Yahoo Finance

Christopher Turner

Thank you, David, and good morning, everyone.
Today, I'll discuss our first quarter financial results, our balance sheet and capital strategy, and our outlook for 2025.
As David mentioned, we are off to a good start in 2025 with momentum in our top line, impressive growth in digital mix, and strong profit flow through to the bottom line. First quarter system sales grew 5%, driven by 3% same-store sales growth and 3% unit growth.
Ex-special G&A expenses were $274 million, up 3% year over year. Reported G&A was $302 million and includes $24 million in special expenses related to our resource optimization program that is unlocking efficiency in the organization along with investments related to our brand headquarters consolidation.
Yum!'s core operating profit was $586 million, up 8%, highlighting the strength of our global multi-brand portfolio. Delivering an 8% core operating profit is a strong result in a complex consumer environment driven by the contributions of our twin growth engines.
Taco Bell delivered 16% core operating profit growth, led by double digit system sales growth and strong profit flow through on flat G&A. KFC grew operating profit at 9%, driven by 5% system sales growth and lower G&A, a good example of the impact of the strategic actions we've taken to remove duplicative work across the system.
At Pizza Hut, first quarter operating profit growth was negatively impacted by 7 percentage points, or approximately $6 million due to expenses associated with transitioning stores from four franchise entities to new ownership and by 3 percentage points due to timing of technology spending within franchise, advertising, and other services expenses.
One important driver of Yum!'s overall performance is our store level margin performance, particularly for our largest equity estate, Taco Bell. Taco Bell's magic formula allows it to deliver category leading value while also maintaining industry leading margins.
The expansion of Taco Bell's Luxe cravings box lineup at $5, $7, and $9 price points delivered exceptional value across income levels with the $5 Luxe box becoming a massive win with low income consumers. As we announced at Live Más LIVE, we expect Taco Bell US full year margins to come in at 24% to 25%.
At Habit, restaurant level margin performance was commendable, with an impressive 310 basis point improvement year over year despite meaningful labor headwinds in California. Another factor supporting store level margins across all brands is the acceleration in digital sales.
At Taco Bell, digital mix reached 42%, while Habit expanded digital mix 10 points, driven by kiosk sales increasing to 17% of mix, up from 10% last year. First quarter, ex-special EPS was $1.30. Reported EPS was $0.90, including an unfavorable tax impact of $0.33 relating to a tax reserve in a foreign jurisdiction.
Finally, in general, our business has minimal supply chain related tariff risk, as most markets source within their country or with countries where there is not currently tariff risk. As a result, we expect tariffs to have an immaterial impact on our system-wide supply chain.
Our global scale offers our system advantages to drive supply chain efficiencies, and our expert teams are partnering with suppliers and franchisees on the limited items where there is potential impact.
Now on to development. While Q1 development reflects previously signaled and planned closures, including in Turkey and across Pizza Hut, unit development in the first quarter was in line with our forecast, and we are on track to deliver 5% unit growth excluding Turkey this year.
Our development engine remains healthy, with 751 new stores opened in Q1, roughly in line with Q1 last year across 68 countries. KFC led the way with 528 openings, the second highest for a first quarter in their history, driven by growth in China, India, Japan, and Thailand.
Globally, KFC offers highly attractive paybacks with the global average below five years. And even stronger paybacks in markets like China, Thailand, and the Middle East. Pizza Hut delivered solid development with 198 new units across 34 markets, while Taco Bell added 24 gross units.
Taco Bell's net unit development in Q1 reflects planned phasing, closures in Malaysia, and the closure of remaining restaurants in China's Tier 2 cities. As announced at Taco Bell Consumer Day in March, the team is on track to deliver 100 international net new units this year, with growth strongest in the UK, Spain, and India.
Lastly, Habit continues to improve its store level paybacks and is exploring opportunities to capitalize on lower cost conversions from fast casual brands closing stores in its core markets. As a reminder, the termination of our franchise agreement in Turkey resulted in 537 closures, 283 KFC locations, and 254 Pizza Hut locations.
As shared on our last call, the Pizza Hut team also accelerated planned closures or engaged with franchise partners to strengthen our system, specifically in markets such as Chile, the UK, and the US. Notably, in the US and UK, we facilitated a transfer of more than 200 stores to more capable franchise partners.
In Latin America recently, the Serrano Group signed a binding agreement for majority ownership in a joint venture with IMC, our KFC franchisee in Brazil. The Serrano Group is one of our world-class 3C partners who started with their first KFC store in Ecuador and now manages nearly 800 stores across 6 countries in Latin America.
Over the past three years, they've opened 183 new stores leveraging a sophisticated supply chain that includes in-house commissaries and chicken processing facilities. We believe this strategic deal paves the way for accelerated unit growth in a large and under penetrated market.
As David mentioned, earlier this month, we hosted our global franchise convention in Sydney, Australia, bringing together franchisees from around the world. The energy and enthusiasm were unmistakable. Over several days, we aligned on brand strategy, covering everything from world class development capabilities to cutting edge marketing analytics while showcasing the power of our global network and the competitive advantage that comes from sharing best practices across markets.
We also celebrated franchise partners who delivered outstanding results, underscoring the strength of our system. The chance to speak with so many of our franchisees made it clear that sentiment in the Yum! system is strong, with many eager to grow their portfolios and help to reinforce one of Yum!'s greatest advantages, a network of strong corporate-minded franchise partners who see opportunity and are willing to invest even in times of macro volatility.
I'll now discuss our connected brand strategy that continues to revolutionize digital and technology across our system, strengthening operations, enhancing consumer experiences, and unlocking new insights. Byte by Yum!, with emphasis on both foundational and AI-driven capabilities was showcased extensively at the franchise convention, and our D&T leaders engaged in meaningful one-on-one conversations with our largest and most strategic franchisees, deepening relationships and reinforcing our shared vision for growth.
