Good morning, and welcome to the Second Quarter 2021 Yum! Brands, Incorporated Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Jodi Dyer, Vice President of Investor Relations and CFO, Digital & Technology.
Please go ahead..
Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing. Third quarter earnings will be released on October 28, 2021, with the conference call on the same day. Now, I'd like to turn the call over to Mr. David Gibbs..
Thank you, Jodi, and good morning, everyone. I'm excited to share our strong second quarter results as we delivered record second quarter unit development and 23% same-store sales growth. Importantly, each division reported positive same-store sales growth on a 2-year basis, a step-up from first quarter trends.
This sustained momentum was underpinned by our investments in digital and off premise and the adaptability of our brands to meet the needs of consumers in an ever changing environment.
Though COVID obviously creates a more challenged operating environment, our confidence is stronger than ever in our ability to navigate the resulting uncertainties and in the long-term growth potential of Yum!.
As a result, we're reinstating our long-term growth algorithm with one important change, we are raising our previous guidance of 4% unit growth to between 4% and 5% unit growth.
As a reminder, our long-term growth algorithm includes 2% to 3% same-store sales growth, and mid-to-high single-digit system sales growth, leading to high-single-digit core operating profit growth.
The diversification of our global portfolio, the resilience of our business model, and the agility of our teams are allowing us to compete and win in a full range of market conditions, including both those markets with accelerated recovery and markets still heavily impacted by COVID.
Looking forward, our iconic brands and unmatched scale, in combination with the world-class talent in our restaurant teams, franchisees, and above store leaders have uniquely positioned us for sustained growth. Now, we'll discuss our recipe for growth and our Q2 performance and the growth drivers that underpin it.
To start, I'll cover two growth drivers, namely relevant, easy, and distinctive brands or RED for short; RED, for short; and Unrivaled Culture & Talent. Then Chris will share more details of our Q2 results, our Unmatched Operating Capability and Bold Restaurant Development growth drivers and our strong liquidity and balance sheet position.
First, a few highlights from the quarter. In Q2, Yum! system sales grew 26%, driven by 23% same-store sales growth. Importantly, same-store sales grew 4% on a 2-year basis, which includes the impact of approximately 700 or about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021.
This was driven by continued strong sales momentum in North America, the UK, and Australia with improved performance in Europe as it began to reopen and showed signs of recovery.
As I mentioned earlier, each of our brands delivered positive 2-year same-store sales growth on a global basis, including the impact of temporary closures, and each brand also reported an improvement in the 2-year trend from Q1.
This is a great indicator for the sustained strength and breadth of our recovery, even more exciting as the extremely strong net new unit growth of 603 units that we delivered during the quarter, which was both broad based and record setting.
Looking across the more than 150 countries in which we operate, we've seen that while the overall global trend is positive, the recovery will neither be consistent from country to country nor linear within a country.
This insight reinforces the competitive advantages of our diversified portfolio and our ability to serve customers through multiple armed and off premise channels. We've seen that increased customer mobility driven by reopening trends and vaccinations contributed to strong performance in many of our markets.
A key growth driver for our business and priority for our teams is the continued acceleration of our digital and technology initiatives across the globe geared toward providing customers with new and seamless ways to access our brands. Even as economies continue to reopen, the importance of the off-premise occasion remains a top priority.
We delivered a second quarter record with over 5 billion in digital sales, a 35% increase over the prior year. Even more exciting for the first time on a trailing 12-month basis, we delivered more than $20 billion in digital sales.
We believe these sales are highly incremental and result from our investments in our digital and technology ecosystem, which enable our teams to deliver an even more RED customer experience. To bring the impact of our digital efforts to life, I want to share a few proof points.
At Taco Bell U.S., the launch of our Taco Bell Rewards Program in 2020 has continued to grow digital sales for the brand with features such as loyalty member exclusives, and early access to crave worthy promotions. We're incredibly excited by the early results from the program and the future growth opportunity that remains.
