Hello, and welcome to the Yum! Brands 2024 Second Quarter Earnings Call. My name is Lauren, and I’ll be coordinating the call today. There’ll be an opportunity for questions at the end of the presentation. I will now hand you over to Matt Morris, Head of Investor Relations, to begin. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us. On our call today are David Gibbs, our CEO; Chris Turner, our CFO; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, we’ll open the call to questions. Before we get started, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statement in the earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and the relevant sections of our filings with the SEC to find disclosures, definitions, and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. As a reminder, several of the Yum! Brands business units report on a period calendar basis including all US and Canada brands, KFC UK, and KFC Australia. When forecasting 2024, please keep in mind this year will include an extra week in the fourth quarter for those entities. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. We would like to make you aware of the upcoming Yum! investor events: our third quarter earnings will be released on November 5th with the conference call on the same day. Finally, on our last call, we shared the timing for our talk about consumer data originally planned for December of this year. We are finalizing a revised date for early next year. Please stay tuned for more details and invitations to follow. Now I'd like to turn the call over to David Gibbs.

Thank you, Matt, and good morning, everyone. Despite a continued challenging operating environment, I'm pleased Yum! was able to deliver 10% growth in core operating profit this quarter, thanks to our team's strong execution and progress on the initiatives laid out on our last call. While we take comfort in improving global trends and still expect the first quarter to warrant the low for same-store sales growth, significant volatility remains, and we recognize sales in some markets are not where we want them to be. The impacts from the Middle East conflict, in addition to a more cost-conscious consumer, have presented headwinds to same-store sales. Despite these tougher conditions, we are confident we will deliver on profit growth in line with our long-term algorithm for 2024 and are set up for continued strong growth in 2025. Fortunately, we are well-positioned to navigate these consumer headwinds given the strength of our brands and our reputation for value regardless of the environment. Nonetheless, ensuring we provide consumers with affordable options has been an area of greater focus for us since last year, with all of our brands having offered disruptive deals and introduced or reintroduced the track of everyday value with examples in the US such as KFC's Taste of KFC deals, Pizza Hut's $7 Deal Lovers, and Taco Bell's Cravings Value Menu. As a result, our brands experienced improving trends relative to the first quarter in the US market, and we continue to refine our offerings in international markets to recapture similar momentum. The second quarter offered signs of improving fundamentals. For example, at Taco Bell, we've begun to see sensitivities to check management stabilize, improving from Q1 into Q2, and have witnessed year-over-year check growth led by items per transaction. Internationally, KFC markets excluding China, that we believe were not impacted materially by the Middle East conflict, reported an encouraging mid-single-digit increase in same-store sales. Across our system, our 2024 commodity inflation has come in lower than we expected heading into the year, helping our franchise partners navigate recent sales volatility. Furthermore, momentum in the critical and strategic areas of our business remains strong. This includes robust increases in digital sales, progress leveraging our scale, continued deployment of our proprietary technology ecosystem, and efficiency improvements in our cost structure from efforts underway in the next phase of our journey to be a leading global digital restaurant company. Our twin growth engines, Taco Bell US and KFC International, helped Yum! deliver 3% system sales growth driven by market share gains at Taco Bell US and strong unit growth at KFC International. Combined, these two powerful business units delivered 7% operating profit growth. At an individual level, unmatched innovation fueled Taco Bell US' 7% increase in system sales, with Cantina Chicken performing above our expectations. Taco Bell is a clear standout in today's environment, not only achieving same-store sales growth well ahead of the QSR category but delivering restaurant-level margins near a record high. In addition, Taco Bell's same-store sales grew mid-single digits across all income cohorts, proving that craveable innovation, even at a higher price point, resonates well with today’s consumers. At KFC International, on a quarter-over-quarter basis, same-store sales showed strong improvement on a two-year trend, and unit growth in the quarter was an impressive 9% year-over-year as franchisees take advantage of strong paybacks. I know from experience that this powerful brand is not constrained by expansion opportunity; rather, its growth and success are closely tied to having the right franchise partner. This is why we are very intentional about who we choose to allow into our system. For example, our new franchise partner in South Korea took over in April 2023 and has drastically improved performance with same-store sales up 17% this quarter. In that vein, the KFC team is tirelessly working