Good morning and welcome to the Fourth Quarter 2021 Yum! Brands, Inc. Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jodi Dyer, Vice President, Investor Relations. 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 CFO; and Dave Russell, our Senior Vice President, Corporate Controller. Following remarks from David and Chris, we'll open the call to questions. Before we get started, I would like to remind you that this conference call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this announcement and 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 definitions of non-GAAP financial measures and other metrics that may be used on today's call as well as reconciliations of non-GAAP financial measures. Please note that during today's call, all system sales and operating profit results exclude the impact of foreign currency. We will no longer be providing an update on temporary store closures as we ended Q4 with less than 1% of our stores temporarily closed. As a reminder, temporary store closures only include stores that were fully closed as of the end of the quarter but have or are expected to reopen. For more information on our reporting calendar for each market, please visit the Financial Reports section of our website. 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 would like to make you aware of upcoming Yum! investor events and the following. 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 earnings will be released on May 4, 2022, with the conference call on the same day. Now, I'd like to turn the call over to Mr. David Gibbs.

Thank you, Jodi and good morning, everyone. As we reflect on 2021, I couldn't be prouder of the collective accomplishments of our world-class franchise partners and collaboration of our global teams, guided by our Recipe for Growth and Good. While the last two years have been the most challenging operating environment we've ever navigated, we exit 2021 stronger than ever with over 53,000 global restaurants. Compared to 2019, we've nearly doubled our digital business. System sales have grown over $5.5 billion and operating profit has grown over $200 million. Additionally, since 2019, we've added another iconic brand and closed on three technology acquisitions, all while launching our global Unlocking Opportunity Initiative with a $100 million commitment over five years investing in equity and inclusion, education and entrepreneurship, the cornerstones of our Recipe for Good. In 2021, we opened 3,057 net new units, driven by 4,180 gross unit openings, with meaningful contributions from each of our brands, marking the strongest growth year in our history and setting an industry record for unit development. To put that into context, as the world's largest restaurant company, we opened a new restaurant on average every two hours. This speaks to the health of our business; iconic brands; capable, committed and well-capitalized franchise partners; and strong unit economics. This is yet another significant development milestone on our ongoing growth journey, providing customers with access to our brands through a variety of restaurant formats and on- and off-premise ordering channels. Now more than ever, we've leaned into the structural advantages of our diversified global portfolio by leveraging our unmatched global scale, sophisticated supply chains, marketing and consumer insights expertise and our growing digital and technology capabilities to fuel growth and deliver strong results. Even as dining room sales recovered throughout the year, we continued to grow…

Thank you, David and good morning, everyone. Today, I'll discuss our fourth quarter financial results, Bold Restaurant Development and Unmatched Operating Capability as well as our strong balance sheet position and capital allocation strategy. I'll begin by discussing our financial results. We finished the year strong, opening a record-breaking 4,180 gross units or 3,057 net new units, resulting in 6% unit growth for full year 2021. A robust 10% same-store sales growth helped us achieve 13% system sales growth, driving full year core operating profit growth of 18%. That is a tremendous outcome given the inflation, labor, supply chain and consumer mobility challenges our brands faced in the back half of the year particularly in Q4. Q4 results also reflect impressive performance. System sales grew 9%, led by same-store sales growth of 5% or 4% on a two year basis, accelerating from Q3. Strong underlying profit growth was masked by elevated G&A levels owing to higher incentive compensation as a result of our strong full year results and the normalization of Taco Bell company-owned restaurant margins in the quarter as previously signaled. We anticipate quarterly variability in our company-owned restaurant margins as we remain focused on balancing relative value for our customers while protecting margins in the long run. To that end, full year 2021 Taco Bell company-owned restaurant margins were in line with our historical range of 23% to 24%, virtually unchanged relative to 2019 levels. This demonstrates our ability to drive strong top line results while managing profitability in an inflationary environment. Our Q4 ex special EPS was impacted by two items. First, we recorded a $35 million pretax gain on our investment in Devyani International Limited. Second, we had a higher-than-normal tax rate for the quarter due to a tax reserve related to a prior year filing…

[Operator Instructions] The first question comes from David Tarantino with Baird. Please go ahead.

