is one of the first global collaboration meetings we instituted and which continues to gain momentum and impact each year. In fact at our recent 2019 KFC AMPM had a record number of franchisee and team members in attendance. We…

Thank you, Greg and good morning, everyone. Today, I’ll discuss our second quarter results, our remaining transformation initiatives, bold restaurant development, unmatched franchise operating capability and some exciting news on unrivaled culture and talent. To begin, our second quarter results, core operating profit growth increased 18%. And as Greg mentioned, we delivered system sales growth of 10%, same-store sales growth of 5%, and net new unit growth of 7%. A major contributor to this success was KFC, our largest division in units and profit contribution with 6% growth in both same-store sales net new unit growth driving 10% system sales growth in the quarter. Contribution to the KFC’s strength were again broad-based. Japan and Africa which together represent 8% of KFC’s system sales performed particularly well while easier laps at KFC UK were also beneficial. And not to be left out, Taco Bell had another tremendous quarter with 10% system sales growth driven by 7% same-store sales growth. Our second 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 therefore 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’s 2018 core operating profit growth was 5% for the first quarter – 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, 1% for the second quarter, and 1% for the full year. Again, now that we have lapped the disruption, there will be no benefit from easier laps going forward. I’ll now update you on our 2019 EPS outlook and…

[Operator Instructions] Our first question will come from the line of David Palmer with Evercore ISI.

Thanks. Just a little bit of a longer-term question on Taco Bell and actually international development of Taco Bell. There is recently a podcast with Liz Williams who was interviewed by Novak and I listened to yours too, Greg. But those are pretty good interviews and it reminded me that you have one of your better executives working on that and you just mentioned that 600 unit development deal. I am wondering if India was maybe uniquely fertile opportunity and there be that’s more unique or will there be other development deals around the corner. Thanks.

Sure, David. I think, yes, obviously it was a great deal, 600 units in India and the business in India is doing incredibly well. It’s very relevant. We made it easier and it’s very distinct. I am also happy that, in the UK and Spain, we now have over 50 units in each of those. We have opened four units in Australia right now. Those are off to a really good start and in fact, both our New Zealand franchisee and one of our Australian franchisees has announced that they will be expanding our presence in Australia. So, I do think we are at an inflection point. I think our plan is to open over a 100 units internationally. Taco Bell this year, which will be the first time are over a 100. So we are seeing good progress. I think the brand is very relevant. It’s very distinct and I think it’s connecting with our millennial audience, not just in the U.S. but globally. So, David?

Yes, I think, and one of the keys to India is, we have been in added in India for quite some time and we now have the perfect partner Burman Hospitality and given the fact that we've been building the brand over time and now we have the right party – partner with that’s ready for growth. That’s going to always be our challenge around the world is establishing the brand and finding the right partners and as you say, Liz is doing a good job of going out and striking those deals with the right people on building the brands.

Thank you. Next question please?

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

Hi, thank you. A couple of different questions, I think, related, I mean, we’ve talked a lot about global scale and I just wanted to get a sense of how you view your current franchise community and one thing that we have seen is a fairly common theme is consolidating franchisees around the world, allowing franchisees themselves to have scale from every different perspectives. How much more of that do you think should occur within the overall Yum! system? Is there still an opportunity from here to accelerate unit growth? And I’d like to ask just because that there is an undercurrent that’s discussed about this, is how you are monitoring the leverage that the franchisees are taking giving you confidence that they can continue or maintain their development even when this cycle eventually comes to an end?

It’s a good question, John. As you know, our franchise-base tends to have the larger typical franchisee has about 25 stores which is much bigger than most in the industry. And there are pockets around the world where we would be encouraging consolidation where we do have a more fragmented base in a country. But in general, we like the model of having bigger, better capitalized, more capable franchisees. We view that as a competitive advantage that we have really professionally-run organizations helping us to build our brands. But I don’t think we have some – to answer your question, I don’t think we have some big strategy to consolidate. We already have a pretty large number of stores for a franchisee. And then as far as monitoring leverage obviously, as part of being a world-class franchisor, we are putting the brands in the hands of our franchisees and we need to make sure that they are all in the best financial health and most capable to grow the brands. That’s a big part of what we do working with franchisees to make sure they have the right kind of financial structure to succeed. And with 2000 franchisees, there will always be situations that we have to attend to. But in general, around the world across the three brands, we feel like our franchisees are generally in good health.

I think they are also very engaged in their business right now. We had record attendance of the franchisees at the recent three brand AMPM. So, that’s really good to see when they coming to want to understand why the brand is performing well. What we are doing on a global basis, so we can share best practice. So, I am very encouraged by, I guess, their energy and their commitment to growing our three iconic global brands.

