Q3 2021 Yum! Brands Inc Earnings Call

Good morning, and welcome to the third quarter 2021, Yum Brands' earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions to ask a question you need press Star then one on your telephone keypad to withdraw your question. Please press Star then two please limit yourself to only one question. Please.

Please note this event is being recorded.

I would now like to turn the conference over to Jody Dire Vice President Investor Relations and CFO digital and technology. Please go ahead.

Thanks, operator, good morning, everyone and thank you for joining us.

But again, our CEO, Chris Turner, our CFO and Dave.

Senior Vice President and corporate controller.

Remarks from David and Chris well open the call for questions.

Before we get started I would like to remind you that this conference call includes forward looking statements that are subject to future events.

That could cause our actual results to differ materially from these statements.

All forward looking statements are made only as of the date of this announcement and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with SEC. In addition, please refer to our earnings releases and relevant sections of our filings yeah.

I disclosure and definitions of non-GAAP financial measures and other metrics that may be used on today's call as well as reconciliation of non-GAAP financial measure.

Please note that during today's call all system sales results exclude the impact of foreign currency and references to temporary store closure only England stores are fully closed as of the end of the quarter, but have or are expected to reopen.

For more information on our reporting calendar for each market. Please visit the financial reports section of our website.

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 it.

Any future use of the recording.

We would like to make you aware about coming down the investor events and following disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the.

Form 10-Q filing fourth quarter earnings will be released on February nine 2022 of the conference call on the same day.

Now I'd like to turn the call over to Mr. David Yes.

Thank you Judy and good morning, everyone I'm pleased to share our strong third quarter results underpinned by record breaking unit development continued strong digital sales.

The ability of our brands to meet the needs of our consumers in an ever changing environment. During the third quarter, we delivered 5% same store sales growth or 3% same store sales growth on a two year basis.

Despite a challenging operating environment due to the ongoing COVID-19 pandemic I'm extremely proud that we opened 760 net new units a Q3 record with broad based strength across our portfolio well Yum, China continues to be a leader in development. We opened 379 net new units across.

The rest of our portfolio roughly equivalent to our Q3 2019 global net new units, including China.

Our continued positive development momentum this quarter is a testament to the strength of our iconic brands fueled by a strong unit economics are healthy well capitalized franchise system price for a sustained growth.

Now I will discuss our Q3 results and two of the four growth drivers that underpin our recipe for growth are relevant easy and distinctive brands or red for short and our unrivaled culture and talent.

I will also share an update on our ESG agenda, which we call our recipe for good.

Chris will talk about our other two growth drivers are unmatched operating capability and bold restaurant development. In addition to providing more details on our third quarter financial performance and our strong balance sheet and liquidity position.

First a few highlights from the quarter.

Overall young third quarter system sales grew 8% led by same store sales growth of 5%.

A two year basis same store sales grew 3%, which includes the impact of around 500 stores or 1% temporarily closed due to COVID-19 as of the end of Q3.

Covid restrictions and limited mobility in a few markets primarily in Asia.

Significant impact on sales however, our sales momentum remained strong as evidenced by the fact that our global two year same store sales growth, excluding Asia accelerated since last quarter.

Sales strength continued in many developed markets, including the U S U K and Canada with significant recoveries seen across Europe as restrictions ease throughout the quarter.

We've also seen pockets of strength in our portfolio of emerging markets, including the Middle East Latin America Africa, and India to name a few.

We've previously shared looking across the more than 150 countries in which we operate our recovery will neither be consistent from country to country, nor linear within a country reinforcing the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off premise channels.

A key growth driver for our business remains the continued acceleration of our digital and technology strategy, including how we leverage our global scale with technology investments to enhance the customer and employee experience strengthen restaurant unit economics improve.

A competitive advantage for our franchisees.

Being strong and sustained momentum through our digital and off premise channels across our global business, even though its customers returning to our dining rooms, we posted over 5 billion and global digital sales with a near 40% digital mix during Q3.

