Hello, everybody, and welcome to today's Yum! Brands, Inc. 2022 Third Quarter Earnings Call. My name is Drew, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations to begin. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering from Jodi Dyer while she is out on maternity leave. On our call today are David Gibbs, our CEO; Chris Turner, our CFO; 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 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, full system sales growth and operating profit growth results exclude the impact of foreign currency. Next, I'll provide an update on the financial reporting treatment related to our exit from Russia. As a reminder, as of the beginning of the second quarter, we elected to remove the Russia business from key performance metrics. This negatively impacted our third quarter unit growth by two percentage points and our system sales growth by three percentage points. Additionally, these units were removed from our same-store sales calculations and thus do not impact same-store sales results for the third quarter. For the purposes of this call, all references to system sales growth and unit growth results…

Thank you, Gavin, and good morning, everyone. Our strong top line momentum this quarter highlights clear demand for our iconic brands. We delivered 10% system sales growth underpinned by 5% same-store sales growth and 6% unit growth. While the broader macro environment evolves, our brands continue to thrive by being distinctive, creating excitement for consumers and by delivering exceptional value and convenience. The investments we have made in areas such as consumer insights, marketing analytics, and new technology platforms allow us to act with pace and confidence to meet the needs of consumers around the world. I'm particularly thrilled about the performance of the KFC and Taco Bell division that were both standout performers this quarter. KFC did an excellent job in driving transaction growth through its omnichannel approach, leading to a sequential improvement in comps from the prior quarter. Taco Bell is winning, thanks to its ability to generate and amplify standout moments in culture and translate the resulting top line growth into impressive restaurant-level margins. I'm also excited to share that we opened a total of 979 gross units across 74 countries, proof that our development engine is powerful and diversified. As these results show, our committed and well-capitalized franchise partners are seeing opportunities to invest in the growth of our brands for the long term. Next, I want to provide an update on our Russian business. As Gavin mentioned, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating system and master franchise rights to an existing KFC Russia franchisee. Following the completion of the transaction, we will have ceased our corporate presence in Russia. I want to say that I'm incredibly proud of how our local teams have managed through this extremely difficult time and prioritized the safety of our people…

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, followed by our capital strategy. I'll begin with our third quarter financial results. System sales grew 10%, with broad-based strength evident across our portfolio. Same-store sales grew 5%, while units grew 6%. Core operating profit grew 8%, which includes a 3-point headwind from the removal of Russia profits this year. Ex-special general and administrative expenses came in at $259 million, tracking in line with our expectations for $1.1 billion of G&A expense for fiscal 2022. Impressively, our Taco Bell store level margins were 24% trending above third quarter last year and above pre-COVID levels. With respect to reported operating profit, FX had a negative $39 million impact and we now expect a full year FX headwind of approximately $100 million. Third quarter EPS, excluding special items was $1.09, an 11% decrease versus the prior year. In addition to a three percentage point impact from foregone operating profits in Russia, EPS growth was also negatively impacted by nine percentage points from the aforementioned FX, nine percentage points owing to a higher tax rate and six percentage points from lower year-over-year unrealized gains associated with our investment in Devyani. Our next special tax rate this quarter was higher than usual at just under 27%, largely due to adjustments recorded in the quarter associated with prior year taxes. Given these adjustments, we now expect our full year tax rate to land between 23% and 24%. Overall, given the same strength of our global business, we continue to expect to grow core operating profit in the mid single-digit range for the full year. As we mentioned on the past two quarterly calls, whereas not for the loss of Russian profits, we…

Thank you. We will now start today's Q&A session. [Operator Instructions] Our first question today comes from Dennis Geiger from UBS. Your line is now open.

Great. Thanks for the question. I wanted to ask about the strength in the US business and maybe David or Chris, could you talk a little bit more about what you're seeing across the brands in the US? What you're seeing from a consumer behavior standpoint? And I guess really, how that guides how you're thinking about the resiliency of the brands in the US going forward. Thank you.

Yes. From a consumer standpoint, obviously, you saw the top line results we reported this quarter. We're very pleased with them. They're very strong. So, generally around the world, we're not seeing any concerns from a consumer standpoint. Then, if you dig deeper into what's going on in the US, it's been well documented that there's a little bit of a K-shaped recovery. And we're seeing a little bit of that. We're higher in consumers having a little bit more demand. But the great thing about our business is our brands are so well positioned to succeed in any environment. And in particular, our business is 80% globally based on Taco Bell US and KFC International. Those two businesses make up 80% of our profit. They're incredibly well positioned to deliver value to consumers and with appealing brands. So in the US, this K-shaped recovery, there's a little bit of K-shaped demand for value on the high end. The demand is more for premium value. That's why you're seeing us do things like the Double Stay Grill Cheese Burrito at Taco Bell, which is at a higher price point than normal, but still a great value and a big part of our success in Taco Bell. And then on the low end, in Q3, KFC go back to Mac and Cheese bowls with some success that moves the needle. So, that's value offering, but at a price point that's appealing to a line consumer, but still not just discounting our core product, something interesting that consumers are [indiscernible]. Cravings menu in Taco Bell, the same thing, where we're offering burrito for $2. As far as the consumer environment for us and our industry and for our brands, which are particularly well suited to navigate, it looks good. Now, I know in other industries like in other parts of retail, if you bought some furniture a couple of years ago, you probably pulled your demand forward and that they're not going to have the same demand today. We don't have that issue in our industry because if you bought lunch two years ago, that's not influencing your decision today. And your decision today is more determined by how we stack up versus your options. We know that we're a really attractive option versus grocery, which is experiencing a lot of inflation. So this is a good environment for us.