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

Hi, thank you very much. I have a question about Pizza Hut and in particular, traffic versus ticket. You mentioned that traffic grew globally and ticket I guess, the implication was a bit negative. I think we saw this in China. But are you seeing in other markets as well? In other words, maybe you could just talk about the puts and takes to that comp as you think about the shift towards delivery from dine-in and the impact of aggregators whether it’s just competitors or partners. And then just, a housekeeping, you are going to close some stores. I know said that will have an impact on unit count in U.S., but shouldn’t that be a tailwind for same-store sales if those are some of the weaker performing stores? Thanks.

Sure. Let me just – I’ll talk about Pizza Hut and all the brands. I think we had a good transaction quarter. Obviously, as you said, Pizza Hut U.S. trends were up 3, international trends were up run, Taco Bell trends were up 3, and our global KFC trends were also up 3. So, it was a strong quarter from a transaction point of view. I do think, at the same time, value, even though the customer is in a healthy position, value remains a priority and making sure that we don't walk away from both everyday and disruptive value. So it's about finding that fine line between everyday and disruptive value, and obviously, driving transactions. On the aggregator front, I think what we are clearly learning is that, there are people that are loyal to Pizza Hut. There are people that are loyal to GrubHub in our case. The way to grow our business is to increase reach and penetration. And our ability, I think to partner with both GrubHub and as a party to the sort of Pizza Hut brand enabled just to get broader reach and with broader reach and penetration, we're going to get transaction and sales growth. So, I hope that answers the question. But we are encouraged by our partnership with GrubHub. I think it's incremental. But at the same time, very focused on transaction growth for all three brands.

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

Thanks very much. Just following up on the transformation in the Pizza Hut US business, just first checking my math. I think it looks like you have got about 7,500 units in the US. So, a net closure of, say 500 over. I guess, the question is, what is that right? Two, over what period of time would you contemplate that? And maybe most importantly, what do you think the company's role in this is, is there going to be direct assistance in the form of maybe taking ownership in some of the stores at some point in time or some other financial assistance or is this all go through the franchise system and you are just an advisor in that process?

Yes, John, again your numbers are roughly right. I think we have as of the end of the quarter 7,449 Pizza Hut assets in the U.S. Just a clarifying comment on that, 6,100 of those are traditional restaurants and about 1,350 are express units. I know sometimes, as we calculate percentages of dine-in and stuff, you could use either base, but within our traditional base of 6,100 close to half are dine-in, as obviously as part of the 7,449 it's a smaller percentage. But, as far as the numbers and how the math works, it's hard to estimate how soon the timing of when a store will close and then, when the replaced unit will open. There will be gaps on some of those certainly. Our goal is to try to minimize those gaps. So, it's a little hard to pinpoint an exact number, but - and that's why we provided the guidance of the store count at any point in time over the next few years could dip down close to that 7,000. But we ultimately – we know that the economics of building a modern delivery asset work quite well for us and that any – for the most part, any area, trade area where a store closes, there should be the opportunity to rebuild the store in that area or somewhere nearby. As far as the capital required to do this, we are committed to the asset-light model at the 98% franchise and we think the economics of building a new unit stand on their own and we should have no trouble getting either existing or new franchisees ultimately to rebuild in these trade areas. But, as we get into the specific situations and sort them out, there may be some situations where we deploy a little capital in the short-term to flip a market and get it in the hands of somebody else and take our capital back out. So we'll update you on that part of the journey as well.

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

Hi. Good morning. And congratulations on such a strong momentum. Maybe a follow-up, David, on that last point on Pizza Hut. Will the closings in the U.S. be in fact lower volume units? So, if there is a net reduction in the units, would that have a smaller impact on the system sales, than on the unit count? And then, I guess secondly, a bigger picture question about KFC's momentum, which appeared very strong globally. So, just wondering how you are thinking about the sustainability of that trend, given all the drivers, you have in place across all those markets. Thanks.

I'll let Greg comment on KFC and then I will talk about Pizza Hut.

Yes, sure, obviously, David, as you saw the momentum was really broad probably the broadest momentum we've had in KFC. I think I give credit to Tony. We had probably been focused on driving what we call, one extra transaction, one extra occasion from a frequency point of view. And what Tony has got the business focused on, as I said earlier is driving reach and penetration, i.e. broadening the user base. We know exactly what drives both reach and frequency and what I am really excited is that, he and Catherine Tan, the CMO have pivoted the brand to really helping us drive the reach. And so I think that's also the reason why the transaction growth was so strong in the quarter at plus 3 internationally, which is really half of our same-store sales growth. So - and at the AMPMs last week, which we sat through, I think David and I was so impressed with the consistency of what we saw. People are focusing on a very clear, simple and aligned global brand positioning. They are executing it and a lot of the tactics that we saw, I think even across markets developing where consistently strong and I think broad based. So, we feel really good about the leadership of the brand, we feel good about the positioning of the brand. And we feel good about this idea, I think of pivoting a little bit from just trying to drive frequency to driving reach and frequency.

