Ladies and gentlemen, thank you for standing by, and welcome to the Yum! Brands Q4 2019 Earnings Release. [Operator Instructions] Please be advised that today’s conference call is being recorded. [Operator Instructions] I would now like to hand the conference over to Keith Siegner, Vice President, Investor Relations, M&A and Treasurer. Sir, please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO; Chris Turner, our Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, 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 and relevant sections of our filings with the SEC to find disclosures and reconciliations of non-GAAP financial measures that may be used on today’s call. We’d like to remind you that the Habit Burger Grill transaction is subject to approval by their stockholders and other customary closing condition. This transaction is expected to be completed by the end of the second quarter of 2020. As such, please understand that we are limited in what we can discuss on today’s call. Please note the following regarding our basis of presentation. First, all system sales results exclude the impact of foreign currency. Second, Pizza Hut Division and worldwide system sales, include the benefit of the increase in units in the fourth quarter of 2018 related to our strategic alliance with Telepizza. Same-store sales and net new unit 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. No significant impact in our income statement or cash flows as a result of this accounting change. And last, please note that the fourth quarter 2019 results include a 53rd week. However, figure stated on this call will exclude the 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-K filing. First quarter 2020 earnings will be released on April 29, 2020, with a conference call on the same day. Now, I’d like to turn the call over to Mr. David Gibbs.

Thank you, Keith, and good morning, everyone. 2019 was a truly historic year for Yum!. First, we successfully completed our three-year transformation and delivered on our bold commitments. Second, we surpassed two milestones that are a testament to Yum!’s incredible scale, as we eclipsed $50 billion in system sales and mark the opening of our 50,000 restaurant. None of this would have been possible without our unrivaled culture and talent and over 2000 franchisees who run 98% of our restaurants globally and employ more than 1.5 million restaurant team members. Because of our journey to become more focused, franchised and efficient, we’re now in a much stronger position to accelerate growth and improve franchise unit economics over the long-term. Before I begin, I want to share a heartfelt thank you to everyone within the Yum! family who made these results possible. I especially want to thank Greg Creed, who led Yum! as our CEO for five years with his signature blend of smart, heart and courage. I also want to thank Tracy Skeans, who was uniquely essential to this massive transformation. In her dual role as Chief Transformation Officer and Chief People Officer, Tracy helped shape Yum! direction all while working to make our culture more collaborative and inclusive and getting us in the best position to expand our capabilities with new talent and strategic investments. As an example on the talent side, in 2019 we elevated experienced Yum! executive to critical global growth role. Tony Lowings to KFC CEO, Artie Starrs to Pizza Hut CEO, Gavin Felder to Chief Strategy Officer and Nikki Lawson to Taco Bell Chief Brand Officer. We also brought in fresh thinking and capabilities from outside Yum!, with Chris Turner as Yum! CFO, Mark King as Taco Bell CEO, Clay Johnson as Chief Digital and…

Thank you, David, and good morning everyone. Today, I’ll discuss our fourth quarter and 2019 results, 2020 guidance and our remaining growth drivers. During the fourth quarter, we delivered system sales growth of 7%, same-store sales growth of 2% and net new unit growth of 4%. As expected, growth in the second half of the year was lighter than the first. But it was still consistent with our long term growth model. Standouts for the quarter included KFC, with 3% same-store sales growth and a remarkable 7% net new unit growth. And Taco Bell also had another great quarter with 4% same-store sales growth and 4% net new unit growth. This performance translated into core operating profit growth of 9% for the quarter. Next, I’m excited to say that we achieved or exceeded each component of our 2019 guidance. First, and as David mentioned, our consolidated system sales growth was 8%, with 3% same-store sales growth and 4% net new unit growth. KFC and Taco Bell both met or exceeded our long term of 2% to 3% same-store sales growth, bringing the aggregate Yum! Figure to the high end of our 2% to 3% range. We also had our second consecutive record breaking year for development with 2,040 net new units. Second, we met our full year core operating profit growth guidance of low double digits. Core operating profit growth for the year was 11%. Third, net CapEx for the year was $86 million, which was slightly below our guidance for 2019 owing to generally tight controls over all buckets of spend. Four, we met our target G&A at 1.7% of system sales in 2019. After running below our guidance through the first three quarters in the fourth quarter aggregate G&A was above that three quarter run rate, primarily owing…

[Operator Instructions] Your first question will come from the line of David Tarantino with Baird. Go ahead.

