Hello, everyone, and welcome to the Yum! Brands, Inc. 2022 Fourth Quarter Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host, Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations, to begin. Gavin, please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering for Jodi Dyer while she is 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, please note that this 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 call 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 release and relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. Please also note the following 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. For the purposes of this call, all references to system sales growth and unit growth results for the quarter are adjusted to remove our Russia business from the prior year base. This negatively impacted our worldwide unit growth by 2 percentage points and our worldwide system sales growth for both the fourth quarter and the full year by 2 percentage points. These units were removed from our same-store sales calculations and thus did not impact same-store sales…

Thank you, Gavin, and good morning, everyone. 2022 truly was a landmark year for Yum!. In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, our world-class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record-breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net new units, beating our prior record set just last year and ending the year with over 55,000 restaurants globally. For the full year, system sales were up 8% and core operating profit was up 6%, which includes a 2-point headwind from the removal of Russia profits this year. Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same-store sales growth of 8%. Taco Bell also bucked the industry trend on margins, holding company operated margins flat from last year despite elevated industry-wide cost pressure. KFC International delivered a record year, opening approximately 2,400 gross units and nearly 2,000 net new units, translating to 9% unit growth. Combined, these 2 parts of the business account for approximately 80% of our divisional operating profit. We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same-store sales growth and 6% unit growth, contributing to 22% core operating profit growth, which includes a 2-point headwind from the removal of Russia profits this year. Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us. Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, we have a signed purchase agreement to transfer…

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. As David mentioned, 2022 was a year of huge milestones for Yum!. The resilience and winning mindset shown by our teams around the world helped us open a record-breaking 4,560 gross units or 3,076 net new units on a full year basis. These development numbers put full year unit growth at 6%. System sales for the year grew 8%, driven by strong international same-store sales growth for KFC and another stellar performance from Taco Bell. Full year core operating profit grew 6%, which includes a 2-point headwind from the removal of Russia profits this year. Fourth quarter system sales growth of 10% was in line with the update we shared at our Investor Day, driven by 6% same-store sales growth and 6% unit growth. Core operating profit grew 22%, which includes a 2-point headwind from the removal of Russia profits this year. Reported operating profit included a negative $42 million foreign currency translation impact in the fourth quarter and a negative $118 million impact to the full year. Ex special general and administrative expenses came in at $357 million and approximately $1.1 billion for the full year. Taco Bell store level margins were 23%, flat year-over-year. Taco Bell paid additional discretionary bonuses to its store-level employees, given the strong performance for the year, which impacted quarterly margins by approximately 50 basis points. Taco Bell's full year store level margin was 24%, near the upper end of its 23% to 24% historical pre-COVID margin range. Fourth quarter ex special EPS was $1.31, a 29% increase versus the prior year. EPS growth was positively impacted by core operating profit growth of 22% and a…

[Operator Instructions]. Our first question comes from David Tarantino of Baird.

My question is about the profit outlook for 2023. And I was wondering how you're thinking about the puts and takes related to potential upside or offsetting factors. And in particular, I was curious about the China business. It seems like there's potential for China to recover and be additive to your overall profit algorithm for this year. And I was curious to get your view on whether that would be an upside lever or you would think about potential offsets to that factor for this year.

Yes. David, thanks. Good question. As we look forward to next year and beyond, we're still confident in the future. As we shared at Investor Day with the raised algorithm, we feel confident in the trajectory of the business and nothing has changed in that outlook as we come into 2023. As you mentioned, the China component of our sales, you heard Yum China talk last night about being cautiously optimistic. So we'll continue to work with them. But in the long run, we are very bullish on the China market as it comes out of COVID, but of course, the timing of that is uncertain as they shared on the call last night. Of course, to the extent that we have rebound in that China sales, it does come at a lower royalty rate as you factor that into the plan for the year. The other elements, I think, are in line with the -- with what we shared in the algorithm. You heard the guidance that we shared on G&A for next year. And so our focus is on driving that growth. And of course, every day, it's our mission to come in and over deliver on that algorithm if we can.

Our next question comes from Dennis Geiger of UBS.

Thanks, Chris, for that color on G&A for the year. Helpful. Wondering, David or Chris, if you could speak just a bit more to the strength that you're seeing from a sales momentum perspective globally and the resilience really across the brands in the current macro, and how that guides sort of how you're thinking about 2023 if consumer pressure increases. I mean strength at Taco Bell, KFC non-China, International, Pizza Hut U.S. even momentum building. Just any additional color given the last several month's momentum for how you think about '23, particularly if globally, the macro situation gets worse.