We're seeing significant uptick in frequency and higher spend per visits leading to an increase in overall spend of 35% for active customers in the Taco Bell Rewards Program compared to their pre-loyalty behavior.
As another example, at KFC U.S., we launched our internally built KFC e-commerce website and app in early 2021 replacing our previous third-party solution. As a result, our 2021 digital sales are on pace to soon surpass last year's full-year digital sales amount. Now, let's talk about our RED brands.
Starting with the KFC division, which accounts for approximately 51% of our divisional operating profit, Q2 system sales grew 35% driven by 30% same-store sales growth and 5% unit growth.
For the Division, Q2 same-store sales grew 2% on a 2-year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021. At KFC International, same-store sales grew 36% during the quarter.
Same-store sales declined 1% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021. We had truly outstanding results in market leading to recovery with double-digit 2-year same-store sales growth in the UK, Australia, Canada, and the Middle East.
Our strong off-premise capabilities, digital strength, and value offerings have continued to meet shifting consumer demand around the globe, and there is opportunity for continued recovery as reopening and mobility increases globally. Next, at KFC U.S., we continue to see strong momentum with 11% same-store sales growth in Q2.
Importantly, same-store sales grew 19% on a 2-year basis, owing to the continued strength of our group occasion business, the digital capabilities mentioned earlier, and our new chicken sandwich. Our chicken sandwich performed exceptionally well and provides us with a solid platform to drive additional sales layers in the future.
Moving on to Pizza Hut, which accounts for approximately 17% of our divisional operating profit, the division reported Q2 system sales growth of 10% driven by 10% same-store sales growth.
While the division had a 3% unit decline versus last year, driven by the elevated COVID-related dislocations and closures of 2020 it has sustained its positive 2021 development momentum delivering 1% unit growth relative to Q1.
Global Q2 same-store sales grew 1% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021. Overall, Pizza Hut International same-store sales grew 16%.
Same-store sales declined 6% on a 2-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
Importantly, the off-premise channel achieved 21% same-store sales growth on a 2-year basis for the quarter and delivery continued to be the primary driver of growth as the shift towards an off-premise model continues in most of our Pizza Hut markets. The top line results from our Australia, Canada, Malaysia, and our U.K.
delivery business are shining examples of what it means to nail the RED Brand strategy.
These markets continue to unlock off-premise growth opportunities through a focus on value and innovation, a digital-first customer experience, and distinctive communications with the help of our magnetic ambassadors, spokespeople who bring our brand to life across the world.
At Pizza Hut U.S., we continue to see positive same-store sales with 4% overall same-store sales growth. On a 2-year basis, the off-premise channel grew 18% and overall same-store sales grew 9%, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021.
Pizza Hut also delivered strong product news with the continued success of our iconic stuffed crust pizza and the successful return of a consumer favorite, the Edge Pizza during the quarter.
As for Taco Bell, which accounts for approximately 31% of our divisional operating profit, Q2 system sales grew 24%, driven by a 21% same-store sales growth and 2% unit growth. For the division, Q2 same-store sales grew 12% on a two-year basis.
The quarter kicked off with the return of the Quesalupa as part of the fan-favorite $5 Chalupa Cravings Box, followed by the re-launch of the iconic Naked Chicken Chalupa. In May, we launched our first-ever global brand campaign, #ISeeATaco, in which fans could score a free taco when the moon looked like a taco.
We generated over 2 billion impressions and step-change brand awareness, especially in our international markets where we have a tremendous run rate for growth. And finally, the Habit Burger Grill delivered 31% same-store sales growth and 6% unit growth. Q2 same-store sales grew 7% on a 2-year basis.
Importantly, digital sales continued to mix over 35%, only a modest pullback from Q1, even as dining rooms continued re-opening and dine-in sales saw a steady improvement throughout the quarter.
On the innovation front, we introduced the Brunch Charburger during the quarter, a unique all-day breakfast offering that included crisp golden tots, house-made secret sauce and a freshly cracked egg.
