Q2 2021 Yum! Brands Inc Earnings Call
<unk> are calculated using the geometric method.
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Third quarter earnings will be released on October 28.
2021, with the conference call and the same day.
Now I'd like to turn the call over to Mr. David Gibbs.
Thank you Jody and good morning, everyone of.
And I'm excited to share our strong second quarter results as we delivered record second quarter unit development and 23% same stores sales growth.
Importantly, each.
And reported positive same store sales growth on the 2 year basis of <unk>.
Tap up from first quarter trends.
This sustained momentum was underpinned by our investments and digital and off premise and the adaptability of our brands to meet the needs of consumers and an ever changing environment.
Low COVID-19, obviously creates the more challenged.
Each of environment, our confidence and stronger than ever and our ability to navigate the resulting uncertainties and and the long term growth potential of young.
As a result, we're reinstating our long term growth algorithm with 1 important change we are raising our previous guidance of 4% unit growth to between 4% and 5% unit growth.
Operating as a reminder, our long term growth algorithm includes 2% to 3% same store sales growth and mid to high single digit system sales growth leading to high single digit core operating profit growth.
The diversification of our global portfolio, the resilience of our business model and the agility of our teams are allowing us to compete and win.
Both the whole range of market conditions, including both of those markets with accelerated recovery and market is still heavily impacted by COVID-19 and looking forward, our iconic brands and unmatched scale and combination with the world class talent in our restaurant teams and franchisees and above store leaders have uniquely positioned us for sustained.
In and of growth now I will discuss our recipe for growth and our Q2 performance and the growth drivers that underpin at the start I'll cover 2 growth drivers, namely relevant easy and distinctive brands or red for short and unrivaled culture and talent.
And then Chris will share more details of our Q2 results our unmatched operating capability.
And so the and bold restaurant development growth drivers and our strong liquidity and balance sheet position.
First a few highlights from the quarter and.
And Q2 Yum system sales grew 26% driven by 23% same store sales growth.
Importantly, the same store sales grew 4% on a 2 year basis, which.
Capability the impact of approximately 700 or about 1% of our stores being temporarily closed due to COVID-19 as of the end of Q2, 2020.1.
This was driven by continued strong sales momentum and North America, the U K and Australia with improved performance in Europe as it began to reopen.
The open and show signs of recovery.
As I mentioned earlier each of our brands delivered positive 2 year same store sales growth on a global basis, including the impact of temporary closures and each brand also reported and an improvement in the 2 year trend from Q1.
This is a great indicator for the sustained strength and breadth of.
Of our recovery, even more exciting is the extremely strong net new unit growth of 603 units that we delivered during the quarter, which was both broad based and record setting.
Looking across the more than 150 countries and which we operate we've seen that while the overall global trend is positive the recovery will neither be consistent from country to country.
Our linear within the country.
This insight reinforces the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off premise channels. We've seen that increased customer mobility, driven by reopening trends and vaccinations contributed to strong performance and many.
And more markets.
Key growth driver for our business and priority for our teams as the continued acceleration of our digital and technology initiatives across the globe geared towards providing customers with new and seamless ways to access our brands.
Even as economies continue to reopen the importance of the off premise occasion remains of top.
The priority.
We delivered a second quarter record with over $5 billion and digital sales of 35% increase over the prior year, even more exciting for the first time on a trailing 12 month basis, we delivered more than $20 billion and digital sales. We believe these sales are highly incremental and result.
For our investments and our digital and technology ecosystem, which enable our teams to deliver and even more red customer experience to bring the impact of our digital efforts to life I want to share a few proof points.
And at Taco Bell U S launch of our Taco Bell rewards program in 2020 has continued to grow digital sales for the brand.
And with features such as loyalty member Exclusives and early access to crave worthy promotions. We're incredibly excited by the early results from the program and the future growth opportunity that remains.
Seeing significant uptick in frequency and higher spend per visit leading to an increase and overall spend of 35%.
<unk> for active customers and the Taco Bell rewards program compared to their pre loyalty behavior.
And as another example at KFC U S. We launched our internally built KFC E Commerce website, and App and early 2021, replacing our previous third party solution.
