Q3 2024 Yum! Brands Inc Earnings Call

Welcome everyone to the Young Brands 2024 Third Court earnings call. My name is Lauren and I will be coordinating your call today.

Bill, we are an opportunity for questions at the end of the presentation. If you would like to ask a question and please press start with one from the telephynki bad. We can't be asked that you give it to a sound to one question only.

Head of the Civil Relations to you begin.

Speaker Change: Thanks to operator, good morning everyone, and thank you for joining us. On our call today, our David Gibbs, our CEO, Chris Turner, our CEO and Dave Russell, our senior vice president and corporate control. Followed remarks from David and Chris, we'll open the call to questions.

Before we get started, please note that this call includes four looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.

Speaker Change: All four looking statements are made only as of the date of this call. And should be considered in conjunction with the cautionary statements in our earnings release in the risk factors included in our following with the SEC.

In addition, please refer to our Vering for Reef and the relevant sections of our findings with the SEC to find disclosures, definitions, and reconciliations of non-gap financial measures in other metrics used on the days call.

Please note that during today's call, Austin Sales Group, in operating profit growth, results exclude the impact of foreign currency.

As a reminder, several of young brands business units report on a period counter basis, including all U.S. and Canada brands.

Speaker Change: KFC UK and KFC Australia. When forecasting 2024, please keep in mind this year will include an extra week and a fourth quarter for those entities. For more information on a reporting calendar for each market, please visit the Financial Reports section of the IAR website.

We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback.

We would like to make you aware of coming in better bits.

Speaker Change: Our first in talking to Bill Concerer Day will be held Tuesday, January 28th in downtown Los Angeles.

[inaudible]

Our fourth quarter of the earnings will be released on February 5th with the conference call on the same day.

Speaker Change: Now, I'd like to turn the call over to David Gibbs.

David Gibbs: Thank you, Matt, and good morning, everyone.

David Gibbs: Despite the complex consumer environment around the globe, our team managed to grow profits 3% year over year with the quarter bringing to life a real strength of our twin growth engines.

David Gibbs: Taco Bell U.S., which meaningfully outperformed the industry on comp sales, and KFC International, which meaningfully outperformed on unit growth.

David Gibbs: Although the U.S. QSR industry experienced negative traffic trends in Q3, Taco Bell U.S. posted an impressive 4% increase in same-store sales and led the industry in Q3 on value perception among all QSR users.

Speaker Change: Taco Bell delivered another quarter of significant market share gains driven by the execution of the brand's magic formula involving brand buzz, value, category entry points, and digital engagement.

talk about competitive advantages in innovation, value leadership at compelling price points, and strong consumer connection are clear reasons why the brand remains a category of one when it comes to winning with consumers in any economic environment.

Our other twin growth engine, KFC International, delivered 9% year-over-year unit growth, an incredible result that led all major competitors and that reflects the underlying power of the brand and the confidence of our franchise partners in the future of our business.

KFC International's development was diverse, spanning 64 countries.

Furthermore, gross unit openings year-to-date are up nearly a hundred and fifty units over last year.

Building on this momentum, KFC is enhancing its core capabilities to ensure growth over the long term by establishing seven centers of excellence focused on restaurant design, customer insights, market planning, food innovation, and more.

These centers will drive operational and marketing excellence while leveraging the brand scale, strengthening the competitive moat that has helped KFC grow successfully around the globe in 150 countries, an achievement that few global brands have ever accomplished.

It is no secret that the global macroeconomic environment remains complex. In many parts of the world, our brands are delivering outstanding growth and outperforming the competition.

We continue to see strong sales growth in KFC regions such as Africa, Latin America, and the Caribbean, and parts of both Europe and Asia.

In South Africa, where our KFC sales are up strongly, our teams have improved our value proposition, limiting recent price increases to 1% in comparison to nearly high single digits in affected local competitors.

In some other geographies, our performance did not meet our expectations, and our teams are working with our franchise partners to re-establish strong value offerings, all while safeguarding franchisee profitability.

The complex consumer environment that exists in many markets around the globe has contributed to pronounced regional sales variations, which has caused our system sales growth to fall short of our long-term algorithm this year.

The most pronounced regional headwinds continue to be in the Middle East, Indonesia, and Malaysia.

stemming from the impact of the Middle East conflict. In these markets, KFC same-store sales declines have generally ranged between 15% and 45% throughout the year, including Q3.

Speaker Change: We are fortunate that the vast majority of our restaurants are in the hands of highly scaled and well-capitalized franchisees around the globe, including Americana, our largest partner in the Middle East, who can weather temporary headwinds like this over extended periods.

However, in a few isolated cases, the scale and duration of these sales impacts are affecting the financial health of our less scaled or less well-capitalized partners, particularly those whose restaurants have been most heavily impacted by the Middle East conflict.

Speaker Change: We are working closely with those specific partners to help them navigate the challenges and implement tactical and strategic changes, including pricing studies, introducing new value offerings, and adjusting development schedules to improve profitability and position the business for healthy growth in the future.