Our next question today comes from John Glass from Morgan Stanley. Please go ahead. Q – John Glass: Good morning. Chris and David, is 6% unit growth, the new 5%? I guess I'm thinking about durability of that growth rate as you think out and just remind us one, when you think about sort of targets for growth rate, what's the time horizon? Ultimately, the base effect of large numbers catches up with such a large system. So is it a three-year target, five-year? How do you sort of frame that internally? And Chris, can you also just talk about cost of capital, cost of debt has gone up. Is that a worrisome impediment to growth over the immediate term as the rate environment changes? Thanks. A – David Gibbs: Thanks, John. I'll take the first part of that and then let Chris talk about some of the capital issues out there. Look, I don't think the law of large numbers. If we're anything close to catching up on that and ours, we continue to put up impressive development numbers. You saw this -- the numbers this quarter and our year-to-date numbers today are roughly in line with what we had last year at this time, showing -- which was a record for us and for the industry, we believe, showing the strength of our development, and it is broad-based. The amount of development that's occurring outside of China continues to climb nearly 60% now, and that's in 74 countries last quarter. So this is broad-based. We think we have tons of opportunities around the world for all the foundational reasons you would want. The returns that our franchisees are getting are strong. Taco Bell, being voted the best franchise opportunity out of the 500 that are ranked in the…

Our next question is from John Ivankoe from JPMorgan. Please go ahead.

Hi. Thank you. Also a capital question, if I may. Obviously, there's a lot of focus on new unit development as there should be. Clearly, the same-store sales around the world, particularly KFC International really does support underlying franchise system that should. And I'm sure is doing very well. But the question is on the existing base of assets, especially the existing base of assets that might be 10-plus years old. I mean just how the overall system is from a capital perspective, are there any major projects that are happening in some major countries around the world that maybe we just haven't heard about? And does it make sense? Would it make sense for Yum! to co-invest with its franchise system around the world. Obviously, we all see the US, but you have a lot of big countries around the world where maybe putting some capital in the existing base of assets could be something that could drive longer-term brand value and shareholder value as well? Thanks.

Yes, a good question on the existing asset base. We're -- as we just discussed, a tremendous unit grower, but we also want to make sure that our current asset base remains fresh and relevant provides a great experience for our customers. Of course, whenever you're growing at 6% units. Every year, that's a new chunk of new stores that are being added to the system. Plus we have programs with our franchisees where they got requirements around remodeling and keeping the asset base fresh. In terms of the responsibility for that, that lies with our franchisees. And it's part of their approach to being in our business, investing in stores. They know they've got to make investments over time to continue to keep the asset base refreshed, and our brands are working hard with the franchisees to do that.

Our next question comes from Jon Tower from Yum! [ph]. Your line is now open.

Hey, this is Jon. How is it going? Just a quick question. We heard from one of your larger global competitors about the need to potentially offer franchisee relief to some of their partners in Europe over the next, say, 12 months or so. The picture is kind of reminiscent of what we heard during COVID times due to the inflationary pressures in that market. So I'm curious to learn what you're hearing from your operators in that market and what they're doing to price for the potential volatility ahead? And frankly, maybe if you could even frame your own operating profit exposure to that region, that would be helpful as well.

Yes. So obviously, in Europe, right now, there are some challenges, particularly on energy inflation, they're facing, our franchisees. Europe is an important growth market for us in the long run. We have meaningful but moderate exposure in the context of our global portfolio. Europe as a geography, is about mid-teens percentage of our sales and our operating profit. The business continues to be strong from a top line perspective there. If you look at KFC Europe, we had 25% system sales growth in Q3. Now the UK was a little bit of a different story where those energy inflation is a bit more pronounced, and you've got that holiday overlaps continuing throughout the year. So we had slight negative sales there. Same thing in the Pizza Hut business, strong in other parts, UK a bit more impacted, but we are working closely with our franchisees. We know this is going to be a challenge for them to navigate. And we manage the business on a franchisee-by-franchisee basis. So our teams in Europe are partnering with them setting the commercial plans for the business to help navigate those inflationary challenges.

Our next question is from David Tarantino from Baird. Please go ahead.

Hi good morning. My question really is about the sales strength you saw for both KFC and Pizza Hut, especially when you factor out China. You saw a pretty material acceleration in the comps relative to pre-COVID levels. So I guess, on a three-year comp basis, a pretty big step-up. And I wonder if you could just talk about what you think drove that step up from the second quarter and how sustainable that trend might be? Thanks.