In addition to providing customers with a seamless experience to access our brands, we continue to invest in restaurant technology initiatives that make it easier for our team members to operate and run a restaurant.
As previously announced in the quarter, we’ve agreed to acquire Dragontail Technologies, a cutting-edge restaurant technology company, whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow, driver dispatch, and customer order tracking.
The acquisition is subject to various approvals and we expect to close by the end of the third quarter. We will not be able to comment further on Dragontail today, but you can find additional information in the May 26 press release. An important factor of RED Brands is having a positive impact and the desire to make good easy for customers.
Our Recipe for Good framework focuses on our commitment to investing in the right recipe today. We were proud to publish our 2020 Recipe for Good report this week, which highlights our strategic investments in socially responsible growth and sustainable stewardship of our people, food, and impact on the planet.
The report includes updates on our key commitments on critical issues like climate change and equity and inclusion. I’m confident that our plans in these areas have the right ingredients for us to succeed and make a positive impact for our people, franchisees, customers, and communities. Now, to unrivaled culture and talent.
Two of our key assets are our iconic brands and the people that bring our brands to life around the world every day. As I’ve mentioned in previous quarters, COVID has further strengthened the collaboration partnership across our entire system.
A great example of this is our relationship with our independent supply chain purchasing co-op in the U.S., RSCS.
Many of you probably saw the recent announcement that the CEO of RSCS, Steve McCormick has made the decision to retire in early 2022 and that RSCS Chief Operating Officer, Todd Imhoff, was unanimously selected to succeed Steve in the role of CEO.
Steve has had a tremendous and positive impact on our business for nearly a decade and our entire system is grateful for his leadership. At the same time, Todd is the right leader to step into this role and lead the RSCS moving forward as it continues to provide a true competitive advantage for our entire U.S. business.
Our unrivaled culture and talent has always been a towering strength of Yum! and I’m incredibly proud of our ability to bring our brands and people together in ways we haven’t in the past.
During the quarter, we hosted several virtual meetings where we fostered collaborations on a global scale for our franchisees and teams, including marketing, planning meetings, ops, development programs, a global finance summit, leaning with leaders sessions, and company-wide chats just to name a few.
It’s during these meetings that we realize we are all more alike than we are different and the power that our brands and our culture have to bring people together. To wrap up, I’m pleased with the sustained momentum in our business and the agility we’ve shown in the last year and I’m optimistic that we are set up to win.
Our results demonstrate the resilience of our diversified global business and confidence in our strategies, which are fueled by the underlying health of our franchise system. We are poised to accelerate growth and maximize value creation for all our stakeholders for years to come. With that, Chris, over to you..
Thank you, David, and good morning, everyone. Today, I’ll discuss our second quarter results, our unmatched operating capability, and Bold Restaurant Development growth drivers, and our solid liquidity and balance sheet position. To begin, let’s discuss Q2. Overall, Yum! system sales grew 26%, driven by 23% same-store sales growth.
On a 2-year basis, same-store sales grew 4%, which includes the negative impact of about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021. We delivered 2% unit growth year-over-year, which included a Q2 record of 603 net new units.
EPS, excluding special items, was $1.16, representing a 41% increase, compared to ex-special EPS of $0.82 in Q2 2020.
Core operating profit grew 53% in the second quarter, driven by accelerated same-store sales growth in several developed markets at KFC, the combination of strong sales and restaurant margin growth at Taco Bell, and a year-over-year benefit associated with reserves for franchisee accounts receivable.
At Taco Bell, company restaurant margins were 25.9%, 1.4 points higher than prior year. Favorable sales flow-through was partially offset by labor and commodity inflation, as well as increasing semi-variable costs as we return to normal operations.
As mentioned on our previous call, we expect these margins to return closer to historical pre-COVID levels later this year given inflationary pressures, along with increased staffing at our restaurants as a result of increases in dining room patronage and a return toward our historical day part mix.
