Good day, and welcome to the Yum! Brands, Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Keith Siegner, Vice President, Investor Relations, M&A and Treasurer. Please go ahead..

First, disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing. Second, third quarter earnings will be released on October 29, 2020, with the conference call on the same day. Now, I'd like to turn the call over to Mr. David Gibbs..

Thank you, Keith, and good morning, everyone. I want to start by thanking and recognizing our employees, franchisees and restaurant team members around the globe. They have adapted to the incredible challenges of 2020 with remarkable agility bringing our delicious, affordable food to customers in a low contact manner.

As a result, we are well positioned to leverage our scale and capabilities to generate profitable system sales growth in the new customer environment. On the foundation of our resilient, highly diversified business model, we are driving our recipes for growth and good to emerge a stronger company for all stakeholders.

Our Recipe for Growth, using our four key growth drivers, continues to guide our business strategy. So I'll start with an overall review of the second quarter and use a few examples to illustrate the power of our relevant, easy and distinctive, or RED, brands unmatched operating capability and Unrivaled Culture & Talent growth drivers.

Then Chris will share more details of our Q2 results, our bold restaurant development growth driver and our healthy liquidity position. First, Q2 results, the quarter was significantly impacted by COVID-19, the primary driver of our 25% core operating profit decline.

Overall, Yum! system sales declined 12% with a 15% same-store sales decline, offset by a 3% increase in net units year-over-year. The impact on our sales in each of our market's dependent on the timing, severity and duration of the outbreak as well as our reliance on dine-in sales in the market.

Overall, our sales declines were primarily driven by temporary store closures, which peaked in early April at about 11,000 restaurants. We then experienced a consistent pace of reopening until our June 10 8-K filing when approximately 5,000 units or 10% of our global system remained close.

I'm excited to share that closures have now fallen to less than 2,500 units, which means roughly 95% of our system is open for business in full or limited capacity. The remaining closed stores are dispersed around the globe with about 70% located in balls, transportation centers, airports and the like.

We're encouraged that, generally speaking, when our stores are open, customer trust and demand are high. This is true even though the majority of our dining rooms have been and remained closed, highlighting the importance of executing the off-premise occasion well and demonstrating the resilience of our business model.

Our brands are becoming even more RED by leveraging consumer insights to adjust operations, menu options and marketing and by digitally enabled off-premise capabilities across the globe. With our focus on delivery carryout in digital, we have passed some tremendous milestones this year.

We now have over 34,000 restaurants offering delivery around the world, representing a 13% increase year-over-year, in part driven by expanded aggregator partnerships. Our digital sales mix has increased dramatically to over 30% of system sales, a 15-point year-over-year improvement.

To put that into context, during the quarter, digital sales were approximately $3.5 billion, a $1 billion step-up from Q2 2019. Our brands, working in concert with our Yum! Central technology team, have shown remarkable agility and will continue to unlock sales growth over the near and long term. That's a perfect segue to our 4 RED brands.

Let's start with KFC Division results. Q2 system sales declined 18% as a 21% same-store sales decline was partially offset by 6% net new unit growth. Encouragingly, trends improved from early April troughs, fairly in line with the rate of store reopens.

KFC started the quarter with 5,000 restaurants temporarily closed; peaked in mid-April with about 6,000 closures; and following a massive effort to reopen, ended Q2 with about 95% of stores opened. Our performance in open stores is primarily linked to off-premise capability within a given market. We saw consistent strength in Canada, the U.S.

and Australia. And after government-mandated closures eased, we saw resiliency in Germany and the U.K. All of these markets have good drive-thru coverage, strong off-premise capabilities and robust digital foundations.

Western Europe, in particular, KFC France, which was hit hard early on, led the way in reopening markets where all channels and restaurants have been closed due to lockdown. The local teams took action to keep our team members and customers safe while working with government bodies to ensure that we were among the first QSRs to reopen.

In the U.S., KFC is serving the right occasion at the right time, fulfilling families' needs for delicious meals to take home and unpack around the dinner table. The timing of our launch of kfc.com for pickup and delivery, the addition of new aggregators and our bundled bucket meals that travel well all contributed to a fantastic quarter.