Speaker Change: As we mentioned on the second quarter earnings call, the same geopolitical pressures have grown over time to meaningfully, but less severely, impact certain markets beyond the Middle East, Malaysia, and Indonesia.

As an example, we have seen in the UK, Australia, and New Zealand that KFC's Sainster sales performance in certain individual stores has been significantly impacted.

Importantly, these specific pressures have been location-specific and not indicative of broader global trends.

Specifically, are KFC markets, excluding China, that we believe were not materially impacted by the Middle East conflict reported an encouraging low single-digit increase in same-store sales?

As we shift to the U.S., the overall QSR industry is navigating a complex consumer environment. Of course, our scale and digital capabilities are an even bigger advantage right now, and our powerhouse Taco Bell business, which represents 75% of our U.S. profit, is thriving.

While our Pizza Hut and KFC businesses are more challenged in this environment, we have fantastic leaders in place in these businesses who are working through revised strategies to create a step change in the results.

Speaker Change: Overall, we achieved 5% unit growth year-over-year, an impressive outcome considering the obstacles faced by our teams.

Speaker Change: Closures have temporarily increased this year primarily in markets dealing with impacts from the Middle East conflict and in China.

Despite the strength in our gross unit openings in this tough environment, the risk of an increase in closures of lower volume units affected by the Middle East conflict could impact our Q4 net new unit growth and put at risk our ability to deliver our 5% unit growth target.

Speaker Change: Given the lower volume nature of these units, we would not expect a material financial impact from their closure.

We're encouraged at the pace of our gross unit openings that Chris will discuss in more depth and as we look at our 2025 pipeline, see no change in pace behind our gross opening momentum, giving us confidence in the strong fundamentals of our brands.

Speaker Change: Now, let me highlight our relevant, easy, and distinctive brands, or REDD for short, in more detail, followed by our unrivaled culture and talent and good growth strategy.

Speaker Change: I'll then turn it to Chris to provide further updates on our third quarter results, including our bold restaurant development, unmatched operating capabilities, and balance sheet position and capital strategy.

Speaker Change: starting with the KFC division

Speaker Change: which represents 50% of our divisional operating profit.

System sales grew 1% as significant unit growth was offset by the aforementioned Middle East conflict impact and transaction softness in several regions navigating constrained consumer spending.

Such challenges have led competitors to introduce incremental value offers, namely to capture low-ticket transactions in markets such as the UK, France, and India.

Speaker Change: The good news is that, despite category headwinds, we are gaining or holding share in several of our largest international markets, as well as seeing positive transaction growth in markets like Mexico, Poland, and Korea.

Speaker Change: We're also sustaining high system sales growth in larger regions like Africa and Latin America and the Caribbean, where we've benefited from product innovation and more stable consumer environments.

Speaker Change: Helping KFC to remain agile has been the focus of its robust digital strategy. Digital mix, now over 55%, grew three percentage points over the previous quarter on expanding kiosk and click and collect channels.

Speaker Change: In the U.S., limited time offers underperformed expectations due to a more intense competitive environment, particularly within the chicken QSR category. In Q4, the team will focus on strengthening its value proposition and has recently introduced boneless innovation like original recipe chicken tenders.

Speaker Change: Additionally, the team will capitalize on the success of the KFC Rewards membership growth, which has contributed to digital sales growth over 20% from last year.

Speaker Change: Moving on to Taco Bell, which contributes 37% of our divisional operating profit, system sales grew 5% driven by a 4% increase in same-store sales.

Speaker Change: This quarter, Taco Bell gained momentum with the launch of the Cheesy Street Chalupas, marking the brand's first innovation on the cantina chicken platform.

Speaker Change: Further momentum came from the reintroduction of the Cheez-It and investing behind the $7 Luxe Cravings Box.

Speaker Change: The team tapped into cheesy street chalupa innovation to drive delivery sales by offering exclusive access to an aggregator's premium members, which led to seven daily sales records for the aggregator during the quarter.

Speaker Change: Toward the end of the quarter, the team made the strategic move to make breakfast optional for our franchise partners, providing greater flexibility to spend our marketing dollars more effectively on growth drivers such as Cantina Chicken and our Cravings Value menu.

Speaker Change: These are platforms where our marketing spend has had significant success building new and very profitable sales layers.

Speaker Change: We expect the net impact from these changes to be less than a one-point headwind to same-store sales growth. We intend to reintroduce breakfast in the future with a bolder, more distinctive Taco Bell approach.

Speaker Change: In another strategic priority involving growth through its loyalty program, Taco Bell drove impressive advancements, with 90-day active loyalty users increasing by 50% year-over-year.

Speaker Change: On the digital front, where Taco Bell U.S. has implemented the majority of Yum's digital and technology platforms, digital sales grew an amazing 30% year-over-year.