During Q2, we continued to see recoveries of amounts past due, primarily led by KFC International. These recoveries resulted in a $4 million net benefit to operating profit related to bad debt during the quarter, representing a $17 million year-over-year tailwind to operating profit growth as we lapped $13 million of expense in Q2 2020.
As a reminder, we ended 2020 with $12 million of full-year bad debt expense with large quarterly swings due to COVID. As such, we expect year-over-year operating profit growth to be negatively impacted in the second half as we lap bad debt recoveries of $21 million and $8 million in Q3 and Q4, respectively.
While difficult to forecast, at this point, we still don’t expect bad debt to significantly impact our year-over-year operating profit growth on a full-year basis. General and administrative expenses were $230 million. Full-year 2021 G&A is expected to be back-end weighted, as it has been historically.
We now estimate that our consolidated G&A expenses will be approximately $1 billion for the full-year 2021, a slight increase from our Q1 estimate attributable to increased incentive-based compensation.
Our commitment to be an efficient growth company that leverages fixed costs with our unique scale benefits is unchanged and we expect our G&A to system sales ratio to move back toward our historic ratio as sustained growth continues.
Reported interest expense was $159 million, an increase of 21% compared to Q2 2020, driven by a special item charge of $34 million related to early redemption of restricted group bonds during the quarter.
Interest expense, ex-special, was approximately $125 million, a decrease of 5%, driven by recent refinancing actions and the elimination of revolver balances held in the prior year. We still expect our 2021 interest expense to be approximately $500 million, excluding the previously mentioned $34 million special item charge similar to 2020.
We plan to continue to take advantage of favorable market conditions to refinance debt at attractive rates. As a reminder, this will result in higher one-time expenses that will be favorable to interest expense going forward. Capital expenditures, net of refranchising proceeds, were $16 million for the quarter.
As we’ve discussed on prior earnings calls, we believe roughly $250 million in annual gross CapEx appropriately balances the inherent needs of the business, with opportunities to invest in technology initiatives and strategic development of equity stores.
We still anticipate at least $50 million in annual proceeds from refranchising, which will fund the strategic equity store investments. As a reminder, for 2021, we may be slightly higher than the $250 million gross CapEx amount to catch up on repair, maintenance, and remodels, as well as selective strategic development in the U.S.
Now, on to our unmatched operating capability growth driver. Our restaurants are operated by world-class franchisees who are experienced and competing and winning in any environment. It’s well known that the U.S. is facing a competitive labor market, which is more pronounced relative to other markets across our diverse global footprint.
We and our franchisees are leaning into our unrivaled culture, which differentiates our brands to compete in a tight labor market with a focus on retention and recruiting. I’ll add some color by sharing examples from our Taco Bell company restaurants. I’ll start first with recruitment.
We posted hiring parties, which have led to a significant uptick in employee hires. We also launched a fast apply option to make the application process easier and more efficient by reducing the application time from 8 minutes to 2 minutes.
On the retention front, we’ve supported and rewarded our team members by offering a variety of incentives, including paid time off, free family meals, and increased employee development activities to name a few.
We’ve always prioritized investing in our people and we recognize the importance now more than ever to ensure we maintain focus on our unmatched operating capability to deliver a RED customer experience.
At the same time, our system is well-positioned to sustain strong unit economics while managing the inflationary environment related to labor market dynamics and commodity cost trends.
On the commodity front, there is no one better equipped to navigate this environment, given our massive cross-brand purchasing scale through our domestic supply chain co-op RSCS that gives our franchisees many benefits, including advantaged end-to-end sourcing and supply chain costs.
We are also confident in the pricing power of our brands and partner closely with our franchisees as they make strategic pricing decisions in their respective markets to deal with cost pressures, while still providing customers with relevant value and distinctive products.
As David mentioned earlier, we are also prioritizing investments in restaurant technology initiatives that make it easier for our team members to operate a restaurant, while also providing an enhanced customer experience.
