Q1 2022 Yum! Brands Inc Earnings Call
Interacted to humanitarian efforts as of the end of the quarter from the operating segments in which it was earned through our corporate and unallocated segment.
Operating profit has been reflected within other income expense and are reflected as a special item.
David and Chris will provide additional context in their prepared remarks.
For more information on our reporting calendar for each market. Please visit the financial reports section of our website.
We are broadcasting the conference call via our website.
This call is also being recorded and will be available for playback.
Please be advised that if you ask a question. It will be included in both our live conference and in any future use of the recording.
I would like to make you aware of upcoming Yum investor events in the following.
Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of our Form 10-Q filing.
Second quarter earnings will be released on August <unk> 2022, with a conference call on the same day.
Finally, we'll be hosting an in person Yum Brands' Investor day on Tuesday December 13, 2022 at the New York Stock Exchange stay tuned for more details.
Now I'd like to turn the call over to Mr. David gift.
Thank you Jody and good morning, everyone.
Before I go over our first quarter results I'd like to begin by sharing an update on our business in Russia and Ukraine.
The company that puts people first in every decision I'm incredibly proud that we have made the safety and wellbeing of all of those impacted by the tragedy in Ukraine is a top priority.
I want to personally thank our many dedicated team members and franchisees working hard to navigate through this deadly conflict and manage our business in the most complex and challenging geopolitical environments in recent history.
I'm proud of how our people and the surrounding regions have banded together and they are doing everything possible to support impacted Ukrainian refugees team members and franchisees some of whom have overcome incredible challenges that have reopened a number of stores to serve food and communities where it is today.
Additionally, the young brands Foundation made a donation to the Red cross to support those affected by the crisis, we activated the young disaster relief fund to support Ukrainian franchise employees, and our matching employee donations to organizations, providing relief and Ukraine, including units.
The Red Cross the World Food program and the International Rescue Committee.
We previously announced the suspension of all investment in restaurant development efforts in Russia, as well as operations or company owned KFC restaurants, and that we are finalizing an agreement with our pizza hut master franchisee to suspend all restaurant operations.
In addition to these actions we have begun the process aimed at transferring ownership to local operators while in the interim we continue to redirect any profits from Russia operation to humanitarian aid.
This is not a decision we take lightly and I know that it will be a complicated process to execute these transactions.
We will update you on this process during our second quarter earnings call.
Chris will provide more details around the financial impact from Russia on the quarter.
I'll now discuss our first quarter results, which illustrates the resiliency of our highly franchise diversified growth model.
Our first quarter system sales growth of 8% driven by both unit development and same store sales growth is a testament to our iconic brands and the unmatched operating capabilities of our world class franchise partners.
We set a first quarter development record opening nearly 1000 gross unit supported by positive unit growth in each of our brands.
Our continued same store sales momentum was fueled by our brands executing our recipe for growth strategy by providing relevant value access via new channels distinctive products and a strong brand noise, all supported by our digital and delivery capabilities.
Our digital channels continued to accelerate with digital sales of approximately $6 billion of new first quarter record, reflecting an increase of 15% year over year.
Importantly, we set a new digital mix record now exceeding 40%.
And then complex and highly inflationary operating environment, we and our franchisees remain focused on maintaining long term profitability by leveraging our scale and strategic pricing actions, while still offering our customers convenience and value.
Many competitive advantages of our unrivaled talent are sophisticated franchise system and the power of our business model gives me great confidence that we are well prepared to navigate these complexities and deliver robust global growth.
Let me share a few global trends from the quarter.
As young China shared on its first quarter earnings call last night, Covid related Lockdowns impacted restaurant operations and depressed sales in that market temporarily delaying an eventual recovery.
However, our results outside of China remained strong.
In fact, excluding China, both our KFC Division and Pizza Hut International same store sales were up 10%, which would result in consolidated same store sales, excluding China of 6% for the quarter.
We're pleased with the continued momentum in our developed markets as they lap strong results from last year and we're excited about the continued resurgence from emerging markets with same store sales, excluding China of positive 18% for the quarter.
So we continue to be encouraged by the global consumer recovery underpinned by returning consumer mobility, creating a tailwind for our on premise dining while we sustain our off premise business.
Next I'll discuss two of the four recipe for growth drivers are relevant easy and distinctive brands or red for short and our unrivaled culture and talent.
Then I'll discuss the progress we've made on our recipe for good.
Turning to our first growth pillar, a relevant easy and distinctive brands.
Starting with the KFC division, which represents 51% of our operating profit.