Speaker Change: Internationally, Taco Bell focused on executing its three core pillars, brand, food, and value, leading to positive same-store sales growth for the quarter. Very encouragingly, that momentum has continued into Q4.

Speaker Change: To strengthen brand relevance, the team is connecting more with local cultures, including most recently in the UK with the launch of Encore Hours, allowing stores to stay up and late near music venues to serve fans after shows.

Speaker Change: We were also pleased to see our first equity store open in the UK in late October with a very encouraging consumer response, giving us confidence in our accelerated investment in the brand internationally.

Speaker Change: Clearly, Taco Bell International has the potential to be a third growth engine for Yum for many years to come.

Speaker Change: At Pizza Hut, which represents 13% of our divisional operating profit, system sales declined 1% as the same-store sales decline of 4% was partially offset by 2% unit growth.

Speaker Change: The third quarter started strong in the U.S. with momentum from MyHutbox and a robust marketing plan for the Chicago Tavern-style pizza, which translated to positive traffic growth for the full quarter and ahead of the QSR industry.

Speaker Change: However, product news and bounce back offers were not sufficient to compete against deep value offers in the market.

Speaker Change: Throughout the quarter, several markets became more intentional in pursuing value, including China, India, and countries within the Middle East.

Speaker Change: As an example, in some of our pressured markets, we shifted towards a lower price point value over abundant value.

Speaker Change: At the same time, we are making progress in repositioning the brand over the long term, most recently hiring a new chief brand officer, and have plans to improve and expand our consumer relationship management and loyalty platforms next year.

Speaker Change: Lastly, at Habit Burger Grill

Speaker Change: While overall sales remained under pressure during the third quarter, there were encouraging signs of momentum as the quarter progressed. Same-store sales trends improved each period in the quarter as the team leveraged recent accolades, including being recognized as having the number one grilled chicken sandwich by Daily Meal and the number one fast food burger and side by USA Today.

Speaker Change: These accolades were impressive given many of the other contenders have a broader national presence with larger store footprints.

Speaker Change: Clever marketing efforts combined with refinements to have its media mix using YUM's proprietary marketing analytics platform successfully ignited consumer excitement, driving visits to the brand to experience the award-winning double char and tempura green beans.

Speaker Change: I'm pleased to see this positive momentum continue into the fourth quarter.

Speaker Change: Now I'll turn to our good growth strategy, starting with our people pillar.

Speaker Change: A hallmark of YUM and a key driver of our performance is the strength of our talent base, including our deep bench of amazing leaders always ready to take on bigger roles.

Speaker Change: I'd like to start by congratulating Erika Burkhardt, who was recently promoted to Chief Legal Officer and Corporate Secretary for YUM. Erika is a seasoned and respected leader throughout YUM who has been with the company for over 20 years.

Speaker Change: She leads by example and has earned the trust of her peers and teams alike, providing invaluable insight and counsel on key initiatives across Yum and our brands.

Speaker Change: I would also like to recognize her predecessor, Scott Catlett, for his years of service and the tremendous impact he made at YUM and our brands as he starts a new chapter outside of the company.

Speaker Change: Additionally, as we progress on our journey to becoming the leading global digital restaurant company

Speaker Change: I'm pleased to announce Joe Park has been named president of Yum's digital and restaurant technology ecosystem in addition to his overall chief digital and technology officer role.

Speaker Change: He's doing a fantastic job bringing our vision to life for a fully collaborative

Speaker Change: digital and technology team across YUM, and is reinventing how the team works to drive increased consistency and efficiency in tools and processes, as well as greater deployment of AI-driven capabilities, leveraging our global data assets and scaling our proprietary technology.

Speaker Change: Also during the quarter, for the first time in over two years,

Speaker Change: We brought nearly 200 of our most senior leaders from around the world together for our Global Leadership Summit.

Speaker Change: our technology leaders at the summit made up the largest functional group demonstrating our focus on leaning into our digital leadership and our investments in AI.

Speaker Change: We showcase the progress we're making on our good growth journey and what we're doing behind the scenes to reinvent how we run the business by better exploiting our scale to drive future growth.

Speaker Change: Moving on to the planet pillar of our Good Growth Strategy, just last month we published our annual Global Citizenship and Sustainability Report. This report highlights YUM's long-standing dedication and continued progress and investments in our three priority pillars of people, food, and planet.

Speaker Change: We are on track to reduce our greenhouse gas emissions by nearly 50% by 2030 and continue to make progress around sustainable packaging, building upon our harmonized cross-brand packaging policy.

Speaker Change: In closing, in a difficult operating environment, we are encouraged by the underlying strength of the fundamentals of our business.

Speaker Change: Stepping back, our twin growth engines are demonstrating what makes them special through share gains at Taco Bell U.S. and strong franchisee investment in unit expansion in KFC International.

Speaker Change: Despite the numerous headwinds, we are proud of the resilience of our overall business model and our ability to deliver 6% core operating profit growth year-to-date.