As an example, Pizza Hut International continues to demonstrate significant momentum on this front, as evidenced by increased customer satisfaction metrics.
Their improvements are fueled by continued adoption of frictionless restaurant technology, including our in-house intelligent coaching app called HutBot that launched at the end of 2020 and is now live in 40 markets, covering 4,000 restaurants. HutBot eases the daily management of our stores with the [RTM], leading to a better customer experience.
At Taco Bell, we’ve continued excelling at serving more customers through our drive-thru’s. We had our sixth consecutive quarter of under 4-minute drive-thru order to delivery time. Speed for Q2 was 6-seconds faster than Q2 2020 and our teams served 4 million more cars compared to the same quarter last year.
A huge shout-out to our operators and team members for continuing to break records in speed with the increased demand in off-premise. The drive-thru experience is an increasingly critical competitive advantage for our brands. So these improvements position us well to win going forward.
That’s a perfect segue to our Bold Restaurant Development growth driver, which I’m particularly thrilled to speak about today. Our net new unit growth of 603 during the quarter was broad-based across brands and geographies, making this not only a record quarter, but also capping a record first half.
These results speak to the strength of our iconic brands in growing food categories supported by a healthy, well-capitalized franchise system primed for sustained growth.
Most notably, KFC opened 428 net new units during the quarter with significant builds in China, Russia, India, Latin America, and Thailand, contributing to 5% unit growth year-over-year. As many of you know, KFC has the first-mover advantage in several emerging markets with a strong domestic footprint upon which to grow.
This impressive development quarter from KFC speaks to the power of this global brand and the unit economics that underpin it. Pizza Hut has sustained its positive 2021 development momentum, delivering 1% unit growth relative to Q1, underpinned by the strength in gross openings and moderating store closures.
Pizza Hut opened 99 net new units during the quarter, led by strong development in China, India, and Asia. Taco Bell opened 74 net new units and we’re excited to share that Taco Bell International had its best development quarter ever, opening 30 net new units led by Spain and the U.K.
In the U.S., we opened our flagship Taco Bell Cantina in Times Square, with a digital forward footprint and personalized experience. Overall, we are pleased with the momentum in the first half of the year and we’re extremely proud to announce 4% to 5% unit growth guidance, led by development from all four brands across our footprint.
Next, I’ll provide an update on our balance sheet and liquidity position and priorities for capital allocation. We ended Q2 with cash and cash equivalents of approximately $552 million, excluding restricted cash.
The strong recovery in EBITDA during Q2 drove our consolidated net leverage down to approximately 4.5 times, temporarily below our target of approximately 5 times. During the quarter, we repurchased 2.1 million shares, totaling $255 million at an average price per share of $119.
Year-to-date, we’ve repurchased $530 million of shares at an average price of $112. Finally, our capital priorities remain unchanged, invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash flows to shareholders via repurchases.
Overall, I’m extremely proud of our Q2 results, the resilience of our business model, and the agility of our teams. With that, operator, we are ready to take any questions..
Thank you. [Operator Instructions] Our first question comes from John Glass from Morgan Stanley. Please go ahead..
Thanks and good morning.
Chris and David, I just wanted to, you know on your new unit development target, I’m wondering what signals you’re getting that prompted you to not only reinstate the guidance, but increase it from a pipeline perspective? What time frame is reasonable to expect? Could this become visible in 2022, for example? And just specifically on the KFC brand domestically, it’s doing very well on a same-store sales basis.
I don’t think there’s been a lot of development, though, over the last several years. How do you think about domestic development specifically or generally playing into that? And the KFC brand, specifically, do you see opportunity here in the U.S. just given the repositioning of that brand? Thanks..
Thanks, John. Yes, obviously, we’re excited about net new development. And as you know, we do have a lot of visibility into the pipeline of our development because it takes about 12 months to plant the seed of development before you get the opening.