As a result, our 2021digital.
Sales are on pace to school surpassed last year's full year of digital sales of Mt.
Now, let's talk about our Red brands Star.
Starting with the KFC division, which accounts for approximately 51% of our divisional operating profit Q2 system sales grew 35% driven by 30% same stores.
Sales growth and 5% unit growth.
For the Division Q2 same store sales grew 2% on a 2 year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2.2021.
At KFC International same store sales grew 36% during the quarter.
Digital same store sales declined 1% on the 2 year basis, which includes the impact of about 2 per cent of our stores being temporarily closed as of the end of Q2 'twenty 'twenty..1 we are truly outstanding results and market, leading the recovery with double digit 2 year same store sales growth in the U K, Australia, Canada, and the Middle East.
Our strong off premise capabilities digital strength and value offerings have continued to meet shifting consumer demand around the globe and there is opportunity for continued recovery as reopening and mobility increases globally.
Next at KFC U S. We continued to see strong momentum with 11.
And 1% same store sales growth and Q2 importantly, same store sales grew 19% on a 2 year basis, owing to the continued strength of our group occasion business. The digital capabilities mentioned earlier, and our new chicken sandwich or chicken sandwich performed exceptionally well and provides us with a solid platform to drive additional sales.
And the future.
Moving on to Pizza hut, which accounts for approximately 17% of our divisional operating profit. The division reported Q2 system sales growth of 10% driven by 10% same store sales growth.
While the division had a 3% unit decline versus last year, driven by the elevated COVID-19 related dislocate.
<unk> and closures of 2020 at has sustained its positive 2021 development momentum delivering 1% unit growth relative to Q1 <unk>.
Global Q2 same store sales grew 1% on the 2 year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2.2021.
Overall.
The layer of Pizza and international same store sales grew 16% same stores sales declined 6% on a 2 year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2, 2021 and importantly, the off premise channel achieved 21% same stores sales growth on.
Overall year basis for the quarter and delivery continues to be the primary driver of growth as the shift towards and off premise model continues and most of our pizza at markets.
The topline results from our Australia, Canada, Malaysia, and our UK delivery business are shining examples of what it means the nail the.
And of 2 brand strategy. These markets continued to unlock off premise growth opportunities through a focus on value and innovation of digital first customer experience and distinctive communications with the help of our magnetic ambassadors spokespeople, who bring our brands to life across the world.
At Pizza Hut U S. We continued to see positive same store sales.
The red 4% overall same store sales growth and a 2 year basis. The off premise channel grew 18% and overall same store sales grew 9%, which includes the impact of about 1% of our stores being temporarily closed as of at the end of Q2.2021 Pizza at also delivered strong product news with the continued success of our iconic stuffed.
And with Pizza and the successful return of the consumer favorite the edge pizza during the quarter.
As for Taco Bell, which accounts for approximately 31 per cent of our divisional operating profit Q2 system sales grew 24% driven by a 21% of same store sales growth and 2% unit growth.
For the Division Q2 same store sales grew 12% on a 2 year basis.
The quarter kicked off with the return of the case the loop as part of the fan favorite at $5 to loop of Cravings box, followed by the relaunch of the iconic naked chicken chalupa.
And May we launched our first ever global brand campaign.
Cash tag IC at Taco, and which fans could score of free Taco and the Moon looked like a taco.
We generated over 2 billion impressions and step change brand awareness, especially in our international markets, where we have a tremendous runway for growth.
And finally, the habit Burger grill delivered 31% same store.
Our sales growth and 6% unit growth.
Q2 same store sales grew 7% on the 2 year basis and.
Importantly, digital sales continued to mix over 35% only a modest pullback from Q1, even as dining room of continued reopening and diamond sales saw a steady improvement throughout the quarter.
And the innovation front, we introduced the brunch Char Burger during the quarter of unique all day breakfast offering that included crisp Golden clots housemaid secret sauce, and a freshly cracked egg in addition to providing customers with a seamless experience to access our brand, we continue to invest and restaurant technology initiatives and make.