We continued to expand delivery capabilities across the globe setting a record this quarter with over 41000 stores offering delivery to our customers.

Most recently, we acquired dragging tell systems, which will allow us to tap into the power of artificial intelligence.

Streamline the end to end food preparation process.

Further enhance our delivery capabilities.

Where do we deploy dragging down cutting edge technology, we found that it makes it easier for team members to operate and run our restaurants and also our franchisees strength in store operations, all resulting in a better customer experience.

This is the perfect segue to talk about our four red brand.

Starting with the KFC Division, which accounts for 52% of our operating profit Q3 system sales grew 11% driven by a 6% same store sales growth and 7% unit growth.

On a two year basis Q3 same store sales were up 1%, which included the impact of 1% other stores being temporarily closed due to COVID-19, but KFC international same store sales grew 6% during the quarter same store sales declined 1% on a two year basis as previously mentioned increased coli case counts.

And mobility at a few key Asia markets pressured top line trends in the quarter.

This quarter several western European markets joined the group of resilient market, leading the recovery where sales are fully recovered to pre COVID-19 levels.

Strong digital and off premise growth newsworthy products and doubling down on value offerings has fueled top line growth in these markets coupled with the continued strength of the chicken category across the U S. Our segment growth.

Next at KFC U S same store sales grew 4% during the quarter, while same store sales increased 13% on a two year basis.

So the continued success of our chicken sandwich and the strength of the group occasion remains significant drivers of our same store sales growth.

Additionally, as of July our year to date digital sales in the U S surpassed our full year 2020 digital sales.

He speaks to the results we're seeing from our investments in this critical growth channel.

Now onto the Pizza Hut division, which accounts for 17% of our operating profit.

Q3 system sales grew 4% driven by 1% unit growth and 4% same store sales growth.

For the division two year same store sales grew 1% during the quarter, which included the impact of 1% of stores being temporarily closed as of the end of Q3 2021.

Pizza Hut International same store sales grew 6% during the quarter on a two year basis same store sales declined 4%.

Our pizza Hut international business continues to be pressured given our substantial value.

The sustained strength in our off premise business as reflected by 21% same store sales growth on a two year basis.

Bodes well for the future of the brand and continues to fuel franchisee interest in investing in assets focused on serving the off premise occasion.

Our markets continue to demonstrate what it means to be read by focusing on strong value propositions and innovative partnerships, including beyond meat product offerings and to market this quarter.

And he said U S. We continued to see positive momentum with 2% same store sales growth.

On a two year basis same store sales grew 8% and the off premise channel grew 17%.

Pizza hut continues to delight customers by bringing only from pizza hut premium innovation with the launch of the edge Pizza and a return of the successful Detroit style pizza in Q3.

Additionally, we promoted the big theater box during back to school season to offer an easy dinner solution for our pizza hut customers.

Moving on to Taco Bell, which accounts for 31% of our operating profit third quarter system sales grew 8% driven by a 3% unit growth and 5% same store sales growth.

Two year same store sales growth was 8% for the quarter.

Taco Bell continues to focus on long term growth opportunities by expanding into multiple category entry points, including the relaunch of breakfast in August and the fried chicken category with the crispy chicken sandwich Taco during the quarter.

Meanwhile, I'll talk about international remains focused on their mission to make tacos cool around the world. While also ensuring the brand is culturally relevant in each market.

The U K, we gave away free tacos to the country to celebrate England advancing to the finals and the European Championship.

Well it was on the English team, even tweeted on behalf of the brand, resulting in Taco Bell being one of the top trending brands on Twitter during the finals and finally at the habit Burger Grill.

We saw system sales growing 19% during the quarter driven by 11% same store sales growth and 7% unit growth.

On a two year basis same store sales grew 7%, which included the impact of about 1% of stores being temporarily closed as of the end of Q3.

We continue to see strong results through our digital channels, even as customers returned to our dining room.

During the quarter, we launched a culinary forward ball solid grilled chicken and asparagus salad that highlighted our unmatched char grilled chicken and seasonal ingredients.