So, we’re working with our franchise partners around the world to get that visibility, understand what’s coming down the pike, and that’s what gives us the increasing confidence, but really that all starts with the unit economics. When our unit economics are good, it’s an attractive proposition for our franchisees to build.
You saw Yum! China last night talk about that. We’re seeing that in the vast majority of the world right now, which is what gives us the confidence to make that commitment to 4% to 5% net new unit growth. And just to clarify, that would apply to 2021, as well as 2022 and beyond. As far as domestically, we do think we’ve talked about this past on calls.
We do think that there’s upside for KFC and Pizza Hut, particularly in the U.S. Taco Bell is starting to accelerate the development.
So that went all – that trend is moving, but KFC and Pizza Hut haven’t historically been growing in the U.S., and we think there’s every reason in the world they should be net growers and they’re shifting into that in 2021 and we think that will continue..
Our next question comes from Dennis Geiger from UBS. Please go ahead..
Great. Thanks for the question. Maybe just a follow-up on that impressive unit growth target acceleration, David and Chris. As it relates to kind of where that might be coming from, as you contemplated that acceleration, Chris, I think you spoke to all brands would be seeing the increase.
Is it any in particular over the next few years or longer-term where you feel like you’re really seeing something interesting where one brand more so than others might be driving that acceleration, and how to think about the timing of that over the next few years perhaps, just curious if any additional insights to share there? Thank you..
Yes. Thanks, Dennis. Just to elaborate, our development engine is working and we expect it to work across all four of the brands, as David said. KFC has historically been our development leader.
And if you look at what they did in Q2, it was very broad-based growth across a number of countries in the KFC system, I think north of 60 countries in the KFC system. And we expect them to continue to be the leader. But we have high expectations for the other brands.
You’re seeing Taco Bell with strong domestic growth, but you also saw a strong international growth in Taco Bell development. And they are now back on track running ahead of where they were in 2019. We expect to get to 100 units, for example, in Spain this year and have other markets that are getting to scale.
And then you’ve seen a market trajectory change in Pizza Hut. We took last year to drive our asset transformation strategy. We made some closures that helped accelerate that. And now you’ve seen the trajectory change and plus 99 in Pizza Hut this year. So, we have high expectations for growth across all the brands..
Our next question comes from John Ivankoe from JPMorgan. Please go ahead..
Hi. Thank you. I think these are all related questions. Just for clarification, I may have missed this or just didn’t catch it.
Is there a quarter coming up maybe over the next eight or so, where you do expect to be in that 4% to 5% net unit growth? Your kind of parameter or goal that you’ve set out, I mean, if you can maybe point to a specific quarter that will get us all on the same page? And secondly, how many of the units that you are opening in 2021, whether you want to talk about the first half or you want to talk about the full-year, are units that are still catch-up units from 2020? In other words, you now is 2021 a year where it’s 2021 development and 2020 combined and 2022 doesn’t necessarily increase much from 2021, or am I thinking about that the wrong way that the actual development pipeline is so robust that 2022 development will exceed that of 2021? Thank you..
strong unit economics, healthy franchisees. We’ve got strong brands all around the world, in general..
The next question comes from Brian Bittner from Oppenheimer. Please go ahead..
Thanks. Good morning. I’m going to ask my question on the KFC International business. When you adjust for the store closures, the two-year same-store sales for KFC International were positive. They turned positive in the quarter.
This was despite what we heard from China last night, your largest international market, where sales do still remain below pre-COVID levels.
So, can you again highlight where you are seeing this offsetting strength KFC International? And maybe, if possible, could you give us a glimpse of how those better markets are performing on a 2-year basis relative to the whole international business?.
Yes. Great question. The KFC International business obviously showed quarter-over-quarter improvement in the 2-year trends which we are excited about and we think reflects the strength of the brand across its markets. You do see differences depending on the COVID situation in the state of each of those markets in that business.