Quarter system sales grew 9% driven by 8% unit growth and 3% same store sales growth.
To illustrate the strength of the KFC brand around the World I thought I'd highlight a few markets that show a meaningful improvement in the quarter, specifically, the middle East Latin America and Africa.
Our middle East market delivered 40% system sales growth fueled by robust transaction growth.
Our marketing team led with a healthy balance of new products with the launch of the messy Burger as well as innovative value focused flavory items, such as the twister blade.
These items drove both value perception and new customer acquisition.
Additionally, the team is focused on meeting the needs of our customers through digital and off premise channel growth, while the diamond business bounces back fueled our strong results.
Latin America is another standout markets. This quarter system sales grew 34% thanks to our team hitting on all fronts all countries in the market deploy the balanced marketing calendar focused on value to drive velocity and transaction well paced campaigns continued to build brand strength.
This came to life for consumers in January with the genius menu value ladder, that's helping recover the individual occasion in March the Latin American market launch the Kentucky fried chicken sandwich for the first time, which drove over 10% growth in the sandwich category.
Another market worth highlighting is our African business, which has been incredibly resilient as systems sales grew 25%.
<unk> were fueled by continued traffic recovery, leading to transaction growth ahead of pre COVID-19 levels and design our value driven strategy that offers accessible price points resonated well with customers.
Finally in the U S. Our KFC team is working hard to maximize convenience for the customer and focusing marketing efforts on creating greater awareness of our off premise channels, including quick pickup services and our white label delivery offering.
The incremental sales layers, we built over the past two years, including our digital ordering channels in the chicken Sandwich platform contributed to top line growth this quarter in the face of a difficult operating environment.
Additionally, we offered beyond fried chicken in the quarter, which elevated the brand and boosted relevance, resulting in more media impressions than any other product launch in the brand's history.
A consistent theme across each of these four markets is the continued growth of digital transaction and the ability to execute an omnichannel strategy.
Moving to the Taco Bell Division, which represents 32% of our operating profit first quarter system sales grew 8% driven by 5% unit growth and 5% same store sales growth.
Talking about U S system sales grew 7% driven by 2% unit growth and 5% same store sales growth I thought I'd start by celebrating Taco Bell 60, <unk> anniversary as a brand.
Given the brand's role as a cultural leader in the industry, it's easy to forget its experience and heritage all of which makes us even more confident in the brand's ability to navigate any economic environment.
Talk about with executing on our strategy to inspire and enable the world to live Mas by remaining relevant easy and distinctive to its customers on.
On the relevance front Taco Bell continued to champion customer value with new offerings to meet all occasions, including the introduction of $2 burrito on new craving value menu, adding to Taco Bell's existing $1 menu offerings.
The combination of talk about new creating value menu with its box and combo offerings positioned Taco bell well to serve the needs of all customers.
Beyond value to talk about was actively marketing craveable distinctive foods from its limited time crispy chicken wings to the return of our fan favorite Nacho fries.
Additionally, the return to the Super Bowl with Dodger Cat Mark the distinctive cultural enrollments in the quarter.
We're building on this cultural moment with the long anticipated and much celebrated upcoming return of the Mexican Pizza, which <unk> announced in April .
Comparable international system sales grew 37% driven by 26% unit growth and 12% same store sales growth.
We continue to build brand momentum in multiple markets, including the UK, Spain and India.
Our new strategy to reach scale at a few key markets has driven brand awareness, thereby improving new unit returns that lead to accelerated growth.
Next the Pizza Hut division, which accounts for 18% of our operating profit. So on the first quarter system sales grew 3% driven by 5% unit growth.
Flat same store sales growth.
At Pizza Hut International which represents 11% of our operating profit system sales grew 10% underpinned by 7% unit growth and 5% same store sales growth.
We opened 283 gross units setting a Q1 record with further easing in Covid restrictions, we saw strong contributions from India, and Latin America, where system sales were up 44% and 18% respectively.
At Pizza Hut U S, which represented 7% of our operating profit.
<unk> sales declined 6% for the quarter attributable to a 6% decline in same store sales and flat unit growth.
Consumer demand remains strong.
Softness in the quarter stems from our delivery channel where capacity constraints limited our ability to meet demand.
This was driven by staffing challenges mainly from delivery driver shortages that have been felt across the industry.
The team is prioritizing restaurant operations, including a focus on improving staffing levels, restoring operating hours, increasing online ordering availability and more effectively leveraging the use of our overflow call center.
Additionally, in early Q2, we completed the integration of delivery as a service into our point of sales system.
