Q2 2020 Yum! Brands Inc Earnings Call
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Okay and welcome to the young brands.
Third quarter 2020 earnings conference call, all participants will be any listen only mode should you need assistance. Please pick my conference specialist bypassing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions.
As a reminder, we ask that you. Please limit yourself to one question to ask your question. Please press Star then one. Please note. This event is being recorded I would now like to turn the conference over to Keith Siegner, Vice President Investor Relations Emanate and Treasurer. Please go ahead.
Thanks, operator, good morning, everyone and thank you for joining us although called today. Our gave it gives our CEO, Chris Turner, Our Chief Financial Officer, Dave Russell, Our senior Vice President Corporate controller following remarks from Dave and Chris will open the call. The question before we get started I'd like to remind you that this conference call includes forward looking statement.
Forward looking statements are subject to future events and uncertainties that could cause our actual results to differ materially from the statement, we're going to do our best to provide our current thinking about the impact of the covert 19 pandemic on our business, but obviously this situation is completely unprecedented and evolving so any forward looking remarks should be considered in light of the uncertainty regarding I said.
Already in duration 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 the cautionary statements in our earnings release and the risk factors, including in our filings with the FCC indecision. Please refer to our earnings releases and relevant sections of our files.
At the FCC defined disclosures and reconciliations of non-GAAP financial measures that maybe you on todays 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 broad.
Casting 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 will be included in both our lives conference and in any future use of the recording we'd like to make you aware of upcoming Yom investor events and the following first disclosures pertaining to outstanding debt and our restricted group cash.
Capital structure will be provided at the time of the form 10-Q filing second third quarter earnings will be released on October 29, 2020, with the conference call on the same day now I'd like to turn the call over to Mr. David Gibbs.
Thank you Keith and good morning, everyone I want to start by thanking in recognizing our employees franchisees in restaurant team members around the globe. They have adapted to the incredible challenges of 2020 with remarkable agility, bringing our delicious affordable food to customers in a low contact manner. As a result, we're well positioned to leverage our SKU.
Alan capabilities to generate profitable system sales growth in the new customer environment on the foundation of our resilient highly diversified business model, we're driving our recipes for growth and good to emerge a stronger company for all stakeholders are recipe for growth using our four key growth drivers continues to guide our business.
Strategy, So I'll start with an overall review of the second quarter and use a few examples to illustrate the power of our relevant easy and distinctive or read brands unmatched operating capability and unrivaled culture and talent growth drivers then Chris will share more details of our Q2 results.
Our goal restaurant development growth driver and are healthy liquidity position first Q2 results.
Quarter was significantly impacted by Cobot 19, the primary driver of our 25% core operating profit decline overall young system sales declined 12% with a 15% same store sales decline offset by a 3% increase in net units year over year.
The impact on our sales at each of our market depended on the timing severity and duration of the outbreak as well as our reliance on dine in sales in the market overall, our sales declines were primarily driven by temporary store closures, which peaked in early April at about 11000 restaurants. We then experienced a consistent pace of reopening until our.
June 10, 8-K filing when approximately 5000 units or 10% of our global system remained close I'm excited to share that closures of now fallen to less than 2500 units, which means roughly 95% of our system is open for business in full or limited capacity.
The remaining closed stores are disbursed around the globe with about 70% located in balls transportation centers airports and like we are encouraged that generally speaking when our stores are open customer trust in demand. Our hi. This is true even though the majority of our dining rooms have been and remain closed.
Highlighting the importance of executing the off premise occasion wealth and demonstrating the resilience of our business model. Our brands are becoming even more read by leveraging consumer insights to adjust operations menu options and marketing and by digitally enabled off premise capabilities across the globe with our focus on delivery carry out in digital we.
Have passed some tremendous milestones. This year, we now have over 34000 restaurants offering delivery around the world, representing a 13% increase year over year in part driven by expanded aggregator partnerships. Our digital sales mix has increased dramatically to over 30% of system sales of 15 point year over year improve.