Yes. Strength is a good word, Dennis, and it really was widespread, as you mentioned. We feel great about the fact that all of our brands are really on a roll right now. You saw that in the results for the quarter. And the consumer environment, much like my comments last quarter, remains a positive environment for us generally globally. Obviously, there are pockets of challenges when you have things like lockdowns in China last year, but that flips to be a more -- potentially a positive for this year. But the consumer in the U.S., on the high end, we're actually seeing more frequency from that consumer, and we're seeing possibly driven by a little trade down into our brands, which is all good. And then on the lower end, as I mentioned last quarter, consumers are starting -- there's a little bit more interest in value, which our brands are perfectly positioned to deliver on. You're seeing that with our menu offerings. Taco Bell with the Cravings Menu and $2 burritos, the new Melts product at Pizza Hut, which is screaming value. KFC just rolled out wraps as you guys are probably aware of at a great value price point. So I think the environment sets up well for us. From a consumer demand standpoint, more of the same. And then on the labor side, we're seeing an increase in applications, stores returning to their pre-COVID operating hours, which is great that we're able to staff the stores now appropriately. So when you mix it all together, we like the environment we're in. I also saw some data about grocery inflation in December being pretty high. So I think relative to alternatives, we're still a very attractive option.

Our next question comes from Andrew Charles of Cowen.

Great. David, a little bit of segue to my question. Can you talk about your philosophy for how you plan to balance pricing versus value for Taco Bell U.S. in 2023? If I recall from the Investor Day, you tend to take most of the price on new menu innovation as largely premium. I was wondering for way to perhaps get more aggressive on value, if you need it, while preserving the strong margins the brand has reached. And perhaps you can just remind us as well what was the level of pricing for Taco Bell U.S. in 4Q as well?

As far as Taco Bell and the amazing job that they do, segmenting their consumers and providing each consumer what they want. That's what we talked about at Investor Day. And obviously, Taco Bell has some amazing value offerings that have been in their menu now for quite some time, on the Cravings Value Menu. But it doesn't -- it's targeted to a certain set of consumers and halos the entire business. So as the environment gets more competitive, we're already in the value game at Taco Bell, and we're already doing a great job. I don't see us changing anything. Well, we're connecting and we're winning because of value. That's why you saw the great numbers that we just put up in the quarter. But the brand with amazing margins, steady year-over-year, just has all the tools at its disposal to navigate any kind of environment and deliver great margins, great top line sales growth and a great proposition to consumers.

Our next question comes from David Palmer of Evercore.

Congrats on the very strong unit growth. I wonder how you're thinking about EBIT margin over time. In 2022, it was 32%. And it's been near 35% before, but business mix is always changing. I wonder though, how you think about that margin over time. Do you think you could get back to 35% or so in the next few years? And I'm thinking about certain flow through like a China license fee recovery could be very good incremental margins. And so I'm just wondering how you're thinking about the potential for that EBIT margin.

Yes. Thanks, David. I think in general, we focus on delivering the algorithm and the profit growth that's embedded there. If you think about puts and takes on EBIT margin, obviously, from a core operating profit standpoint, you do have to consider the royalty rate mix. I mentioned earlier, to the extent if any of our lower royalty rate markets were to grow faster than the others, you have to take that into the account in the modeling. We did talk about at Investor Day, our philosophy on G&A and how we're going to have a lower G&A growth rate going into next year than we've had the last few years. So we're going to be managing that carefully in 2023. And then of course, when you go to reported profit -- reported operating profit, you have to take into account FX. And FX was a headwind this past year. Pretty hard to predict. Nobody has the crystal ball on that. I will share that right now, as we look to 2023, FX will continue to be a headwind for us based on our current estimates, primarily in the first half. But we think on a full year basis, our best estimate is between a $30 million to $40 million headwind going into the year. We'll continue to update that as things change. So it's our push to drive the strong profit growth implied in the algorithm, and that's where we're focused.

Our next question comes from Jon Tower of Citigroup.

Just two quick ones. G&A came in a bit higher than I think guidance had -- or you guys have been targeting for guidance. I just wanted to confirm, maybe there were some one-timers in there. Is there something else that might have hit that line? And then outside of that, we heard from another number of other operators that 2023 started off on some strong footing in the U.S. and frankly, across the globe. So I guess I'm asking if there's any reason to believe that Yum!'s brands wouldn't have been participating in that strength globally.