We held in-depth product demonstrations for our Byte platform and highlighted some of the unique innovations only possible with an integrated technology stack. As a result of this, we have overwhelming interest from our franchisees in adopting Byte in their restaurants.
Completing the rollout of Byte in our US brands remains a top priority in 2025, but given the level of interest, we're beginning to work with our international franchisees on how we can scale Byte into their markets in an accelerated fashion over the coming years.
We are also thrilled to announce our partnership with NVIDIA this quarter, a milestone that enables us to accelerate the development and deployment of cutting edge AI technology solutions across our system. We're focusing on three key areas of the business, voice automated drive-through and call center operations to deliver more natural and seamless ordering experiences for our consumers.
Computer vision technology to enhance backup house and drive through efficiency through real-time analytics. And advanced restaurant intelligence to equip general managers with personalized action plans that drive operational excellence.
These innovations will enhance operational performance, support our teams, and elevate the guest experience across our brands. We believe AI will become the new operating system of restaurants, and our partnership with NVIDIA positions Yum! at the forefront of that revolution.
Now let me highlight the significant strides across our easy experiences, easy operations, and easy insights pillars. Starting with our easy experiences pillar where we prioritize delivering frictionless consumer experiences.
This quarter, Pizza Hut UK, powered by the launch of our Byte commerce platform, achieved impressive digital momentum with a 67% year over year increase in mobile app transactions. In 2025, we're set to scale Byte commerce to four new Pizza Hut international markets and introduce AI-powered personalization to drive higher average order value and accelerate transaction growth.
KFC is also making strong progress in this area with kiosks now representing its largest digital sales channel, accounting for nearly 50% of all digital sales, excluding China, highlighting the growing consumer preference for this convenient ordering option.
Turning to our easy operations pillar, where we're focused on optimizing operations to support and empower our team members. In Q1, we expanded Byte restaurants coach to an additional 5,000 stores. The Byte coach's digital routine tools and training have enabled more proactive, consistent, and scalable performance management across our restaurants.
At Taco Bell US, we onboarded an additional 1,500 restaurants to Byte's backup house platform, bringing the total stores live to 3,000. This continued momentum reflects strong operator engagement and meaningful progress toward building a fully connected kitchen ecosystem that drives efficiency and data-informed decision making.
Lastly, under our eays insights pillar, we're leveraging data to drive smarter, more informed decision-making. Our US brands are harnessing our powerful data engine and first of its kind cross-brand consumer data platform to deliver personalized marketing campaigns which for our first test through the email channel delivered 2 times the improvement in consumer engagement compared to traditional email marketing.
Since the end of last year, we've expanded AI-driven marketing use cases across our brands, further embedding intelligence into how we engage and convert consumers. These advancements are driving smarter targeting, increased efficiency, and stronger returns on our digital marketing investments.
Next, I'll provide an update on our balance sheet and liquidity position. Net capital expenditures for the quarter totaled $56 million, reflecting $15 million in re-franchising proceeds and $71 million in gross capital expenditures.
Throughout the quarter, we repurchased approximately 1.56 million shares for a total of $228 million. Our net leverage ratio ended the quarter at 3.9 times. Subsequent to quarter end, we took advantage of a favorable window of interest rate volatility to enter into a new three year interest rate hedge, reducing our exposure to interest rate risk on $1.5 billion of variable rate debt for which hedges had recently expired.
As a result, we expect $10 million in interest rate savings versus our planned interest expense for 2025, which had contemplated higher interest rates on that debt. As I shared on the last call, subject to market conditions, we expect to maintain our net leverage ratio at approximately 4 times over the medium term by issuing incremental debt subject to market conditions as our business grows.
Overall, our capital priorities remain unchanged and focus on maximizing shareholder value through strategic investments in the business, maintaining a strong and flexible balance sheet, offering a competitive dividend, and returning excess cash to shareholders.
Now let me share our latest outlook for the full year. 2025 is shaping up to be a complex year to navigate given economic uncertainty and geopolitical challenges. However, we believe this is another year that will demonstrate the resilience of our business model.
In the US, Taco Bell, which represents approximately 80% of our US profit, is incredibly well positioned to navigate this environment as the value leader. With an opportunity to take share from higher priced competitors, its robust innovation pipeline, including the return of crispy chicken nuggets in Q2, reinforces our view.
Internationally, we are seeing that KFC, which represents 85% of our international profits, is recovering from the Middle East conflict and gaining momentum around the world. More broadly, the strength of our diversified portfolio of four brands and more than 155 countries combined with our well capitalized 3C partners allows us to manage country specific challenges and continue investing through uncertainty.
Given these advantages and after a strong Q1 performance, we remain confident in our plan to deliver 8% core operating profit growth this year excluding the lap of the benefit of the 53rd week in 2024. As for the shape of the profit growth this year, in Q2, we expect to experience lower profit growth in part due to one-time expenses such as our global franchise convention.
As a result, we expect second half operating profit growth to be higher than the first half, landing us on algorithm for the full year. Finally, on FX, with the US dollar's recent move lower, at current spot rates, we expect a $10 million tailwind to GAAP operating profit for the remainder of the year.
To close, while the near term macro environment remains uncertain, our leaders at Yum! are focused on the long term opportunity, the vast under penetrated white space around the globe. We're making significant progress toward becoming a more efficient, adaptable, and data-driven organization.
And in a challenging consumer environment, we remain energized by the momentum behind bold initiatives like Live Más Cafe, Saucy, and KWENCH, each offering distinct avenues to grow our top line and expand market share.
Our 98% franchise structure, global footprint, and consistent cash generation give us flexibility and confidence, no matter the near term noise.
With that, operator, we are ready to take any questions.