Hi, good morning. My question is on your outlook for 2022. And Chris, I think you mentioned that you're planning it to be on algorithm for comps and unit growth. And specifically on comps, 2% to 3%, it looks a little maybe conservative in light of the fact that many of your markets will still be cycling some issues related to COVID, so arguably could see a recovery phase as you move through the year. So I just wanted to ask if you could give some context to that 2% to 3% outlook and whether you view that as a baseline that could prove conservative or if there are any offsets that we should consider as we think about the year.

Yes. Thanks, David. I think we view all of our brands as having strong momentum coming out of 2021. Our long-term growth algorithm is just that, it is our long-term algorithm and we feel confident in delivering it in 2022 and beyond. You do have lots of puts and takes around the globe in terms of lapse, in terms of where Omicron is in any of our given markets but we feel good about the momentum that each of our brands have. And so we're always going to strive to deliver the algorithm and find ways to beat it. And so that's going to be our aspiration but the long-term algorithm sort of defines the plan.

The next question comes from Jared Garber with Goldman Sachs. Please go ahead.

Hi, thanks for taking the question. Actually, somewhat of a follow-up to the prior question just on the comp algorithm as we look to next year. It looks like in today's results, the average weekly sales growth across the brands didn't exactly line up with sort of the comp growth so there was some noise in between those numbers. And I wonder if that maybe is what's driving potentially some of that -- what David said as some conservatism in the comp algo. So I just wanted to understand maybe if there's any specific drivers there, if it's just lapse on a year-over-year basis in some of these markets or if it's maybe lower productivity units that are being opened. Any color there would be really helpful.

Yes. So when we think about how same-store sales and net new units add up to overall system sales growth, on that net new unit number, there are always going to be some factors like timing of when the stores open within the quarter, where we see stronger sales in -- or stronger growth in markets that may have slightly different AUVs than the overall average. But that's what's driving that difference. But overall, as we say in the algorithm, 2% to 3% same-store sales growth, 4% to 5% net new unit growth translating to mid- to high system sales growth is how we think about it.

The next question comes from Sara Senatore with Bank of America. Please go ahead.

Thank you very much. Just a two part question on the digital sales and some of the technology investments. First, on the digital sales mix, could you just talk about -- you said it's structurally your sustainably higher mix. How is that playing out by brand or channel? Is this coming from delivery which is lower margin or order ahead which is higher margin, just as I think about the shape of the business going forward? And then you are investing for Pizza Hut on digital and technology. Can you just give a little more color on this? Is this sort of pass-through where fees show up in revenues and the costs show up in G&A? Or are you kind of investing ahead of the curve to support franchisees? And will that likely persist?

Yes. So first, if I take the drivers of the $22 billion in digital sales, it's been broad-based. We've seen strength across all of our brands and we're seeing strength across all of the channels. So delivery has continued to grow. Carryout has grown over the two years where people are using click and collect. And of course, as people have come back to the dining rooms, we've seen growth in the kiosk business which has rebounded at Taco Bell, for example. So we're seeing strong growth across all of those channels. And of course, on a brand-by-brand basis, you've got real strength in each one. KFC, if you go ex-China, was up 46%. Taco Bell in the U.S. is approaching 20%, Taco Bell International with a 40% mix. And of course, Pizza Hut is sustaining their strength on digital. So it's just a really great story. Clearly, those strong digital numbers come as a result of the investments we've been making and our strategy around digital because we knew this was the future of the industry. As we've said before, COVID accelerated those trends and we're glad that we were in a great position to be able to capitalize on it. But whenever you nearly double your digital sales in two years, I think that's evidence that those investments are paying off. And of course, our franchisees are co-investing with us to help make that happen but they're doing that because they're seeing strong returns from those investments in their business as well. So, I think overall story is we're getting a strong return and we're very pleased with the digital results and we're going to continue to drive that.