Movement to put that into context during the quarter digital sales were approximately $3.5 billion a $1 billion step up from Q2 29 team our brands working in concert with our young Central technology team have shown remarkable agility and we'll continue to unlock sales growth over the.
The near and long term, that's a perfect segue to our for Red brands, Let's start with KFC Division results Q2 system sales declined 18% as a 21% same store sales decline was partially offset by 6% net new unit growth.
Encouragingly trends improved from early April troughs fairly in line with the rate of store reopens.
KFC started the quarter with 5000 restaurants temporarily closed peaked in mid April with about 6000 closures and following a massive effort to reopen ended Q2 with about 95% of stores open.
Our performance in open stores was primarily linked to off premise capability within a given market. We saw consistent strength in Canada, the U.S. and Australia and after government mandated closures evolved we saw resiliency in Germany in the UK all of these markets have good drive through coverage strong.
Off premise capabilities and robust digital foundations Western Europe in particular, KFC, France, which was hit hard early on led the way in reopening markets, where all channels and restaurants had been closed due to lockdown. The local team took action to keep our team members and customers safe, while working with government bodies to ensure that we were.
Among the first QSR is to reopen.
In the US KFC is serving the right occasion at the right time fulfilling families needs for delicious meal to take home and unpack around the dinner table.
The timing of our launch of KFC dot com for pickup and delivery. The addition of new Aggregators and are bundled bucket meals that travel well all contributed to a fantastic quarter. We recorded the highest average sales per store in the brands history. During a week in early May and we finished with 7% same store sales growth.
For the quarter.
Moving on to Pizza Hut, the Division reported a Q2 system sales decline of 10% with a 9% same store sales decline and a 1% net new unit decline.
Pete had entered the quarter with over 3500 restaurants temporarily closed due to the covert 19 pandemic with same store sales growth trending in line with temporary closures closures. Then peaked in mid April with about 4000 restaurants temporarily closed by the end of Q2 about 87% of Pizza Hut's were open with Pete.
Had us express stores, representing half of the remaining closures in general market that operator dine in segment have significant stores in malls or transport hubs or have expressed units have been most impacted by closures and government restrictions.
While the effect has been partly offset by increases in delivery and carriers demand. The net impact globally has been the headwind.
At Pizza Hut International temporary closures peaked at approximately 24% in April.
Importantly, certain markets, including Canada, Japan, and Australia closed the quarter with positive result, though this was offset by markets with a substantial dine in and express footprints. Those markets include the UK much of Europe, and Central America, the Middle East and select markets in Asia.
In aggregate off premise channels generated a positive 10% same store sales growth and represented 80% of total sales internationally.
At Pizza at U.S., we balanced value and innovation as we introduced the 999 large three topping deal and premium products such as the big different the big airbags.
Same store sales grew 5% in the second quarter and I'm excited to share that an early made to use recorded its highest average sales week for delivery in carried out in the past eight years are off premise channel generated 21% same store sales growth when excluding the drag of closed express stores or 16% same store.
Sales growth when including the drag of closed express units during the quarter, we launched our contact list initiative by adding additional pickup and payment options for customers. Since March 2020 Pizza that served close to 20 million contact list digital orders. We've also welcome several million, new and Reengaged customers to our hot roll.
Rewards loyalty program.
As Taco Bell system sales declined 6% driven by an 8% same store sales decline, partially offset by 4% net new unit growth.
Taco Bell temporary closure peaked at 500 at the end of Q1 and had reopened 100 units by mid April by the end of Q2 about 97% of talk about units were open.
At Taco Bell U.S., we pivoted, our marketing to promote group bundles drive awareness of contact list drive thru and delivery and thanked our fans heroes and communities by giving away free to read those locos tacos recovered this with a bundled value offerings, such as cravings boxes and party packs and are all new at home Taco bar, which support.