Question and Answer Session

Operator

(Operator Instructions)
Brian Bittner, Oppenheimer.

Brian Bittner

My question is on KFC International. It's obviously a very important driver of the Yum! model and it was very encouraging to see the same-store sales for KFC International accelerate in the first quarter to that 3% level. We're sensing some worry by investors out there that perhaps American brands like KFC could be seeing softness outside the US from geopolitical dynamics, although it's really hard to find evidence of that happening.
So I would love for you to address your take on this. And how you're thinking about the sustainability of KFC's improved trends moving forward?

David Gibbs

Yeah, we agree. We're encouraged by what we're seeing out of KFC International. You mentioned the 3% same-store sales growth. Actually, there was an issue with Ramadan timing that negatively impacted the quarter and backed out China, our sales internationally were up 5%, same-store sales.
So and that growth is actually quite widespread. If you look at a table in our earnings release, you can see system sales was up in all 10 markets that we measured. So we are sort of putting the issues from the Middle East behind us and most of the world and feel good about the recovery there.
And we have not seen -- and we obviously monitor this and any other kind of consumer change in behavior. We have not seen any anti-American sentiment impacting our stores. One thing I will say is I think the team is doing an amazing job navigating this environment.
They're leaning in a little bit more on value. The Canadian market was up strongly this quarter, leaning in on the $5 price point. Korea did a buy one, get one free. I mentioned some of the innovation they're doing -- that we're doing around the world.
In the UK, we launched the double down zinger burger and stole share from competitors in France. We had a really creative offering. I think I mentioned in the prepared remarks, the Crispy Naan Burger, that drove really strong sales growth outdistancing the market and taking share from others.
So there's a lot to like about the recovery for KFC globally. It's widespread and sets us up for a good year on KFC.