This is leading to accelerated system adoption, allowing us to leverage third party aggregators.
<unk> our own delivery drivers.
Another action item, we're taking is expanding customer access to the pizza brand via aggregator marketplaces.
We are excited about the potential incremental growth from aggregated marketplaces based on outperformance, we're seeing from existing franchisees using this channel.
Lastly, at the habit Burger Grill first quarter system sales grew 17% driven by 13% unit growth and 3% same store sales growth.
To streamline restaurant operations for team members. This quarter, we promoted operationally easy to execute customer favorites, such as our Patty melt and the Santa Barbara Char Burger.
We continue to lean into digital only promotions and saw a strong response to our delivery and app only campaigns in the quarter that ultimately drove an increase in app downloads and active app users, even as consumer mobility improved in the first quarter, our digital sales across multiple channels increased sequentially.
Continuing to demonstrate the stickiness of these ordering option.
Moving onto our unrivaled culture and talent growth driver.
We kicked off the celebration of our 25th year as a publicly traded company with several powerful forum galvanized our top talents around engagement and development for.
For the first time in five years, we brought our top 250 leaders from around the world together for our global leadership summit.
Our technology leaders at the summit made up the largest functional group, which speaks to the investments we've made in differentiated technology capabilities and growth oriented function.
We will also showcase the progress our brands that maybe putting our recipe for good priorities at the center of our future growth not only with less carbon and less packaging and waste.
But also by making equity and inclusion come alive across every aspect of our business from our talent to our brand marketing to our suppliers and franchisee.
Additionally, we were proud to take many of our aspiring leaders to the womens foodservice form where our chief operating officer, and Chief people Officer Tracy schemes serves as chair.
It was wonderful to see young so prominently represented in a forum dedicated to growing women in our industry something truly important to us as we are increasing the number of women in senior leadership globally and are on track to achieve gender parity in leadership by 2025.
Finally, a group of our diverse leaders gathered in Washington D. C to discuss how we inspire and advanced equity inclusion and belonging across all levels of our organization.
When it comes to our recipe for good we invest in critical work that is focused on our three priority areas of people food and plan.
Just last month and as part of our larger climate strategy Im joined the supplier leadership on climate transition Global consortium, which was created to accelerate climate actions throughout supply chain. Our climate work is starting to take shape in markets such as KFC U K, where they are partnering with the university of Liverpool to develop a roadmap to achieve net.
Zero carbon and zero waste.
To wrap up this continues to be an incredibly challenging operating environment for my confidence in our future remains high given the resilience of our iconic brands across our global diversified portfolio.
Our unmatched global scale provides us unique competitive advantages, including our sophisticated supply chains with cross brand purchasing power strong marketing and consumer insights expanding digital and technology capabilities, and our capable committed and well capitalized franchisees that are willing to invest in the long term growth of the business.
This quarter's results continue to demonstrate the power and sustainability of our business model, while we continued to deliver lasting value for our stakeholders for years to come.
With that Chris over to you.
Thank you David and good morning, everyone today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers and our solid balance sheet and liquidity position.
I'll start by discussing our financial results, our first quarter system sales grew 8% driven by 6% unit growth and 3% same store sales growth, reflecting our continued global momentum.
During the quarter, we opened at 997 gross units.
Q1 record for young core operating profit decreased 5% for the quarter.
<unk>, a negative impact from Russia of 1%.
Ex special General and administrative expenses were $252 million tracking in line with our expectations for $1 $1 billion of G&A expense for fiscal 2022, and a return to our normal quarterly cadence.
Fight inflationary headwinds, we maintained company owned restaurant margins of approximately 22% at Taco Bell in line with Q1 2019 pre Covid margins finally, EPS, excluding special items was $1 <unk>, representing a 1% decrease.
Greece year over year.
Next I will address the impact to our first quarter results from the Russia conflict in Ukraine.
We previously announced the suspension of all investments in restaurant development efforts and Russia as well as operations of company owned KFC restaurants, and we are finalizing an agreement with our Pizza hut Master franchisees just to spend all restaurant operations and that brand.
In addition to these actions we pledged to redirect profits from operations in Russia. So humanitarian aid our core operating profits in Russia declined versus the first quarter of last year negatively impacting our young core operating profit growth by one percentage point.
Finally, as David previously shared we have begun a process aimed at transferring ownership to local operators. We will plan to provide additional updates on the process on our next earnings call.
Given the rapidly evolving operating environment, we wanted to provide our latest thoughts on full year results and the shape of the year.