More developed markets where we’re seeing recovery advance are running further ahead where you’ve got more customer mobility and fewer restrictions on operating hours, those sorts of things for our restaurants, and where the footprint is more off-premise-ready.
And so, if you look at markets like the U.K., for example, running incredibly strong, north of 40% growth in the quarter. The emerging markets have a bit of a longer tail on recovery. And so that’s what you’re seeing, but in general, great trend and improvement over the entire KFC International business..
The next question comes from David Palmer from Evercore ISI. Please go ahead..
Thanks. A question on digital sales. I think you mentioned that digital sales was up 35% in the quarter and that you believe it’s incremental. I’m wondering if that’s an interesting reason why multi-year growth might be higher coming out of COVID as the headwinds from COVID directly ease.
For example, I think the digital order mix was 20 points higher at global KFC versus pre-COVID levels at least earlier in this year. So, I’m wondering what brands and maybe broken out by U.S.
versus International, do you see the digital step-up proving to be the biggest help to multi-year sales growth in 2022 and beyond or whenever we finally have COVID headwinds ease? Thanks..
Yes. Thanks, David. I’m glad you asked about digital. Obviously, it’s something we’re really excited about as we are now on track for trailing 12-month $20 billion of digital sales. We’ve been making investments and developed a long-term strategy for how to win in digital for many years now.
So this is starting to pay off, not something that happened overnight. You’ve seen us make investments in things like Quick Order, Quantum, Tictuk, Dragontrail now more recently, and then investments in people. So, this is something where we’ve been building up the capability in all aspects.
We developed a road map to win in digital and now we’re implementing that, and it’s actually been accelerated by COVID. But it’s all the things that we were expecting to happen to the business are happening.
It’s really hard to single out which part of the business is going to benefit most from digital, because all of our brands are very rapidly becoming digital brands. You’re seeing that in the numbers. Obviously, the brands like Pizza Hut that tend to – that started with a bigger digital base of customers, launched loyalty first.
They’re getting a benefit because it’s central to what they do. But really on a growth basis, it’s the brands like our other brands that started up from a smaller base that are really getting a big benefit, and it is both the U.S. and an international play.
It’s widespread and we do think it can fuel the business for a long time to come, part of the reason why we confidently reinstated our long-term growth algorithm..
The next question comes from Jeffrey Bernstein from Barclays. Please go ahead..
Great. Thank you very much. Just a question on the broader inflationary topic, which you mentioned in your prepared remarks. Clearly, the franchise model insulates corporate, which is a good thing.
But I am just wondering how you think about the outlook maybe for the system in terms of both commodities and labor over the next 12 months or so? I’m assuming the pressure is outside and I was wondering how you respond in conversations with franchisees.
I guess, qualitatively, whether you prefer to take the hit to margin or suggest they would take a hit to margin or are there maybe incremental cost savings or incremental menu pricing, maybe you can share the current pricing by brand to help us understand how the franchisees are managing? Thank you..
Yes. This is clearly a topic that is top of mind right now. We are seeing inflationary pressures primarily in the U.S., much more mark there than in our global footprint outside the U.S. represent 60% of our business. In the U.S., it is a topic that we and our franchisees are collaborating closely on. We are well-positioned to deal with this.
First, when we had commodity inflation, as we mentioned in the remarks, we have greater purchasing scale than most players in the industry. RSCS, which leverages purchasing across the brands, gives our franchisees advantaged cost and negotiating capability from a sourcing standpoint. We are also seeing some wage inflation, as you mentioned.
But when we think about dealing with both of those, the next lever that our franchisees and our brands pull is pricing. And so, we are confident that our brands have strong pricing power and our franchisees, who are the ones who actually make those decisions in their restaurants, are being very thoughtful about how to do that.
They use analytics, they tend to layer these in over time, so that they don’t get too far ahead of the consumer. And our brands, obviously, are very smart about how they create mix in the menu. I would say, we’ve been very thoughtful and have increased pricing moderately across the brands in the U.S. to deal with this.