Operator

David Tarantino, Baird.

David Tarantino

Chris, I wanted to ask about the full year guidance, and I appreciate your comments on your confidence in achieving the 8% operating income growth. But I wanted to ask related to the back weighted nature of that, your degree of confidence in the second half acceleration in the profit growth and what gives you that confidence in light of maybe an uncertain macro backdrop?

Christopher Turner

If we look at the full year, we're off to a good start in Q1, 8% core operating profit in Q1, despite the impact of the strategic moves that we mentioned at Pizza Hut. If I think about the rest of the year, company store margins were on plan in Q1. But Q1 is seasonally low.
So if we look at the full year, we expect to be on plan in terms of our company store profit margins. Full year, we mentioned on Taco Bell, like 24% to 25%. Pizza Hut, if you look at the quarter of those strategic moves and the timing that we mentioned was about an $8 million impact.
So big for Pizza, but small in the grand scheme of things at Yum! And if we look at the back part of the year on Pizza Hut, we've got some favorable profit laps that the team thinks that they can lap. And if we look at our full year plan right now for Pizza Hut, we expect to get to roughly flat profit on the full year.
Obviously, we're working to drive sales every day. We're pleased with Q1, but our plan isn't dependent on sequential acceleration on same-store sales in the US throughout the year. We've got plenty of levers to drive the full year profit. We're confident in the 8%.

Operator

Dennis Geiger, UBS.

Dennis Geiger

I wanted to ask you another on the broader international or sort of impacts on the global macro environment, but specifically on store development across the portfolio. Could you talk a little bit more about that new development outlook for the year in thinking sort of what sounds like a strong trajectory excluding the planned closures?
Sounds like ran these are in a good spot. Returns are encouraging, but any additional commentary on sort of the confidence in the development outlook, even if the macro were to have a downturn in your confidence there to kind of continue to hit numbers.

David Gibbs

Yeah. We're confident in the development plan. As we said, we were just in Australia with our global franchise convention. The mood was incredibly upbeat despite all the complexities around the globe. Our franchisees are confident in the future of our brands.
And of course, as you know, our franchisees are larger and more sophisticated and well capitalized on average than franchisees in other systems, so they think long term and they invest through near term noise. If you look at the year, gross openings in Q1 for the company were higher than in 2023.
So we're off to a good start on gross. Really what we had were the planned closures in Turkey and the strategic closures in Pizza Hut. Of course, those closures were significantly lower volume than our system's averages.
So the economic impact wasn't significant on those. KFC, second highest Q1 ever from a gross build standpoint. We opened in 53 countries in Q1 versus 43 countries last year. Paybacks remained strong in KFC.
If you go to Pizza Hut, obviously, Q1 was lower than normal given all the factors that we just described. But if we look at the next three quarters for the remainder of the year, we expect net development will be higher year over year.
So on a full year basis, we feel good about the development plan. We feel good about the confidence of our franchisees.

Christopher Turner

I'll just. You caught China's call this morning, they reiterated their confidence in their development plan and their guidance, which obviously is a big part of our development plan.

Operator

David Palmer, Evercore ISI.

David Palmer

David, congratulations on what will be -- I was just checking this out on your bio that you're going to have a 37 year career at Yum! and yet somehow, you still seem pretty young. So good job. Well done on that. That's pretty incredible.
At Taco Bell, I wanted to ask you, Chris, on Byte. It feels like early days in a good way for Byte, not just at Taco Bell, but for Yum! as an enterprise and for your franchisees and other systems. And what I wonder is, right now, maybe this is a period of investment in that you're going to be training models like your voice AI, for example, in the drive-through.
It's going to be getting better. So maybe the benefits today are going to be a fraction of what they'll be as that those models get stronger and more robust and the fidelity is greater and you get to over 90% fulfillment and those things could happen more rapidly than we think.
Maybe it's one or two years and you have something that even becomes an external revenue source for Yum! as you're sharing these tools and becomes a sort of an AWS for you guys. So maybe a comment on that.
And then separately, on Saucy. We visited that concept, down when we were at the ICR. And it's a great concept. I wonder what you're going to do with that. That was a converted KFC, but that kind of looks expensive. Do you -- it's doing big volume.
So maybe it becomes a growth concept in of itself. But maybe you can find some ways to sprinkle a little Saucy onto your existing KFCs in a more of an approachable price point.