We remain confident in the strength of our business and our ability to achieve our long term growth algorithm in future years in 2022, the underlying momentum of the business gives us confidence that we can still deliver on the same store sales unit growth and system sales aspects of our long term growth algorithm.
Were it not for the loss of Russia profits, we would deliver on all elements of our long term growth algorithm in 2022.
However, losing 3% of full year core operating profit from the exclusion of Russia profits puts us outside of our high single digit core operating profit range. This year with our current forecast closer to mid single digit core operating profit growth with <unk>.
Strength in many key markets continued emerging market recovery and strong development momentum our teams will continue to strive to over deliver against our current forecast.
We will keep you updated as the year progresses.
As a reminder, given the shape of our anticipated G&A spend in 2022 in comparison to 2021, we expect our G&A expense to remain a headwind to Q2 core operating profit growth and a tailwind to second half core operating profit growth.
Additionally, we expect continued softness in China, and a full quarter impact from the exclusion of Russia Province.
Therefore, we now expect Q2 core operating profit trends to be similar to Q1, and we remain on track with our prior expectations for high teens core operating profit growth in the second half of the year.
While our system sales and operating profit results shared during today's call exclude the impact of foreign currency. We wanted to provide a brief update on the impact in the quarter and the anticipated impact on both our second quarter and full year results for Q1, our reported operating profit was unfavorable.
Currently impacted by $14 million due to foreign currency translation.
Based on current exchange rates, we expect FX to reduce second quarter reported operating profit by approximately $12 million to $14 million and reflect a headwind to full year reported operating profit of approximately $30 million to $45 million. This.
Directional guidance as rates will likely change as we move through the year.
Moving onto our bold restaurant development growth driver I am excited to share that we had another quarter with each of our brands reporting strong positive unit growth.
During the quarter, we opened 997 gross units, resulting in 628 net new units a Q1 development record for young contributing to 6% unit growth over the last 12 months.
We wouldn't be able to achieve these record breaking results without broad based contributions from multiple markets across each of our brands. In fact, we had over 500 gross units and 261 net new units opened outside of China contributing to 5% unit growth in the rest of world year over year.
Both KFC Division and Pizza Hut International delivered another exceptional development quarter with 587 million and 283 gross units respectively.
While China continues to be our lead developer there were significant contributions from each of these brands in India Asia, The Middle East and Latin America.
<unk> remains on track for another record development year with growth in next Gen assets in the U S and additional markets reaching scale internationally.
On that front, we're excited to share that Yum, China has committed to expanding the Taco Bell brand.
Which will allow even more people to live Mas as we build our brand identity globally and grow our footprint in that market.
To that end, we now expect to have three more markets costs are critically important scale threshold of 100 units by the end of 2022.
<unk>, Spain, which reached that milestone in 2021.
The global development landscape is increasingly complex, but the sophistication scale and capabilities of our teams and franchisees provide competitive advantages that have allowed us to deliver yet another quarter of record unit openings.
Visibility into our development pipeline remains strong.
Now I'll discuss our unmatched operating capability and the three key elements, we're leaning into easy experiences easy operations and easy insights before I provide an update across our easy pillars I wanted to comment briefly on our global supply chain.
Our supply chain teams continue doing an amazing job building supply chain contingencies, and acting as needed to secure product availability, including restaurant equipment, which is necessary for new store openings.
Additionally, I am proud of how our sourcing teams are leveraging our scale and cross brand purchasing power to help our franchisees and equity stores manage costs in this highly inflationary environment as an important lever and maintaining long term profitability. This.
This scale combined with our operating experience and learnings from exposure to over 155 markets around the world create a unique competitive advantage for us as we navigate these inflationary pressures.
Starting with easy experiences with continued reopening trends in markets around the globe, a frictionless experience remains front and center for the consumer with that in mind, we are constantly adding new convenient ways for our customers to access our brands.
<unk> U S and the habit Burger grill have made digital ordering even easier customers can now order via the App I pick up their food from a specific company or shelf within the restaurant.
This enables a quicker and more seamless experience that eliminates the need to wait in line at the counter or in the drive thru.
Quick pickup is fully deployed across the KFC U S system and roughly a third of the habit stores currently have dedicated pickup shelves with plans to expand more broadly in the coming months.
In addition, Taco Bell U S recently launched a similar program in their equity stores and we'll continue to deploy across their systems more broadly in the coming quarters.
Both delivery and early tests, a quick pick up continue to free up drive through capacity for the Taco Bell system, which helps fuel their ninth consecutive quarter of average drive thru times underperformance with a sequential improvement from their fourth quarter drive thru speed.
