Q1 2020 Earnings Call
[music].
Good day and welcome to the young brands troubles employee first quarter earnings Conference call Oh.
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I would now like turn the conference over to can't Senior Vice President Investor Relations <unk> I'm Treasurer. Please go ahead.
Thanks, operator, good morning, everyone and thank you for joining us on our call today, our David Gibbs, Our CEO, Chris Turner, Our Chief Financial Officer, Dave Russell, Our senior Vice President and corporate controller following remarks from David and Chris well open the call to question before we get started I would like to remind you that this conference call include.
Forward looking statement forward looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from those statement, we're going to do our best to provide our current thinking about the impact of the cobot 19 pandemic on our business, but obviously the situation is completely unprecedented and evolving.
So any forward looking remarks should be considered in light of the uncertainty regarding the severity in the region of the pandemic and the variables that will be impacted as a result.
All forward looking statements are made only as of the date of this announcement and should be considered in conjunction with a cautionary statements in our earnings release and the risk factors included in our filings with the FCC. In addition, please refer to our earnings releases and relevant sections of our filings with the FCC defined disclosures and reconciliations of non.
Non-GAAP financial measures that may be used on today's call. Please note. The following regarding our basis a presentation first all system sales results exclude the impact of foreign currency second core operating profit growth figures exclude the impact of foreign currency and special items for more information on a reporting calendar for.
Each market. Please visit the financial reports section of our web site. 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.
Upcoming Yom Investor event, and the following first disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the form 10-Q filing second second quarter earnings will be released on July Thirtyth 2020, with the conference call on the same day now.
Now I'd like to turn the call over to David Gibbs.
Thank you Keith and good morning, everyone.
Before we begin I'd like to take a moment to acknowledge the unprecedented challenges that we're all experiencing and say heartfelt. Thank you to our team members and franchisees around the world.
It's been amazing to see our entire system band together to take action to confront these challenges with unbelievable speed and while many of US are working to play our apart the Braves healthcare workers on the frontline has the most critical role and there are positive thoughts are with them as everyone affected by Covance 90.
Our goal today is to be transparent and give you timely information about the state of orbit.
I'll start with an overall review of first quarter and the current state in the business and use a few examples illustrate the power of our unrivaled culture and talent and unmatched operating capability I'll also highlight how our brands are adapting the red framework to be relevant easy and distinctive in this environment, then Chris will share more detail.
Sales of our Q1 results in currency, how we're adjusting our business model importing franchisees and our healthy liquidity position first Q1 results. We were encouraged by our momentum early in the quarter driven by the underlying strength of Arbor. However, as we signaled in our 8-K on March 24th quarter was heavily impacted by Covidien.
Indeed, which was the primary reason core operating profit declined 6% overall young system sales declined 3% as our same store sales declined 7% was partially offset by 4% net new unit growth the impact on our sales in each market has dependent upon the timing severity and duration of the outbreak as well as each.
Markets reliance on Dynasil importantly, we have seen early signs of recovery in markets that were first impacted by coal was 19 and stabilization and others. As one example at the time over 8-K filing approximately 7000 over global stores were completely core driven largely by government shutdown as various stores.
Closing reopened given changing mandate. This figure increased to about 11000. Since then stores have been slowly and consistently reopening with approximately 1000, we opened its from the trial, Chris will talk more about recent sales trends as a few minutes.
Since the onset of this pandemic the safety in support of our employees restaurant team members customers and franchisees has been our top priority.
First we moved quickly to reinforce and strengthen our already stringent protocol emphasizing hygiene cleaning insanity.
Next we leveraged the best practices of contact list delivery in Carryout pioneered body on China, which accelerated our execution of off premise or.
Simultaneously, we moved to suspend or dining room operations in many markets.
Brands also continues to expand protective measures for frontline restaurant team members, including protective facial covering increased usage of single use disposable globe temperature chair and physical distancing measured where possible. We will continue refining our practice is based on consumer feedback and the latest public health and government guide at our 1200 comes.
Many owned restaurants around the world, we are paying scheduled hours. The team members who are required to stay at home due to cope with 90, recognizing the vital role our restaurant general managers continue to play in need 1200 doors. We have provided 1000 dollar one time bonuses or AARGM. In addition to committing to pay their second key.
Order bonuses, even if the restaurant sales performance would not normally qualified also in June we will pay one time bonuses for the majority of team members working in our 1200 company owned restaurant. Our franchisees are also taking steps to increase supported restaurant team members. During this critical time finally, we created a global employee medical relief.
To provide financial support for restaurant employees at both company and franchise owned restaurants were diagnosed with or who are carrying for its on one diagnosed with Cowen 90.
I'd also like to share some of the steps, we're taking to help our franchisees bridge to the other side of this crisis as a 98% franchise system, where our business comprised of many independent and small businesses and entrepreneurs and our franchisees are lifeblood going into this crisis, we reassured our franchisees.
I would do everything in our power within the constraints, we were all facing to help them and their team we set up a global franchise health and Cobot 19 support team chaired by Chris Turner, and our general Counsels got catalyst to help our franchise partners navigate business continuity and assist them with access to all available sources of economics.
Board, including but not limited to young provided source to help our franchise partner, we are providing assistance to those who are in good standing and need more access to capital, including Grace periods for certain near term payment and deferring certain asset obligation, which Chris will talk more about now moving.