We recorded the highest average sales per store in the brand's history during a week in early May, and we finished with 7% same-store sales growth for the quarter. Moving on to Pizza Hut, the division reported a Q2 system sales decline of 10% with a 9% same-store sales decline and a 1% net new unit decline.

Pizza Hut entered the quarter with over 3,500 restaurants temporarily closed due to the COVID-19 pandemic, with same-store sales growth trending in line with temporary closures. Closures then peaked in mid-April with about 4,000 restaurants temporarily closed. By the end of Q2, about 87% of Pizza Huts were open, with Pizza Hut U.S.

Express stores representing half of the remaining closures. In general, markets that operate a diamond segment have significant stores in malls or transport hubs or have Express units have been most impacted by closures and government restrictions.

While the effect has been partly offset by increases in delivery and carryout demand, the net impact globally has been a headwind. At Pizza Hut International, temporary closures peaked at approximately 24% in April.

Importantly, certain markets, including Canada, Japan and Australia, closed the quarter with positive results, though this was offset by markets with substantial dine-in and Express footprints. Those markets include the U.K., much of Europe and Central America, the Middle East and select markets in Asia.

In aggregate, off-premise channels generated a positive 10% same-store sales growth and represented 80% of total sales internationally. At Pizza Hut U.S., we balanced value and innovation as we introduced the $9.99 large 3 topping deal and premium products such as the Big Dipper and the Big Dinner Box.

Same-store sales grew 5% in the second quarter, and I'm excited to share that in early May, the U.S. recorded its highest average sales week for delivery and carryout in the past 8 years.

Our off-premise channel generated 21% same-store sales growth when excluding the drag of closed Express stores or 16% same-store sales growth when including the drag of closed Express units. During the quarter, we launched our contactless initiative by adding additional pickup and payment options for customers.

Since March 2020, Pizza Hut has served close to 20 million contactless digital orders. We've also welcomed several million new and reengaged customers to our Hut Rewards loyalty program. At Taco Bell, system sales declined 6%, driven by an 8% same-store sales decline, partially offset by 4% net new unit growth.

Taco Bell temporary closures peaked at 500 at the end of Q1 and had reopened 100 units by mid-April. By the end of Q2, about 97% of Taco Bell units were open.

At Taco Bell U.S., we pivoted our marketing to promote group bundles, drive awareness of contactless drive-thru and delivery and thanked our fans, heroes and communities by giving away free Dorito Locos tacos.

We coupled this with abundant value offerings such as cravings, boxes and party packs and our all-new at-home Taco bar, which supported record-breaking sales on Cinco De Mayo and further established Taco Bell as a destination for groups.

And to adjust to widespread dining room closures, our company and franchise partners doubled down on world-class operations as Taco Bell served an additional 4.8 million cars through our drive-thruns while achieving an 18-second faster drive-thru time year-over-year. Taco Bell has always been an easy brand for customers to access.

And now with the ability to order on the Taco Bell app and pick up through our world-class drive-thru, they are redefining the easy part of RED. During the quarter, we added over 1 million new users to our active e-commerce platforms through our mobile app and tacobell.com.

These operational improvements and increased focus on digital and delivery have made an impact in driving profitable growth for our franchisees, and we are extremely proud of our operators for making it happen. Following an eventful first full quarter as our newest brand, I'm pleased to share details about the Habit Burger Grill.

With the majority of the Habit's assets being in line or end cap units, COVID-19 significantly impacted Habit sales just as we were closing on the acquisition in mid-March. With over half of sales typically coming from dine-in and temporary closures running at approximately 10% of habit's throughout the quarter, they faced a massive headwind.

Impressively, from the April sales lows, the Habit quickly turned things around by shifting focus to off-premise. They ended Q2 with an 18% same-store sales decline, mostly due to temporary closures, and recent trends for open stores are flat to slightly negative.

During the quarter, the Habit built customer awareness of new access options and shifted marketing to focus on family meal bundles such as the variety meal that can feed a family for only $30. Digital ordering via mobile and kiosk represented 40% of sales during the quarter.