Now I'll discuss our unrivaled culture and talent growth driver.

A hallmark of your AUM is our people first culture, we have tremendous leaders across our organization that had been developed internally to lead our brands and because of our culture, we're able to attract world class external talent.

This quarter really had the opportunity to announce some exciting internal promotions with planned leadership transition.

First Tony La and CEO of KFC will be retiring on March one 2022.

I want to thank Tony for his more than 25 years working at young.

He has an body what it means to be a people first leader throughout his career and will no doubt leave a lasting legacy on the KFC brand.

Tony's successor will be sovereign Sammy KFC as global Chief operations Officer, who is an incredibly well respected and experienced leader who has played a pivotal role in the KFC global business.

Sovran's promotion to CEO of KFC provided an opportunity to elevate another internal talent with Dyke ship stepping in as president of KFC after serving as KFC Global Chief people and development Officer.

With their combined experience of over 40 years with young both sovereign dike will assume their new roles are effective January one 2022.

I couldnt be more confident in our ability to continue to unleash the power of this iconic brand with both sovereign dike leading KFC.

Next we recently announced that David Graves Pizza Hut U S. General manager will be promoted to president of Pizza Hut U S. Effective January one 2022.

Alongside Kevin Hochman, David has helped architect the Pizza U S strategy and is the right person to lead the way forward for the brand by continuing to partner with our franchisees with this promotion Kevin Hochman interim President of Pizza Hut U S. President of KFC U S. We will return to full time to KFC U S.

I would like to thank Kevin for his unwavering commitment and leadership over the past two years as he led the pizza Hut U S business and franchisees through a critical turnaround that has shown tremendous progress to date.

While simultaneously, taking KFC U S to new Heights.

These internal promotions demonstrate that our deep bench of experienced leaders is a real competitive advantage for us across the restaurant industry.

Lastly, we recruited significant external talent with the appointment of Aaron Paul as Chief Executive Officer of Pizza Hut.

And joins us from Kimberly Clark, where he most recently led the Asia Pacific business.

We're thrilled to have Aaron joined our leadership team with seasoned CPG executive experience and believes his leadership alongside this which I'll, let David Graves will help fuel the brand growth strategy.

Equally as important is our recipe for growth is our recipe for good I could not be prouder of the progress Yamana are brands, who have made this year in sharpening the focus and execution of our ESG agenda, particularly on climate action and sustainable packaging alongside or global unlocking opportunity initiatives to tackle inequality.

We are advancing our plans to reduce greenhouse gas emissions across our global system and supply chain by nearly half by 2030, while we work to implement learn from and scale pilots for reusable recyclable and compostable packaging in the front of our restaurants to meet our 2025 public commitment across all of our brands.

We're focused on building a resilient business for the future with purpose and sustainability at the core.

Our iconic brands and unmatched scale put us in a class of our own we're competitively advantaged given the size and capabilities of our franchise system and I'm thrilled with our teams as we continue to be nimble and meet the consumer where they are overall I'm proud of how our business is performing and I'm confident that we're positioned to win in a post COVID-19 world.

That Chris over to you.

Thank you David and good morning, everyone today, I'll discuss our financial results, our unmatched operating capability and bold restaurant development growth drivers and our solid balance sheet and liquidity position.

I'll start by discussing our financial results.

Our results year to date through Q3 highlighted by 15% system sales growth translating into strong core operating profit growth of 26% demonstrates the resilience and strength of our economic model.

<unk> momentum reflected in our results reaffirms our confidence in delivering on an annual basis. The long term growth algorithm, we reinstated on our last call specifically, 2% to 3% same store sales growth plus 45% net new unit growth translating to mid to high single.

Digit system sales growth and high single digit operating profit growth.

In the third quarter, specifically Yum system sales grew 8% driven by 5% same store sales growth or 3% on a two year basis, which includes the impact of about 1% of stores being temporarily closed as of the end of Q3.

We delivered 4% unit growth year over year, which included a record of 760 net new units this quarter.