The next question comes from Dennis Geiger with UBS. Please go ahead.

Great. Thanks for the question. Wondering if you could talk a bit more about some of the industry challenges in the current environment, even as you're managing them well, what you're seeing globally but particularly in the U.S. across staffing, impacts on operations and sales. And I guess more importantly, how do you think over the coming quarters and going forward as some of these industry challenges ease and the headwinds potentially turn to some tailwinds for the business as it relates to hours, et cetera?

Yes. Thanks for the question, Dennis. Obviously, this is a challenging environment to operate in, in our industry. That's been well documented. Q4 was more of the same of that and that extended into the early part of this year. As far as Omicron goes in the U.S. specifically, it does feel like we're moving to a better place. I was just on the phone with our chief operating officers yesterday, comparing notes across brands and there were some really similar themes of we're past the peak impact of Omicron, applications for team members are starting to come back up. So we think that the challenges and the impact on our restaurant hours may start to slowly abate over time. As far as the global picture, what we're seeing internationally is through most of the COVID pandemic, we had, had a more severe impact in our emerging markets. They were less well equipped to deal with the challenges of COVID. That's starting to change a little bit and we're starting to see the gap between the developed markets and emerging markets narrow. As you know, Yum! has outsized exposure to emerging markets. So even though we put up some amazing numbers over the last two years through this, we've been held back by those emerging markets. As that gap starts to narrow, we can see that there can be some strength in emerging markets to help strengthen our overall sales picture internationally, where, of course, 2/3 of our restaurants reside. But it's always a challenge to predict and forecast in this environment. We've all learned that over the next two years. But quite optimistic right now that both internationally and domestically, the business is heading to a better place.

The next question comes from David Palmer with Evercore ISI. Please go ahead.

Thanks. Good morning. Heck of a unit growth year in '21 with 4,200 gross opens; I think it was 6% net unit growth, at least as far as an exit rate. I was wondering if you could give a hint as to where you could see globally, by brand, by region, some areas of acceleration and perhaps moderation in unit growth. For example, it's amazing that 1,800 of the 4,200 gross opens were from China. And I think there's some people concerned about economic headwinds there. And then you mentioned that Pizza Hut U.S. was no longer a drag to the unit development. So hoping for some highlights and lowlights as you look ahead.

Glad you talked about the new unit development, David. For me, it's an amazing accomplishment at Yum!. In my 32 years in this business, I've never seen anything like it obviously. The growth rates are industry records, Yum! records. It was widespread. It's across all brands. It's occurring in the vast majority of our countries which is really encouraging. And the question about where do we see softness going forward, it's a great question. I can tell you that there's no countries that we're worried about pulling back on development. We see all of our countries that are developing today being able to continue to develop at the pace that they're at and even accelerate. India is one I would highlight. We opened 335 units in the country of India on the strength of some development agreements with really great partners across all of our brands. Obviously, there's a huge opportunity for Yum! in India and one that should be accelerating. But even in the U.S., we're starting to see the momentum develop in our Pizza Hut and KFC businesses, who historically haven't been contributing net new unit growth. We're optimistic about that. And Taco Bell U.S. is back to developing at a really fast pace like in the early days of Taco Bell and we see that accelerate. But Taco Bell International is probably one of the most exciting stories we have right now. We've talked about it a lot and you're seeing over 160 net new units built on a base of 600 entering the year. That's a 26% growth. That's pretty impressive and we see that accelerating. Spain, for example, passed 100 units on the ground. We know when you get to that 100-unit tipping point, you see an acceleration but we have other markets poised to do the same.