But we’re confident in the ability to continue to pull those levers to deal with this tactfully..
The next question comes from Jon Tower from Wells Fargo. Please go ahead..
Great. Thanks. I was just kind of following up on the question about digital and specifically how it ties into development.
Is this higher digital mix that you’re seeing across your brands across the globe allowing you to, kind of penetrate in the markets and specifically urban versus suburban at a different rate than you had once thought? And specifically, how is the digital mix impacting the type of future development that you’re thinking for these brands, meaning, our footprint is a little bit smaller than you had previously thought, say, two to three years ago, because digital mix is higher.
Just curious to get a little color there..
Yes. Look, digital is one of those things that had no downside. Obviously, the customers are – you have a better experience when it’s a digital experience. The average check is higher. There’s labor savings from processing orders on digital.
So, the link to development is probably pretty – is pretty clear, right? It’s going to give you better unit economics when you have higher check and less labor associated with the check and stickier customers by the way.
So, we do think digital as part of our upside for development as we go forward and you’re also seeing our brands develop new assets that take advantage of that, Taco Bell is best example of that, is the Taco Bell Go Mobile asset, which is, as you mentioned a smaller footprint, more on digital and should give our franchisees better unit economics.
Obviously, this all starts and ends with franchisee unit economics, and to the extent that digital improves that, it’s going to drive development..
Operator, we have time for one more question..
Okay. Our next question is from David Tarantino from Baird. Please go ahead..
Hi. Good morning. My question is on Pizza Hut, and I wanted to specifically ask about the transformation or asset transformation that you’ve been going through there.
And whether your unit growth guidance now assumes that you’re largely completed with that transformation, the closings that would be tied to that? And then I guess secondarily, can you just kind of frame-up how you’re thinking about growth for that brand globally? Do you think Pizza Hut can get closer to your overall average on growth as you think about the next several years?.
Yes. Thanks, David. The Pizza Hut strategy, as we’ve talked about over the last few years, has been to revitalize the brand and driving asset transformation. But it’s focused on a modern off-premise business. And through COVID, both Pizza Hut U.S. and Pizza Hut International has continued to drive progress on that front. If we take Pizza Hut U.S.
specifically, if you saw last year that we drove a number of closures in the system that did move our mix of [Delco assets] by a few percentage points. So, we’re continuing to make progress on that transformation. There is still further to go. So, we’re going to continue to drive that.
But in terms of net unit count, you’ve seen a change in that trajectory. We were actually slightly positive this quarter in Pizza Hut U.S., which we think reflects the improved unit economics in the U.S. that stem from the strength of the brand. And then across both Pizza Hut U.S.
and across Pizza Hut International, you’re continuing to see strong growth in off-premise, roughly 20% [indiscernible] I think we were 18% in Pizza Hut U.S. on a 2-year basis and 21% in Pizza Hut International. So, we think the strategy is working. We think the brand is strengthening.
Still more work to go on continuing to transition the asset base, but we’ve seen a change in trajectory on unit counts. I think with that, we’ll wrap up. I just want to thank everybody for the time on the call. And obviously, you sense that results are strong.
But underlying those results, what’s really encouraging for us is that all four brands are performing well. You saw that on a global 2-year basis they were all positive. They were all positive on a global basis in the U.S. Those all four brands had improved trends from Q1, which really bodes well for the future.
And a lot of it is being fueled by digital obviously with $5 billion of digital sales in the quarter and on-track for over $20 billion on an annual basis. But it’s not just the top line story, it’s also on the net new units side with 603 net units in the quarter, a record no matter how you slice it.
And all of that obviously adds up to great confidence in the business and the way forward and which is why we reinstated our guidance and raised our net new unit target. We know we have a lot of work and a lot of exciting work ahead of us to continue to grow and accelerate the brands.
The team is fired up for it and it’s a great quarter, but there’s a lot more to come. Thanks for your time, everybody..
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..