Core operating profit increased 3% for the quarter in line with our internal expectations when accounting for one time items that impacted comparability.

The largest of these items was the lack of last year's bad debt recoveries, which accounted for a five point headwind to core operating profit growth.

Excluding special items was $1 22, representing a 21% increase compared to X special EPS of $1. One set in the third quarter last year reflected in our ex special EPS. This quarter is an investment gain on our approximate 5% <unk>.

Investment and Debbie Ani International limited an entity that operates KFC and pizza hut franchise units in India.

However, a minority stake and Debbie Ani was acquired in lieu of cash proceeds upon the refranchising of approximately 60 KFC in India during 2019 and 2020.

During the third quarter, Debbie on and completed an initial public offering and we began reflecting the change in fair value of our investment in our results during the quarter.

This resulted in $52 million pre tax investment gains on our approximate 5% stake, which added <unk> <unk> to EPS, but did not impact our core operating profit.

During Q3, we had bad debt expense of $3 million. As a reminder, we have large quarterly swings and bad debt last year due to COVID-19, and we're lapping $21 million and bad debt recoveries in the third quarter of last year, resulting in a year over year headwind of five points.

Or $24 million to core operating profit growth this quarter.

We expect core operating profit growth to be negatively impacted again in Q4, as we lap bad debt recoveries of $8 million in the fourth quarter last year.

Our general and administrative expenses on an ex special basis for the quarter were $249 million.

On a full year basis. This year, we now estimate consolidated G&A will be approximately 1.05 billion, an increase of about $60 million above our incoming expectations for the year driven entirely by our above target incentive compensation based on.

Our strong business performance.

Our commitment to be an efficient growth company that leverages fixed costs with our unique scale benefits is unchanged. We expect our G&A to system sales ratio to move back to one 7% next year on a full year basis.

Finally, we note that Taco Bell company store margins have begun to normalize in the back half of this year due to increased staffing in our restaurants as we returned to our historical day part mix wage investments and recent commodity inflation.

While there will be quarterly variability due to the dynamic environment.

We are confident in our ability to consistently deliver Taco Bell company store margins in line with our historical pre COVID-19 levels for full year 2021 and beyond.

Next I'll discuss our unmatched operating capabilities, we continue to invest in our technology strategy to expand both our digital capabilities and restaurant technology solutions.

We're prioritizing making it easier to operate a restaurant ultimately driving efficiencies in our stores to enhance franchise unit economics, while also improving the customer experience.

To that end during the quarter, we closed on the acquisition of Dragon sale systems, a restaurant technology company that enhances both the team member and customer experience.

I can tell us is the innovative technology that streamlines the order management process in the restaurant and Optimizes delivery routes for drivers, resulting in our customers receiving the freshest possible products.

Thus far the Dragon sale solution has been deployed in 13 markets and over 1700 stores across the Pizza hut system.

Many pizza hut restaurants, leveraging Dragon tales platform have already seen a positive impact on sales order fulfillment and customer satisfaction scores, including product freshness and delivery times by.

I recently participated in virtual store visits in the U K and in Latin America, where franchisees demonstrated benefits of the Dragon sale system and shared their team members excitement.

Another example of how our technology investments yield enhanced operating performance as Taco Bell is continued execution of its all access technology initiative.

Connected suite, our core restaurant technology solutions is used to optimize operations and create a frictionless customer experience.

These strategic efforts contributed to Taco Bell seventh consecutive quarter with drive thru times below formats.

The brand to serve more customers through the drive thru, while also delivering a great customer experience.

Moving onto our bold restaurant development growth driver I am thrilled to discuss how we delivered another record development quarter with 760, net new units, including meaningful contributions across multiple geographies at our KFC Pizza hut and Taco Bell global brands.

While we continue to see strong development from Yum, China. Our brands are also seeing broad based development across other markets.

Widespread strength in our store level economics, and cash on cash returns improving relative to pre COVID-19 levels are key drivers contributing to the acceleration in development, we're seeing around the world.

