Hello, everyone, and welcome to the Yum! Brands, Inc. 2024 First Quarter Earnings Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host, Matt Morris, Head of Investor Relations to begin. Matt, 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 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 the 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. On our last earnings call, we announced that we signed an agreement to acquire 218 KFC franchise restaurants in U.K. and Ireland. The transaction closed on April 29. As a reminder, several of Yum! Brands business units report on a period calendar basis, including all U.S. and Canada brands, KFC U.K. and KFC Australia. For business units that report on a period basis, first quarter same-store sales growth excludes the benefit from the additional day of sales owing to Leap Day. When forecasting 2024, please keep in mind this year will include an extra week in the fourth quarter for those entities. For more information on our reporting calendar for each market, please visit the Financial Reports section of the IR website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware of upcoming Yum! investor events and the following. Our second quarter earnings will be released on August 6 with a conference call on the same day. Finally, please mark your calendars for an in-person Taco Bell Consumer Day on December 10 at the Taco Bell headquarters in Irvine, California. Stay tuned for more details and invitations to follow. Now I'd like to turn the call over to David Gibbs.

Thank you, Matt, and good morning, everyone. I'm pleased to report that Yum! grew core operating profit 6% this quarter despite a challenging operating environment, demonstrating the resilience of our business. As we communicated last earnings, 1Q should represent our most challenging sales quarter this year as we work through tough year ago laps, return to a more normal inflationary environment and navigated discrete consumer demand pressures. While the impacts from the Middle East conflict have been scattered and difficult to measure, we've begun to see improvement in the most impacted markets. Taco Bell U.S. outperformed the industry on same-store sales and delivered industry-leading margins, while 1Q unit openings at KFC International set us up for a strong unit growth story in 2024. We continue to make significant progress scaling our proprietary digital and AI-powered platforms and are excited by plans to accelerate deployment. Digital sales continued an upward trajectory approaching $8 billion and were up 11% year-over-year. Through continued kiosk deployment, greater adoption of click-and-collect and stable third-party aggregator sales, digital mix improved 5 points and, for the first time ever, represented over 50% of system sales in Q1. We now have $30 billion in annualized digital sales, which by itself would represent one of the largest restaurant companies in the world. Overall, despite a more challenged operating environment, we have reached impressive new milestones and remain on track to deliver on our long-term growth algorithm target of at least 8% core operating profit growth for the full year. Now I'll discuss our Relevant, Easy and Distinctive brands, or R.E.D. for short, followed by our Unrivaled Culture and Talent and Good Growth strategy. Chris will then provide an update on our first quarter results, followed by our Bold Restaurant Development, Unmatched Operating Capabilities and balance sheet position. Starting with…

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 an update on our balance sheet and capital strategy. Starting with our results. First quarter system sales grew by 2% driven by 6% unit growth. As we communicated on our last call, we expected the first quarter to be our most challenged from a same-store sales perspective due to prior year lapse, a return to a more normal inflationary environment and discrete consumer demand pressures, including markets impacted by the Middle East conflict. We believe the markets most impacted by the conflict collectively created a low single-digit headwind on Yum!'s overall Q1 same-store sales. Despite these challenges, I'm pleased to report Yum! delivered 6% core operating profit growth exceeding our internal plan and demonstrating the resilience of our profit model. First quarter ex special general and administrative expenses were $265 million, down 4% year-over-year, a continuation of the G&A momentum we had in the fourth quarter. Reported G&A was $286 million and includes $21 million in special expense related to ongoing resource optimization, which we expect to generate additional savings in the second half. Reported operating profit included a 2-point impact in the quarter from foreign currency translation. First quarter ex special EPS was $1.15, which includes negative after-tax impacts of $0.08 from investment losses and $0.03 from foreign currency translation. As a reminder, we shared on our last call the intent to purchase 218 KFC U.K. and Ireland stores. We're excited to report we officially closed this acquisition at the end of April. These stores have average unit volumes above $2 million and healthy store level cash margins. We expect the addition of these units to provide approximately $40 million of incremental EBITDA in…

[Operator Instructions] Our first question goes to Jon Tower of Citigroup.

Encouraging to see the G&A curve bending. I was hoping you could maybe drill into some of the puts and takes there. Obviously, there were some offsets this quarter with some charges. But curious if you could give us a little bit of context around what's flowing through that line to help move it lower and maybe where you anticipate this moving over the long term for the business. I think historically you've talked about the idea of potentially reaching -- or at one point in time, having that sit at about 1.7% system-wide sales. Is that still a target that you think is reasonable? Or do you feel like you can even move that further as we continue to grow this digital business over time?