Good record breaking sales on Cinco de Mayo and further establish Taco bell as a destination for groups and to adjust to widespread dining room closures, our company and franchise partners double down on World class operations as Taco. Both served an additional 4.8 million cars through our drive-thrus, while achieving an 18 second.
Faster dry through time year over year.
Taco Bell has always been an easy brand for customers to access and now with the ability to order on the Taco Bell App and pickup through our World class drive through they are redefining the easy part of Red.
During the quarter, we added over 1 million new users to our active ecommerce platform grew our mobile App and Taco Bell Dot Com. These operational improvements and increased focus on digital and delivery have made an impact in driving profitable growth for our franchisees and we're extremely proud of our operators for making it happen following into.
Eventful first full quarter as our newest brand I'm pleased to share details about the habit Burger grill with the majority of the habits assets being in line or end cap units coated 19 significantly impacted habit sales just as we were closing on the acquisition in mid March with over half of sales typically coming from dining and.
Temporary closure is running at approximately 10% of habits throughout the quarter. They faced a massive headwind impressively from the April sales lows. The habit quickly turn things around by shifting focus to off premise. They ended Q2 with an 18% same store sales decline, mostly due to temporary closure.
Others and recent trends for open stores are flat to slightly negative.
During the quarter the habit built customer awareness of new access options and shifted marketing to focus on family meal bundles, such as the variety meal that can feed a family for only $30 digital ordering via mobile and kiosk represented 40% of sales during the quarter and importantly, each month. This year, we have seen us.
Steady increase in the number of App downloads I've been incredibly impressed with the resilience of this brand the agility of the entire have a team and the know how sharing taking place between habit and our legacy brands. None of us could have imagined how Q2 would play out when we made the decision to acquire the habit, but I'm more confident than ever that the Brandon the team.
We will create a new long term growth opportunity for young.
I'd now like to spend a moment on the current state of the business.
Course, there remains incredible uncertainty in the global macro outlook, owing to covert 19, and its implications as evidenced by the different trends, we see in each of our 290 brand country combinations due to this uncertainty we must remain vigilant.
That said we are encouraged about our continued store reopenings the general financial health of our global franchisee base and our own strong liquidity and balance sheet.
Just as importantly, same store sales trends for open stores stabilized in June just a few points short a flat and despite the majority of our dining room still being closed these trends have continued into July.
Finally earlier this year, we elevated our recipe for good to serve as our roadmap for young global strategy for citizenship and sustainability that recipe is built on the three key pillars of food people and planet. Those of you familiar with you. All know we have always been a people first company committed to ensuring a safe welcoming and inclusive environment for.
Our customers and employees.
But recent tragedies across the U.S have revealed a stark and unacceptable reality and have shown us that we must do more to that end at the end of June we announced our unlocking opportunity initiative with a 100 million dollar commitment over the next five years of which 50 million was funded in the second quarter.
This initiative will promote equity and inclusion education and entrepreneurship for our employees frontline restaurant teams and communities around the world and will serve as the cornerstone of our recipe for good going forward.
I look forward to providing further updates on our progress on unlocking opportunity as we bring utilized.
With that I'll turn it over to Chris.
Thank you David and good morning, everyone. Today, I will discuss our second quarter results old restaurant development, and our strong liquidity and balance sheet position.
But first I'd like to express my appreciation for the focus and execution of our team members around the globe, who rose to the occasion and generated competitively superior results. It has now been a year since I joined young and the challenges Cobot 19 has presented to the entire restaurant industry has given me an even greater appreciation for the power.
And resilience or beyond is unique and highly diversified business model that combined with our tremendous strides in digital and delivery innovation and operations give me confidence that young was is and will remain a high growth company generating attractive returns for all stakeholders to begin let's discuss Q2.
As David mentioned core operating profit declined 25% during the quarter and overall Yam system sales declined 12%. This was driven by a 15% same store sales decline, partly offset by a 3% increase in net units year over year.