Onto our core Red Brad.
Each brand has listened intently to customer needs and quickly pivoted to adjust in response to the crisis, we partnered with our entire global franchise system on a share admission to provide affordable convenient food in the state low contact environment with Dr. Kurpad Carryout contact list delivery and mobile payment.
All enabled by our digital and technology capability in many ways covert 19 is accelerating trends we were already addressing in our business, let's start with KFC Division result, the division reported a Q1 system sales decline of 2% as an 8% same store sales declined was partially offset by 6% net new.
Unit growth given Cobiz 19 impact details were already provided by Yum, China on their earnings call, let's take a minute to walk through the KFC global business, excluding China outside of China, We had great momentum in the beginning of the quarter was 6% same store sales growth in January and 4% same store sales growth in February in particular.
We want to highlight the UK and the middle East for having a very strong start to the year as covered 19 restrictions became more prevalent around the world in March the full quarter ended down 2% for the KFC Division, excluding China as part of our Cobot 19 pivot contact list services are now available in 90%.
KFC market and we're doubling down on digital and expanding delivery global digital mix increased through Q1, driven by delivery and click and collect with particular strength in Thailand, and Australia. If current trends sustain KFC globally could end the year with more than a quarter of itself through digital channels.
Came to US is a perfect example of how are off premise and digital capabilities, along with family friendly affordable meal options are competitive advantages in the current environment KFC U.S. It made major strides on staying read by offering multiple variations of family style meals that customers can customized.
We now have a $30 still offer which includes 12 tenders as an add on to the $20 below truly incredible value with enough foods, a feed a family for multiple meals and focus we've seen a change in how people are accessing buckets of original recipe with digital sales increasing to approximately 10% today. This is up from.
No single digits, just a month ago, and importantly about 40% of digital sales are going through KFC Dot com, which launched late last year moving on to the Pizza Division system sales declined 9% with the same store sales decline of 11% and flat net new unit growth, excluding China Pizza Hut Division same.
Or sales were down 5% in Q1 globally Pizza hut has seen a mass shift in brand messaging focusing on contact list services food safety team member safety and giving back to the community in partnership with our franchisees, we were able to quickly develop appropriate protocols and training materials to support a rollout of contact.
As delivery Carryout and curbside pickup now available and over 90 countries. During the first quarter at Teesside U.S., we pivoted towards more targeted at higher margin QSR value construct and leaned into core product, while offering limited time promotional value on premium products, such as our specialty meet levers.
Pizza and the Big Denver, we're now starting to see the benefit from the marketing and innovation changes led by Kevin Hoffman, who is serving as interim pizza hut President and the early returns or reason for increased optimism about the pizza brand ability to succeed in a world where off premise and contact list are more important than ever recent gains in off premise.
Helped offset the impact of closing or dining room, and the vast majority of our express unit.
Expressed represented 5% of our overall system sales in 2019 at Pizza Hut International same store sales declined 4%, excluding China, our heavy delivery and carried out focus markets that have continued to be able to trade without significant restrictions have typically very well through the crisis. Thus far however, many country.
These across Europe, Latin America, and the Middle East has been significantly impacted by cold is 19 related closures and operating restriction well some of the dine in declines have been offset by an increase in delivery and carried out demand such as in the UK. The net impact has been a headwind historically for all of Pizza hut international off premise sales.
Have been 50% of sale and this quarter off premise sales increased to 70% to put this into context are off premise channel generated a positive 12% same store sales growth in Q1 and in certain Asian markets, Japan, Taiwan, and Hong Kong in particular, we saw off premise sales.
Growth, which more than offset dine in decline to deliver positive overall same store sales during the quarter turning to Taco Bell Q1 system sales grew 4% with 1% same store sales growth and 4% net new unit growth importantly, excluding the last two weeks of the quarter same store sales growth and view.
With trending toward an impressive 6% the years started with the value offering at a power price point with the one dollar double stack Taco. This was followed by Buffalo Chicken Fries, a very successful program with total sales mix above 9% like all of our brand talk a little responded quickly across all fronts to adapt to covert 90.
Taco Bell advertising is highlighting all premise options and offering free delivery on orders over $12 to grow hub in the us delivery and driving sales Creek cobot represented about 75% of sale. Now. This is nearly 100% of Taco bells, Bill with digital representing approximately 10%. We've also maintained our.
Below four minute drive through times, while simultaneously achieving an all time low end customer dissatisfaction. This is remarkable considering how quickly the landscape has changed finally, our taco Bell restaurants have the option to pause offering breakfast and adjust hours of operation as appropriate as best optimize the business model also during the first.
Quarter, we completed our acquisition of the habit Burger Grill, we knew all along that Russ Bendel and the whole habit team were very strong operator, and we've already seen this inaction and in fact, we've just 50 drive through unit. The habit team adapted quickly to the new environment by Rolling out many different order modes for carry out such as parking order Papa.
Rude and outdoor self order kiosks. Additionally, habit digital marketing shifted the focus on value and family meal bundle accessible through carried out in the delivery combined the operational and marketing adjustments of fueled our growth in digital ordering which is now about 40% of sales up from 10% versus pre cobot 19 level.
We couldn't be more excited about what the future holds for the habit and believe our acquisition of this trend board brands will prove to be a long term win.