Yes. Thanks, Jon. Good question. First, let me just reiterate a couple of details on the G&A guidance. So we expect that ex special G&A on a 52-week basis will be flat to slightly down. As we mentioned on the last call, that assumes a target level of incentive compensation. So that's one factor that could move as we go through the year. But on the factors and levers that help us to achieve that plan first, there are some onetime factors at play. Examples of that include lapping the cyber event last year, a couple of small remnants of the Russia overlap and some lapse of incentive-based compensation last year. Now on the other side, we do have some expenses related to the acquisition of the stores in the U.K. We expect that will add just under $10 million to our G&A in year. But those are the [ best ] set of factors. If we go to the longer-term levers that we're pulling, we continue to drive our resource optimization program, which has allowed us to find efficiencies in legacy parts of the business, part of which we've used to fund investments in the D&T strategy. You saw some special charges this quarter which included the impact of some of those moves that we make, but that helps to drive productivity in the business going forward. And finally, as you say, we continue to bend the curve on the impact of our D&T investments on the P&L. This happens as we deploy more and more of our technology through increased franchisee adoption. And of course, we're continuing to better leverage our scale and how we operate internally in digital and technology, which is allowing us to do more together across the business. All of that is in service, delivering more, better, faster, cheaper and safer technology to our business, as David said earlier, but bending that curve is a part of the long-term plan.

The next question goes to Brian Bittner of Oppenheimer & Co.

You reiterated your 2024 target to grow core operating profit in line with your long-term algorithm of at least 8%. And that's impressive given the first quarter where comps were negative and core operating profit growth was below the full year outlook. And I'm assuming this was always built in the plan because of the tough comparisons, and I realize you have a lot of G&A flexibility to hit your operating profit targets. But the question is what's the global same-store sales base case that you're thinking is required for the rest of the year to comfortably reach your operating profit goals.

Appreciate the question, Brian, and I agree. Hitting 8% in this choppy environment, we're proud of our ability to expect that kind of a result. And I think it speaks to the resilience of our business model and the talent of our leaders. As you know, we don't provide quarter-to-quarter same-store sales guidance, particularly in an environment like this. We're preparing for various scenarios to get to the 8% number. Obviously, one of the lever -- one of the strong levers we have to pull to get to the number is on the development front. And we feel really good about the pipeline that we have in place in development from our partners around the world, and that's something much more so than same-store sales because we can count on to get to the 8%. But as far as forecasting same-store sales growth in this environment, obviously, it's very difficult given the impact that we're seeing.

The next question goes to David Palmer of Evercore ISI.

I was just hoping to get some more color on international, KFC International, Pizza Hut International. What were some of the highlights and lowlights on same-store sales trends in terms of your brand geography combinations? And more importantly, I'm curious about your reality for 2024 given the exit rates of brand geography combinations. Has any of these changed for the better or worse? How are you feeling about things versus perhaps just a few months ago?

Thanks, David. Yes. Look, we feel great about our twin engines of growth, right? 80% of our profit comes from Taco Bell U.S. and KFC International. In the international business, to your question, 85% of our profit from KFC International. And if you look at the areas of the world that are less impacted by the Middle East, like Africa, for example, our system sales, you'll see in our release, was up 22%. Latin America, less impacted, really no impact, up 11% -- I'm sorry, Latin America, up 22%; Africa, up 11%. I recently actually made a trip to Africa this quarter with our team and was just blown away by the progress we're making on the ground there, where we're the leader in the industry, and we're widening our margin in terms of that leadership. Whether it's South Africa, which we visited, or Kenya where we've got franchisees that used to be part of our -- the company's system, who's building our brand the right way there, launching breakfast, the employer of choice in the country, leveraging menu innovation to take and actually inspiring some of our innovation around the world. So if you look at places like that, the business is real healthy and doing well. The other -- the impacted parts of the world are obviously much more challenged. But we still see impressive results for KFC International growing system sales 6% in this environment. And if you adjust for Middle East, that's 8%, 9% kind of system sales growth. And very importantly, we highlighted this in the earnings release, KFC International with net new unit growth up 10% shows the strength of the quality of the development pipeline that we have, which obviously bodes well for the future of the brand. But as far as the international consumer goes, it's probably more of an emphasis on value than there has been in past quarters. We're seeing the same thing in the U.S. That's one that we know with KFC, we're well equipped to navigate.

The next question goes to John Ivankoe of JPMorgan.