And easier for our team members to operate and run a restaurant as previously announced in the quarter, we've agreed to acquire drag and tail technologies of cutting edge restaurant technology company, whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow driver.
At the end customer order tracking.
The acquisition is subject to various approvals and we expect to close by the end of the third quarter, we will not be able to comment further on dragon tell today, but you can find additional information and the May 26 press release.
And an important factor of Red brands is having a positive impact and the desire to make good.
Good easy for customers.
Our recipe for good framework focuses on our commitment to investing and the right recipe today, we were proud to publish our 2020 recipe for good report this week, which highlights our strategic investments and socially responsible growth and sustainable stewardship of our people food and the impact.
This pad.
The report includes updates on our key commitments on critical issues like climate change and equity and inclusion.
And I'm confident that our plans and these areas have the right ingredients for us to succeed and make a positive impact for our people franchisees customers and communities.
Now to unrivaled culture and talent 2 of our key.
Key assets, our iconic brands and the people that bring our brands to life around the World every day.
And I've mentioned in previous quarters Covid has further strengthened the collaboration and partnership across our entire system of <unk>.
Great example of this is our relationship with our independent supply chain purchasing co op and the U S. R. S.
Yes, the us many of you probably saw the recent announcement at the CEO of our S. C. S. Steve Mccormick has made the decision to retire and early 2020.2 and at Rs <unk>, Chief operating officer, Todd and half was unanimously selected to succeed Steve and the role of CEO.
We've had a tremendous and positive impact on our business for nearly a decade and our entire system is grateful for his leadership.
At the same time, Todd is the right leader to step into this role and lead the RFC is moving forward as it continues to provide a true competitive advantage for our entire U S business.
Our unrivaled culture and <unk>.
<unk> has always been a towering strength of Yum and I'm incredibly proud of our ability to bring our brands and people together in ways. We haven't in the past during the quarter. We hosted several virtual meetings, where we fostered collaboration on a global scale for our franchisees and team, including marketing planning meetings ops development programs of global.
And summit leaning with leaders sessions and company wide chat just to name a few it's during these meetings that we realize we are all more alike than we are different and the power that our brands and our culture have to bring people together.
To wrap up I'm pleased with the sustained momentum and our business and the agility.
<unk>, we've shown at the last year and I'm optimistic that we are set up to win our results demonstrate the resilience of our diversified global business and confidence and our strategies, which are fueled by the underlying health of our franchise system.
We're poised to accelerate growth and maximize value creation for all of our stakeholders for years to come with.
That Chris over to you. Thank.
Thank you David and good morning, everyone today, I'll discuss our second quarter results, our unmatched operating capability and bold restaurant development growth drivers and our solid liquidity and balance sheet position.
To begin let's discuss Q.
Overall Yum system sales grew 26% driven by 23% same store sales growth.
And a 2 year basis same store sales grew 4%, which includes the negative impact of about 1% of our stores being temporarily closed due to COVID-19 as.
As of the end of Q2.2021, we.
We delivered 2% unit growth year over year, which included a Q2 record of 603 net new units.
EPS, excluding special items was $1.16.
Representing a 41% Inc.
Increase compared to ex special EPS of <unk> 82.
In Q2.2020.
Core operating profit grew 53% and the second quarter driven by accelerated same store sales growth and several developed markets at KFC and the combination of strong sales and restaurant margin growth at Taco Bell.
And the year over year benefit associated with reserves for franchisee accounts receivable.
At Taco Bell Company restaurant margins were 25, 9%, 1.4 points higher than prior year favorable sales flow through was partially offset.
The labor and commodity inflation as well as increasing semi variable costs as we return to normal operations.
As mentioned on our previous call. We expect these margins to return closer to historical pre Covid levels. Later this year given inflationary pressures along with.
<unk> staffing at our restaurants as a result of increases and dining room patronage and of return toward our historical day part mix.
During Q2, we continued to see recoveries of amounts of past due primarily led by KFC International.
These recoveries resulted in a $4 million net.
By lit to operating profit related to bad debt during the quarter, representing a $17 million year over year tailwind to operating profit growth as we lapped $13 million of expense in Q2.2020.
