YUM BRANDS INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Twin Growth Engines: Taco Bell U.S. posted 4% same-store sales increase and led industry in value perception; KFC International achieved 9% unit growth, spanning 64 countries.
• RED Strategy: Focus on relevant, easy, and distinctive brands, with emphasis on talent (e.g., Erica Burkhart promoted to Chief Legal Officer) and sustainability (on track to reduce greenhouse gas emissions by 50% by 2030).
• Digital and Technology: Progress on AI-driven marketing, voice AI in drive-through (over 2 million orders processed in Taco Bell U.S. stores), Super App expansion to KFC U.S., and e-commerce engine migration for Pizza Hut.
• Development: Surpassed 60,000 restaurants worldwide, with 1,029 gross openings and 482 closures in Q3; KFC drove unit growth with 685 gross units opened, led by China, India, etc.

Segment Performance

• KFC: Represents 50% of divisional operating profit. System sales grew 1%, offset by Middle East conflict and transaction softness. Digital mix over 55%, growing 3 percentage points from previous quarter.
• Taco Bell: Contributes 37% of divisional operating profit. System sales grew 5%, driven by 4% same-store sales increase. Digital sales grew 30% year-over-year.
• Pizza Hut: Represents 13% of divisional operating profit. System sales declined 1%, same-store sales down 4% but offset by 2% unit growth.
• Habit Burger Grill: Overall sales under pressure, but same-store sales trends improved towards the end of the quarter, leveraging accolades and clever marketing.

Guidance

• Q4 core operating profit growth expected to be mid- to high single digits, excluding contributions from the 53rd week (expected to add ~$35 million).
• Taco Bell fourth quarter company-operated store margins expected to be in the range of 23% to 24%.
• Q4 net interest expense expected to be just under $140 million.

Risks

• Potential risk of not hitting the 5% unit growth target due to increased closures of lower volume units affected by the Middle East conflict.
• Geopolitical pressures in certain markets (beyond Middle East, Malaysia, Indonesia) impacting KFC same-store sales in specific locations.

Q: Going to be on operating profit growth, and how confident are you in getting back to 8% next year?

A: This year has 6% core operating profit growth in a challenging environment. Sales didn't meet expectations in key markets like China and Middle East, tempering Q4 expectations. The business model is strong, and long-term trajectory looks positive with dual growth engines and digital capabilities.

Q: Confirmation on Taco Bell's same-store sales and new value ideas?

A: Taco Bell's trends from Q3 continue into Q4. Taco Bell can provide value, innovative products that help franchisee margins. Launching the decades menu and $7 Lux Box are examples of bringing innovation and value.

Q: Drilling into net unit number and implications for 2025?

A: ~40% of net new unit growth change is from conflict-impacted markets. Closures this year are lower volume units (average 60% of global average unit volume), with minimal economic impact. Global franchise base is strong, with Americana in Middle East navigating well.

Q: Digital initiatives and G&A opportunity?

A: AI-driven marketing leverages digital ecosystem and data assets for personalized offers. Voice AI in Taco Bell enhances customer and team member experience, with fast rollout pace. Goal is to provide best tech to franchisees at low cost to drive sales and profitability.

Q: Taco Bell comp trend carryover to Q4 and KFC directional commentary?

A: Taco Bell sales trends from Q3 carry over into Q4. KFC's sales impact from Middle East conflict is still evolving; lap will get better but uncertain how sales will behave once past the 1-year anniversary.