Internationally, we have exciting projects in early stages, including our KFC, Australia business, which is piloting a drone delivery program that gets our finger licking good products to our customers home or office and less than 15 minutes on average from when it's ordered.
Next I'll move on to easy operations in which we are focused on streamlining operations for our team members and franchisees.
We are installing a new kitchen display system, and smart hub and leveraging our cloud based point of sale system and our Taco Bell locations with the goal of modernizing the employee experience and providing more digital capabilities within our restaurants thesis.
These systems separate out delivery orders from standards drive through orders, allowing for improved visibility and execution in the restaurants by our team members at.
At KFC U S. We're improving back of house operations by expanding our mobile manager a back of house suite of applications, which simplifies ordering inventory management and digital order fulfillment, enabling our team members to spend more time, focusing on the customer experience pizza.
Pizza Hut continues to make progress putting technology in the hands of its team members through continued global expansion of Dragon sale.
And the $3 60 coach platforms.
Given the driver staffing challenges, we're experiencing in the Pizza Hut U S business, we're piloting the dragon sale platform and over 100 of our U S stores to improve the efficiency of our delivery network.
Cited by the early results and the platform is working as we hoped given the outstanding performance, we've seen in other markets around the world.
We're in conversations with our franchisees to expand this cutting edge platform across the U S.
Third I'll discuss easy insights in which we focus on using data and analytics to drive more effective marketing and leverage our insights to enhance the customer and team member experience.
At Taco Bell U S. We continue to experiment with new and innovative ways to engage with our consumers through LTI programs, such as the Taco members past, which helped fuel growth in loyalty membership during the quarter and which drove customer frequency.
Quantum continues to scale its media mix marketing tool, which was recently used in several pizza hut international markets to drive incremental sales for the more efficient use of marketing spend.
Additionally, we continue to build targeted artificial intelligence and machine learning based tools, including an exciting new pricing tool that is being piloted in select international markets.
Next I'll provide an update on our strong balance sheet and liquidity position.
We ended the quarter with cash and cash equivalents of $365 million and.
Excluding restricted cash on April one, we called our $600 million seven.
775% bonds due in 2025.
Repayment was funded by the issuance of a new $1 billion five 375%, while ibi bond due in 2032.
We were especially pleased with the strong demand and execution in light of the rate environment and volatility in the financial markets with the recent bond offering which closed subsequent to the quarter. Our consolidated net leverage is roughly in line with our target of five times our capital priorities.
Unchanged invest in the business, maintaining a healthy balance sheet.
Pay a competitive dividend and return the remaining excess cash to shareholders via share repurchases.
Capital expenditures net of Refranchising proceeds during the quarter were $18 million. We continue to expect net capital expenditures of approximately $250 million for the full year, reflecting roughly $100 million and refranchising proceeds in up to 300.
$50 million of gross Capex.
With respect to our share buyback program during the quarter, we repurchased three 4 million shares at an average share price of $121 per share totaling approximately $407 million.
In closing I'm pleased with the results of the quarter, we opened a record number of units for the first quarter driving impressive system sales growth.
We remain committed to advancing our digital and technology capabilities, leading to enhancements in both the team member and customer experience and I am confident in our teams and franchisees ability to win in a dynamic and complex global landscape.
With that operator, we are ready to take any questions.
If you would like to ask a question. Please press star followed by one on your tenant. Thank you Pat now.
To ask a question please ensure you're on mute locally.
Change your mind, Please press star followed by <unk>.
First question is from Dennis Geiger of UBS. Your line is now open. Please go ahead.
Great. Thanks for the question and good morning, I'm wondering if you could talk a little bit more about the brands in the U S. How they're positioned right now and I guess really what youre, what youre seeing from the customer.
In recent months have behaviors changed at all anything that you would call out there.
Most importantly, just kind of looking ahead, David I think you spoke to the resiliency and how Taco Bell and some of the brands can navigate.
Consumer spending environment. So just wondering if you could speak a little bit more to that please thank you.
Sure. Thanks for the question.
As far as the consumer I would say that U S demand is generally strong.
But this is a really complex environment and I know a lot of people have talked about the take shape recovery bifurcated. There was higher income consumers are in better shape and lower income I think thats true, but I think thats, probably a little bit of an over simplification I don't know in my career, if we've seen a more complex environment to analyze consumer behavior.
And what we're dealing with right now from an economic standpoint, you have got inflation rising wages, you've got the funkiness in the stimulus lab that were lapping from last year, but the bulk of that all of these societal issues like mobility coming out of Covid consumer reaction.