And importantly, each month this year, we have seen a steady increase in the number of app downloads. I've been incredibly impressed with the resilience of this brand, the agility of the entire Habit team and the know-how sharing taking place between Habit and our legacy brands.

None of us could have imagined how Q2 would play out when we made the decision to acquire The Habit, but I'm more confident than ever that the brand and the team will create a new long-term growth opportunity for Yum!. I'd now like to spend a moment on the current state of the business.

Of course, there remains incredible uncertainty in the global macro outlook owing to COVID-19 and its implications, as evidenced by the different trends we see in each of our 290 brand/country combinations. Due to this uncertainty, we must remain vigilant.

That said, we are encouraged about our continued store re-openings, the general financial health of our global franchisee base and our own strong liquidity and balance sheet. Just as importantly, same-store sales trends for open stores stabilized in June, just a few points short of flat.

And despite the majority of our dining room still being closed, these trends have continued into July. Finally, earlier this year, we elevated our Recipe for Good to serve as our road map for Yum's global strategy for citizenship and sustainability. That recipe is built on the three key pillars of food, people and planet.

Those of you familiar with Yum! know we have always been a people-first company committed to ensuring the safe, welcoming and inclusive environment for our customers and employees. But recent tragedies across the U.S. have revealed this dark and unacceptable reality and have shown us that we must do more.

To that end, at the end of June, we announced our unlocking opportunity initiative, with a $100 million commitment over the next 5 years, of which $50 million was funded in the second quarter.

This initiative will promote equity and inclusion, education and entrepreneurship for our employees, frontline restaurant teams and communities around the world and will serve as the cornerstone of our Recipe for Good going forward. I look forward to providing further updates on our progress on unlocking opportunity as we bring it to life.

With that, I'll turn it over to Chris..

invest in the business, maintain a healthy balance sheet, pay a competitive dividend and return remainder excess cash flows to shareholders via repurchases.

Regarding our commitment to a healthy balance sheet, we plan to continue repayment of our revolver drawdown and to grow back into our historical 5 times consolidated net leverage target over time. Third, we are ending the suspension of our $2 billion share repurchase program.

We may resume repurchases should business trends persist and should we continue to gain confidence in the time line for achieving a healthy balance sheet, as I just outlined. As a reminder, we've not repurchased any shares under our current authorization, which runs through the middle of 2021. In summary, Yum!'s future is bright.

Our business model has proven resilient, growth in our digital capability and sales has accelerated and overall sales continue to trend in the right direction as we reopen. We remain confident our brands are purpose-built for delivering a modern off-premise dining experience to customers around the globe.

Just as important to our long-term growth, the investment case for building new units is as strong as ever, especially when enhanced by our continued investments in digital capabilities, such as ordering and payment and an enhanced drive-thru and numerous contactless off-premise access options.

By leveraging these scale benefits to drive profitable system sales growth for franchisees, we believe we are well-positioned to accelerate growth and create value for all stakeholders in the future. That said, lingering uncertainties remain for the near-term, which make the time frame for such acceleration difficult to forecast with confidence.

Therefore, we believe it is still too early to reassert specific guidance. We appreciate your understanding and look forward to discussing progress in coming quarters. Now, the team and I are happy to take your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from John Glass of Morgan Stanley..

Thanks very much. Chris, just going back to the comments on development. What are the conversations with the franchisees? I know it matters by market, by brand.

Are you willing to change your philosophy in terms of capital allocation to help rekindle that growth in certain markets? How do they think about the share opportunity ahead of them in certain markets where some of these smaller chain's independents? What – I know you're not going to give specific guidance, but can you talk about the relative enthusiasm? Is it too early to give a comment about that, about resuming growth in various markets?.

Yeah. Good question, John. Obviously, unit development and growing our network has been an important part of our algorithm. And we think in the long-term, we remain confident that it will be an important part of Yum!'s story. Obviously, given the uncertainty in the near-term, we're not sure when we'll get back to that.

But if you think about the factors that actually are driving this conversation, it depends really on where you are around the globe. We've got certain markets where sales are strong. Our brands have proven their resilience, and our franchisees are forward focused. You heard Yum! China last night reaffirm their units for the year.