I was hoping to get maybe just a little bit more color on bending the curve on digital and technology spend, especially how it might influence '25 and '26 type of total G&A growth. I mean, I think this has been one of the more kind of debated topics of this -- on the Street as -- are we just talking about a lower rate of growth? Or might we actually see declines in dollars in '25 and '26 as you leverage the platform? And the follow-up to this, and I think it's very related, acquiring technology, building technology is one thing. But of course, maintaining technology with best-of-class technology talent, especially kind of at the leadership end, might be something different. So I just wanted to get your thoughts in terms of acquiring some of this tech talent and Yum!'s ability to both attract and retain this talent going forward as they may have other projects to work on in the future.

Thanks, John. Look, if you go back over the last few years, we saw the importance of digital and technology to Yum's! future and we invested ahead on behalf of the system to build those capabilities and put them in place across Easy Experiences, Easy Operations and Easy Insights. We thought that was the right thing to do for the business, and it did create some pressure on the G&A line as we did it. As we deploy our platforms to more and more markets and we get increased adoption, of course, that happens when our franchisees see the business cases coming to life and the improvements in their economics and the way the technology impacts their consumers and their team members. And we're, as we shared on the call, continuing to drive those deployments. In fact, we're now starting to bundle some of those deployments. At Taco Bell, for instance, we are driving both the AIM inventory management in addition to the Trax back-of-house system at KFC U.S. We'll be deploying the Dragontail kitchen display system along with the Poseidon POS system. So we're bundling those together. And as we create more and more examples and proof points of the impact, as we talk to franchisees in additional markets, it becomes easier to prove the business case that our technology is delivering. So that's what supports the long-term deployment path as we move forward. Obviously, we have to continue to make investments in things like AI, better leveraging our data, as David mentioned, and as you said, in continuing to enhance the existing platforms that we have. But as we bend the curve, that reduces the net P&L impact over time. And so in the long run, we expect us to get increasing leverage on our G&A and the G&A as a percent of system sales should come down over the long run.

The next question goes to Brian Harbour of Morgan Stanley.

Maybe just following up on that. You spent a lot of time discussing all of these tech initiatives. I think it's probably a little bit harder for us to sort of observe that in terms of comp impact, margin impact. Obviously, we don't kind of see franchisee profitability. But are there any examples you can give of, for example, e-commerce was deployed in certain restaurants and you saw a certain uplift in sales or franchisee profits, what happens to those when you deploy that tech bundle that you just mentioned? I think that would just sort of bring it to life more for us.

Yes. Great question. Look, in all of these deployments, this is us partnering with our franchisees and, of course, they co-invest to bring these platforms to their businesses and they only do that when they see a strong business case. So if you take Taco Bell U.S., which is the one market where we deploy the most of our platforms in combination, I think the tremendous sales results there as they've gone from essentially no digital sales in 2018 to well into the 30% mix now demonstrates the power of the combination of those platforms. In every market around the globe, as we shift sales from nondigital to digital channels, we see increases in check size, we see increases in frequency. Now as you said, you don't see all of our franchisees' P&Ls. But on the productivity side for our franchisees, I think our development momentum is the best proof point that digital is adding to unit economics. That's the driver of us continuing to set records on unit development around the globe, and the digital and technology impacts on their P&L is an important part of that. So all of that is enhancing the business model. But as we said, we think we're just getting started on the value creation potential from these platforms and capabilities.

Yes. And just to get in, if you're looking for specifics, as you can imagine, when we move people to digital ordering, we see an uplift in check in almost every case, whether it's kiosk or online. When we move people to things like Dragontail, we know we get a -- for Pizza Hut, we know we get a 4-minute savings on delivery time of pizzas and we know we can get drivers to deliver more orders per hour by using it. So to the point of your question, the measures and the financial results from the rollout of these things, there are use cases all over the place for how this improves unit economics for franchisees, which ultimately is the heart of our business. The better their unit economics are, the more they build, the more they can afford to offer the right prices and value to customers and so on.

The next question goes to Dennis Geiger of UBS.

Specific to the U.S., I'm wondering if you could speak a bit more to how you think about the trajectory of the brands with some of those tougher comparisons and the weather headwinds behind you, even if it's at sort of a higher level. And sort of maybe how do you think about how the brands are positioned in the U.S. in a seemingly difficult environment and whether there's sort of any notable strategy shifts that you guys contemplate in an environment like this, be it on value or otherwise?