Before I pass it over to Chris I want to offer a few thoughts on young position as we contemplated the future move toward a new normal.
As I see it we have four distinct advantages first our unrivaled culture and talent, our brand builders and operator that the arm or partnering and a wedding and at a pace. We've never seen before acting urgently on solutions that address the changing needs of our consumers employees and franchisee second our iconic brands each of which have endured.
Many challenges for over half a century and will recover from this challenge and become even more relevant easy and distinctive as a result, our brands consistently stand for value and convenience and normalcy all of which are highly sought out in these uncertain times and beyond third our business model our diversification across 200.
90, plus brand country combinations enables us to withstand sustained adversity.
Fourth and finally, our strength in the off premise segment will position us well for recovery and growth.
Cobas 19 is a stark reminder of just how globally connected we all are by working together, we can limit the spread of cobot 19, and support our front lines and community while doing our part to offer a convenient affordable food in a safe environment.
With that I'll hand, it over to our CFO Chris term.
Thank you David and good morning, everyone. Today I'll discuss our first quarter results April highlights 2020 guidance and our capital strategy to begin our first quarter results as David mentioned in Q1, we reported a system sales decline of 3% same store sales decline.
7% and net new unit growth of 4% on the development front, we opened 515 gross new restaurants for 65 restaurants on a net new basis and added 276 habit restaurants for an aggregate increase of 341 during the quarter.
Core operating profit declined 6% EPS, excluding special items was 64 cents, which included a six cents headwind owing to the change in fair value of our investment and grow hub as we signaled in our recent 8-K cobot 19 weighed heavily on our Q1 results and has had.
During a much more significant impact on Q2 as common and related government restrictions became more prevalent across the system, especially in western Europe and the use our overall same store sales deteriorated through the month of March before starting to trend better in April.
Help illustrate these recent trends I will share our latest rough approximation of recent same store sales growth as a reminder, our methodology has always been that temporary closures remain in our base for determining same store sales growth in the first week of March our global same store sales growth was approximately flat.
We then saw a rapid decline in the following week seeing same store sales drop to approximately negative 10%. The decline continued with yams global same store sales falling to beyond negative 30% on average across the second half of March and April. This includes the impact of approximately.
20% of our stores being close Pizza hut mobile same store sales in that timeframe, we're down to between negative 20, and negative 25% negatively impacted by significant dine and declines in most parts of the globe and closures in the U.S. expressed business, but bolstered by strength and carry out and deliver.
Taco Bell was a little worse with declines to almost negative 30% on average over this time period. Finally, KFC same store sales declines were approximately 35% during that period driven in large part by full closures of more than 20% of KFC restaurants since that time period.
And in recent weeks, we have seen global sales trends improved significantly across all brands and restaurants that are open and operating keep in mind, we still have approximately 10000 stores closed. So as we look to Q2 same store sales growth, we know that improvement will mostly depends on the pace of reopenings and continuing.
One of the current trends in Asia, and the use given the changed environment and results and outlook for our business. We have an active programs to assess and refine our plans for non essential expenses and capital spend as an example, and for the safety of our team members, we moved clearly and quickly to eliminate most travel and person.
Meetings until at least September we also implemented hiring freeze to be clear, we have not made any drastic reductions and corporate head count as our recently completed strategic transformation appropriately rightsize. Our business. However, we have teams working on identifying longer term opportunities to increase efficiency and to reality.
Hey resources toward the growth opportunities that should best leveraged our scale to drive sustainable competitive advantages for our franchisees well have more to talk about in the future. But these areas could include drive-thrus curbside carry out contact with delivery digital capabilities and other areas relevant and an off premise low content.
Environment, we're working with franchisees and impacted markets to help navigate business continuity in the safest manner possible. We're also working with franchisees who are in good standing and need more access to capital to provide assistance, including grace periods for certain near term payments where necessary. These grace periods.
To provide those franchisees with cash flow constraints and additional 60 days to pay two of their royalty payments and to provide additional breathing room. We have also deferred 2020 capital obligations for Remodels and new developments up to a year in the us and in select international markets.
Next our outlook for the business. There are many factors that give us confidence and the long term, including the strong 2019 and early 2020 momentum each of our brand has a strong track record and culture of pivoting to meet rapidly evolving customer needs. We remain steadfast that young has been and will remain.
In a high growth company generating strong returns for all stakeholders over the long term that said the unprecedented global nature of Copel 19, and the uncertainty around the timing and shape of various recoveries make it difficult to say when we will settle back into the Sabra and we're withdrawing guidance as a result now for our.
Ill sheet and liquidity position, we entered 2020 with a strong balance sheet with cash and cash equivalents of over $600 million, which excludes restricted cash and with nothing drawn on our $1 billion revolver, knowing that we would fund the acquisition of the habit in March and out of an abundance of caution we took steps to.
Bolster our cash balance and increase our liquidity position first in order to further enhance our liquidity given uncertainties in the macro outlook, we suspended our share repurchase program, we have not repurchased any shares under our 2 billion dollar share repurchase authorization, which was authorized in 2019 and runs through the middle of 20.
21, second we drew down $950 million of our $1 billion revolving credit facility. While a portion of this strong along with cash on hand was used to fund the acquisition of the habit Burger Grill. The majority of the proceeds were kept in cash third we issued a 600 million dollar five.