Speaker Change: Importantly, our teams are making great progress in ushering our brands into the next era, leveraging young scale and digital and technology capabilities to improve sales and operations, leading to improved franchisee profitability and value creation for our shareholders.

Chris Turner: With that, Chris, over to you.

Chris Turner: Thank you, David, and good morning everyone. Today I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, our balance sheet and capital strategy, and provide an update on our outlook for the remainder of the year.

Chris Turner: Turning to our third quarter financial results, system sales grew 1% driven by 5% unit growth. As the third quarter progressed,

Chris Turner: Sales trended below our expectations due to a more challenged U.S. environment.

Chris Turner: Soft Trends in China, and continued pressures from the Middle East conflict. Ex-special G&A was $252 million for the quarter, less than anticipated due to lower performance-based compensation.

Chris Turner: Reported GNA was $263 million including $11 million of special expense related to our ongoing resource optimization program.

Restaurant level margins were 15.8%, modestly below levels from last year, partially due to KFC UK and Ireland Equity Restaurants acquired in the second quarter.

Chris Turner: Core operating profit grew 3%. Third quarter X special EPS was $1.37.

Chris Turner: translating to a nine cent year-over-year EPS headwind. Now on to development. In the third quarter we achieved a significant development milestone surpassing 60,000 restaurants worldwide.

Chris Turner: Overall, we increased our unit count by 547 units, reflecting 1,029 gross openings and 482 closures.

Chris Turner: KFC drove Yum's unit growth with the team opening 685 gross units led by China, India, Thailand, and Japan.

Chris Turner: Notably, we've seen an acceleration this past year in net new unit expansion in markets like Italy, the Philippines, and South Africa.

Chris Turner: Most of our key KFC markets report paybacks less than five years and as a result we continue to see a strong appetite by franchisees for unit growth.

Chris Turner: In Saudi Arabia, for example, we expect our store count this year to grow by nearly 30 restaurants, with paybacks still under three years, despite conflict-related sales pressures.

Chris Turner: Turning to Pizza Hut, we added 63 units this quarter driven by 292 gross unit openings offset by 229 closures.

New unit openings were led by China, India, and the United States.

Chris Turner: Taco Bell added nearly 50 gross units led by the U.S. while 14 other countries contributed to growth.

Chris Turner: Recall, Yum! China went through a portfolio restructuring earlier this year, resulting in 60 closures in the first half of the year. Excluding China, Taco Bell International's unit count increased 7% year over year.

Chris Turner: Last month, we also opened our first store in Bosnia and our first equity store in the UK.

Chris Turner: We expect to open several Equity Taco Bell UK stores by year-end, providing a fantastic testbed to generate insights to guide the business model, including an innovation, pricing, technology, and restaurant experience.

Chris Turner: Moving to our digital and technology initiatives, we continue to make great progress on both of the parallel phases of our journey.

Chris Turner: Recall, the first phase is focused on acquiring, building, and scaling a comprehensive suite of platforms to enable ownership of our data, control of the digital ecosystem, speed of innovation, and cost advantages.

Chris Turner: These foundational platforms include Poseidon, our Yum-owned, cloud-first point-of-sale system.

Chris Turner: our e-commerce engine, our delivery optimization platform, Dragontail,

Chris Turner: Super App, an integrated restaurant management platform for team members, restaurant general managers, and area coaches.

Chris Turner: and a scalable global data platform that houses over 80% of our transaction data.

Chris Turner: In the second phase, we are focused on maximizing the value creation potential of our platforms through AI and by leveraging our extensive data assets.

Chris Turner: We believe we are still only scratching the surface of the full value creation potential of our capabilities with exciting innovations including one-touch labor scheduling and inventory management.

Chris Turner: consumer feedback dashboards, quality control monitoring, and personalized AI- driven marketing, to name a few. Let me now discuss additional digital and technology accomplishments for Q3 across our Easy Experiences, Easy Operations, and Easy Insights pillars.

Chris Turner: I'll begin with our Easy Experiences pillar, focused on providing frictionless experiences to our consumers.

Chris Turner: Taco Bell is currently working on two significant digital initiatives in the drive-thru, voice AI and loyalty program enhancements.

Chris Turner: Drive-Thru Voice AI continued to scale across our network with many franchisees eager to test this new innovation.

Chris Turner: To date, we have processed over 2 million successful orders with the system now in place in over 300 Taco Bell U.S. stores, making Taco Bell the largest QSR voice AI brand in the world.

Chris Turner: For loyalty, Taco Bell is using its connected ecosystem to allow loyalty consumers to identify themselves at the drive-thru and kiosk, enabling personalization of the ordering experience and earning and redeeming of loyalty rewards.

Chris Turner: This was rolled to 160 stores in Q3 and we're encouraged with early results which clearly show an increase in signups and in daily loyalty transactions, all without an impact to speed of service.