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

Hi, thank you. And I apologize if I missed this. Have you gone back and looked at the fourth quarter system sales and determined how much the labor environment may have actually constrained system-wide sales growth, whether that's in the U.S. or global, it's up to you how we talk about that, just in terms of having less hours in the store that -- the store than you would have -- labor hours in the store than you would have liked? Are you actually having less store hours than you would have like, perhaps even day-parts in certain cases than you would have liked, I guess, is the first part of the question. And then secondly, we talked about easy operations and you mentioned a few things that you were doing at the store to help your franchisees. Are any at the point now where stores can be more efficient from a labor perspective where they can do the same or even more customer counts on a reduced level of labor? Or might that come from future initiatives that you are working on?

Yes. Great questions, John, on the labor front. As David mentioned earlier, it's obviously been a challenging environment but kudos to our teams, our franchisees for navigating through that. And I'm thankful that we have such a strong culture that goes from top to bottom, to our stores in Yum! that our franchisees help bring to life. So if we think about your specific question on how it impacted our sales in Q4 and coming into Q1, first, it's important to put this in context, that these labor challenges are most pronounced in the U.S. And of course, the U.S. is 40% of our business. There are a couple of markets, say the U.K., Australia, that are also experiencing some pressures but they are most pronounced in the U.S. So our global footprint provides us a natural advantage in this type of environment. But obviously, let's dig into the U.S. where we know those challenges have been tough. We did see some constriction of hours across the brands in Q4 as our franchisees dealt with the Omicron impact on staffing availability. The nature of that impact varied from brand to brand. For example, in Pizza Hut, you saw it really constrained delivery hours because of the challenges in staffing those driver positions. I think it's been well documented that's a challenge for the pizza category and we've seen other folks talk about that challenge. But that's an area where it was particularly pronounced, particularly coming into early January. I think the good news is we believe, as David said, that we're past the peak probably two or three weeks ago and things, we've been talking to our COOs yesterday, have gotten significantly better in the last couple of weeks. All of that has had a small but real impact on sales but again, trend coming out of that's much better. I will say that in terms of dealing with it, our franchisees have been focused on all of the levers that you would expect but we think the one that differentiates us is the culture that we have in the restaurants that causes our team members to want to stay. Second part of your question around efficiencies. I think the Taco Bell example of how we've driven more volume through the drive-thrus while reducing service times is the best example of how we're bringing efficiency to life in the restaurants. We are doing a number of things on the technology front, whether it's Dragontail, other systems. We have an innovation team that is in place. And of course, our core ops process teams are always improving processes in the restaurants. So things are in motion; there are things that have been implemented. And in the long run, we think there's a lot more to come.

Operator, we have time for one question.

Thank you. The last question comes from John Glass with Morgan Stanley. Please go ahead.

Thanks. Good morning. I wanted to ask about KFC International. I was struck by how strong the comps were on a one and two year basis despite the fact that China was down 12%. David, I know you commented earlier about some of those key markets but just maybe unpack that a little bit in terms of what offset that decline in China which is an incredibly important market for KFC. And if you're willing to talk about how you think about the China recovery in your plans for '22 just broadly. Is it a recovery story? And is that embedded in your plans or not?

Yes. As far as KFC International, obviously, that's a really positive story for us and more than most, benefits from that turnaround in some of our emerging markets. You saw markets like India put up some really incredible numbers as they've recovered from COVID. And that also gives us confidence that some of these markets, as we get more on the other side of COVID, are going to really start to take off. Look, this idea of forecasting specific countries and how they're going to do, I think the benefit of Yum!'s model is how diverse we are across brands, across countries all around the world. We're not reliant on any one country. I'm glad you pointed out that even with softness in China, that we can put up numbers like we did this quarter. And we think that's the exciting part of the business as we head into 2022. We've got this diverse business model that is stronger than ever. We've been through over the last two years some amazing challenges. But all they've done is really proven that our business is resilient, that our talent is the best in the industry and that our business model is one that franchisees want to invest behind in a huge way. You saw that in the numbers this quarter on net new units. That gives us a lot of confidence in our ability to maintain top line momentum and profit strength as we go forward and truly, the team is incredibly excited about the future. Thank you all for your time today on the call and look forward to talking to you on the -- and sharing Q1 results.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.