And then we've got other markets at the other end of the spectrum where we still got some closures or -- and where sales are more impacted by COVID. Those franchisees are focused on just basic operations right now. So the discussions really depend on where you are around the globe.

But in general, we believe the investment case for our restaurants will be even stronger going forward. Our brands have proven resiliency. We believe real estate costs should be more favorable going forward. Our digital capabilities allow us to pivot to off-premise, and we'll obviously be looking at optimizing our footprints for that environment.

So we feel really good about the investment case..

And look, that said, we're not wavering from our asset-light model, right? Our model is for franchisees to do development. Within that, though, we've been building a couple of Taco Bells, equity stores. To the point of your question, John, we are going to continue to do that.

And then Habit, we talked about the data a little bit in the prepared remarks, but we've been really pleased with how Habit has gone through this and the resiliency of that business, and they have been building corporate stores. We'll continue to do that as we slowly open it up to franchising over time.

So there will be company investment in mostly Taco Bells and Habit stores over the near term..

Next question, please.

The next question comes from Gregory Francfort of Bank of America. Please go ahead..

Hey, thanks for the question. You just touched a little bit on Yum!'s willingness, I guess, to maybe invest in some of these franchisees. And I guess the question comes back somewhat to the NPC situation. And I guess, if you could put some capital in and maybe accelerate some of the asset changes there.

Is that something Yum!'s considering? Or is that something that will be off the table at this point? Thanks..

Yes. Again, back to the comment I just made. We're committed to the asset-light model. We never rule out any possibility, but there's plenty of interest in getting into all of our different businesses around the world as investors have seen how resilient our business is.

And we're not going to comment very specifically about the NPC situation, but other than to say we're working productively. There's lots of interest in that business, and we expect it to be in the hands of a capable franchisee coming out of this process..

Thank you. Next question, please..

The next question comes from Sara Senatore of Bernstein. Please go ahead..

Thank you. I was wondering if you could maybe talk about Pizza Hut and KFC in particular. They would – I characterize them as maybe some of the few beneficiaries, if you will, of the changes in the consumer behavior during the pandemic. Both I think comping better. Certainly, the off-premise business repeats that, and we've seen it in a long time.

Can you just talk about how you think about retaining some of that strength, specifically the two dynamics I'm interested is what happens when people are able to go out, eat again? Your dining rooms are open.

How much of that do you think you'd give back? And then also to the extent that you've taken market share, how do you keep that Pizza Hut, x closures and dine-in comps, I think, over 20%, which is actually pretty consistent with what we've seen from other large pizza chains who have historically, I think, led Pizza Hut in many quarters.

So I guess, how do you capitalize on these things? Or can you over the long term? Thanks..

Great question, Sara. And it's obviously our intent to hold on to the gains that we've made. A lot of the gains at Pizza Hut and KFC have been from the fact that they offer great Family Meal solutions, which is right for these times.

But one of the things that I'm really encouraged about all of our brands is the incredibly positive feedback we're getting in our customer satisfaction surveys. Customers that are – and the new customers that are being drawn to our brands during these times.

So those two things coupled together says that we should be able to hold on to some of these new customers, given the great experiences that they're having and the new normal It's very hard, obviously, to predict what the world will look like six months from now.

I think we're most proud that we've demonstrated how resilient our businesses and how nimble we are and how we can pivot to meet customers as their needs change. We know, like a lot of other retailers, we're looking at data about how -- what happens when customers do return to dining-in in certain parts of the country or in certain markets.

And we see a little bit of an impact on that to our business, but not to the degree that will lead you to conclude we'll give up the gain -- all the gains that we've gotten here. So, it's a pretty bright picture in terms of what it paints for the future..

Thanks. Operator, next question please..

The next question comes from John Ivankoe of JPMorgan. Please go ahead..

Hi. Thank you and apologies, I went through the release, obviously, very quickly. First, the Taco Bell store margins really did jump off the page, considering the comp that you guys reported.

Can you provide some color on that in terms of like what happened? And what out of that margin is actually sustainable? And if there is a kind of a new Taco Bell company store margin coming out of this is the first question. And then secondly, if I may, there's obviously been a lot of news in disruption in terms of third-party delivery.