Yes. Thanks, David. I'll just comment on a couple of things. And of course, in the speech, I already mentioned the foundational things that are driving our business that will continue to drive it this quarter and in future quarters. Like the progress that we're making on technology and digital. But beyond that, I guess what I would highlight is outside the US, while we had good growth in both developed and emerging markets. Our emerging markets are really starting to perform strongly. We were plus 20 in emerging markets outside the US ex-China. So that was a big driver and that was expected. We talked about this on previous calls that as these markets recover from COVID, we expected outside growth. The really encouraging thing about that is that's actually plus 16% versus 2019. So not just a recovery but real growth versus the 2019 baseline and then in the US, obviously, Taco Bell has been a steady high performer, but KFC, I think did a better job on value with the Mac & Cheese Bowl this quarter. Pizza Hut, as we've talked about in previous quarters, has done – has made progress on embracing third-party aggregators to solve some of that delivery challenge. So, we saw a meaningful improvement in their trends on delivery sales. So that all added up to as you mentioned, good strong growth around the world.

Our next question is from Andrew Charles from Cowen. Please go ahead.

Great. Across the US portfolio, you guys are obviously leading to the value across all three brands. And I'm curious how you see the industry evolving as we look at the end of 2022 and into early 2023. Do you expect the domestic quick service industries focused on value to further intensive buy and a difficult traffic backdrop or do you think value activity is going to be challenged by just the high COGS and robust labor backdrop?

Yes. Look, it's hard to predict anything over the last few years in this environment. The one thing that I can predict though, is our brands are incredibly well positioned to navigate any environment. We've demonstrated that over the last few years, and I feel confident as we move forward. Value does seem to be more of a factor today than it might have been six or nine months ago. And that's just more of a return to normal for the industry, rather than it is an exaggerated emphasis on value. But as I mentioned in my earlier comments, the scale that we have, our purchasing ability, the appeal of our brands, the fact that the vast majority of our business is at Taco Bell US and KFC International piece, that are so strong and so successful at navigating that give us great confidence that we will be able to continue to thrive in any environment. And there is a little bit more of an emphasis on this premium value, which is good for the industry where without products that aren't at the absolute lowest price can still be very appealing to consumers as long as the overall equation, the experience, the convenience, the credibility of the food is all there.

Operator, we have time for one more question.

Our last question today will be from David Palmer from Evercore. Please go ahead.

Thanks. Question on Pizza Hut US. What have been the learnings with regard to third-party delivery marketplaces and drivers as a service, the contribution to growth from that, but also, what concerns did you have going into it with your franchisees? And how has it played out versus your plan? And then related to the unit growth thing, I'm wondering, you highlighted Pizza Hut International having a strong unit open opening quarter, but I'm wondering about the US stabilizing and how you're feeling about that being a driver to your net opens as we go into '23? Thank you.

Yes. Thanks, David. On Pizza Hut US first. As David mentioned, the addition of aggregators has been one part of solving the delivery capacity challenge that we mentioned earlier in the year. We talked about how at the beginning of the year, we view this more as a capacity challenge than a demand challenge. And we've used our relationships with the aggregators, both being on their platforms and working with them on delivery as a service as one mode to solve that. Plus, I think we've mentioned that we have also adjusted some of our hiring practices and our HR practices or our franchisees have to attract more drivers into their jobs, things like reducing the time it takes to apply for a job at Pizza Hut. Both of those have contributed to us having significantly more delivery capacity in the market. If you look at Q2, we had a 23-point gap between our carryout growth and our delivery growth. In Q3, we actually extended our carryout growth, but the gap narrowed to 17 points. So that means delivery was significantly higher, and I think that's just attributable to both of those levers, giving us more delivery capacity into the system. There's one other benefit from the aggregator platforms, which is we get an incremental customer, who sees us on those marketplaces. And so that's probably been a bit of an impact there as well. And we've mentioned earlier that we've seen franchisees who adopted these faster run a little bit ahead of the system. So, I think that is part of what's driving growth in the Pizza Hut US system. A – David Gibbs: On the unit growth question, obviously, we had strong unit growth in Taco Bell US, Pizza Hut US, and KFC US have stabilized. And in the long run, we expect all of our markets around the globe to be focused on driving units. And so the teams are working on strategies to do that. But right now, those businesses are in a stable place from a unit standpoint as you see in the results this year. End of Q&A:

Yeah. To wrap up, obviously, a very strong quarter for Yum!. We're pleased with the results, led by our great teams in the field. We've got an investor conference coming up, and it's actually the first investor conference that we've had in four years given the delays from COVID. So we're really eager to get to spend some time with all of you in New York on December 13. In particular, we've got some new leaders in the business that you'll get to hear from live in person for the first time very excited about letting them tell the great growth stories that we have going on all around the world. A great quarter, and thanks for your time today.

That concludes today's conference call.