More in eastern Europe .
Appropriate working from home changing consumer patterns. All of this makes for a pretty complex environment to figure out how to analyze the.
Analyze it in market consumers, but thats the great part about yes, we've got the scale and the talent to do that better than we think anybody else in the industry and navigate that complexity with our internal divisions like Coca lighter, which is an expert on consumer behavior quantum helping us figure out how to navigate that navigate the media landscape the market for those.
Consumers and all of our marketing and talent marketing talent and leaders in the U S and around the world So complex environment.
But as usual convenience and value matters in this environment and we believe we are leaders.
Across all our brands in that regard you're seeing that result.
It really in all the brands in Q1 Q1 in the U S.
The challenge obviously at Pizza hut.
No.
Sales performance is simply just due to demand.
The demand is there, but simply due to our ability to meet that demand with drivers as has been documented by others.
Generally as you mentioned resiliency is a key feature of our brands and going forward, we actually feel really good about our ability to navigate this environment and continue to prosper.
Thank you very much.
Our next question is from John Glass of Morgan Stanley . Your line is now open. Please go ahead.
Thanks, Ken Good morning, Chris just inside your new mid single digit core operating profit.
The impact of Russia, what are you assuming China does in that I suspect that as another pivotal piece what gives you confidence in that reacceleration in the back half I understand the comparisons are easier and.
And just when you look at that guidance, 6% unit growth is above that long term reset target is that a realistic view for this year or was the first quarter, just unusually good and thats not necessarily the right run rate. Thanks.
Yeah. Thanks, Sean on the profit side, we feel really good with the profit plan for the year, we laid out the shape on our last call. We said first half was going to be.
Roughly flat of course, we now have a Russia impact.
That was one point in Q1 and of course, if you think about but loss profit growth in Russia that actually get you closer to a couple of points and as you mentioned.
China impact is.
You heard on their call the business there is softer than expected. So that's.
A bit of an impact.
And we expect that going into Q2 as well.
But yes.
So Q2 is going to land about where Q1 is but those are the two.
Primary drivers and of course, when we think about the full year. We still think Russia is the one driver that takes us off of our algorithm from a profit standpoint for.
For the year of course, we're going to work hard to try to over deliver against that plan. So in general we feel really good about the profit plan.
A little bit of noise there on those on those two factors.
In terms of development.
Feel great about the pipeline.
One was strong but the pipeline looking to the rest of the year remained strong as well and of course, our job every day to come in and find ways to over deliver.
Hence the 4% to 5% unit guidance at course keep in mind, we had a 100 net new units from Russia last year, even without the 170 units, we still feel good about delivering on that part of the answer.
Thank you.
Our next question is from Jon Tower of Citi. Your line is now open. Please go ahead.
Great. Thanks for taking the questions just two real quick for me just going back to that unit growth piece, specifically can you talk about perhaps how.
Management incentives across the company may have been realigned in recent years to kind of focus more on this growth aspect of the business unit growth side, specifically across the brands and then secondarily drilling down specifically into Pizza Hut U S.
Move to <unk>.
Do you think that the sourcing and fulfillment platform can you comment on the decision to move that way specifically.
Why do the fulfillment side using.
<unk> and potentially giving up that competitive advantage that the brand holds from a delivery standpoint. Thank you.
Thanks, John I'll take the first question, Chris will comment on Pizza hut as far as unit development. Obviously, we're very proud of the progress that we've made.
Yes, we have actually introduced some new incentives companywide around development, we thought it was important to just unite.
So, but our franchise partners to take advantage of frankly in an environment that is really favorable to us our brands have gotten stronger over the last two years in general our business model is stronger and there are really great opportunities to expand our footprint and a lot of economies around the world, where there have been some discounts to the available real estate.
And you're seeing all of that come together.
Through the use of incentives with our team in some cases.
In the franchise markets and Thats, all leading to an increase in the pace of development.
We're proud of and as Chris mentioned, we have visibility into the pipeline and believe it will continue.
Yes.
On the second part around Pizza U S and the shift to using third party delivery.
As David said earlier, we still see strong demand in the Pizza Hut U S business, but it's primarily a challenge of being able to fill it with the labor challenges around drivers and particularly the most pronounced challenge that we have from a labor perspective in the U S.
So that's part of the driver for continuing shift to additional modes of being able to deliver and we're doing that by adding in both delivery as a service which is basically.
Still having sales through our website and apps within fulfillment.
Leveraging those third party drivers during peak periods, when we need extra capacity and to help us address some of those hiring challenges for drivers, but as we mentioned we're also.