As a reminder, we ended 2020 with 12 million.
A full year bad debt expense with large quarterly swings due to COVID-19 as such we expect year over year operating profit growth to be negatively impacted in the second half as we lap bad debt recoveries of $21 million and $8 million in Q3 and Q4 respect.
Benefit of <unk>.
While difficult to forecast at this point, we still don't expect bad debt to significantly impact our year over year operating profit growth on a full year basis.
General and administrative expenses were $230 million full year 2021, G&A is expected.
Respect at to be back end weighted as it has been historically.
We now estimate that our consolidated G&A expenses will be approximately $1 billion for the full year 2021, a slight increase from our Q1 estimate attributable to increased incentive based compensation.
And our commitment.
Expect to be and efficient growth company that leverages fixed costs with our unique scale benefits is unchanged and we expect our G&A to system sales ratio to move back toward our historical ratio of sustained growth continues.
Reported interest expense was 159 million.
<unk> hours and increase of 21% compared to Q2.2020, driven by a special item charge of $34 million related to early redemption of restricted group bonds during the quarter.
Interest expense ex special was approximately 120.
$25 million, a decrease of 5% driven by recent refinancing actions and the elimination of revolver balances held in the prior year we.
We still expect our 2021 and interest expense to be approximately $500 million.
<unk>, the previously mentioned $34 million.
Special item charge similar to 2020.
We plan to continue to take advantage of favorable market conditions to refinance debt at attractive rates.
As a reminder, this will result in higher 1 time expenses, but will be favorable to interest expense going forward.
Capital.
Capital expenditures net of Refranchising proceeds were $16 million for the quarter as we've discussed on prior earnings calls, we believe roughly $250 million and annual gross capex appropriately balances the inherent needs of the business with opportunities to invest and technology.
Initiatives and strategic development of equity stores.
We still anticipate at least $50 million and annual proceeds from Refranchising, which will fund the strategic equity store investments as a reminder, for 2021, we may be slightly higher than the 250 million.
Gross capex amount to catch up on repair and maintenance and remodels as well as selective strategic development and the U S.
Now onto our unmatched operating capability growth driver. Our restaurants are operated by World class franchisees, who are experienced and competing and winning.
And any environment, it's well known that the U S is facing of competitive labor market, which is more pronounced relative to other markets across our diverse global footprint, we and our franchisees are leaning into our unrivaled culture, which differentiates our brands to compete in a tight labor market with a focus.
Retention and recruiting.
I'll add some color by sharing examples from our Taco Bell company restaurants, I'll start first with recruitment, we posted hiring parties, which have led to a significant uptick and employee hires.
We also launched of fast apply option to make the application process easier and more efficient by reducing.
And the application time from 8 minutes to 2 minutes.
On the retention front, we have supported and rewarded our team members by offering a variety of incentives, including paid time off free family meals and increased employee development activities to name a few.
We have always prioritized investing.
On people and we recognize the importance now more than ever to ensure we maintain focus on our unmatched operating capability to deliver a red customer experience.
At the same time, our system is well positioned to sustain strong unit economics, while managing the inflationary environment related.
And our parts and labor market dynamics and commodity cost trends on the commodity front. There is no 1 better equipped to navigate this environment given our massive cross brand purchasing scale through our domestic supply chain co op Rcs that gives our franchisees many benefits, including advantaged end to end.
<unk> and supply chain costs.
We are also confident and the pricing power of our brands and partner closely with our franchisees as they make strategic pricing decisions and their respective markets to deal with cost pressures, while still providing customers with relevant value and distinctive products.
So as David mentioned earlier, we are also prioritizing investments and restaurant technology initiatives that make it easier for our team members to operate of restaurant, while also providing and enhanced customer experience.
As an example, pizza hut international continues to demonstrate significant.
As momentum on this front as evidenced by increased customer satisfaction metrics.
Their improvements are fueled by continued adoption of frictionless restaurant technology <unk>.
Including our in House intelligence coaching App called Hut Bot that launched at the end of 2020.
And is now alive and 40 markets covering 4000 restaurants.
Hotspot eases the daily management of our stores for the RPM, leading to a better customer experience at.
