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Text: On our call today are David Gibbs, our CEO; Chris Turner, our Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller.
Following remarks from David and Chris, we'll open the call to questions.
All system sales results exclude the impact of foreign currency.
Core operating profit growth figures exclude the impact of foreign currency and special items.
All two-year same-store sales growth figures are calculated using the geometric method.
For more information on our reporting calendar for each market, please visit the Financial Reports section of our website.
We are broadcasting this conference call via our website.
Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.
We would like to make you aware of upcoming Yum!
Investor events and the following.
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.
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 two-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 are 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, and unrivaled culture and 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.
system sales grew 26%, driven by 23% same-store sales growth.
Importantly, same-store sales grew 4% on a two-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 U.K., and Australia, with improved performance in Europe as it began to reopen and show signs of recovery.
As I mentioned earlier, each of our brands delivered positive two-year same-store sales growth on a global basis, including the impact of temporary closures, and each brand also reported an improvement in the two-year trend from Q1.
This is a great indicator for the sustained strength and breadth of our recovery.
Even more exciting is 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 on 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.
The Taco Bell U.S. 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 visit, 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 two-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 two-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 March, leading the recovery with double-digit two-year same-store sales growth in the U.K., 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 continued to see strong momentum, with 11% same-store sales growth in Q2.
Importantly, same-store sales grew 19% on a two-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 two-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 two-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 two-year basis for the quarter and delivery continued to be the primary driver of growth as the shift toward 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 two-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 relaunch 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 two-year basis.
Importantly, digital sales continued to mix over 35%, only a modest pullback from Q1, even as dining rooms continued reopening 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.
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 companywide 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.
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.
system sales grew 26%, driven by 23% same-store sales growth.
On a two-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 earnings per share 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 daypart 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.
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 eight minutes to two 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-thrus.
We had our sixth consecutive quarter of under four-minute drive-thru order to delivery time.
Speed for Q2 was six 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.

user
compname reports second-quarter results; record 603 net-new units.
digital system sales of over $5 billion.
same-store sales growth of 23%.
reinstates long-term growth algorithm with raised unit guidance.
q2 earnings per share $1.16 excluding items.
q2 worldwide system sales excluding foreign currency translation grew 26%, with kfc at 35%, taco bell at 24% and pizza hut at 10%.
q2 worldwide system sales excluding foreign currency translation grew 26%, with 23% same-store sales and 2% unit growth.

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