Brand, most impacted whats KFC, where operating margin, excluding FX decreased approximately 8% versus prior year driven by lower same store sales due in large part to temporary closures higher bad debt expense and lower company restaurant margins, partially offset by net new unit growth.
Excluding the habit general and administrative expenses, excluding FX and special items were approximately flat over the second quarter 2019, as one time cobot related expenses were offset by reduced any other efficiency actions and onetime savings interest expense was approximately 100.
31 million, a 10% increase from prior year, driven by higher debt balances, including our outstanding revolver balance, partially offset by lower interest rates on our floating rate debt.
We recorded $84 million, a pretax investment income related to the change in fair value of our investment and Grubhub, which resulted in a 21 cents benefit to EPS in the second quarter.
As we recorded $24 million, a pretax investment income and the second quarter of 2019 for a six cents benefit to EPS, our grubhub investments favorably impacted year over year EPS growth by 15 cents.
Our effective tax rate was 18.8% during the quarter a decrease from the prior year driven by tax benefits from share based compensation.
Adding this up EPS, excluding special items was 82 cents.
This represented a 12% decline compared to ex special EPS of 93 cents in the second quarter of 2019.
On the bold restaurant development front, we delivered 3% net new unit growth over the second quarter of 2019.
This was benefited by the addition of 276 habit restaurants in Q1 of this year and the stellar unit growth. We had in the second half of 29 team during the quarter. We opened 328 restaurants and closed 446 with openings led by China Asia, The Us Russia and.
Thailand.
Put the quarter into context, cobot, 19 impact and uncertainties led to lower than normal gross openings and somewhat higher than normal closures, which in combination drove year over year net unit growth to 3% compared to our recent run rate of 4%. These uncertainties should abate into.
And we remain confident in the long term outlook for net unit growth backed by strong unit level economics next the vast majority of our restaurants temporarily closed due to the pandemic have already partially reopened and we continue to monitor those few areas of the world, where we have restaurants that remain temporarily.
Most cobot 19, economic impacts and recoveries are unique to each country and hard to predict.
Therefore, while it's possible some of these restaurants may end up closing permanently as of now it is too early to forecast that outcome with accuracy.
As we've highlighted over the past few months, we're supporting our Threec franchise partners during the pandemic. The primary tools for doing so include capital obligation deferrals and royalty grace periods, which have largely been successful and helping our franchisees.
Where franchisee cannot continue to operate due to deep financial distress, our preference is to assist with having a new or existing franchise partner acquire and operate their restaurants as David mentioned, we've been encouraged by the resilience of our franchisees during the course of the pandemic.
Partnering with and supporting them through the crisis highlighted the importance of ensuring a strong system.
The general health of our global franchisee base is good and the vast majority are expected to emerge from the pandemic well position for future growth as our focus shifts from short term crisis management for long term growth. Our recently formed franchisee Health Committee is working to enhance our visibility into the health of our global system.
And to ensure our franchisees maintain long term financial strength.
As it relates to the chapter 11 filing of NPC, one of our Pizza Hut US franchisees. This was an expected development and we view it as an opportunity to create a better future for pizza hut restaurants owned by MPC and therefore, the overall system in the us as the proceedings continue we expect that there will be some issue.
Is that we can result, with MPC and related parties directly and others that will require briefings and court rulings ultimately, we will support and outcome that results in a lower more sustainable level of debt a higher focus on operational excellence and a greater level of investment for the restaurants in the MPC system.
In Q2 bad debt expense related to royalties rent and other franchise services. We provide was $13 million an increase of $11 million compared to the second quarter of 2019, but well below our first quarter figure the expense was attributable to incremental bad debt and KFC and.
International due to financial hardships and countered by certain franchisees largely due to temporary store closures as well as bad debt in the us related to NPC.