Hi, good morning and congrats on a good 2019. My question is about the U.S. Pizza Hut business. And first, could you just maybe clarify your comments about the choppiness that you expect in 2020 related to your largest franchisee? Perhaps what are the range of outcomes there that you’re considering at this point? And then secondly, my main question involves around whether you’re contemplating an injection of capital into the business, whether to support the existing franchise base in some way, like you did with the transformation agreement? Thanks.

So thanks for the questions, David. Obviously, on Pizza Hut U.S., as we mentioned, we are focused on driving the turnaround in that business. As David mentioned, we’re excited about the new leadership that we have in place there and their focus on the fundamental improvements to business on both the way that we translate the brand to consumers and on the asset base. But obviously, there’s a lot of work to be done there. You asked specifically about our largest franchisee. We typically do not go into detail on specific franchisee situations. But as we’ve discussed before on the asset side of the equation of Pizza Hut U.S., we are – the majority of our franchisees are really good partners, they are well capitalized, committed and capable and continue to drive the business in the right direction. We do have a handful of situations where we are working with the franchisees to get them into a better place. Obviously, each of those processes take time and do create some choppiness as a result. As an example, we do have one market in the U.S. where we had a franchisee whose assets simply weren’t up to our standard. We’ve worked with them to exit them from the system, and we’re well down a path to getting a new franchise operator into place. And so hopefully, that gives you a general feel for the situation and why there may be some choppiness as we work toward a better asset base.

Yes. I guess – and what I would add, David, I know there’s concern about injecting capital. I understand your question. In the past, we have done two transformation agreements, one with KFC U.S., one with Pizza Hut U.S. Those were done at a point in time in exchange for certain rights that we gained. For Pizza Hut U.S., we got more marketing contributions and other rights related to operational standards. As Chris mentioned, that helps us, in some cases, actually shut down the market and get the hands – the market in the hands of a better operator for that market. So as I mentioned in my prepared remarks, we’re committed to an asset-light model. If we do something with capital, whether it be going out to buy The Habit Burger Grill or some kind of an agreement with franchisees, that’s done because there are some benefits to Yum!, but we are really committed to the asset-light model.

Next question, please.

Your next question is from the line of John Glass with Morgan Stanley. Please go ahead.

Thanks very much. I did want to just ask a follow-up on Pizza Hut if I could. What was the bad debt expense in the fourth quarter? And how do you – what have you baked into your model? Or how should we think about what that debt may represent as a pressure on earnings in 2020? And can you also talk about Kevin’s early moves at Pizza Hut? What has he done? I understand maybe there’s some change in pricing or franchisees’ ability to change pricing. What are the things that early on he’s really focused on specifically – I know driving sales generally, but specifically to help the brand?

Thanks. I’ll take your first question, and then I’ll let David follow on with some remarks. So on the bad debt expense, if we step back and think about in the context of Yum! globally, we collect north of $4 billion in royalties and other fees from over 2,000 franchisees around the globe. So you’re always going to have some situations that we are working through. There was an uptick in bad debt expense at Pizza Hut. Just to give you a sense for the numbers for the division, Pizza Hut Division globally. In Q4, bad debt expense related to royalties and digital fees was $8 million for the division, which was up $4 million year-over-year. And for full year 2019, bad debt expense was $22 million, which was up $12 million year-over-year. To help put it into some context though, this was related to just a handful of franchisee situations. And as I mentioned earlier, we are working through those. And the timing of how the steps play out, there may be some bad debt impact as we go through that, but that is part of the choppiness that we’ve described as we work through this. But hopefully, that gives you a sense and helps put it in the context of our global franchisee base and give you some point of reference for the number.