Chris Turner: As required enablers of these technologies, we have accelerated deployment of digital menu boards to now over 6,000 restaurants.

Chris Turner: Digital menu boards will be a Taco Bell brand standard in 2025, along with Yum's proprietary point-of-sale system, Poseidon.

Chris Turner: Our other key initiative under this pillar is the rollout of Yum's e-commerce engine. We completed migration of a substantial portion of Pizza Hut's U.S. traffic in the quarter and are on track to complete migration by year-end.

Chris Turner: We also recently launched the Yum! e-commerce engine in Pizza Hut UK, our second international Pizza Hut market, and we'll target two new Pizza Hut international markets before year-end.

Chris Turner: Next, I'll discuss our Easy Operations Pillar, where we continue to deploy our world-class technology to provide our franchisees and team members with the capabilities to operate their stores more effectively and efficiently.

Chris Turner: This quarter, we started to expand Super App to KFC U.S., now having reached 50 countries and nearly 5,000 KFC and 8,000 Pizza Hut stores with the technology.

Chris Turner: We are planning to nearly double the KFC penetration by year-end. Recall, Super App is our modular restaurant management platform that offers a suite of products to managers and team members to simplify their jobs and improve operations.

Chris Turner: This quarter, we also reached significant scale for our AI-powered labor scheduler, now in use in over 5,000 Taco Bell U.S. stores, driving significant improvements in labor planning accuracy and labor efficiency.

Chris Turner: At Taco Bell, we now have AI-powered forecasts driving both our labor scheduling and inventory management processes.

Chris Turner: We expect to scale these solutions to our other brands throughout 2025.

Chris Turner: Lastly, I'll discuss our Easy Insights Pillar.

Chris Turner: This quarter, we successfully launched personalized AI-driven marketing campaigns that, relative to traditional digital marketing campaigns, generated significant increases in consumer engagement, leading to increased purchases and a reduction in consumer churn.

Chris Turner: This innovation has the potential to greatly improve our marketing return on investment and allow us to extract the unique benefits of our proprietary global data hub. And we expect it to be broadly and easily scalable across brands.

Speaker Change: Next, I'll provide an update on our balance sheet and liquidity position. Net capital expenditures for the quarter were $34 million, reflecting $52 million in gross capex and $18 million in re-franchising proceeds.

Chris Turner: We repurchased 2.1 million shares totaling $277 million. Our net leverage ratio ended the quarter at 4.1 times.

Chris Turner: As a reminder, we have no debt maturities until 2026. Our capital priorities remain unchanged. Investing in the business, maintaining a resilient balance sheet, offering a competitive dividend, and returning excess cash to our shareholders.

Chris Turner: Before I close, let me touch on the outlook for the balance of 2024.

We expect Q4 core operating profit growth to be mid to high single digits excluding contributions from the 53rd week, which we expect will add approximately 35 million dollars

Chris Turner: Of course, precise forecasting is difficult in this environment.

Chris Turner: To finish with guidance, we expect Taco Bell fourth-quarter company-operated store margins to be in the range of 23 to 24 percent, and lastly, our Q4 net interest expense to be just under $140 million.

Chris Turner: Taking into consideration the challenging environment, I am incredibly proud of our team's perseverance to open approximately 4,500 gross new restaurants, or roughly one store every two hours.

Chris Turner: and Envy of the Restaurant Industry.

Chris Turner: Into next year, we'll continue our focus on capturing the global white space opportunity.

Chris Turner: that offers significant runway for our iconic brands.

Chris Turner: I'm excited by our continued progress in transforming Yum! into a digital, multi-brand powerhouse. We look forward to seeing many of you at our upcoming Taco Bell Consumer Day in January, where we'll further unpack many of these exciting digital and technology initiatives.

Chris Turner: With that, Operator, we are ready to take any questions.

Speaker Change: Thank you. We will now begin the Q&A session.

Speaker Change: If you would like to ask a question, then please press star-floated by 1 on your telephone keypad. To withdraw your question, please press star-floated by 2.

Speaker Change: Please also ensure that your phone is unmuted locally.

Speaker Change: As a reminder, please limit yourself to one question.

Speaker Change: Our first question comes from Gregory Frankfurt from Guggenheim Security. Gregory, please go ahead.

Gregory Frankfurt: Hey, thanks for the question. My question is going to be on operating profit growth, but thanks for the thoughts in the fourth quarter. I think that leaves you a little bit below the 8% growth for this year.

Gregory Frankfurt: I guess, as you look out to next year, how confident are you in getting that back up to 8% and what's the bridge maybe from what the outlook looks like this year to what might be the contributors next year? Thanks.

Speaker Change: Yeah, Greg. Hey, this year, you know, year-to-date, we've got 6% core operating profit growth in a really challenging environment.

Gregory Frankfurt: So when we step back and look at that, we think that demonstrates the strength and resilience of our business model.

Speaker Change: You know, the main change from the last time we updated you on the last call is that our sales didn't meet expectations in a few key markets, including China and the Middle East, where we have outsized exposure. And as a result, we tempered our expectations in Q4.