This increase was partially offset by significant recoveries in the U.S. related to pizza hut as sales and unit level profitability rebounded strongly during the quarter. We are encouraged with the improvements shown in the second quarter.
Now for an update on our balance sheet and liquidity position as well as our latest thoughts on capital structure and priorities for capital allocation.
First we ended Q2 with cash and cash equivalents of $1.2 billion, excluding restricted cash.
This represented 5.5 times net leverage of consolidated EBITDA, which is slightly above our historical target of approximately five times.
Importantly, we began paying off our revolver draw during Q2 with only $575 million drawn at quarter's end compared to $950 million drawn at the end of Q1.
When considered alongside with the 47 cents dividend we declared during the quarter. We believe this should clearly demonstrate the confidence we have in our liquidity position at this time second our capital priorities remain unchanged invest in the business maintained a healthy balance sheet pay a competitive dividend and return.
Remainder excess cash flows to shareholders via repurchases regarding our commitment to a healthy balance sheet. We plan to continue repayment of our revolver drawdown and to grow back into our historical five times consolidated net leverage target overtime.
Third we are ending the suspension of our 2 billion dollar share repurchase program.
We may resume repurchases should business trends persist and should we continue to gain confidence and the timeline for achieving a healthy balance sheet as I just outlined.
As a reminder, we've not repurchased any shares under our current authorization, which runs through the middle of 2021 in summary, Young's future is bright our business model has proven resilient growth and our digital capability and sales has accelerated and overall sales continued to trend in the right direction.
And as we reopened.
We remain confident our brands our purpose built for delivering a modern off premise dining experience to customers around the globe.
Just as important to our long term growth the investment case for building new units is as strong as ever, especially when enhanced by our continued investments in digital capabilities, such as ordering and payment and and enhanced derived through and numerous contact close off premise access options.
By leveraging the scale benefits to drive profitable system sales growth for franchisees. We believe we are well positioned to accelerate growth and create value for all stakeholders in the future that said lingering uncertainties remain for the near term, which make the timeframe for such acceleration difficult to forecast with comp.
Thanks, Therefore, we believe it is still too early to reassert specific guidance.
We appreciate your understanding and look forward to discussing progress in coming quarters.
Now the team and I are happy to take your questions.
Thank you we will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone.
You are using his speakerphone. Please pick up your handset. This war pressing the key to withdraw your question. Please press Star then too as a reminder, we ask that you. Please limit yourself to one question at this time, we will pass momentarily to assemble the roster.
The first question today comes from John Glass of Morgan Stanley. Please go ahead.
Thanks, very much Chris just going back to the to the to the comments on development what are the conversations or the franchisees matters by market by brand.
Are you willing to change your philosophy in terms of capital allocation to sort of help me Kindle that growth in certain markets. How did they think about the share opportunity ahead to them in certain markets, where some of the smaller chains independents.
I know you're not going to give specific guidance, but can you talk about their relative enthusiasm as the too early given comment about that about resumed resuming growth in various markets.
Yes. Good good question, John Obviously AD unit development and growing our network has been an important part of our algorithm and we think and the long term we remain.
Confident that there will be an important part of Yom's a story, obviously the given the uncertainty in the near term.
We're not sure when we'll get back to that but if you think about the factors that actually are driving this conversation depends really on where you are around the globe. We've got certain markets, where sales are strong our brands have.
A proven their resilience and our franchisees are.
Forward focus you heard Yum, China last night reaffirm their units for the year and then we've got other markets at the other into the spectrum, where we've still got some closures and where sales are more impacted by covance. Those franchisees are focused on.
You know just basic operations right now so the discussions really depend on where you are around the globe, but in general we believe the investment case for our restaurants will be even stronger going forward our brands have proven resiliency.
We believe real estate costs should be more favorable going forward.
Our digital capabilities allow us to pivot to off premise and we'll obviously be looking at optimizing our footprints for that environment. So we feel really good about the investment case.