Our KFC International markets has seen impressive development as China, Russia, India, Latin America, and the Middle East continued to deliver strong unit development during the third quarter.

Additionally, over the past year Pizza Hut International has driven a significant inflection in their unit growth going from negative net new units in 2020 to opening nearly 200 net new units during the third quarter. We expect this momentum to continue further testament to the confidence our franchisee.

These have and the future of the brand.

Taco Bell International we continue to see strong development as key markets are approaching scale.

Not only are we seeing strong development across our brands, but given the continued strength in digital and off premise growth. Our teams continue to evolve the asset types being developed into more digitally enable formats. As an example, we now have 23 go mobile locations that Taco Bell U S deep technology.

400, restaurants, which include dual drive throughs with a dedicated mobile pickup lane mobile pickup shelves and faster bell half experience. Among other things has been a big hit and we have more in our development pipeline.

Next I'll provide an update on our strong balance sheet and liquidity position.

In August we completed our third whole business securitization issuance at Taco Bell in the past five years issuing $2 billion to $5 billion of new securitization notes.

Weighted average yield of the new notes was approximately $2 two 4% and the proceeds were used to opportunistically repay one $3 billion of existing higher coupons, Taco Bell securitization notes and to support our share buyback program.

We still expect our 2021 interest expense to be approximately $500 million inline with 2020.

We ended the quarter with cash and cash equivalents of $1 billion, excluding restricted cash.

Due to our continued recovery in EBITDA, our consolidated net leverage continues to be temporarily below our target of approximately five times.

With respect to our share buyback program during the quarter, we repurchased two 6 million shares at an average share price of $127 per share totaling approximately $330 million year to date, we've repurchased $860 million of shares at an.

Average price of $117.

Capital expenditures net of Refranchising proceeds during the quarter were $49 million. We now expect net capital expenditures of approximately $175 million for the full year, reflecting roughly $75 million and refranchising proceeds and 250 million.

Our gross Capex.

Lastly, our capital priorities remain unchanged.

Invest in the business maintain a healthy balance sheet.

Our competitive dividend and return the remaining excess cash to shareholders via share repurchases.

Before wrapping up I'd like to take a moment to address both labor and cost inflation pressures and how young is well positioned to navigate these challenges.

U S labor availability remains tight across most industries driving wage inflation and staffing challenges that have resulted in a small number of our stores limiting operating hours, particularly during the early morning, and late night day parts.

While our franchisees are not immune to these market pressures, we believe the power of our scale and the larger average size of our franchisees relative to those of our <unk> peers enables our system to manage the inflationary environment better than most for example, while many small chains and independent restaurants.

<unk> difficulties adapting to these market dynamics, our franchisees continue to invest through this environment accelerating investments that help widen their strategic advantage.

<unk> our people first culture is a true competitive advantage in both attracting and retaining team members. We're confident in the ability of our brands to respond to dynamic market conditions and are working closely with our franchisees to assess strategic opportunities to take price as and when needed while ensure.

We continue to offer compelling value to our customers.

While store level margins have moderated franchisee unit economics generally remain incredibly healthy.

Overall I am pleased with our performance this quarter driven by impressive unit growth and sustained digital sales, we continue to invest in our digital ecosystem to scale technologies and provide a unique competitive advantage for our franchise operators, while enhancing the customer and team member experience.

Our franchise system is healthy and well positioned to invest through the near term pressures fueling our development engine and future unit growth.

Our unit growth and sustained sales momentum despite lingering COVID-19 impacts only make us more confident in our ability to deliver on our long term growth algorithm.

With that operator, we are ready to take any questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speaker phone.

Please pickup your handset before pressing the keys.

Anytime your question has been addressed and you would like to withdraw your question. Please press Star then two.

Again, please limit yourself to one question.

At this time, we will pause momentarily to assemble our roster.

The first question comes from John Glass with Morgan Stanley. Please.

Please go ahead.

Thanks, and good morning, I'm wondering if you could just comment a little bit more about Taco Bell performance. This quarter, while it was strong in Q basis, there was some deceleration.