Speaker Change: Of course, on a full year basis, if you flow through what we said about Q4, we likely will end the year below our operating profit algorithm for 2024, but of course the main driver of that was this conflict situation. Without that, we would have had a very strong year and been on or above.

Speaker Change: the algorithm.

Speaker Change: And, of course, we delivered that while still investing in things that drive the long-term health of business. Big investments in digital and AI. We talked about voice AI progressing rapidly, marketing-driven AI.

Speaker Change: Forty other AI-driven projects that are happening in the business. So, you know, that resilient business model and investing in the long-term growth of the business.

Speaker Change: We're still working through the plans for 2025. We'll share an update as we always do on the next call. But there's no major things that are unusual right now as we look at that 2025

Speaker Change: plan, but you know, we think about the long-term trajectory of the business, our dual growth engines continue to perform, and our digital capabilities continue to power the business.

Speaker Change: Thank you. Our next question comes from Brian Bitzner from Oppenheimer. Brian, please go ahead.

Brian Bitzner: Thank you. Good morning. Just a confirmation question and a follow-up on Taco Bell. Just on the guidance...

Brian Bitzner: for the fourth quarter as it relates to the mid to high single-digit core operating profit growth. Are you able to talk about the base case for global same-store sales that does underpin that outlook by any chance?

Brian Bitzner: And just on Taco Bell, very strong relative performance, obviously, with your 4% same-source sales. And you mentioned...

Brian Bitzner: that you were the best-ranked by consumers in value within QSR during the quarter. And it obviously happened at a time where the industry got way more aggressive.

Brian Bitzner: So just curious how you protected or even expanded your value positioning in this environment and

Brian Bitzner: Is there any new value ideas in the hopper as we move into 2025, particularly as a few large QSRs are eager to put more permanent value on their menu? Thanks.

Speaker Change: Thanks, Brian. I'm glad you pointed out Taco Bell's strength. That's obviously something we're incredibly proud of, and you can see that strength is evident in the U.S. with the Plus Four. We're also positive in international.

Brian Bitzner: And the other thing I'll share is that momentum has continued into Q4. A lot of it is what you said, it has to do with the unique way that Taco Bell can provide value with products that nobody else has.

Speaker Change: Really, if you think about it, you know, Taco Bell can provide a product that is a value product, that's an innovative product, and that can help our franchisee's margins. That's an incredibly powerful set of tools that we have in our toolbox that our competitors don't.

Speaker Change: As we move forward, of course, Taco Bell has always got ways to bring in new value.

Speaker Change: Right now, you're seeing us, you know, launching the Decades menu, and then you can get some of those products within the $7 Luxbox, for example, which is a unique way to bring innovation and value to consumers.

Speaker Change: So I think we're very confident in Taco Bell's ability to win in this environment.

Speaker Change: alternative picking sales are still a little bit off time for new products relative to our peers as far as sales guidance for the quarter. It's a difficult environments to forecast sales globally but as I said the trends that we saw in 2.3

Speaker Change: for Taco Bell. Thank you.

Speaker Change: Thank you. Our next question comes from John Tower from City. John, please go ahead.

Great, thanks.

John Tower: I appreciate all the color you provided in the gross unit openings for the brands across the globe. I was hoping maybe you could drill a little bit more into the net unit number. David, I think you'd mentioned that there's a potential risk of not hitting the 5% this year.

Speaker Change: And then maybe specifically drilling into, you know, you do have pockets of weakness across the globe. And I think you'd mentioned some of the smaller operators having a hard time keeping the lights on.

Speaker Change: How should that inform the thinking regarding 25? Is there an opportunity to...

Speaker Change: perhaps consolidate some of those closures into 24, such that 25 is a cleaner year, and or are there opportunities to consolidate some of those stores into larger operators within markets, such that your net unit number is not under too much pressure.

Speaker Change: Yeah, a couple things on development, then I'll let Chris give them a little more detail. If you think about it, 2024 is obviously a very challenged year in terms of the impact to our sales in certain parts of the world and some of the consumer pullback.

Speaker Change: So, you know, for us, we're incredibly proud that this year does showcase how resilient

Chris Turner: business model is and the capabilities of the vast majority of our franchisees to continue to grow and invest in the business in this challenged environment.

Chris Turner: you know, like Americana, our franchisee in the Middle East.

Chris Turner: They're positive operating profit in this environment, continuing to develop. That is a unique strength of YUM in terms of the capability of our franchisees around the world. And 2024, as difficult as it is, really is allowing us to showcase that and let that part of our business model really shine.

Chris Turner: American has got about two-thirds of the stores in the Middle East, so most of our stores there are in very good hands. As far as the, you know, risk that we signaled on net new units,

Chris Turner: Just to clarify, I can give you a little more detail.