Working with the aggregator partners on the marketplaces and Thats just part of our strategy for wanting to be ubiquitous be everywhere that our company our customers want to do business with us.
And we are seeing in the early going on that incremental growth from those camels back. We've got one of our leading franchisees who has already moved onto those platforms and is running.
Four points or so ahead of the system, which is primarily driven by the incremental customers that they are finding on those platforms and of course the way we negotiate.
The economics of those deals in the U S.
Really are indifferent in terms of where the sales fall we ensure that our economics are roughly the same across channels. So we want to be there wherever our customers want to do business with us.
Thank you.
Our next question is from David Palmer of Evercore. Your line is now open. Please go ahead.
Thanks that was an interesting comment just right then.
You said it was the <unk>.
Franchise, he was four points better than the average so down low single digits as opposed to.
Down 6% is is that the type of thing you were seeing when they did that third party <unk>.
Collaborations.
Yes, Brian this is running.
Four or five points ahead of the system and the vast majority of that we attribute to the incremental customers that theyre finding through fifth platform.
And do you and do you think that that's going to be.
The majority of the system will be doing something similar to that that franchisee by the end of the year.
I'm wondering if it was a little crystal ball ish, but do you think that the third party delivery.
Adoption will be fairly universal within the U S.
Do you anticipate on top of that some sort of labor easing being a path.
Forward here to flat to positive comps for the U S.
Well in terms of the strategy to address these challenges.
David Graves.
And <unk>, who are doing a great job dealing with this very dynamic environment.
Those are a couple of key parts of their strategy for dealing with this and.
We'll be implementing the delivery of the service as we mentioned in the earlier comments over the next.
Two to three quarters, and then of course, the franchisees Egypt decision on how to work with Aggregators, but we'd do that under our umbrella agreements and we expect that those kinds of gains continue to show up in the results, obviously, I think more and more going to be.
Choosing to move in that direction.
So the implementation will take will take a while.
But it's certainly part of our strategy for dealing with this very dynamic environment.
And then just one last question is what is the sort of mix that you get like that franchisee for example, what sort of mix do they get from third party when they get that type of improvement and I'll pass it on thank you.
It's still too early to tell this is something that has just been implemented.
Over the last.
A few months so it's still too early it's still too limited sample size I think to draw conclusions on a broad basis.
But as we said if you look at our business there is.
Fulfillment challenge.
<unk> business was actually up in the quarter. So.
Primary challenge was on the delivery business. So these strategies are directly pointed at that biggest root cause.
It's getting in the way of being able to serve and fulfill forecast customer demand.
Thank you.
Our next question is from Jonathan <unk> of Jpmorgan. Your line is now open. Please go ahead.
Hi, Thank you.
I wanted to revisit some of the comments on economics.
I mean, these brands have been around long enough.
In the U S and globally that they may get some maybe previous experiences that we can maybe pick and choose from historically so in environments, where we're a consumers' cost have risen faster than their incomes and obviously there are so many costs that are rising.
For the consumer where does the consumer.
Where might that consumer typically cut back is it any different solution or is it and take it and I guess on the first point and secondly, if it is quick it when you guys look back.
22 versus 19, how much of that average quicker and quicker.
Accidents frothy that consumer that that may be traded up.
Added onto a larger sizes, what haddon to unsustainable levels versus how.
How much average take or do you think made naturally come out of the business that the consumer still uses.
<unk> brands for all the obvious reasons, but.
If I can just find back ways, because basically revert to the mean in terms of what they actually buy and how they use the various brands.
Yes, thanks for the question John .
Obviously, the on the ticket I think the biggest driver of the ticket increased over the last few years has actually been party size.
Rather than premium position, although they are both drivers.
As we see mobility return individual meals returns that could bring down ticket without necessarily implying consumers trying to cut back.
Cost per eater.
But as far as the consumer and how their behavior in this environment.
Some of the other things to think about are the fast casual category has grown a lot.
We expect that if there is cutting back but there'll be some trade down from fast casual back into <unk>, which will be favorable for us, particularly Taco Bell, which I think is well positioned to capture some of those visits.
But it all comes back to this theme of the <unk> industry is built on convenience and value convenience and value win in any environment, particularly when you couple it with our great brands and innovative products that we're constantly introducing.
And you saw Taco bells performance in Q1 in the U S.
Five one of the better numbers for the major <unk> chains.
And then you saw the growth that we're getting just the Taco Bell internationally.