Limulus may have played a role last quarter. So maybe that was a false read that that would also seem to be the brand just given your comments on staffing in early morning, and late night that may have been impacted so was there any notable impact of sales just from staffing shortages. There. If you can just sort of talk about the overall trends in staffing in particular and why maybe you saw some default.

<unk> on it on a two year basis.

Yeah on a in.

In terms of staffing obviously were pressured in our restaurants, just as everybody else's.

I think we're doing an amazing job in the field of <unk>.

Being focused on retention, we won't have a staffing problem. If we don't have any open jobs. If we retain the employees that we have and given the culture that we have in our restaurants across all of our brands and the kind of environments that our franchisees create for their employees with paychex and pathways to advancement I think we're getting through this better than most.

Really proud of the results, we put up across all of the brands this quarter.

Probably saw it on a two year basis, we're positive on all four brands on a one year basis. We're positive on all four brands and then obviously the Big news is the 760 net new units that we opened for the quarter. So very strong quarter, we've got pluses and minuses, John if youre talking about in the U S.

KFC was up 13 on a two year basis Pizza Hut's HMO business home.

Home meal replacement business was up 17, Taco Bell was a little bit softer.

For them late night, and breakfast become a little bit more of a challenge and they skew a little bit more towards individual meals and I think thats, what youre seeing every brand has a different set of attributes as we go through this some will play better in this environment than other but all of our brands are really doing quite well, which is contributing to this great quarter.

The next question comes from David Palmer with Evercore ISI. Please go ahead.

Thanks, just a quick follow up on John's and then I have one on unit growth. The Taco Bell result in 8% two year, that's below the industry's comp Taco Bell, it's been a long term share gain or if you have a big picture comment about it.

Maybe sources of weakness whether supply chain the Midwest something like that also just bigger picture why you think Taco Bell on a two year basis might not be.

It's doing as well as the industry average of drive through chains out there and then on unit growth do you. The results are very strong and it's hard to see weakness or hold backs from a development standpoint from from a macro sense, but we would expect there to be that that there would be some friction out there given all of the.

Macro challenges around Covid do you believe that there is some something hold you back even in these strong numbers. Thanks.

Yeah, It's a great point, obviously the numbers that we put up in this quarter are truly record setting 760 net new units in the third quarter was a record for young we're at 1800 net new units.

Year to date, basically which is closing in on the record we set for <unk> in 2019 for full year development and I think youre right Theres, probably some friction that we're experiencing there.

I haven't been able to open all of the units that we could.

Because of some challenges, but this is where the big advantages of Yum come in our scale our purchasing capability.

Size of our franchisees their access to capital we've been anticipating some of the supply chain challenges ordering ahead of time, securing the inventory we need an equipment for example to get through this without having equipment delays to open restaurants. So I do think there is further upside to the numbers, we're putting up and I do think.

If we continue these trends will obviously set a record for young in the fourth quarter and we probably have a shot at setting a record for the restaurant industry. All time for a number of units open in one year I look forward to reporting back on that in our fourth quarter call as for Taco Bell Taco Bell sales are up 15% system sales are up.

15% on a two year basis.

Make no apologies for that.

Business is doing quite well with very strong it does have its own unique challenges since it skewed a little bit more towards individual meals versus family occasions, Youre seeing the brands like pizza hut KFC that skewed towards family occasions, performing even better but talk about performance is strong in Q3, we made some investments on the marketing.

Side, there werent designed to pay off on the top line such as re launching breakfast. We know those will have benefits for us down the road. So we're proud of what's going on at Taco Bell with system sales growth like that unit growth like we're seeing all across the home and at Taco Bell.

About the future for all our brands.

The next question comes from David Tarantino of Baird. Please go ahead.

Hi, good morning.

I have another question on development.

First I just wanted to.

Let's see.

You thought this year's development strength.

Does.

Due in part to some pent up activity from delays that you saw last year.

And <unk>.

<unk> just underlying strength and then Chris I think you mentioned.