Can you comment on -- in the U.S. business specifically and around the world, if you'd like to, your ability to grow delivery dollars year-over-year? And how some potential changes in the relationship might benefit or, I guess, impact your business in some way? Thank you..

Yes. Thanks, John. Good questions. On the Taco Bell store margins, I'd say, yes, obviously, 24.5% and outstanding result from Taco Bell. And I think the main takeaway for us is that shows how resilient the Taco Bell business model is, similar to what we've seen in our other brands around the globe.

But I think that's the main takeaway for us is the resiliency. That was primarily driven by some things that probably are related to pandemic. So, we have seen higher average check sizes as consumers are buying more for family occasions than prior to the pandemic.

We've also had some labor efficiencies as the dining rooms have been closed, and we've adjusted our operating hours for a bit. So, I'd say those two things were the primary things that helped. Of course, we had some things on the other side of the equation. We paid some extra bonuses to our front-line and had other COVID-related expenses.

So, that helped balance it. So, I think it was a good story. But those two primary drivers of check and dining rooms, once those things go back to normal, those would be things that would sort of swing back to the other direction. So, I think the main takeaway is resiliency during the crisis.

On third-party delivery, I think at the highest level, our philosophy remains we want to be accessible to our customers where they want to do business with us. And we build relationships with aggregators to serve that purpose.

In terms of total delivery capabilities around the globe, we saw a more than 10% increase versus last year in terms of our number of restaurants. We're now north of 34,000 restaurants that offer delivery, up from just over 30,000 at this point last year. Part of that's driven by our aggregated relationships.

Of course, we've got our own proprietary delivery capabilities and a number of those restaurants as well. So, it's a mix there. But I think in general, where customers are doing business with aggregators, we want to be there..

Yes. The other point about delivery as much as we've seen delivery growth, we've also seen a lot of carryout growth with options like curbside pickup in a contactless way, which is obviously great for our operators because it's a high-margin business when you can do -- carry out in that way.

So the growth that we're seeing, yes, delivery is one of the drivers. But carryout is very much growing at the same kind of pace..

Next question please..

The next question comes from Dennis Geiger of UBS. Please go ahead..

Thanks, and I hope you're all doing well. Just wondering if you could talk a bit more about Taco Bell, the strength of the brand and the franchisees, and thinking about maintaining that industry-leading momentum going forward.

Maybe specifically, if you could comment on some of the latest developments, including the loyalty program, what the opportunity there is, as well as menu simplification? And if the drivers there are more operations in speed or making way for new items coming in the future? Thank you very much..

Yeah. Look, Taco Bell was a bright spot for the quarter. If you look at -- they're basically flat on a two-year basis, and they made tremendous progress during the quarter. If you just look at our previous filings from sales results, you can see that they probably had the best results moving from April forward through the quarter.

If you think about what -- in the U.S., for example, Taco Bell, with almost one-quarter of their sales is dine-in and the late night and breakfast business, they were impacted the most. So they had the most ground to make up. And now we've got into July, and Taco Bell, along with the other two big U.S. brands are all positive.

So that's enormous progress given the hit to their business. It's due to the fact that they've pivoted really well, leveraging the option -- the menu that consumers love with items like the Grilled Cheese Burrito, that's obviously proven a hit.

And the loyalty program, as you mentioned, which recently launched still in its infancy, but obviously has a lot of upside. The margins actually were somewhat of a record, tying a record for us for store-level margins in the quarter. So when you add all that up, it's the brand with a huge amount of momentum as we come out of the quarter.

I'm very excited about the future for Taco Bell. The relationship with the franchisees, as you mentioned, couldn't be more positive. They've been great partners working through all these challenging times. Again, they were hit the most at the beginning of this pandemic. So they were the ones that were in some ways in the U.S.

in the most dire straits, but quickly partnered together with the franchisees. Mark King and his team have done an amazing job to get the business on much more solid footing and with momentum right now..

Thank you. Next question please..

The next question comes from Andrew Charles of Cowen and Company. Please go ahead..

Great. Thanks.

As investors try to better understand when the business can return to 4% net restaurant development, can you help set the backdrop a little bit? I'm looking to learn more about KFC International franchisees access to capital, particularly in emerging markets since this is the biggest engine behind Yum! development in the context of the bad debt expense step-up that you saw during the quarter? Thanks..