So I think we feel like we've got momentum in this environment is not going to get us off of it but we're going to have to do what we always do which is continue to pivot and evolve our offerings to meet consumers maybe talk about the Great example, 70% of our U S profit.
They've been leaning in on the cravings value menu, which is $1 $2 price points.
That's working to meet the needs of consumers with less money to spend but at the same time, they've been able to take price across the rest of the menu on their combos in more premium offerings and thats working as well.
Thank you and if it's appropriate to comment is there any near term change just in the last month or two.
From consumers that are that are closest geographically closest.
To the crisis.
In Russia, and Ukraine, obviously thinking about.
Some of the central Western European markets in terms of how that consumer may have reacted dig into some of these terrible events.
Yes no.
Surprisingly.
Our business in Europe , and you can see from the numbers is doing quite well. So we're not seeing to the point of your question, we're not seeing an impact on adjacent businesses.
We're seeing the prevailing factor there is just sort of return to mobility in Europe and the recovery of our businesses that were suffering more at this time last year.
Understood. Thank you.
Our next question is from David Tarantino of that your line is now open. Please go ahead.
Hi, good morning, Chris.
Wanted to come back to your profit guidance for the year and I think you mentioned multiple times that <unk>.
We're working hard to over deliver versus that plan and I Wonder if you could just elaborate on what factors.
That you see could drive upside to the plan.
If you were to see upside where would it come from.
In your view and then secondly, I guess the balance a discussion where do you see the greatest risk to.
The current plan.
Yes, Thanks, David.
We have all elements of our algorithm, we're always working to find ways to over deliver we called out the one primary driver, which on profit creates a headwind this year, which going into Q2 Q3 Q4, we're going to lose three points of operating profit plus the planned growth in Russia as we.
<unk>.
Exclude those from the results in direct any profits from Russia towards humanitarian effort. So thats the thats the big hit.
And of course in the early going as we said.
China softness is probably a little bigger than expected.
The long term trajectory there you would think at some point in the long term.
China will rebound in that business should see growth, but I'm not sure of the timing on that is uncertain.
If you think about other puts and takes I think emerging market stream. If you look at our 18%.
Same store sales growth.
In emerging markets.
A great sign of recovery and a big important part of our business. So that's a place where you might see you might see upside.
On the flip side, we will continue to navigate the really dynamic environment around inflation pricing and how those are playing out in each of our markets around the globe right. Now we think we're dealing with those at Kroger well our scale gives us advantage it gives our franchisees.
The advantage in dealing with those but.
Very dynamic environment, but we feel really good about the overall profit engine of the business.
Operator, we are planning for one more question this morning.
Thank you.
Our final question. This morning is from Brian Nolan of Deutsche Bank. Your line is now open. Please go ahead.
Thank you.
A big picture question, but do you see any potential one day for our cross brand loyalty program again, that's something that you think could potentially work in the quick service restaurant industry in the U S.
Conversely are there some reasons why that wouldn't work there wouldn't be a good idea and maybe from a consumer perspective or a franchisee perspective.
Yes, Brian Good question loyalty is becoming an increasingly important.
Part of our business increasingly important part of our digital experience that we provide to customers.
More than half of our restaurants around the globe are part of the loyalty program.
Taco Bell in the U S is a great example of how we're driving excitement through loyalty that's what we did with the <unk>.
Total over the past.
And that's helped to drive App downloads and people signing up into the program and we continue to see significant growth in membership in that program.
Pizza hut, obviously in the U S has a large and very impactful loyalty program of KFC has great loyalty programs in a number of markets around the globe. So we're going to continue to focus on that implementing it in markets, where it makes sense interesting question. Obviously, we've thought about it in terms of cross brand loyalty right now we're focused on maximizing the value of our brand focused loyalty.
Grams, but obviously as our data and analytics capabilities continues to evolve all sorts of possibilities are out there in the future, but for the time being we will remain focused on brand specific loss programs.
So thank you everybody I appreciate your time just to wrap up it was another strong quarter, obviously with good topline sales growth all brands growing.
The development numbers, obviously, we continue to set records, which we're very proud of and Thats widespread right. All of our brands grew at least 5% on a net new unit basis in the quarter.
Digital sales record, which we keep setting on every call and we just keep on delivering on and then at this time, we passed the important milestone of 40% digital mix.
Thanks.
In total the quarter represent our brands all around the world are healthy.
And can perform in any environment. This is certainly one of the most challenging ones we've ever had to deal with.
Proving the resiliency of our business model. Thank you for your time.
This concludes today's call. Thank you for joining you may now disconnect your line.
Yes.
Okay.