Year Yum brands incorporated holding company bond the coupon of 7.75% is reflective of the market conditions at the time as well as our preference to preserve a high level of flexibility given the insurance nature of the issuance in order to preserve future flexibility. The bond contains a call feature.
Allowing us to call the bonds after two years subject to a modest prepayment premium also increasing flexibility was our decision to issue the bond at the holding company level rather than issue from our restricted group subsidiaries, which I'll explain in a few moments bonds issued at the holding company carry a higher cost preserve the most flexibility.
As they are outside of our subsidiaries, which are subject to financial maintenance and debt incurrence covenants. Please note that we received the cash from this issuance on April 1st. So it is not reflected in our Q1 balance sheet. This debt issuance is especially notable because it reopened a high yield market that has gone nearly a month.
Without issuance this signals the strength of beyond branch credit in the mines of investors and lenders. We're very encouraged by the fact that we were able to raise capital and such a difficult environment. The net result of these actions was an increase in our cash and cash equivalents balance to over $1.1 billion, excluding restricted cash.
At quarter end or over $1.7 billion pro forma for the debt issuance cash we received on April Onest next I would like to provide some additional context on our capital structure and debt covenants, we evaluate our optimal capital structure, including our five times leverage target on a continual basis, we're all.
So very thoughtful and how we construct our debt structure within the context of five times leverage our debt structure is designed to balance costs duration refinancing risk and flexibility over time, we source capital from various financial markets, including high yield bonds leveraged loans and the asset backed securitization.
In market each market has its own unique investor base and characteristics, we like participating in each of these markets as participating in multiple markets provides access to a broader base of investors. We issued debt primarily from three distinct groups of entities each subject to different financial covenants equal.
During the young brands incorporated holding company, our restricted group entities and our Taco Bell securitization entity outstanding debt issued at our holding company consists of unsecured bonds issued under investment grade like in ventures, which includes no maintenance foreign corrupt covenants approximately $3 billion of our.
Gross debt issued at this Holdco model pro forma for our April 2020 issuance loans and bonds issued from our restricted group are subject to covenants that are typical in high yield indentures with various maintenance and incurrence covenants, including maximum leverage ratios and minimum coverage ratios.
Approximately $6 billion of our gross debt is issued out of our restricted group. Please note we provide restricted group financials on our website each quarter Lastly notes issued from our Taco Bell securitization entity, our typical in investment grade asset backed security issuances with various maintenance.
And incurrence covenants, including maximum leverage ratios and minimum coverage ratios approximately $3 billion of our gross debt is issued out of our Taco Bell securitization entity.
Including our outstanding revolver balance and pro forma for April issuance, our debt is approximately 92% fixed rate with an average duration of approximately six years and average rate of approximately 4.5% and minimal maturities through the end of 2021, we ended Q1 with significant growth.
Listen to all of the major covenants in both our restricted group and Taco Bell securitization entities and we will continue to monitor covenants going forward in light of the Covance situation.
Now the team and I are happy to take your questions.
Thank you we will now begin the question answer session.
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And today's first question comes from David Palmer at Evercore ISI. Please go ahead.
Thanks, and good morning.
Believe in your prepared remarks, you talked about where things bottomed in the second half of March and into early April in each of the global brands is or could you speak to the pace of recovery that you've seen in recent weeks in where things are lately and if there's anything unusual about that.
Those.
Things that are causing those weekly numbers to be we are somehow on sustainable would love to hear about that.
And then separately on the franchisee health I know that that's a big topic. These days could you talk to what you're seeing out there from your biggest franchisees are there any.
Major issues things that are causing your for franchise revenue to be in arrears or anything so.
Where we should be aware of thanks.
Thanks, David.
As far as the comments about bottoming I think we called out that the number of units that were closed at any one point looks like it bottomed at 11000, and then we have opened back at least 1000 of those if not a few more.
More opening more everyday so we think from a unit count standpoint, we're past the trough on that and backed into the business of reopening in fact.
It was just announcement that just came out the KFC UK is going to have on up to about 100 of their stores reopened by next week.
And then they are having success reopening stores, primarily through offering delivery from the reopening stores.
As far as the sales trends were really not going to comment in great detail about beyond the comment that we made that trends have improved significantly.
As we've moved through April.
Thats, owing to a number of factors.
Certain markets have really figured out how to operate in this environment.
Just to give you. Another example, the pizza hut, Japan business looks like it's going to be up well over 50%.
In the month of April so that's a business has figured out how to market with value and in this and low contact options in this environment.
Only KFC, Australia is doing well capes UK as I mentioned is re opening stores in the U.S. the stimulus impact on the consumers is obviously, helping our business in helping build momentum there well, but I think you heard last night from Yum, China that what they've learned of had gone through the recovery is.
At its been a little bit on even makes it very difficult to forecast, where bottoms, our and exact trends, but certainly look forward to sharing more details on sales when we get to the Q2 results I'll, let Chris talk a little bit more about the franchise health question that you asked and some of those issues. Yes. Good question on franchisee.
The health David the.
I'll provide a little bit of context on that I'd say first and foremost I've had a chance to work along with several folks at young with our franchisees through this crisis and it's just been amazing to see the great leaders that the men and women who lead these franchisee organizations.
Hi, great. Their leadership has been during this time of crisis.