At Taco Bell, we've continued accelerant at serving more customers through our drive throughs, we had our sixth consecutive.
Quarter of under for minute drive through order to delivery time <unk>.
Speed for Q2 was 6 seconds faster than Q2, 2020, and our team served 4 million more cars compared to the same quarter last year, a huge shout out to our operators and team members for continuing to break records.
And with the increased demand and off premise the.
And the drive through experience is and increasingly critical competitive advantage for our brands. So these improvements position us well to win going forward.
That's the perfect segue to our bold restaurant development growth driver, which I am particularly.
And thrilled to speak about today, our net new unit growth of 603 during the quarter was broad based across brands and geographies, making this not only a record quarter, but also capping a record first half of.
These results speak to the strength of our iconic brands and growing food categories.
<unk> supported by a healthy well capitalized franchise system primed for sustained growth.
Most notably KFC opened at 428 net new units during the quarter with significant builds and China, Russia, India, Latin America, and Thailand contributing to.
5% unit growth year over year.
As many of you know KFC has the first mover advantage and several of emerging markets with a strong domestic footprint upon which to grow.
This impressive development quarter from KFC speaks to the power of this global brand and.
And the unit economics that underpinned at Pizza Hut has sustained its positive 2021 development momentum delivering 1% unit growth relative to Q1 underpinned by the strength and gross openings and moderating store closures.
Pizza Hut opened 99 net new units during the quarter led.
The 5 strong development, and China, India and Asia.
And so bell opened 70 for net new units and we're excited to share that Taco Bell International had its best development quarter ever opening 30, net new units led by Spain, and the U K in.
In the U S. We opened our <unk>.
Led by Taco Bell Cantina and times square with a digital forward footprint and personalized experience.
Overall, we are pleased with the momentum and the first half of the year and we're extremely proud to announce 4% to 5% unit growth guidance led by development from all 4 brands across our footprint.
Next I'll provide an update on our balance sheet and liquidity position and priorities for capital allocation.
We ended Q2 with cash and cash equivalents of approximately $552 million excluding restricted cash.
The strong recovery and EBITDA during Q2.
<unk> drove our consolidated net leverage down to approximately 4.5 times temporarily below our target of approximately 5 times.
During the quarter, we repurchased 2.1 million shares totaling $255 million at an average price per share.
$119 year to date, we've repurchased $530 million of shares at an average price of $112.
Finally, our capital priorities remain unchanged.
Invest and the business maintain a healthy balance sheet pay of competitive dividend.
Of and return the remaining excess cash flows to shareholders via repurchases.
Overall I'm extremely proud of our Q2 results the resilience of our business model and the agility of our teams with that operator, we are ready to take any questions.
Thank you we will now begin the question.
And answer session to ask a question you May press stores and 1 on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 and.
And the interest and the interest of time. Please ask only 1 question at this time, we will pause momentarily to.
And in the roster.
Our first question comes from John Glass from Morgan Stanley. Please go ahead.
Thanks, and good morning.
Christine David I, just wanted to hit on your New unit development target I'm wondering what signals you are getting what prompted you to.
And not only reinstate the guidance, but increase at.
From a pipeline perspective.
What time frame is reasonable to expect could this become and invisible and 22 for example.
Typically on the KFC brand domestically and it's been very well and at the same store sales day..1 of the thing has been a lot of developments over the last.
And similarly, how do you think about the.
The net development, specifically or generally playing into that and the KFC brands, specifically do you see opportunity here and the U S. Just given the repositioning of that brands. Thanks.
Thanks, John.
And we're excited about net new unit development and.
As.
Several of them.
Do have a lot of visibility into the pipeline of art of development because it takes about 12 months to plant the seed and the development before you get the opening so we're working with our franchise partners around the world to get that visibility and understand what's coming down the pike and Thats, what gives us the increasing confidence, but really that all stores with the unit.
Unit economics, when our unit economics are good it's an attractive proposition for our franchisees to build and you saw at Yum, China last night and talk about that we're seeing that.
And the vast majority of the World right now, which is what gives us the confidence to make that commitment of 4% to 5% net unit new unit growth and just to clarify.