Christopher Turner

Two good questions. I'll start on Byte. The $1 billion we've invested in our digital technology strategy over the last several years is one of the best investments that Yum! has ever made. And you're seeing it come to life. We shared a lot of the data and insights from the impact on the Taco Bell system at the Live Más LIVE event, the Consumer Day event just a few weeks back.
The data is indisputable. Where we see Byte helping to drive digital mix expansion, you see faster top line growth and faster bottom line growth for our franchisees. And we're really just getting started. We've made a lot of progress in the US, but at our global franchise convention, Joe Park and the team did an incredible job bringing Byte to life.
And we had a ton of interest from franchisees there. So we're looking forward to how we grow Byte outside of the US. And that's -- our priority is to continue to deliver for our system. As you say, as we incorporate AI, the acceleration should continue in terms of the impact that we can deliver.
I won't rule out someday that we may be able to serve restaurants beyond the system, but our priority right now is serving our franchisees in the system. If I go to Saucy, as you said, it's a great experience, a great start with the concept, Saucy by KFC down in that one store in Orlando.
We're four months in. Lots of learnings, but we're very pleased with the start. As we said on the call, one of the highest performing stores in the KFC system in the US. We are looking at multiple avenues to expand. Of course, we always over the long term grow with our franchise partners.
So you could expect in the long-term franchise stores and company stores. But we're being very methodical, making sure we pick the very best partners to work with. And we want to scale it while preserving the unique identity that comes to life when you're there in that restaurant.
Plus we've got to scale the supply chain and real estate that goes along with it.
So more to come as we go forward on Saucy.

Operator

Danilo Gargiulo, Bernstein.

Danilo Gargiulo

I want to ask a question beyond the dual engine of growth. So it's very clear, the dual engine of growth is working exceptionally well. But for an acceleration further, you might need to lean more into the remaining 20% of the operating profit.
So KFC US and Pizza Hut. And this might be offering outside returns given that there is a relatively compressed expectations from the investor base. So can you spend more on the 3D strategy? And by when do you expect to see the sales and traffic to be more sustainably positive?

David Gibbs

Yeah. Great question.
Obviously, the twin growth engines are what powers our long term algorithm. But that doesn't mean that we aren't incredibly excited about that other 17% and what it can do to further accelerate our growth. Taco Bell International in particular is really starting to get a lot of traction.
One of the things that came out of this global franchise convention was just massive enthusiasm from our existing franchise base at Pizza Hut and KFC and starting to get more involved with Taco Bell as we're seeing more success around the world.
So we talked about that we'll get to 100 new units this year. But their plans are much more aggressive as we go forward. And that will start to become a meaningful contributor to our growth model. In the US, KFC International, KFC US actually had positive transaction growth this quarter.
And I think with Catherine Tan coming in to lead that business, some of the work that's being done on that traditional business, as well as the opportunity to leverage Saucy, as David Palmer noted, I think there's lots of reasons to be excited about the future of KFC US.
And then finally, at Pizza Hut, Pizza Hut's in a tough category right now in QSR in the US. And certainly, the pizza category with everybody reporting negative sales is pressured. But we've obviously seen Pizza Hut have significant growth in years past when they do -- when they get the thing -- the offerings right for consumers like with Melts and value.
I know Carl Loredo, who just assumed the leadership role of Pizza Hut US last year around this time. He's got big plans to grow the brand and accelerate expansion in the US and internationally. Aaron and the team have, as we, as we've commented, it got pretty good positive sign for sales growth last quarter internationally and lots of reasons to be excited about the recovery that's occurring there coming out of the Middle East.
So we don't -- we manage each and every business that we have as a growth business, invest in it and have robust plans for their growth going forward. It's just we talk about the twin growth engines obviously because that's the majority of where our profit comes today.