That said, we're not wavering from our asset light model right into our model is for franchisees to do development within that though we've been building a couple of Taco bells.
Equity stores to at point of your question. John We are going to continue to do that and then habit.
Yeah.
We talked about the data little bit in the prepared remarks, but.
We've been really pleased with how habit has gone through this and the resiliency of that business and they have been building corporate stores will continue to do that as we slowly open it up to franchising overtime. So that there will be company investment in mostly Taco bells, and and habit stores over the near term.
Next question please.
Your next question comes from Gregory Francfort of Bank of America. Please go ahead.
Hey, Thanks for the question.
Usage touched a little bit on.
Yom's willingness to maybe invest in some of these franchisees and I guess the question comes back somewhat to the NBC situation.
Yes. It if you could put some capital in media accelerate some of the asset changes there is that something yams considering or.
Is that something there will be off the table at this point thanks.
Yes, again back to the comment I just made we're committed to the asset light model, we never rule out any possibility, but there is.
Plenty of interest in getting into all of our different businesses around the world as investors have seen how resilient our businesses and we're not going to comment very specifically about the MPC situation, but other than to say we're working.
Productively, there's lots of interest in that business and.
We expected to be in the hands of the capable franchisees coming out of this process.
Thank you next question please.
Your next question comes from Saracens Tour of Bernstein. Please go ahead.
Hi, Thank you I was wondering if you could let me talk about.
Peter Hutton intense in particular.
Yes, they win I characterize them as maybe some that youve beneficiaries of the changes and the consumer behavior during the pandemic and they think comping better but certainly.
All right statements repeat that than we've seen an alarm time and can you talk about how how you think that retaining.
Some of that Chang specifically, the two dynamics and interested at what happens when people able to guide it again year dining brands during open and how much of that you think you get back and then also TV and that you've taken market share.
Yes, Hi, how do you keep that pizza hut closures and diamond comp I think about 20%, which is actually pretty consistent with what we've seen some other large pizza chains.
Have historically I think like Pizza hut and in many quarters. So I guess, how do you capitalize our moves on these things are talking year over the long term. Thanks.
Great question, Sarah and it's obviously, our intent take hold onto the gains that we've made a lot of the gains at pizza hut and KFC is have been from the fact that they offer great family meal solutions, which is right for these times.
But one of the one of the things that I'm really encouraged about about all of our brands is the incredibly positive feedback we're getting in our customer satisfaction surveys customers at our and the new customers that are being drawn to our brands. During these times. So those those two things coupled together says that we should be able to hold onto some of these new customers given the great.
Experiences that theyre having.
And the new normal it's very hard obviously to predict what the world will look like six months from now I think we're most proud that we've demonstrated how resilient our businesses and held nimble we are and how we can pivot to meet customers as their needs change we know like a lot of other retailers were looking at data about how wed what happens when.
Customers do return to dining in certain parts of the country or in certain markets and we see a little bit of an impact on that to our business, but not to the degree that would lead you to conclude will give up the gain all the gains that we've gotten here. So it's a pretty bright picture in terms of what it paid for the future.
Thanks, Operator next question please.
Your next question comes from John Engel of JP Morgan. Please go ahead.
I guess I. Thank you and apologies I went to the release, obviously very quickly at the first that Taco Bell store margins really did jump off the page considering that comp here that you guys reported Q on provide some color on that in terms of like what happened and what out of that margin is actually sustainable and if there is that you kind of a new Taco Bell.
Yes, a company store margin coming out of this is the first question and then secondly, if I made there's obviously been a lot of news and disruption in terms of third party delivery can you comment on in the U.S. business, specifically around the world if you'd like to your ability to grow delivery dollars year over year and how has the potential changes in the relationship might.
Benefit or I guess impact your business in some way. Thank you.
Yes, Thanks, John good good questions.
Taco Bell store margins I'd say.