And on the Pizza Hut question David, your assumption is correct. The stores that we would be closing would be lower volume units. So we will have less of an impact on system sales. Just as a little bit more detail on that, if you think about it, we have a lot of stores that were built in the right spots 30 or 40 years ago in the trade area. But that's not the right spot today to have a modern delivery asset and if we can get those stores closed and then put in the right spot in the trade area for delivery, obviously there is going to be upside to sales for those units and better economics for the franchisee, better system sales and a better image to our consumer.

Thank you. Next question, please.

Your next question will come from the line of Dennis Geiger with UBS.

Thanks for the question. Just wondering if you could talk a bit more about Taco Bell's strength including anything additional to share on what you are seeing with delivery? And maybe if there's anything to call out on potential share gains kind of in the lower price point ticket items where maybe some other brands seem to be a little bit softer? And then, just to that point, looking ahead, any way to help kind of frame Taco Bell's back half of the year in light of the strength last year including any high-level thoughts, Greg, maybe on how you feel about the products and the marketing pipeline et cetera? Thank you.

Sure. I think when you deliver a plus seven on 3 trends you are doing everything really well and I think that's very true of Taco Bell obviously delivery is helping the business. Value continued to help the business. The innovation is really spot on. They are doing great cultural icon things like the hotel, which sold out in two minutes. I probably had more customer complaints about they couldn't get a room at the hotel than I've had on anything in Taco Bell in the last five years. So, I think they are doing very well. The calendar for the balance of the year looks strong. Obviously, we do start to roll out some pretty big numbers. Q3 and Q4 we are rolling out, I think plus 5 and plus 6. But I hope, I think we feel good about two year trends hopefully can be, I guess, pretty much where we were - and maybe in the first half or just a little bit were softer, but just a little bit - a little bit softer maybe, yeah. But I still feel good that the brand is in a great shape, doing the right things and we feel good about the long, long-term for this brand.

Yes, I mean just to comment on sales. Obviously, we had a very strong first half of the year. But we do expect trends to return to more of our long-term guidance range in Q3 and beyond as laps get tougher. But we are obviously pleased with the progress in the first half of the year.

Next question please.

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

Great. Thanks and Greg please add me to the customer complaints about not getting hotel reservation. You know, just following up on Dennis’ questions, it's been pretty well publicized there is a partial shortfall in 10-inch tortilla at Taco Bell in the first week or two of July? And so, you alluded to the stunning 7% performance in 1Q. Can you speak to the scope of the shortfall? And importantly the impact this had on July sales? Any residual drag we should think about as we head into August, just from consumer awareness, the replenishment is still potentially taking hold? Thanks.

Yes. Sure, well, the supply issue was limited to 10-inch tortillas, so things like quesadillas and burritos. It was, it was also limited regionally. It wasn't across the whole system. It probably impacted us for about nine days and did it have an impact on sales? Yes. Was it material? No. What we clearly – was it clearly unacceptable to run out of the core menu item? Yes. Have we taken them out with our supplier? Yes. So, but I think the key takeaway is, it had an impact, but we don't believe it was a material impact. And we, our objective is to make sure we don't obviously run out of core menu items going forward.

Thank you.

We have time for one more question, please.

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

Thanks for sneaking me in. Can you just talk a little bit more about the accelerating unit openings we are seeing at KFC globally? I know China is helping here. But outside of China, it's really strengthening and you are growing that portfolio at a 6% clip now. And with the strength in comps, it's just hard to see KFC slowing its unit openings. So, is this just a new normal for KFC? Is it going to be a system sales grower that's consistently above your overall kind of at least 7% trend you think about for your portfolio? Anything else you can say about that would be helpful?

Yes, I think we're really pleased, obviously with the progress we've made on ramping up KFC development and as you know, it keeps getting stronger every quarter. It obviously helped China, as you saw just up their guidance for unit development and that China is having a lot of success with KFC. We are not going to really provide guidance by brand, development and obviously some of the tailwinds we have going on at KFC from new unit development will help offset a little bit of the challenges that will have on unit count at Pizza Hut, which is why we think when you net it all out over the long-term, we will be able to continue to grow Yum! that's 4% rate on average. As the base keeps getting larger, that means that unit counts will keep going up. But KFC is having widespread success. You can see it in the numbers. System sales growth all - and that leads to better unit economics and franchisees are putting their money behind those better unit economics and building more stores.

Okay. Well, thank you everyone for being on the call today. I am thrilled to be able to share such strong Q2 results with you with obviously broad based contributions from each of our iconic brands driving impressive same-store and system sales growth. And we have long expected and discussed a slower growth second half of 2019 owing to more challenging laps and the loss of some discrete benefits like lapping the UK, KFC UK distribution disruption. However, I am 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. Appreciate it.

Ladies and gentlemen this concludes today's call. Thank you all for joining and you may now disconnect.