Yes. First, on G&A in Q4, we had reported G&A of $1.140 billion but that included special expense. We had approximately $20 million in special expense. So we landed broadly in line with our full year plan, a little bit to the high end of our planned range. There were a number of small items, none of them major, but I'll give you 1 example. As we had to split out the Russia business to prepare for sale, we lost some of the fixed cost leverage in our European G&A. But again, going into next year, as I mentioned earlier, the philosophy that we shared at the Investor Day still holds. We are focused on having a lean G&A model while investing in the things that drive long-term growth and health and we'll have a lower G&A growth rate into 2023. In terms of how 2023 is shaping up, as I said earlier, there's nothing that we're seeing at the start of the year that dampens our confidence in delivering our long-term growth algorithm this year and beyond.

Our next question comes from John Ivankoe of JPMorgan.

I was looking for a little bit -- a more detailed color in terms of what's happening at a consumption level in some of your major markets between your dine-in or in-store type of traffic, delivery traffic. Are you actually seeing consumers trade down in your opinion to your brand? Are you seeing your core customers come more often? Is there any slippage at all on the lower income consumer? Just kind of, I guess, a little bit more color in terms of -- I know it's always hard talking about a big global business with 3 and now 4 brands, but if there's anything that you can really provide some more detail in terms of what's going on below what's obviously very good aggregated results.

Yes. Thanks, John. It is hard to talk about a business where we have 290 different brand country combinations versus 290 different stores. But in general -- we obviously saw a shift to off-premise consumption during the pandemic. We've seen some of our on-premise consumption come back, but really for none of our brands is back to where we were, which isn't a bad thing given the efficiency of operating an off-premise model. Our ability with new unit development to build slightly smaller stores that are more efficient with better returns for franchisees. As far as the consumer, I've mentioned this earlier, but I'll -- it does depend -- if we're looking at the U.S. or other developed markets, the environment is still positive, just very similar to what we saw last quarter. We are seeing some increase in our higher-frequency customers -- or higher income customers coming more frequently. And some of that is no doubt due to trade down into our brands. On the lower end, we're not seeing the low-income consumer drop out of our business. What we're seeing is probably a little bit more focus on value, and that's been the trend, that's been continuing throughout 2022 into 2023. And we're there for them with our brands with perfect offerings for them. And in emerging markets, obviously, earlier in the pandemic were a challenge. They've come back now and our emerging developed markets are performing roughly similar around the world.

Operator, we have time for one more question.

Our final question of today comes from Gregory Francfort of Guggenheim.

I just want to ask about Pizza Hut U.S. I mean it seems like the business has picked up the last few quarters. And I'm curious if you're seeing share gains or increased pricing. Or just -- any thoughts on what's going on there would be helpful.

Yes. I'm glad you asked about Pizza Hut U.S. We're really proud of what the team is doing and the success they had in the quarter and the momentum they're building in the business. I know the franchisees and the team are working incredibly collaboratively. And I do believe getting share gains in the category and attracting new consumers. They're doing that a couple of different ways. Number one, how they're playing aggregators with the partnerships with the aggregators and how we've integrated into our IT systems, we're seeing a significant lift in our transactions with aggregators. We started the year with about 5 transactions per store through aggregators. Now we're up to close to 50 by the end of the year. That's a massive progress and obviously, helping us access some consumers that weren't using the brand. But it's also the look tone and feel of the advertising. You'll notice that that's changed. It's a much more modern contemporary approach, which is connecting well with consumers. And then finally, it all comes down to the product. The launch of Melts has been very successful for the brand, attracting younger consumers to different occasions than would traditionally use Pizza Hut. So that all adds up to a very positive story for the Pizza Hut U.S. business. And thank you for the question. I think with that, we'll wrap it up. And I think the numbers speak for themselves. It was another incredible quarter and wrapping up a great year despite many challenges. I'll point out, we actually closed the year with over 4,500 gross new units being built. Take the 4,100 we built last year, that's 8,600 gross new units. That means 1 out of every 6 locations you see around the world was built in the last 2 years for our brands. I think that shows the momentum that we've got in the business. Our Yum China team talked about the great returns they're getting from their new unit development last year, coupled with the top line growth that we're seeing in existing stores, and there's a lot to be excited about as we head into 2023. Thank you for your time today.

Ladies and gentlemen, thank you for joining today's call. You may now disconnect your lines.