And so focused on protecting and enhancing the safety of their team members of their customers and continuing to operate where the stores are open throughout the crisis and I think we're going to emerge from this with an even stronger bond with our franchisees.
On the specific topic, a franchisee health, we typically evaluate franchisee financial strength as new franchisees into our system and in some cases, we have contractual arrangements or policies.
And provisions in our arrangements with franchisees related to their financial House of course with 2000 franchisees across our 290 plus brand country combinations, it's really hard to paint the franchisee base or our arrangements with them with a broad brush.
Just to give you a feel for that in the U.S.
About 60% of our franchisees in the US operate one to three stores and many of them are feeling the same stress that small businesses across the country are feeling through this crisis.
Of course, we go around the globe, we have many larger franchisees.
In fact about 80% of our international restaurants are operated by franchisees with 100 or more units and while these larger franchisees are generally strong and resilient.
Any of them are feeling the same financial pressures that other large companies in other industries are feeling as a result of the crisis. So you know with over 2000 franchisees. We did have a small number that we're struggling before the crisis hit and in a few cases the sales impact of the crisis.
Has accelerated their financial distress and we're working with those partners to address their their health and their role when our system, but overall, we're fortunate that the vast majority of our franchisees came into this situation in solid shape.
And while we expect the vast majority to be able to weather the storm.
The challenges they're facing our real.
In many situations.
The franchisees are going to need a range of support.
Including not only assistance from Yum, which we've offered in the form of the royalty Grace periods and capital deferrals, but also from their other partners there lenders landlord suppliers distributors.
And many others in some countries including government.
Programs and support.
It really is an all hands on Dec situation and we appreciate all the support that all of the partners to our franchisees are providing and again, we appreciate the hard work that our franchisee leaders.
Our putting in.
Last thing I'll mention is that we are feeling some inbound requests from outside capital partners, who would like to put money to work in our system.
So when you think about that really gives us a multi layered approach to bolstering the health of our store network. It starts with the primary focus on working with our existing franchisees in particular, those who are suffering the most distress, but we do have backup plans with partners, who gets step and if needed and certain in certain parts of the globe. So hopefully that gives you a feel for the current.
Franchisee health landscape.
Thanks, Operator next question stiff Sir our next question comes from service or with Bernstein. Please go ahead.
Oh, sorry.
Putting in.
Hey, guys Speaker and just a clarification question.
The franchisee support.
I was wondering and I apologize if I missed this you could just talk about the franchisee expansion I.
I think that like the one line item that was higher than we had expected on first is very tight control from the other operating expense line. So just a little bit more color on that and think center, which is reflected the support that you.
Have provided and then.
After the Pizza Hut, you said, you're starting to see the benefits of the new marketing approach could you just talk about maybe what that looks like how you're measuring it as it is a customer satisfaction scores are sending more tangible I recognize that in this environment. There's a lot of puts and takes but just wanted to get all more color on that thank you.
Great. So this is Chris I'll start with your your question around the the bad debt expense and then I'll turn it over to David for the second part of your question.
So on the bad debt expense you did see noted in the release. This morning that that was a driver in both pizza hut and KFC.
And for Q1.
It continues to be a story of a small number of accounts. So I'll try to give you some context around it so.
In Q1, we had 28 and a half million dollars of bad debt expense, which is up about 22 million year over year versus Q1 last year.
Historically on bad debt expense, our approach has been to book allowances for specific doubtful accounts in general we include 100% of the balances for any franchisee that gets over 60 days in arrears.
This quarter one of the things that happened is.
As I'm sure you're whereas the implementation of the new gap standards on current expected credit losses.
So given the implementation of that standard we of course reflected on the.
Cobot crisis.
And the disruption that it's causing and we thought it was appropriate to book some additional allowance in Q1 and that represented about.
Five and a half million of the 22 million.
So the $22 million increase year over year. So that leaves about 17 million increase versus Q1 last year that was and franchisees specific situations that was primarily driven by a few KFC accounts, mostly in Europe, and Latin America, and a handful of pizza hut us accounts if.
Do I take this from a different lens just to give you a sense on on this being an issue around.
A small number of counts in Q1, if I take our total balance.
You know for.
The allowance for doubtful accounts.
On a global basis that if you took the top 20 franchisees that we have reserved.
Which is about 1% of our 2000 franchisees around the globe that represents about 70% of the total franchisees specific reserves a different way to slice the current balance.
About half of it is driven by Pizza hut, U.S. and Pizza hut U.S. again is driven by handful of accounts.
There are eight pizza hut U.S. accounts.
That drive.
80% to 90% of that balance we've discussed those handful of situations in the past.
So obviously thats just a snapshot of where we are in the first quarter.
As Keith mentioned, when we were opening up this call that's a really unprecedented situation and.
The pandemic is causing strain on our franchisees.
Equally in markets, where stores have been closed and we're working.
Hard with them to help bridge to the other side.
And as far as far as your question on Pizza hut. It we are very excited about.
The impact that Kevin Hoffman is having on that business and his new team. He's brought some new people in with them.
You've probably seen.
We've repositioned the brand's tag line to from our hub to yours.
That was done before the impact on our business from covert 19, but really reinforces our credentials as a delivery player.
Theres been all sorts of.
Work on.