You know that would be.
Slide 2 of 2021 as well at 2022 and beyond.
And as far as domestically.
We do think and we've talked about this on past calls and I do think that theres upside for KFC and pizza and particularly in the U S. Taco Bell and starting to accelerate the development so that that wasn't all that 1.
5 of the trend is moving both KFC and pizza hut and Havent historically been growing and the US and we think Theres every reason of the world. They should be net growers and theyre shifting into that and 2021, and we think that will continue.
Our next question comes from Dennis Geiger from UBS. Please go ahead.
Great. Thanks for the question.
And maybe just a follow up on that.
Rest of the unit growth target acceleration.
And David and Chris as it relates to kind of.
That might be coming from as you contemplated that acceleration and Chris I think you spoke to all brands would be seeing the increase.
Is it any in particular over the next few years or longer.
And where you feel like you're really seeing something interesting, where 1 brand more so than others might be driving that acceleration and.
And how to think about the the timing of that over the next few years, perhaps just of just curious of if any additional insights to share there. Thank you.
Yes, Thanks, Dennis just to elaborate our development.
Engine is working and we expect it to work across all 4 of the brands as David said.
At KFC has historically been our development leader and if you look at what they did in Q2 of its very broad based.
Gross cros.
And number of countries and the KFC system I think north.
The 60 countries and the KFC system, and we expect them to continue to be the leader, but we have high expectations for the other brands Youre seeing Taco Bell with strong domestic growth, but you also saw a strong international growth and Taco Bell development.
And they are now back on track running ahead of where they were at 2019, we expected.
At 2 of 100 units for example, and Spain. This year and have other markets that are getting to scale and then <unk> seen and of marketed.
Trajectory change in Pizza Hut, we took last year to drive our asset transformation strategy. We made some closures that helps accelerate that and now you've seen the trajectory change.
The last 99 and Pizza hut. This year, so we have high expectations for growth across all of the brands.
Our next question comes from John <unk> from J P. Morgan. Please go ahead.
Hi, Thank you.
I think these are all related questions. I mean, just for clarification and then I may have missed this or just didn't.
Catch it.
Is there a quarter coming up and maybe over and over the next 8 or so where you do expect to be either and that 4% to 5% net unit growth.
You've kind of parameter or goal that you set out and maybe just if you can maybe point to a specific quarter that will get us all at the same page.
And secondly, yes.
How many of the units that you're opening in 'twenty, 1 and whether you want to talk about the first half for you want to talk about the full year. Our units that are still catch up units from 20 in other words.
It was 21, a year, where it's at 21 development and 'twenty combined and 22 doesn't necessarily increase much.
And from 'twenty, 1 or am I thinking about that the wrong way that that the actual development pipeline is so robust at 22 development will exceed that of 21. Thank you.
Thanks, John and just to clarify obviously, when we reported quarterly results that has the trailing 12 months and at which we had some closures last year.
So when we're talking about our 4% to 5% net new unit growth algorithm now we're talking on an annual basis, starting in 2021 so.
That's what we're expecting for 2021 and 2022 and beyond.
As far as the second question on catch up units certainly there were some units.
And hold in 2020 that have opened in 2020.1 no doubt.
And that is helping us get to the number for 2020, 1 because we have the restart the development engine, but by issuing the guidance.
Part of our long term algorithm, obviously clearly trying to signal that we think that will continue into 2022.
With organic growth again based on the factors I mentioned earlier strong unit economics, helping franchisees.
Strong brands all around the world and in general.
The next question comes from Brian Bittner from Oppenheimer. Please go ahead.
Thanks, Good morning.
I'm going to ask my question.
On the KFC International business.
When you adjust for the store closures and the 2 year same store sales for for KFC International were positive they turned positive in the quarter and this was despite what we heard from China last night, your largest international market, where sales do still remain.
Below pre COVID-19 levels. So can you again highlight where you are seeing at offsetting strength KFC international and maybe if possible could you give us a glimpse of how those better markets are performing on the 2 year basis relative to the whole international business.
Yeah.
Yeah.
Great question, the KFC International business, obviously showed.