Yes. And then as far as Kevin landing in Pizza Hut, obviously, we’re all excited about having somebody with his talents working on the Pizza Hut brand in the U.S. Kevin, as you know, as the CMO and then the President of KFC U.S. really architected the turnaround of that brand and going back to the things that we know matter in our industry: having brand communications that resonate with consumers, that build the brand in a R.E.D. way; offering the kinds of value that appeal to consumers but that is also profitable for our franchise partners. And he is using that same playbook at Pizza Hut. It’s obviously too soon to start to talk about the specific tactics that he’s going to deploy, but I can say that a lot of franchisees reach out to me and say they’re excited to have Kevin joining. He spent a lot of time in the field with them, getting to know them and understanding their concerns. And I think it’s forming a good partnership with them and going to build on the great work that the Pizza Hut team has done in the last few years in strengthening the brand from a technology standpoint, launching loyalty programs, improving products, operational improvements, all the things that we’ve talked about in previous calls.

Thanks, John. Next question, please.

Your next question is from the line of Dennis Geiger with UBS. Please go ahead.

Thanks. Just following another year of strong development growth, wondering if you could talk a bit more about 2020 development, maybe just some of your most updated thoughts on puts and takes relative to that 4% long-term target. I know you called out the uncertainty related to the coronavirus and presumably, what goes on with Pizza Hut in the U.S., but any more thoughts at a high level on those two points? And any other potential puts and takes around the globe that we should be thinking about? Thanks.

Yes. Thanks, Dennis. It is really remarkable what the team has been able to do with development as we pulled back from building equity stores and the franchisees have picked up the development responsibility. As I mentioned in my remarks, passing 2,000 net new units this year, over 1,000 in the fourth quarter. These are numbers, I think, we’re all incredibly proud of. And I think what you’re seeing is it’s fairly widespread, right? Taco Bell opened over 100 net new units internationally this year for the first time off of a base of roughly 450. That’s pretty impressive growth, and that’s getting stronger and stronger. And the U.S. for Taco Bell was hitting new numbers. At KFC, very widespread. You’re seeing development, I think, with 99 countries, but we’re building new units last year at a number like – over 800 gross new units in the fourth quarter alone. And then even Pizza Hut International, about 450 net new units internationally. So the vast majority of our business is healthy when it comes to development and growing, and we expect those trends to continue into 2020. As far as specific things that may offset that, as we’ve talked about, we know we have a lot of Pizza Hut U.S. assets that are below our standards and need to close, and that could, on a short-term basis, have a negative impact on the pace of development. But we still feel very good about this 4% commitment in the long term and being able to grow at that pace. And I can tell you our teams around the world are excited about development. And obviously, we’ll talk about The Habit Burger Grill when we get past transaction closing, but that’s another positive when it comes to development for Yum!.

Thank you. Next question, please.

Your next question is from the line of John Ivankoe with JPMorgan. Please go ahead.

Hi, thank you. The question is on third-party delivery and also just overall order aggregators, what you’re learning in developed markets around the world and at this point seeing kind of how these markets are evolving in developed markets, whether you think these types of businesses continue to be an opportunity to drive Yum!’s various businesses and whether that opportunity also exists in the U.S. with obviously some context around some of Grub’s recent comments.

Look, obviously, delivery is an area of growth in our industry. Just to put it in context, I saw some NPD data recently. 3.4% of restaurant occasions are delivery. So while it’s a growing part of the business, it’s still – probably the headlines would imply it bigger than it really is. But it is growing, and it is something that our business is benefiting from all around the world. We are forming partnerships with the right aggregator by market that makes sense for Yum!, done on the terms that would make sense for somebody with our scale and our cloud in the marketplace. And you’re seeing it obviously be a little bit of a tailwind for us. I think the other thing I would point out is when it comes to digital, it’s not all delivery. Actually, the data that we’re seeing is the vast majority of digital orders are actually for carryout. So not to be left out, I think our teams are very focused on making sure that the click-and-collect model is working for us as well, not just the delivery model. There are costs to delivery today no matter how you cut it that adds significantly to the per-eater cost. And particularly for our brands, which are very much known for value, that makes the delivery occasion not appeal to our entire customer base. So as we always do, we are always about the customer and giving them what they want. So those customers that want delivery, we’re leaning in there. And for those that are more carryout focused or dine-in focused, we have programs for them, too.