Operator

John Ivankoe, JPMorgan.

John Ivankoe

The question is on the NVIDIA partnership. Really what Yum! expects to accomplish, I guess, both in the short term and the medium term and if you can help educate us of what is exclusive or proprietary or unique between NVIDIA and Yum! that you will be able to take advantage of that presumably many others in your industry that you compete against will not be able to?

David Gibbs

Obviously, we're incredibly excited about the partnership with NVIDIA. This has been over a year in the making. I was there in the first meeting with their team when we started to discuss this and could see their eyes light up when they started to realize the capabilities that we had at Yum! that we built with thousands of people in our tech department.
In terms of what we're working on, obviously, a lot of that is going to be proprietary. What we've said publicly is we're we're working them on voice AI. We're working with them on vision, and we're working with them on analytics.
But we have 40 different AI initiatives that are staffed and distinct projects at Yum! right now. So there's a world of opportunity for us to work together. And I think they recognize that in the restaurant space, there's nobody that's built the capability that we have.
We're the perfect partner for them. The relationship is off to a fantastic start. And as I think somebody said earlier, we really just scratched the surface on what we can do with the tech that we've built. It's been $1 billion investment.
We've built this Ferrari. Now it's -- we're just starting to get it out on the track and hit the gas. So I'm excited about the impact that we can have on all parts of our business across the customers, employees, franchisees and their profitabilities.
It just has -- it's a virtuous cycle. The better our tech gets, the more we can do with it.

Matt Morris

We have time for one more question.

Operator

Andrew Charles, TD Cowen.

Andrew Charles

And just to echo, David, congrats on a story career at Yum! Very encouraging Taco Bell performance in the first quarter in a very tough US domestic backdrop. I'm curious is it realistic to expect that Taco Bell is up 10% performance on a two year basis can persist throughout 2025?

David Gibbs

Yeah. First of all, Andrew, thank you for the comments on my career, and thank you for acknowledging what is the absolutely standout quarter for Taco Bell, plus 9% when we're seeing everybody else reporting negative numbers and we know the industry is flat to negative.
And to the point about, well, if the trends continue, I would say, yeah, I'm not going to be very specific guidance for the full year on exactly where Taco Bell sales are going to end because it's we're constantly navigating changing environment.
But I will say in terms of April trends, and we have seen a general continuation of what we saw in Q1. I know this is a tough operating environment for everybody else in the industry. It just is probably an environment that favors Taco Bell, and that's what you're seeing.
They're firing on all cylinders. We talked about in the prepared remarks, how their penetration is going up. So we're bringing more customers into the brand. That's with things like Cantina Chicken, which launched a year ago and is bringing light and lapsed users into the brand.
The value that we're offering really stands out in this environment. Nobody else has the $5, $7, $9 box offerings we have coupled with the cravings value. And then of course, the hallmark of Taco Bell is their innovation and things like crunch wrap sliders.
We can go have an event like Live Más LIVE and unveil our innovation for the entire year and not have to worry about anybody copying it because nobody sells anything close to what we sell. And that is a very enviable position in the industry.
It's why we call Taco Bell a category of one brand. And yes, we are seeing a continuation of the trends into Q2 although our lap obviously gets much harder as we start to lap Cantina Chicken. So the one year numbers have come down a little.
So we're excited about the impact that Taco Bell is going to have this year. But really the way it's set up for success, very much fueled by that the digital work that Chris has been talking about.
So just to wrap up, I think this is another quarter that demonstrated the strength of the Yum! business model, the resiliency of that model. In 2024, we delivered on our 8% core operating profit commitment when most of our competitors were not able to given the international challenges.
And we did it again this quarter with the backdrop of a lot more challenges and the softer US consumer. The consistency of our growth, I think, is the envy of the industry. Our twin growth engines are firing on all cylinders.
And the milestones that we reached this quarter on digital, I think we'll look back is incredibly important, the launch of Byte by Yum!, the action that we've gotten from the international franchise community, the partnership with NVIDIA, the $1 billion investment is really starting to pay dividends, hitting 55% digital sales this quarter.
Numbers that would have been unheard of just a few years ago. So we're off to a good start for the year and I'm excited about finishing this year really strong.

Operator

This concludes today's call. Thank you very much for joining. You may now disconnect your lines.