At quarter over quarter improvement and the 2 year trends, which we're excited about and we think reflects the strength of the brand across its markets.
And do see differences, depending on the Covid situation and the state of each of those markets.
And in that business more developed markets, where we're seeing recovery advance are running further ahead, where you've got more customer mobility and fewer restrictions on operating hours those sorts of things for our restaurants, and where the footprint is more off premise.
Yes.
Ready and.
So if you look at markets like the UK for example, running incredibly strong north of 40%.
Growth in the quarter the.
Emerging markets have a bit of a longer tail on recovery.
And so thats, what youre seeing but in general and great.
<unk> and improvement over the entire case of the international business.
The next question comes from David Palmer from Evercore ISI. Please go ahead.
And.
Thanks, a question on the digital sales and think you mentioned that digital sales was up 35% and the quarter.
And the U.
Do you believe it's incremental.
And I'm wondering if that's an interesting reason why multiyear growth might be higher.
Coming out of Covid.
At the headwinds from Covid directly East for example, I think the digital order mix was 20 points higher at global KFC.
Trends versus pre COVID-19 levels at least earlier and this year. So I'm wondering what brands and maybe broken out by U S versus the international.
The digital step up proving to be the biggest health to multiyear sales growth and 22 and beyond or whenever we finally have COVID-19 headwind deeds.
Thanks.
Yeah, Thanks, David and I'm glad you asked about digital obviously, it's something we're really excited about as we are now on track for trailing 12 month $20 billion of digital sales.
We've been making.
The investments and develop the long term strategy for how to win and digital for many years now. So this is starting to.
And that's something that happened overnight and you've seen us make investments and things like quick order quantum pick tuk Dragon sale now more recently.
And then investments and people.
And so this is something where we've been building up the capability.
And all aspects.
Developed a roadmap to win and digital and now were implementing that and it's actually.
Pay of accelerated by Covid, but it's all of the things that we were expecting to happen for the business are happening, it's really hard to single out which part of the business is going to benefit most from digital because all of our brands are very rapidly becoming digital brands youre seeing that and the numbers obviously of the brands like Pizza hut.
And then that started with the bigger digital base.
Actually been customers launch loyalty <unk>.
They're getting a benefit because and so central to what they do but really on a gross basis. It's the brands like our other brands that started up from the smaller base at a really getting a big benefit and it is both the U S and and and an international play.
It's widespread and we do think it can fuel the business.
For a long time to come part of the reason why we confidently reinstated our long term growth algorithm.
The next question comes from Jeffrey Bernstein from Barclays. Please go ahead.
Great. Thank you very much.
Just a question on.
<unk> of cut of the broader inflationary topic, which you mentioned in your prepared remarks.
The franchise model Insulates, corporate which is the good thing, but I'm just wondering how you think about the outlook maybe for the system in terms of both commodities and labor over the next 12 months or so.
And the pressures outside of and I was wondering how you respond and conversation.
And with franchisees.
Qualitatively, whether you would prefer to take the hit to margin or suggest they would take a hit to margin and are there and maybe incremental cost savings are incremental.
Incremental menu pricing, maybe you can share of the current pricing by brands to help us understand how the franchisees and managing thank you.
Yes. This.
<unk> is clearly a topic that is top of mind right now we are seeing inflationary pressures.
<unk> and the U S.
And much more Mark there, then and our global footprint and of course outside the U S.
Represents 60% of our business in the U S.
And the it is the topic that we get.
And our franchisees are collaborating closely on.
We are well positioned to deal with this.
First when we have commodity inflation as we mentioned and the remarks, we have greater purchasing scale than most players in the industry, our SCS, which leverages purchasing across the brands gives our.
Franchisees advantaged cost and negotiating capability from a sourcing standpoint.
We are also seeing some wage inflation as you mentioned, but when we think about dealing with both of those the.
Next lever that our franchisees and our brands Paul is pricing and.
We are confident that our brands have strong pricing power and our franchisees are the ones, who actually make those decisions and their restaurants.
And are being very thoughtful about how to do that they use analytics. They tend to layer. These and over time, so that they don't get too far ahead of the consumer and our brand.