The operations side in terms of our delivery capabilities, you've seen us rollout contact list carry out in addition to contact with delivery as a reminder, both of those things were invented by our Pizza Hut, China business and Joey Wat in her great team being very innovative and reacting to the challenges of this environment and now they roll.
Across all our business all around the world and in fact of also rolled.
Across the industry as it's a great idea to meet the needs of consumers at this time.
Yes. So this focus on contact list the repositioning of the Brent brand and focusing on the delivery and carry out component actually led to a recently, we said a digital sales record in the pizza us business doing more sales on a typical Friday than we did on the left on either.
The last two Super bowls, which held their previous record. So it gives you a sense that the brand is going through some rapid changes things that have been on our roadmap.
And what I like to say is.
Yes.
Three month period, we're in right now is basically you're going to have three years' worth of changes to our businesses and its accelerating the the.
Plan that we had for pizza hut and getting us to be truly this digital delivery carryout business.
That.
And in other Baigent benefit to the Pizza brand, which.
Kevin in the team are leveraging its just the trust the consumers have with the brand given its long operating history and being part of the fabric of the community.
Pizza Hut's, a trusted restaurant brand and at times like this I think consumers are turning to those kinds of brands.
Next question operator.
And our next question comes from Dennis Geiger, Yes. Please go ahead.
Thanks, and apparel doing well I'm just wondering if you could talk a bit more about the longer term unit growth and potential impacts.
During the call that situation you know understanding it's difficult to determine when you settle back into that algorithm could you help us think a little bit about the puts and takes to unit development over the next couple of years, maybe how the current situation could could broadly impacts franchisee demand or ability to to open units based on access to capital et cetera, any kind of.
Puts and takes in.
Would it would be great. Thank you.
Obviously, we're excited about the unit growth that we delivered in 2019 with over 2000 net new units.
And.
And that was obviously up from 18, which was up from 17, we've had sequential improvement in unit development and expected that to continue into 2020. This new environment changes a lot of the variables, but we still think.
Long term that the ability to grow our unit count will be there that may be it may be slightly different.
Obviously with off premise being a bigger part of the equation.
Assets, maybe a little bit more design for off premise and they are today.
In terms of the variables Dennis as you think about this.
There could be an opportunity from a real estate standpoint, I think Yum, China talked about this last night on their call there could be an opportunity for locations that might not have previously been available.
Brands that are doing well in this environment should have an opportunity to expand their footprint.
Of course, there is going to be the challenges in the short term our capital availability to our franchisees and.
And that's something that will work with them to get through but.
Weve, obviously withdrawn our guidance I'm not going to give you exact numbers about what we think about the future, but theres no reason to think that this brand that our business in any way shape or form is not going to be a growth business long term and unit development is a big part of that.
Thank you next question.
Our next question comes from David Tarantino with Baird. Please go ahead.
Hi, Good morning hope everyone is doing well.
Chris My questions about the level of cash that you might need to consume here in the short run.
To assist franchisees I was wondering if you could help frame up.
That dynamic and then as you think about bad debt expense heading into the second half a year.
Hi, guys.
How are you thinking about the rest of allowing some of the I guess weaker performing franchisees to defer payments and what that might look like as the year unfolds here.
Yes, Thanks, David.
Good questions obviously.
Managing for any for all companies right now managing liquidity through the crisis is.
Top of the topped the list.
We feel really.
Look we're in a really strong position given the moves that we made.
That I mentioned earlier.
Around.
Starting last year hitting pause on.
Share.
Share purchases.
And then making the bond offering.
Right at the beginning of April that.
Shored up our cash position, we think that gives us.
Plenty of liquidity and put a plenty of cushion.
To work with our franchisees as we move through the next quarter. So you think about these grace periods, it's only a subset of franchisees who will be taking those weve.
You are making those available franchisees, who need the access to capital and so.
If you think about our cash.
Burn over the next few months.
In the number one factor is whats happening to the.
The overall sales rate.
And then second we will.
As we see franchisees take advantage of the Grace periods, we will see.
A couple of months there were.
Well have fewer royalties coming in the door, but then as we collect on the back end of that.
That will shore backup, but we've got plenty of cushion we feel with our current cash position.
In terms of franchisee health as we mentioned one of the qualifications for being able to take advantage of those grace periods for the franchisees who need it is that they're in good standing.
And so.
Around the globe hour.
Brand teams.
I have worked closely with the franchisees.
Two.
Manage eligibility into that program, so thats something that we've been.
Managing carefully as we go through this but as I've mentioned earlier it's.
This is just one leg of the stool, there's so many other components.
Starting with the great leadership of our franchisees and what they're doing to drive sales.
Sales, what theyre doing to drive the performance of their own businesses plus all of the assistance or getting from there are other partners in certain cases, and it's the collection of those that give us confidence about.
How our franchisees come out on the backside even stronger.
Thank you next question operator.
Next question comes from John Glass of Morgan Stanley. Please go ahead.
Thanks, very much I appreciate that visibility on unit openings.
Is is unclear at this point do you expect though an uptick in the number of permanent closures in the system and if so what do you think that is could you specifically inside of that talk about the P type situation. The USA I think there was already some anticipated closures does that accelerate that process.
And then finally, you talk about franchisee assistance in relief fund royalties are there other options on the table or do you draw. The line there I'm thinking about either add fund contribution top ups from the company or even direct capital injections into certain franchisees at that but those are considered options or not.