Yes, obviously at 24.5%.
Outstanding result from Taco Bell and I think the main takeaway for US is that shows how resilient. The Taco Bell business model is similar to what we've seen in.
In our other brands around the globe, but I think thats the main take away for us as the resiliency.
That was primarily driven by some things that probably are.
Related to pandemic. So we have seen higher average check sizes as consumers are buying more for family occasions than prior to the pandemic. We've also had some labor efficiencies as the dining rooms have been closed and we adjusted our operating hours for a bit so I'd say those two things.
Were the primary things that helped of course, we had some things on the other side of equation and we paid.
Some extra bonuses to our.
Frontline.
And had other coated related expenses, so that help balance it. So I think is a good story, but those two primary drivers of check in and dining rooms. Once those things go back to normal.
Those would be things that would sort of swing back the other direction. So I think the main takeaways resiliency during the crisis.
On third party delivery.
I think the highest level our philosophy remains.
We want to be accessible to our customers, where they want to do business with us and.
We build.
Jason ships with Aggregators to serve that purpose.
In terms of total delivery capabilities around the globe.
We saw.
A more than 10% increase versus last year in terms of our number of restaurants were now north 34000 restaurants that offer delivery up from just over 30000 at this point last year part of that's driven by our aggregator relationships of course, we got our own proprietary delivery capabilities and a number of those restaurants as well so it's a mix there.
There, but I think in general where where customers are doing business with aggregators, we want to be there and the other point about delivery as much as we've seen delivery growth. We've also seen a lot of carryout growth, we thought with options like curbside pickup contact list way.
Which is obviously great for our operators because at the high margin business. When you can do carry out in that way. So it's the growth that were thing yes delivery is one of the drivers but carried out is very much growing at the same kind of pace.
Next question please.
Next question comes from Dennis Geiger of UBI. Please go ahead.
Thanks, and I hope, they're all doing well just wondering if you could talk a bit more about taco bell the strength of the brand and the franchisees and kind of thinking about maintaining that industry, leading momentum going forward, maybe specifically if you could comment on some of the latest developments, including the loyalty program what the opportunity there is as well as menu simplification and if the drivers there are more API.
Patients and speed or making wait for new items coming in the future.
Thank you very much.
Yes looked at Taco Bell was a bright spot for the quarter.
If you look at.
They are basically flat on the two year basis, and they made tremendous progress during the quarter. If you just look at our previous filings from sales results you can see that they probably had the best result, moving from April forward through the quarter.
If you think about what.
In the US for example, Taco Bell with almost a quarter of their sales is dine in and the late night in breakfast business. They were impacted the most so they had the most ground to make up and now we've got into July and Taco Bell along with.
The other two big US brands are all positive.
Thats, an enormous progress given the hit to their business. It's due to the fact that they pivoted really well leveraging.
The the options the menu that consumers love with items like the grilled cheese Burrito, that's obviously proven ahead.
In the loyalty program as you mentioned, which recently launched still in its infancy, but obviously has a lot of upside.
The margins actually were somewhat of a record tying a record for us for store level margins in a quarter. So when you add all that up it's the brand with a huge amount of meant a momentum as we come out of the quarter I'm very excited about the future for Taco Bell the relationship with the franchisees as you mentioned.
Couldn't be more positive they've been great partners working through all this this challenging times again they were hit the most at the beginning of this pandemic.
So they were the ones that were in some ways in the us in the most dire Straits, but quickly partnered together with the franchisees marketing and his team have done an amazing job to get the business on much more solid footing and with momentum right now.
Thank you next question please.
The next question comes from Andrew Charles Cowen and company. Please go ahead.
Great. Thanks.
That's just trying to better understand when the business can return to 4% net restaurant development can you help at the backdrop, a little bit I'm looking to learn more about KFC international franchisees access to capital, particularly in Intermat emerging markets is this is the biggest engine behind some development in the context, the bad bad debt expense step up the cell during the quarter.