Brands, obviously are very smart about how they create mix and the menu I would say we've been.
Very thoughtful and.
And have increased pricing moderately across the brands and the U S to deal with this but we're confident and the ability to continue to pull those levers to deal with respectively.
The next.
So it comes from Jon Tower from Wells Fargo. Please go ahead.
Great. Thanks, I was just kind of following up on the question about digital and specifically how it ties into development is at higher digital mix that youre seeing across your brands across the globe, allowing you to kind.
And kind of penetrate in the markets and specifically.
Question and versus suburban.
At a different rate than you had once thought.
Specifically, how is the digital mix impacting the type of.
Future development that Youre thinking for these brands, meaning our footprint a little bit smaller than you would have previously thought say 2 to 3.
The herbs ago.
Because the digital mix is higher just curious to get a little color there.
Yes.
Yes look.
Digital is 1 of those things that has no downside.
Obviously, the customers have a better experience when at the digital experience. The average check is higher there is labor savings.
And from processing orders on digital and so the linked to development is probably pretty is pretty clear right. It's going to give you a better unit economics, when you have higher check and less labor associated with the check.
And stickier customers by the way so we do think digital as part of our.
The upside for development as we go forward.
And Youre also seeing our brands develop new assets that take advantage of the Taco Bell and the Best example of that at the Taco Bell go mobile asset, which is as you mentioned the smaller footprint more reliance on digital and should give our franchisees better unit economics. Obviously this all starts and ends with franchisee unit economics and to the extent the digital improves.
But it is going to drive development.
Alright, great or we at times for 1 more question.
Okay. Our next question is from David Tarantino from Baird. Please go ahead.
Hi, good morning.
My questions on Pizza hut, and I wanted to specifically.
He asked about the the transformation or at the transformation that you've been going through there and and.
And whether your unit growth guidance now assumes that you are largely completed.
And with that transformation and the closings that would be tied to that and then I guess secondarily can you just kind of frame.
Up how you're thinking about growth for that brand globally do you think.
Pizza hut can get.
Closer to your overall average on growth.
As you think about the next several years.
Yeah, Thanks, David for the Pizza hut.
Strategy as we've talked about over the last few years.
Years has been to revitalize the brand and drive and asset transformation that is focused on modern off premise business and through Covid, both pizza at U S and pizza and international have continued to drive progress on that front.
If we take pizza Hut U S.
Quickly.
And you saw last year that we drove a number of closures and the system that did move our mix of Delco.
Assets by a few percentage points. So we're continuing to make progress on that transformation. There's still further to go so we're going to continue to drive that but in terms.
Of net unit count.
<unk> seen a change and that trajectory, we were actually slightly positive this quarter and pizza Hut U S, which we think reflects the improved unit economics in the U S that stemmed from the strength of the brands and then across both Pizza Hut U S and across pizza of internationally.
<unk> and Youre, continuing to see strong growth and off premise.
At roughly 20% and both I think we were 18% and pizza at you asked on the 2 year basis, and 21% and Pizza Hut International. So we think the strategy is working we think the brand of strengthening still more work to go on continuing to transition the asset base.
<unk> seen a change in trajectory on unit counts.
Patrick with that we'll wrap up I just want to thank everybody for the time on the call end of.
Obviously you.
Sense of the results are strong, but underlying those results whats really encouraging for US is at all for brands are performing well you saw that on a global 2 year.
But what if they were all positive for all positive on a global basis and the U S.
All 4 brands had improved trends from Q1, which really bodes well for the future of and it's all a lot of it is being fueled by digital obviously with $5 billion of digital sales and the quarter and on track.
$20 billion on an annual basis.
But it's not the.
It's not just the top line story. It's also on the net new units side with 603 net units and the quarter of record no matter, how you slice it and all of that obviously adds up to great confidence and the business and the way forward and which is why we reinstated our guidance and raised our net new unit target.
We know we have a lot of work.
And a lot of exciting work ahead of us to continue to grow and accelerate the brands and the team is fired up for it and.
It's a great quarter, but theres a lot more to come and thanks for your time for everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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