Thank you. Next question, please.

Your next question is from the line of Sara Senatore with Bernstein. Please go ahead.

Hi. Thank you. I have a question about China and then just a quick follow-up on Pizza Hut in the U.S. I understand there’s lack of visibility on the outlook in China, but we heard from your China licensee last night who’s just talking about 30% of the stores being closed and the rest comping down 45%. So maybe you can just help put some numbers around implications. Even if it’s just – if I estimate maybe 1 point of comp globally out of KFC and Pizza Hut, it’s something like $0.07 of EPS to your full year EPS. If you could just help kind of quantify how we think about the implications of 1 point of comp decline or store closures, any kind of numbers. And then just a follow-up on Pizza Hut. You mentioned – you referred to an acceleration agreement with Pizza Hut. I think the last one kind of closed out at the end of last year, and now a lot of the controls revert back to the franchisees. Are you seeing anything different about how they’re approaching whether it’s advertising or store closures? Just any kind of strategic change now that that transformation agreement has concluded.

So thanks. Good questions. Let me start with China. So on the China situation, I think, most importantly, this focus on the health and safety of customers and team members. That’s the top priority. And we really appreciate how Joey and the Yum China team and the authorities that they’re working with there have that as their focus. So that remains our top priority. As you mentioned, you heard their call last night. For those of you who haven’t seen it, I think it would be really helpful to go review their comments. We thought they did a very nice job of summarizing the situation. One of the key elements, of course, is that it’s a dynamic situation that is a bit hard to predict with a lot of precision right now. Maybe just to give you some numbers and you can kind of work through the math. 1 point of same-store sales growth in China for a full year would translate to 19 basis points of same-store sales growth for Yum! and would also translate to $2.9 million in Yum! operating profit for the year. So hopefully, that gives you a metric that you can use as you work through your estimates. But again, the situation remains dynamic. We’ll continue to stay connected with them. The other place that we’re monitoring closely is the impact outside of China. I can tell you that right now, obviously, as you know, the situation is most active in China. Outside, there really are no store closures that we have as of right now, but we are staying close with those teams and monitoring the impacts.

Yes. And on the question about the Pizza Hut acceleration agreement, I know there was a comment about controls reverting back to franchisees, but the reality is what was in that acceleration agreement made permanent changes to the franchise agreement. So the royalty increase, some part of the marketing contribution increase, some of the operational standards that we now have, those all stayed – commitment to loyalty and technology all stayed in the agreement. As far as franchisees go, obviously, nobody’s happy seeing same-store sales growth negative, and I think, they’re excited about Kevin joining, as I mentioned earlier. And I’m pleased to say that they’re partnering with Kevin. And I think they’re working constructively together as we continue this turnaround of the Pizza Hut U.S. business, which we mentioned repeatedly is something that we’re not counting on a dramatic change in the business in the short term, but we’re proud of the work we’re doing to build a stronger business in the long term.

Thank you. Next question please.

Your next question is from the line of Brian Bittner with Oppenheimer. Please go ahead.

Thank you. Good morning. On the Pizza Hut U.S. business, can you give us an update on a broad range or ballpark range of unit closures that you do expect in 2020? And just a follow-up on the Habit Burger acquisition. Very small acquisition in the grand scheme of its impact to Yum! Brands in the near or medium term, and I totally understand the opportunity it provides your franchisees. But can you just talk a little bit more about what caused you to possibly maybe pass on something that would be larger and more impactful to investors?

Yes. So good questions. I’ll take the first one. I think on the Pizza Hut U.S. situation, as we mentioned, given the processes we’ll work through with a handful of franchisees, there will be, as we’ve said, choppiness in the situation as we go forward. I know we had shared a number of 7,000. I wouldn’t get too wrapped up on that number as, from quarter-to-quarter, the choppiness will be a little bit hard to predict. But we do think, in the long term, that there is opportunity for growth in the network, but in the near term, it’s going to continue to be choppy.