Okay.
Thanks, John I guess on your first question on a unit development, you're right. It's unclear just because of the variables that I mentioned earlier.
Certainly when you have 50000 restaurants around the world there.
We're naturally closing certain number of them every year. That's why we opened a growth number of units and have net openings, which is what we talk about so to the extent that there may be some situations that we want it to get out of with units. This would be an opportunity to take advantage of them. If they're close now, but I don't we're not anticipating a massive number.
Of permanent closures coming out of this.
And as far as the Pizza business goes you know in the U.S. as I mentioned, Kevin Hoffman of franchisees are working really closely together to take the brand to new Heights and.
Become the modern delivery player in the category.
That involves the asset base and they're working together on that.
So there maybe opportunities there, but again capital under other constraints that will play into that.
As far as the relief that we're providing for the franchisees as Chris has described it it's a grace period.
And the money is coming back to us at the other into the Grace period really haven't been discussions about other items like advertising or any or anything like that and we think the franchisees are working closely with us and we're getting through this.
As you know, but as far as other options for things that we might do there maybe a couple of specific situations, where we'll have to do something beyond different than what we've described but there's no wholesale other programs about the launch to address any of that.
Thank you operator next question please.
Our next question comes from Andrew Leslie Charles will kill it sort of Cowen I'm sorry. Please go ahead.
Great. Thanks, one clarification the question within Taco bells, 30% sales declined to end of March conceptualize, how much that is attributable to contributed to the lack of breakfast. Both in terms of sales in the store counts and then my question was really just in the come around the outside capital is available to assist here just curious what that means for what options are on the t.
Able really is this a willingness to take on more debt could this perhaps even a pipe in the business just just your thoughts and what kind of isn't range play there. Thanks.
Thanks, Andrew as far as talk about specifically I do want to just give a shout out to marketing and the Taco Bell team, who put have a great year in 2019, and then as we mentioned in the script.
We're chugging along at 6% same store sales growth until the impact of covert 19, I've been really proud of how the Taco Bell team has reacted to this as you mentioned in many ways. Their business has had the most impact because they have.
Breakfast business, which are other businesses don't and because they were reliant on on late night as some of you can imagine the breakfast businesses impacted when people aren't on the road is going to work, they're not going for you to drive through for breakfast as much and the late night businesses, obviously impact of people aren't out in bars and theaters and things like that so that Taco Bell had the.
Impact from that but their core business to drive through business. As you know is perfectly designed for this time and then they're embracing the delivery and and carry out model and.
I think Taco Bell and there to their creative team is well positioned to get through this.
As far as the outside capital that wasn't meant to imply anything along the lines of.
Pipe or anything like that that was more design.
Address if we do have franchisees that are in financial distress. One of the options. We have is interested buyers outside the system. In addition to in many cases buyers in the system.
As options to take over those businesses and restructure them. So.
I think people recognize that Yum given this skew towards off premise is well positioned to come out of the stronger and there are lot of.
Outside people wouldn't with capital that want to participate in that which Chris and the team will take into account as we address the few situations that become problematic.
Thank you operator next question please.
Your next question comes from John I haven't heard with JP Morgan. Please go ahead.
Hi, Thank you.
Just kind of looking at this overall crisis.
Just curious if there's any initial type of thinking about.
Maybe as you kind of look at that at the at that Corporation. The brands on comment that the need to I guess accelerate some work or do they get even deeper on things like digital consumer insights and data. If there is an opportunity you know I mean again kind of coming out of the other side of this you kind of think about the way that young as a corporate.
Jason is structured or are you happy what the work that you've done in the past couple of years from a structural perspective and secondly in related is there an opportunity that had some of the brands and sells work closer together I know from many logical reasons a lot of efforts have had to be silos, but is this an opportunity to maybe you kind of applying.
More comprehensive digital data consumer insights effort across all the brands that young and maybe you do some were cross brand functionality that perhaps you weren't doing before.
Oh, yes, great question John.
As I mentioned earlier I really do think the few months that were in the middle of right now are accelerating a lot of trends in the business that would have taken years to take hold like digital ordering pay and things like and delivery and technology and all the stuff that everybody is talking about.
So in light of those things.
We've already been working on we've talked a lot on these calls about the fact that we've beefed up our technology team, adding clay Johnson and and at the brand hitting all sorts of talent and all of different projects that we have to become much more technology oriented and leveraging that for our business.
Well those things lend themselves to cross brand collaboration one of the great things that's going on right now is myself and all of the brand teams.
The young executive team our meeting every other day.
On this crisis to compare notes and leverage our learnings from around the world we sit in a very unique position.
Starting with leveraging the learnings that came out of Asia, and Yum, China, but all of the other things that are going on around the world right. Now. This is a great opportunity for us to work closer together and that's exactly what's happening. So I don't think thats going to be a structural change I think it's a mindset change I've talked a lot about the need for even more collaboration.
In the new World, that's happening and I think that will serve us well when we come out of this on the other side.
Thanks, Operator, we have time for one more question. Please oh.
Okay. Today's final question will come from John Power with Wells Fargo.
Awesome great. Thanks, just a couple from me first.
How close here, you're working with the franchisees to access the triple P. loans in the U.S. and then.