Chris Turner: That was risk to the 5%. Right now, the numbers that we're looking at roll up in the 4.5 to 5.0 range. So we would still round to 5% on algorithm. But closures are obviously a little elevated this year. If you're going to have a little bit of a shortfall, you'd rather see this strong gross development mostly continuing, and then closure of some lower volume stores.

Chris Turner: So, this is not some widespread issue to your points about struggling, you know, other struggling franchises. It really isn't a widespread issue. It's just a few stores, lower volume, that might have closed in the future where those closures were pulled up. I'll let Chris give you a little more color on it.

Chris Turner: Yeah, yeah, John, let me give you a little more color on the change in that new unit trajectory first through a couple of lenses.

Chris Turner: First, if we just look at the deceleration in net new unit growth from last year to this year on a geographic perspective.

Chris Turner: We see that about 40% of the change in trajectory comes from countries and markets in our business that are directly impacted by this conflict situation.

Chris Turner: There's another 25 percent.

Chris Turner: that are markets that have some impact from the conflict, not as much as those core markets, but that gives you about two-thirds of the change in that new unit trajectory that is in some way tied to the conflict situation. So that gives you a little bit of bound on it, and of course history would say we, you know, we typically, you know, work through these situations over the long term.

Chris Turner: Another way to look at it, you know David mentioned a little bit higher closures this year.

Chris Turner: As we've said before, when units close in our system, they tend to be lower volume units and we see that again this year.

Chris Turner: Unit volume of the units that are closing this year is about 60% of our global average unit volume

Chris Turner: And so when you actually look at the system sales contribution of our net new unit growth this year, it's going to be basically the same as the system sales growth contribution from our higher net new unit rate last year. So the economic implications of this...

Chris Turner: you know, aren't that big on our business. So that gives you a couple of additional ways to, you know, just think about this change in that new unit trajectory.

Chris Turner: As David said, our global franchise base is strong. Americana in the Middle East region has the majority of our stores and is navigating this very well.

Chris Turner: In fact, in the 22 countries in the specific Middle East geography,

Chris Turner: of another owner. There's some complexity always in the beginning of those situations. We might have some unit closures.

Chris Turner: Thank you.

Speaker Change: The next question comes from Dennis Geiger from UPS. Dennis, please go ahead.

Dennis Geiger: Great, thank you. Good morning guys. Recognizing it's too early to talk about 25 specifically.

Dennis Geiger: I'm wondering if you could just comment high-level about how you think about managing profitability.

Dennis Geiger: as well as the team has in 24 if macro pressures continue. You know, maybe specifically, can you talk a little bit about, you know, GNA growth and how you think about that generally looking ahead and and perhaps the ability of the divisions to continue managing cost and profitability? Thank you.

Speaker Change: Yeah, hey, as I said earlier, we'll give more of an update on the 2025 plan when we get to the next call.

Chris Turner: And as I mentioned, there's nothing that's significantly unusual right now as we're tumbling that plan. As we think about the puts and takes.

Chris Turner: You know, our twin growth engines continue to perform in a strong way. We've shared that our gross unit outlook for next year is similar to this year.

Chris Turner: On the G&A front, you know, we've made productivity moves this year. We'll continue to get some benefit from those. Of course, we will have a reset of our incentive comps, so those are a couple of factors that we'll look at there.

Chris Turner: But if I think about the long term trajectory of our business, you know, there's a lot to be excited about, in particular, with those two primary growth engines. Taco Bell continues to outperform in any sort of economic environment in the US.

Chris Turner: KFC International 9% unit growth in Q3 continues to build units outpacing its competitors and our digital story continues to strengthen so if you look over the long term there's a lot of reasons to be excited and confident in our business model.

Speaker Change: Thank you. The next question comes from David Palmer from Evercore ISI. David, please go ahead.

David Palmer: Thanks. I wanted to maybe double-click on a couple of the digital initiatives. You highlighted the AI-enabled digital marketing that you talked about, Chris, and David mentioned the AI-enabled drive-throughs in the release.

David Palmer: On the digital AI marketing, is that hyper-personalized push marketing in the app and other? You mentioned it was a nice lift where you're rolling that out. Could you maybe give some more color about what that lift was and where the rollout is across your brands?

Chris Turner: and on the AI voice drive-throughs in the US. I'm wondering if that could be a nice profit driver for young brands, any reasons that would not scale quickly in 2025 and any offsets to the fees you'll collect there. Thanks very much.

Speaker Change: Yeah, great. These are two initiatives that we're very excited about. I'll provide a little more color on the AI-driven marketing. This is something we're doing in a coordinated way across our three large brands in the U.S. We've run pilots in each of the brands. I'm not going to share any specific numbers on it.

Speaker Change: But I can tell you what enables it is our digital ecosystem.

Speaker Change: and it's really what we call the AI factory within that ecosystem.

Speaker Change: that leverages our massive data assets that we've built which enable us to know our consumers.