Yes. Thanks, Dennis. I think we referred to this somewhere but I'll -- just for completeness, so in Q1, obviously we had a lot of impact by the weather during the quarter. Our business generally improved sequentially during the quarter. Taco Bell, as you know, is 75% of our U.S. operating profit. Taco Bell improved throughout the quarter. And into Q2, we are seeing an acceleration of same-store sales growth trends. So we're feeling good about how Taco Bell is positioned. Remember, they just launched the Cantina Chicken menu at the end of Q1. So we're excited to share the results of that. But suffice to say, it's been well received by consumers. And we think Taco Bell is incredibly well positioned for what I would describe as a more normal consumer environment today. Customers care more about value in the U.S.. Taco Bell, we know from the industry data that value is more important and that others are struggling with value and that Taco Bell is a value leader. You're seeing some low-income consumers fall off in the industry. We're not seeing that at Taco Bell. So a really favorable setup for Taco Bell, which you probably can say about any environment that they operate in given the strength of the brand. And for Pizza Hut, obviously, the lapse in the quarter were unusually large. We always intend to lap anything with positive sales. We didn't do that at Pizza Hut U.S. But we are positive on a 2-year basis and we actually did see an acceleration of Pizza Hut's 2-year trends in Q1 versus Q4. I'm excited about the calendar that Pizza Hut has for the balance of the year as well in the U.S. For KFC, it's a different story. The KFC brand in the U.S. has been struggling. And I think we're excited about some of the work that's going on behind the scenes to really boldly reset the brand in the U.S. We have a great playbook for KFC, which is our global business, our international business [ is on fire ], as I talked about before, the underlying business. We know how to bring that brand to life to connect with consumers around the world, and we have to do a better job of that in the U.S. It's a small part of our operating profit. Obviously, it doesn't really move the needle in the Yum! growth equation, but it is something that's a high priority for us as we move forward.

The next question goes to Sara Senatore of Bank of America.

First, a quick follow-up and then a question. Just about the impact from the Middle East, you said it was dissipating. I was just curious if you're doing anything specific to do that like brand marketing, that type of thing, or if it's just a matter of time? The question is about unit growth over time and sort of how that translates into system-wide sales maybe this year and beyond. As some of these AUVs are coming in lower as you think about your long-term algorithm, how should we think about that either this year kind of hitting the long-term algorithm from a top line perspective or over time?

Sure. Thank you, Sara. The first part of your question, no, I don't think we're doing anything special. We've obviously had a lot of experience in the past being -- with the global footprint we have of dealing with different issues around the world, and we have a sense for how these things recover. But everyone is different and time is usually the answer to most of those problems. As far as unit growth goes, yes, it is true that a lot of times when we're building, we're building particularly with our footprint and our emphasis on development. We're building in emerging markets which tend to have lower average unit volumes. That's how we built the powerhouse business in China back in the day and it's how we're building out markets like India, which tend to have lower volumes. But we're also excited about a lot of the development agreements and new franchise partners that we're getting in Western Europe, for example, and some other markets around the world, which are much higher volume markets. And I think it will always be a mix and it will probably always tend to be lower volume than our typical average volume. And that's fine because these are markets that tend to start out with lower volumes and grow faster than a traditional market, and we've seen that all around the world over the last few decades as Yum! has built out its footprint.

The next question goes to David Tarantino of Baird.

My question is on your results in the context of the sales performance. I think you mentioned that the operating profit in Q1 was slightly better than your expectations. I was curious to know how the sales are progressing relative to the expectations you might have had when you gave the guidance originally. And then in particular, I guess, was Q1 about what you expected, better than what you expected? And then secondly, David, if you could give us some sense of whether you have line of sight to global comps performance turning positive either in the second quarter or in the second half of the year?

Thanks, David. Obviously, we didn't anticipate the weather impacts in the U.S., for example, in Q1. So it generally was in line with what we expected, perhaps just a tad weaker. But to the point of your question, as we go into Q2, as I mentioned earlier, the Taco Bell business is picking up strength. We are generally on track with our projections for the year, which is why we feel comfortable with our operating profit commitment and the long-term algorithm. But it is going to be a challenging year, and we have a great team out there tackling the challenges. And in any one of these challenging years, it's always an opportunity to grab market share as well. We're doing that through development with the pace of development that you're seeing. And I'll just close with a few comments about the business. We talk about this a lot, but I think this was a quarter that really demonstrated how resilient this business is and how we can navigate just about anything thrown our way. The fact that we're sitting here in this first quarter in this choppy environment and we're able to put up 6% core operating profit growth and reconfirm that 8% plus target, I think, is a testament to the levers that we have to pull and the talent we have around the world. Our twin growth engines which are 80% plus of our operating profit, Taco Bell U.S. and KFC International, their underlying strength of their business is obvious when you look at the 10% unit growth at KFC or you look at Taco Bell's performance with low-income consumers in a value environment and the acceleration we're seeing in 2Q. Our development machine, we actually just put up the second highest quarter for gross development in…

Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.