I guess second.
In terms of thinking about historically the growth of the franchise system. The new store growth how much of that has been self funded versus debt funded and then I guess lastly, if thinking about this business longer term and and I think you just kind of answered part of this but kind of continuing the threat has there been anything that you've implemented throughout this crisis that you.
I believe will carry forward from an operating perspective post crisis across the brands. Thank you.
Why don't I take the last two and then I'll turn it over to Chris on the PPP.
As far as new store development.
The same thing that Chris talked about we've got 2000 franchisees.
Some of them have no debt like Yum, China some of them significant debt. So I don't know that Theres, one broad brush answer to how we financed new store development.
I think some of it is through taking on debt and others are doing it of the cash flow of their business.
Clearly the increase in new unit development indicates that the return.
Almost all of it being done by franchisees indicates that the returns franchisees are getting meet all of their requirements and we still we do think that those that can access capital or have capital, we'll take advantage of the opportunity to build that potentially at unsecure sites that potentially better rates right now.
As far as.
You know the.
Are they.
Third part of the question, what things will sustain a what things will sustain yes. It's a great question in terms of what the future of the restaurant industry looks like obviously, there's these trends that are accelerating right now the as I mentioned digital ordering pay delivery and off premise I think automation has a bigger role to play in in the business as people look for less contact.
Their food.
But then I also think that this is creating new opportunities that play to the strength in young we have this strength in value and convenience and really customer Trust. The foundation of QSR has always been value and convenience, but these may have different definitions as we go forward. So convenience one of the things I'm excited about his curbside pickup.
Curbside pickup in a contact list way is really a great way for customers to can take control of the order process.
It has all sorts of advantages over over delivery in some ways in terms of cost accuracy and time, and we're seeing surprisingly well our delivery businesses, increasing our carryout business through these contact list.
Upside pickup like we've launched a pizza hut is also increasing pretty strongly.
So thats a changed I think is here to say I bought a I'd want to TV. The other day and did it through curbside pickup and it was an easy process and I know consumers are starting to talk more about that I think on value you're seeing a big change in terms of family meals, obviously with more people eating at home I think some of that it's going to stay in.
Our brands have been graded pivoting to offering more value and larger party size constructs.
And I think the thing that we probably haven't talked about enough is when you have three brands like we have with the history that they have with consumers. There's a level of trust the consumers have I've seen it in a lot of surveys about what brands. They want to use at this time. They really has to be that trust, we've always been about things like going above and beyond and food safety.
We've had a long history of operating in the communities that people live in and I think they trust our brands and I think that trust in brands is going to continue.
I'll, let Chris talk just a little bit about franchisee accessing PPP and then I'll close out.
Yes on the question of government support again, we're thinking about franchisee health globally, and we think about our 2000 franchisees around the globe I mentioned earlier the mix of.
Small businesses and larger businesses.
They all when we when we talk about that sales dropped that we experienced in March.
You know the overall average being down 30%, but in some markets with full closures those franchisees.
Parents, even bigger drops that was a dramatic cash flow.
Hit too.
Any of our franchisees in markets that were affected like that and.
As we mentioned given the nature of the pandemic its requiring this multifaceted solve that thing.
The franchisees.
Driving the business Yum, providing things like the grace periods. The other suppliers being involved and these government support programs. Those government programs are different from one country to the next the nature of the program and the extent of the program. It is obviously specific to what each government in each country or locality.
Is doing.
To the extent, we can we tried to help our franchisees understand.
Those programs and we appreciate that they're available.
Ultimately, it's the individual franchisees decision to access.
Any of those programs, but certainly to the extent the franchisees have been challenged and the aim of many of those programs around the globe is focused on keeping employees employed keeping them safe.
And helping.
Provide a service to consumers in that market.
We appreciate the fact that thats been there too to support our franchisees in markets, where it's been available around the globe.
Great Thanks, Chris and thanks, everybody.
Just want to reiterate we as you all know we finished 2019.
Really strong note and we're off to a good start in 2020 before the impact of covert 19.
Business on a widespread broad basis.
It was in good shape before the head of 2019, but we're incredibly uniquely positioned to get through this and come out stronger and that is our marching orders. That's all we talk about is how do we identify the consumer trends that we need to react to.
Be nimble and evolve the business leveraging the learnings that we have from those 290 brand country combinations, our unrivaled culture and talent, particularly in terms of the way.
We're always been attuned to consumers needs and constantly evolving what we offered to the changing consumer is serving us well in this time of changing consumer needs. Our iconic brands as I mentioned with the trust and this combination of value and convenience the diversified business model with 290 brand country combinations gives us ability to leverage learnings from.
Around the World and then finally, the fourth point is off premise. It's really made we are made for contact list.
Just one simple stat in the U.S. talk about and KFC, 95% of their stores have drive throughs. These are we're always competitive advantages, but bigger advantages today. So just finished by thanking the people that bring our business to life on the front lines everyday that have been amazing as we've gone through this our employees in the restaurant.
And our franchisees are franchisees are building stronger bonds with us than we've ever had working together to get through this together and their employees are doing an incredible job serving consumers safe food in a contact list manner to bring some normal flow to fill their lives. During these challenging times. Thanks, everyone for your time today.
Thank you. This concludes todays conference call you may now disconnect your lines and have a wonderful day.