Speaker Change: If you think about the Taco Bell environment, it leverages the fact that we have

Speaker Change: the Poseidon POS in the store, the digital menu boards.

Speaker Change: and the ability to actually bring these to life at the store and through our loyalty programs and through our connections with customers in the app. So we've got many ways to bring it to life.

Speaker Change: But it essentially allows us to do more personalized tailoring of offers and to learn and refine much more rapidly.

Speaker Change: than we could before. So we're excited about the potential of this. We'll continue to bring it to life.

Speaker Change: across the brands and across markets as we progress. On the voice AI side, really we're driven by how do we enhance the consumer and customer experience in our restaurants, and how do we enhance the team member experience.

Speaker Change: And so far, the results in Taco Bell with Voice AI have been outstanding on both fronts.

Speaker Change: The customer response has been very positive, and our team members really enjoy having what they call an extra pair of hands in the restaurant to help them operate the store. Our rollout pace this year has been much faster than we originally envisioned going into the year, and I think that speaks to how our operators are seeing the capability and how our franchisees are seeing the capability.

Speaker Change: Thank you.

Speaker Change: The next question comes from John Idenco from J.P. Morgan. John, please go ahead.

John Idenco: Hi, thank you very much. In your prepared remarks, you really did touch on many digital initiatives, many of which, you know, have yet to get into the hands of franchisees fully.

Speaker Change: especially on a global basis.

John Idenco: The question is, on a previous Yum! language, bending the curve on GNA.

Speaker Change: If there's not further opportunity in 25, talk about if there is, longer term.

Speaker Change: You know, how much of an opportunity do we have, you know, to use, you know, fee collection from franchisees that will significantly drive their own profitability and ease of running their own businesses?

Speaker Change: you know, to kind of think about, you know, fee recapture, you know, if you will.

Speaker Change: on a basis point of franchisee sales basis. I mean, your sales base is so big.

Speaker Change: you know, collecting, you know, even 50 or 100 basis points, you know, of franchise sales would obviously be very significant in terms of, you know, your your total GNA spent. So I wanted to see if we could, you know, have an opportunity today to kind of think about the longer term potential of that.

Speaker Change: Yeah, thanks John. Just a couple of high-level comments on that. I know you and David asked a similar question in that regard.

Speaker Change: Our goal with technology is to give our franchisees the absolute best technology in the industry, better than any of our peers at the lowest possible cost, better than they can get anywhere else. That is our North Star when it comes to tech.

Speaker Change: We know that if they get that tech in their restaurants and it drives sales and drives improvement in their business models, like Voice AI is doing, improving their margins by cutting labor, they'll build more stores, the top line will grow more, and that's the best way for us to leverage technology to drive profitability in the business. Of course, we're making investments, we will recover those investments, but Voice AI is a great example. We're providing that to our franchisees at what we believe is a much lower cost than our competitors in the industry are having to pay for other third-party solutions.

Speaker Change: and we will continue to do that and that is our mission.

Speaker Change: Thank you.

Speaker Change: The next question comes from David Tarantino from Baird. David, please go ahead.

David Tarantino: Hi, good morning. My question, David, I think you mentioned that, you know, as part of your response to a question,

David Tarantino: that the cop trend you saw in the third quarter carried over into Q4. I just wanted to make sure that that comment was directly related to Taco Bell and not the global business, and I guess secondly, I was wondering if you could...

David Tarantino: comment on the KFC segment and, you know, the comparison, you know, it does get quite a bit better.

David Tarantino: are easier in the fourth quarter, but I know you still have some macro pressures you're dealing with. So any sort of directional commentary on the KFC business and how we should think about that for the fourth quarter would be great. Thanks.

Speaker Change: The comment was on Taco Bell in terms of sales trends, where we sit in the quarter.

Speaker Change: We feel good about being able to continue the momentum from

David Tarantino: Q3, but in the U.S. and internationally. Of course, Taco Bell is a little bit easier to forecast because Taco Bell's global store footprint is really unaffected by the conflict.

Speaker Change: It's a lot harder to forecast KFC. What I will say is we haven't really gotten to the point where, even though we're past the one-year anniversary of the conflict, we haven't gotten to the point where it really started to impact sales. So we don't know how sales will behave once we get to that lap, but certainly the lap will get better, and that should lead to a change in the trajectory of the KFC sales.

Speaker Change: Thank you that is the end of the Q&A session so I'll now hand over to David Gibbs for closing remarks.

David Gibbs: Great, I appreciate everybody's time today. You know, we're excited about the upcoming January 28th Taco Bell Investor Day, so if you don't have that circled on your calendar, please do, and we're looking forward to seeing you out in Irvine, out in California, in LA then for that meeting. We've got a lot of exciting stuff to share about Taco Bell. Thanks for everybody's time today.

Speaker Change: This concludes today's conference call. Thank you for joining everyone. You may now disconnect your lines.

Speaker Change: Silent.

David Tarantino: This concludes today's conference call. Thank you for joining everyone.