In your comments that you're seeing improved cash on cash returns and a lot of markets and I was hoping that you can elaborate on what you meant there specifically.

Yeah.

Yes, Thanks, David as David mentioned, we are very excited about the momentum in development and if you think about the drivers. The number one driver is unit economics, so that sort of gets at both parts of your question around the globe.

In general our franchisees are seeing strong EBITDA.

And they are seeing that translate to improved returns whenever they build restaurants remember these are our franchisees putting their capital to work and that's where I think the strength of the brand and the larger average size of our franchisees really matter, if theyre able to see through near term fluctuations related to COVID-19 around the globe and invest for the long term.

The second.

Driver on development.

Is this strong development teams that we have who are focused and incentivized to go create great results on the development front and they havent improved set of capabilities, we're now bringing analytics to bear and how we set our development plans and a number of markets around the globe, we're bringing new prototypes to bear and we talked about the go mobile concept, which is primed for did.

<unk> growth with Taco Bell, we have similar examples in other brands. So it is a broad set of drivers that are supporting this growth and you've seen this trajectory change in particular in the pizza hut business. That's been an important driver of where the numbers are pizza hut international putting up plus 200 in the quarter.

For more than 300, better than where they were a year ago and you've seen pizza hut U S. Stabilized. So those are also important drivers some broad based strength in development right now.

As far as the issue of pent up demand I'm sure. There's some units that spilled over from 2020 into 2021, but we do believe that these trends and development will continue we think we've got into a new level on development. That's why we raised our development guidance on the last earnings call.

Look we're talking about net new units, let's talk about gross new units for the quarter and the <unk>.

We opened over 1000 gross new units that's a store every other hour basically all quarter long pretty amazing when you think about just the side effect of that how we're modernizing state with that kind of development, it's really encouraging.

The next question comes from John <unk> with Jpmorgan. Please go ahead, hi, hi, Thank you very much I.

I think a lot of us on the call know kind of what the U S issues are in terms of construction labor and permitting and even equipment, but I wanted you to kind of give us.

The rest of the World view in terms of how supply chains are around equipment and your ability.

Yeah.

I guess again keep desk your current rate of development over the next couple of quarters and of course asset in the context of your supply chain seem to have gotten worse in the past six months and perhaps some of the stores that opened in the third quarter benefited from what was ordered six months ago or even longer.

Do you expect this momentum to continue is there that pipeline just in terms of overall supply chain constraints. However, you want to you you want to define it that you feel good on a market by market basis.

Yeah. Thanks, a bunch John it's a good question.

And I think this is where the strength of our operating model and our capability set around sourcing really shines.

We saw some of those supply chain challenges related to equipment that are sort of a global.

Challenge, we saw there was on the horizon early this year and our supply chain teams were building a resiliency plans at that point and they worked with our franchisees around the globe to get ahead on.

Purchasing for those equipment and reserving capacity with suppliers, there's certainly going to be some local challenges here and there related to permitting but again this is where that capabilities that helped us get ahead, plus our larger more sophisticated franchisees who invest ahead.

Have a sophisticated teams who are driving their development.

That's a big asset here as well so yeah, we probably left a few units on the table. This year as a result of that but in general we don't see that as a constraint on our long term development path.

The next question comes from Jon Tower with Wells Fargo. Please go ahead great.

Awesome. Thank you for taking the question just just real quick in terms of thinking about the value proposition to the consumer and obviously the.

Inflation thats running through the market today I'm curious to know how your franchisees are handling the pricing situation now in that heading into 'twenty, two with obviously wage rate inflation as well as commodity cost inflation. How are you messaging to the franchisees the weight and the best way to handle it to the extent, obviously you can't have influence.

On it and in terms of new product news.

Are you constructing items say at Taco Bell KFC for next year that will allow them to at least maintain some of the penny profit.

So theyre not getting squeezed too much in this inflationary environment. Thank you.

Yes, Thanks John.

And with our franchisees are brands are working proactively with the franchisees.