Yes. As far as The Habit goes, we’ll – obviously, we’re limited in what we can say at this point until the deal closes assuming we have shareholder approval. But what we have said publicly, which is what we’re excited about is this is a great risk/reward. And so as you said, Brian, it’s a small investment but we’re buying something that has a lot of growth potential. As you know, we’re all about growth. We’re not interested in buying big businesses that are of the same scale of ours that don’t have a lot of growth. We want to buy something – we’re looking for the upside that comes with that growth. We think, given our scale and our capabilities, they match up with Habit very well, and we should be able to unlock growth, give our franchisees a great new growth vehicle in the U.S. and given our ability to take things to international markets, take this brand outside the U.S. in a bigger way than they have already. But we’ll talk about this a lot more as we go forward, but I think the summary would be we really like the risk/reward in terms of the size of what we have to pay to get something with the potential that it has.

Thanks, operator. We have time for one more question.

Your final question will come from the line of David Palmer with Evercore ISI. Please go ahead.

Thanks. Thanks for squeezing me in. What – if we were to talk about 2020 in terms of your – versus your algorithm and excluding coronavirus, which is obviously a discrete health crisis this year, and the 53rd week, what sort of year were you thinking about versus that algorithm? And of course, in that is how important something like what you’re going through with Pizza Hut U.S. is to that. And then you touched – you said some comment about coronavirus Asia ex-China. I’m wondering, are you already seeing an impact in some way in other parts of your Asia business. Thank you.

David, just taking the last part of that first. Yes, we weren’t trying to imply that we’re seeing any impact. We were actually trying to put people at ease that we haven’t seen an impact and we haven’t seen any store close or anything of that sort. But obviously, we’re prudent to be looking at everything related to coronavirus and planning for all different eventualities. As far as the 2020 algorithm goes, I can tell you we entered 2020 with a plan to deliver on our long-term algorithm that we all felt good about despite all of the noise we might have from Pizza Hut U.S. or anything else. I mean when you have 2,000 franchisees and 50,000 restaurants and you are in 287 brand country combinations, not all parts of the business are always humming all the time, and that’s always taken into account as we enter a year. But we felt good about the plan going into the year. Obviously, the coronavirus and the impact it has on China has a significant impact on us and our financial performance this year and ability to hit that algorithm. But other than that, I think we feel good about the business. We obviously have challenges within the Pizza Hut U.S. business related to our large franchisee, which we’ll deal with, we’ll get through and feel good, feel really great actually about the long-term health of the business.

So with that, I’ll just close the call by saying 2019 was truly a milestone year for us. We successfully delivered on all the commitments that we talked about in 2016, which we’re looking past now as we go forward, but really, I’m incredibly proud of the team and what we’ve accomplished. We started out that journey in 2016 talking about the fact that, hey, we have a bold goal of getting to 7% system sales, and I know a lot of people didn’t believe that Yum! could do that. Well, we just concluded a year where we delivered 8% system sales. Even if you back out Telepizza, it was 7%. So we hit that bold goal, and we’re incredibly proud of that. We opened over 2,000 restaurants last year, representing 4% growth and crossed the 50,000 unit mark. That’s sooner than we had anticipated back in 2016. So we’re really coming out of this transformation much stronger than we were entering it, and it’s across all aspects of the business. We’ve really strengthened the team given all the people I’ve talked to you about on this call that we’ve added and folks that have been promoted. We’ve certainly improved the culture. We’re operating more collaboratively. And to do that during all the turmoil of the transformation, I think is a truly special accomplishment. I think our strategy is tighter than it’s ever been with our four growth drivers, our Recipe for Growth and our Recipe for Good. And then we’ve got these extra areas of growth like The Habit Burger acquisition, which I’m really looking forward to talking to you about Habit and Russ Bendel, their great leader, and their team when we get on the next earnings call. So in summary, the business model is working. We’re diverse, world’s largest restaurant operator with more units than anybody else, and we couldn’t be more excited about the future. And with that, I appreciate everybody’s time today.

Thank you. Thank you again for joining today’s conference call. You may now disconnect.