Yeah.
Yes look the return to 4% is not a matter of if it's just a matter of when.
And we have 2000 franchisees around the world. The vast majority of them are coming out of this in good shape, but we have pockets where franchisees are still challenge. We still have couple of thousand stores that are closed with our bigger presence in emerging markets in emerging markets struggling more to deal with the pandemic.
In there in their countries, that's a challenge, which all adds up to making it very difficult to predict exact timing on when we'll get back to our long term algorithm.
But again, there's so many positive things when it comes to development in terms of availability of sites, how resilient our business model has proven which is obviously attractive to investors that want to invest in this space.
The partnerships that we've developed with the vast majority of our franchisees to get through this together and the positive feelings that that creates in the interest in working together long term to grow the brand.
So.
It will vary by market will vary by franchisee in terms of when we get back to the algorithm, obviously Yum China is already there as they announced last night, which is very encouraging.
Thank you next question please.
The next question comes from Peter Saleh of BTI Keith. Please go ahead.
Great. Thanks for taking my question I want to ask about your advertising strategy, especially in the U.S. and the second half a year.
You guys plan to continue to advertise or you plan on pulling back at all with the election year and my second question would be.
Do you need to get the dining rooms open to start to recapture the previous same store sales I guess, Jonathan do you have pretty covet or more stood out what's what's the driver units the half currently thanks.
Yes, just picking up the last one first on the dining rooms.
The reality is of we've got 24000 dining rooms.
But close at or close today, so and in the U.S.. We really just have a have a fraction of our dining rooms open. So when you look at the result that we're getting when you talk about separately.
Excluding close stores, we sold a lot of stores are open with close dining rooms.
It's really quite impressive that we're able to get sales globally back to approaching flat without those dining rooms in the majority of our stores. So it's not critical to our success. It's obviously something that we will return to overtime when it makes sense.
And the teams have developed all the right safety protocols to do that as you can imagine.
Plexiglas on the front from calendar and cleaning captains in the in the dining room to make sure that we clean high touch points every 30 minutes all the different things that you would imagine we company, but large restaurant company in the world would develop to ensure the safety of our customers.
But the dining room piece is really something that we've been able to overcome quite successfully in most markets certain markets, obviously more reliant on it pizza dining restaurants, obviously in some cases very reliant on it. So it does the story does vary but on average it's pretty good story in terms of overcoming dining rooms.
On the advertising piece, obviously, our advertising algorithms have been changed in this environment and we were looking at different ways of promoting our brands. The promotions that were doing with products have changed you've heard announcements about us getting down our menu, where we're advertising more core products.
Advertising more through digital channels.
But for the most part we're committed to continuing to spend the advertising spend that we each of our brands has it varies by brand in terms of what.
The percentage of sales they spend our but we're committed to that for the balance of the year.
Thanks, Operator, we'll now take the last question. Thank you.
Okay.
At this time I'm not showing any additional questions.
Okay, David you want to wrap up.
Yep, Thanks, everybody for spend time with US. This morning as you can tell from the comments, we're incredibly proud of the progress that we've made during the quarter. You know we were joking that April feels like it was back in 2018. It was so long ago and was relevant is the momentum we have coming out of the quarter I think we've demonstrated that the.
Business is incredibly resilient and nimble that our teams around the world can move with speed to get new solutions out to meet customers' needs.
They've done that incredibly successfully and really what's what's happened. This quarter is accelerated a lot of the strategies that we already had in place and which is a big positive.
In terms of the business that we do digitally as we've mentioned that's up a billion dollars year over year actually more than $1 billion and we that was part of our plan to grow that business and we're proud of the progress we've made there and even things like moving from dine in assets to delivery assets thats been accelerated by.
2020.
So we're coming out of extract it much stronger excited about the future young was is and will remain a high growth company for all stakeholders I think we demonstrated that this quarter. So thank you.
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