Yeah. Look, the return to 4% is not a matter of if, it's just a matter of when. And we have 2,000 franchisees around the world. The vast majority of them are coming out of this in good shape. But we have pockets where franchisees are still challenged.

We still have a couple of thousand stores that are closed with our bigger presence in emerging markets and emerging markets struggling more to deal with the pandemic in their countries. That's a challenge, which all adds up to making it very difficult to predict exact timing on when we'll get back to our long-term algorithm.

But again, there's so many positive things when it comes to development in terms of availability of sites, how resilient our business model has proven, which is obviously attractive to investors that want to invest in this space; the partnerships that we've developed with the vast majority of our franchisees to get through this together; and the positive feelings that creates and the interest in working together long-term to grow the brand.

So it will vary by market. It will vary by franchisee in terms of when we get back to the algorithm. Obviously, Yum! China is already there, as they announced last night, which is very encouraging..

Thank you. Next question, please..

The next question comes from Peter Saleh of BTIG. Please go ahead..

Great. Thanks for taking the question. I wanted to ask about your advertising strategy, especially in the U.S. in the second half of the year.

Do you guys plan to continue to advertise? Or do you plan on pulling back at all with the election year? And just my second question would be, do you need to get the dining rooms open to start to recapture the previous same-store sales, I guess, momentum you had pre-COVID? Or can you do that with the drive-thru units that you have currently? Thanks..

Yeah. Just taking the last one first on the dining rooms. The reality is that we've got 24,000 dining rooms....

That closed..

That are close today. So – and in the U.S., we really just have a fraction of our dining rooms open.

So when you look at the results that we're getting, when you talk about our – excluding closed stores, we still have a lot of stores that are opened with closed dining rooms, it's really quite impressive that we're able to get sales globally back to approaching flat, without those dining rooms in the majority of our stores.

So it's not critical to our success. It's obviously something that we will return to over time when it makes sense.

And the teams have developed all the right safety protocols to do that, as you can imagine with plexiglass on the front counter and cleaning captains in the dining room to make sure that we clean high-touch points every 30 minutes, all the different things that you would imagine, we – company – the largest restaurant company the world would develop to ensure the safety of our customers.

But the dining room piece is really something that we've been able to overcome quite successfully in most markets. Certain markets, obviously more reliant on it, Pizza Hut dine-in restaurants, obviously, in some cases, very reliant on it. So it does – the story does vary. But on average, it's a pretty good story in terms of overcoming dining rooms.

On the advertising piece, obviously, our advertising algorithms have been changed in this environment. And we're looking at different ways of promoting our brands. The promotions that we're doing with products have changed. You've heard announcements about us skinnying down our menu.

We're advertising more core products, advertising more through digital channels. But for the most part, we're committed to continuing to spend the advertising spend that we – each of our brands has. It varies by brand in terms of what the percentage of sales they spend are, but we're committed to that for the balance of the year..

Thanks, operator. We'll now take the last question. Thank you..

At this time, I'm not showing any additional questions..

Okay.

David, do you want to wrap up?.

Yeah. Look, thanks, everybody, for spending time with us this morning. As you can tell from the comments, we're incredibly proud of the progress that we've made during the quarter. We were joking that April feels like it was back in 2018. It was so long ago. And what's relevant is the momentum we have coming out of the quarter.

I think we've demonstrated that the business is incredibly resilient and nimble, that our teams around the world can move with speed to get new solutions out to meet customers' needs. And they've done that incredibly successfully.

And really, what's happened this quarter is accelerated a lot of the strategies that we already had in place, which is a big positive in terms of the business that we do digitally. As we've mentioned, that's up $1 billion year-over-year, actually more than $1 billion.

And we – that was part of our plan to grow that business, and we're proud of the progress we've made there. And even things like moving from dine-in assets to delivery assets, that's been accelerated by Q2 2020. So we're coming out of it much stronger, excited about the future. Yum! was, is and will remain a high-growth company for all stakeholders.

I think we've demonstrated that this quarter. So thank you..

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