You mentioned product design I'm sure, we're doing a little bit of that we've done some menu management will think about how to optimize promotions and of course pricing is a lever that's available, but our franchisees in our brands they manage and they balanced the short term and the long term.

In the short term they want to make sure we're providing strong value to the customer that we don't get too far ahead of the consumer but in the long run whenever I talked to our franchisees their confident.

That.

Long term margins in the restaurants will be sustained and we can continue the momentum we've seen on a restaurant profit coming through the last couple of years.

The next question comes from Brian Mullen with Deutsche Bank. Please go ahead.

Hey, Thank you just a two part question on habit just number one as you look to eventually Refranchise. Some company owned stores. There Uhm can you talk about what you'd be looking for in any franchise partner for that brand maybe anything you can share about how far along you may or may not be or operational goal posts.

You would like to Chew first and then just number two David I'm curious are you spend any time, yet looking for international partners or is it just too early for that for having.

We appreciate the question on habit, we're really excited about them habits performance. If you think about it they started prepandemic, 60% dining sales. So they had the biggest hill to climb in this environment and just put up a plus seven on the two year basis. So the the way. They pivoted has been truly impressive I think it hasn't gone.

Unnoticed, we've had lots of demand from franchise beat from a potential franchisees both in the system and outside the system to enter we've now started closing on a few deals we closed onto already with young franchisees entering the habit system and we have more in the hopper. So we're seeing strong demand and interest in becoming for Abbott franchise.

I usually go to the unit economics are great. The all the reasons why we bought them as far as international goes the same story there yeah. As you know they're already in a couple of countries. Just was on a call yesterday, where we were evaluating a new potential partner to enter in another country. So we've built up a little bit of capability and the team internationally to focus on habit international and see.

Every indication that that can be become a growth driver for you up down the road.

Operator, we have time for one more question.

Thank you and that will come from tennis Geiger with you B S. Please go ahead.

Great. Thanks for the question just wondering if you could talk a little bit more about pizza U S. Both kind of near term momentum and then your thoughts on longer term positioning.

Just first of all on the near term any more details.

Aren't impacts maybe drivers staffing challenges if there was a bit more of a an outsize impact their versus staffing challenges at the other brands across the portfolio and then more importantly bigger picture just any more color on the broader strategic shifts the benefits, you're seeing and specifically how the work that you've done across asset base digital new product development et cetera.

Impacts how you were thinking about improved brand health and positioning longer term for pizza hut in the U S. Thank you.

Yeah. It looks pizza U S is obviously, a bright spot for US right now and will be for the long term as all the work that we've been doing over the last few years investing in digital and capabilities are working with our franchise partners.

Really starting to pay off this quarter Pizza U S sales were up 17% off.

Off premise basis, which is the the the heart of the business in the future of the business, but it's not immune to the same staffing challenges that everybody's facing so we had I'm sure. Those sales were held back to some degree by.

The challenges of getting drivers, we actually saw or carry out business is now starting to grow faster.

When we don't have the ability to get drivers were still able to pivot to caveat to carry out.

But so we know that there's a lot of demand for what we're offering a pizza and with a bright future in the U S. I. The other thing I would point out is you know our investment in digital at Pizza Hut has been you know it was really one of our leading investments in the world of digital that's one of the advantages of Yom has is our knowledge of digital through the pizza business you know.

<unk> I hope you guys all picked up on the fact that we had over $5 billion of digital sales yet again this quarter, but interesting context on that cross Uhm is our diamond business started to climb this quarter. So from Q2 Q3, we did see a return to dine in Yep. We saw digital sales go up and we saw.

Digital mix go up which is proving that not only is it sticky that it's still something that's gonna continue to grow for us which is a great sign for all of our brands as we move forward.

With that I just want to thank everybody for the time on the call or obviously excited about what's going on with digital and what's going on with net new unit development widespread same store sales growth on a one and two year basis across all of our brands a lot of momentum in the business right now a lot of enthusiasm from our franchise partners with record profits at the UN.

That level and very excited about the path forward for you in our four brands.

<unk>.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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