to equip our franchisees with the tools to succeed, including furthering the expansion of SuperApp and the KFC global loyalty program, which is now live in 14 markets. Now I'll discuss our relevant, easy, and distinctive brands or RED for short, followed by our unrivaled culture and talent and good growth strategy. Chris will provide an update on our second quarter results, followed by our bold restaurant development, unmatched operating capabilities, and balance sheet position and capital strategy. Beginning with the KFC division, which accounts for 49% of our divisional operating profit, we grew system sales 2% led by 8% unit growth. Our same-store sales were down 3%, largely due to scattered pockets of weakness in several markets attributable to the Middle East conflict and underperformance in the US market. This quarter, we did not see any improvement in the most directly impacted markets. If Q2 trends hold, the pressure on same-store sales growth for the impacted markets will begin to lessen as we compare to the prior year's sales impact beginning in November. Beyond the most significantly impacted markets of the Middle East, Malaysia, and Indonesia, we've seen sales impacts from the Middle East conflict surface in several other markets based on store performance comparisons across neighborhoods. In other parts of the world, we witnessed improved trends from the first quarter, including Canada and Central and Eastern Europe, while South Africa's transactions began to improve during the quarter. Another exciting development in the quarter was Yum China celebrating its 200th KCOFFEE, which consists of an adjacent storefront that is part of an existing KFC and allows for reduced investment and lower operating costs from sharing KFC kitchen facilities. The Yum China team has averaged one new KCOFFEE per day since the beginning of 2024. While these do not count as new units in our system, they are a driver of future same-store sales growth. This quarter, we acquired 216 KFC restaurants in the UK and Ireland, and we have started to optimize restaurant operations there. Lastly, KFC digital sales, excluding China, grew nearly 20%, with an impressive 40% growth in kiosk sales. Moving on to the Taco Bell division, which represents 37% of our divisional operating profit. US same-store sales grew 5%, outpacing the US QSR industry by a wide margin. Taco Bell executed its winning formula this quarter by introducing a variety of compelling innovations such as the Cheez-It and Secret Aardvark fries. The second quarter also reflected sales contributions from the Cantina Chicken menu, our foray into an elevated chicken offering and a new platform to innovate around. Since the platform launch, Taco Bell's chicken sales mix has increased 10 points, with nearly one in four orders including a Chicken Cantina item. Another part of the team's winning formula is digital, with digital sales continuing to grow at an impressive pace. In Q2, Taco Bell's loyalty sales were up over 30%. At Taco Bell International, the team is working on building brand relevance. It is still early in many markets, and trends remain volatile, but we remain confident in the long-term opportunity. A renewed emphasis on value has forced our teams to be creative with a more limited national marketing budget. In mature markets within Europe, which accounts for over 40% of Taco Bell International system sales, we saw encouraging signs of improvement with the introduction of value offers. Next, I'll discuss our Pizza Hut division, which accounts for 14% of our divisional operating profit. System sales were flat this quarter, and units expanded 3% year-over-year. International same-store sales remained negative due in part to a stalled recovery in Malaysia and Indonesia. We're encouraged that Pizza Hut's same-store sales trends have improved four points from last quarter, with positive trends in the US and promising recoveries in Thailand and Hong Kong. Around the world, our team is actively expanding My Hut Box and introducing Melts, including most recently in India and Thailand. Both platforms lift underdeveloped day parts, expand individual meal occasions, and provide attractive price points to our consumers. Since joining Pizza Hut as CEO in 2021, Aaron Powell has assembled an incredible team and is providing strong leadership to drive efficiency, increase accountability, reduce complexity, and align the brand to consumer trends. In the US, momentum accelerated throughout the quarter with an increase in weekly per restaurant average transactions attributable to a number of value-based promotions and the launch of My Hut Box. Lastly, at the Habit Burger Grill, second quarter system sales declined 1%. Habit's restaurant count increased 5% year-over-year due to new regulations in Habit's home market of California that have raised the cost of doing business. Habit's leadership team has been focused on protecting profitability to remain competitive. Those efforts led to a comprehensive store level labor optimization effort, which contributed to an impressive 520 basis point expansion of restaurant-level margins from the first quarter, despite a double-digit increase in restaurant-level labor rates in California stores. Same-store sales growth remained suppressed, but we're encouraged by the improvement from first quarter trends despite a more challenging regional backdrop. Subsequent to the quarter end, I was pleased to learn Habit's Double Charred Burger won USA TODAY's 10 Best Readers' Choice Award for Best Quick Service Burger, landing in the number one spot ahead of all other QSR and better burger competitors. Now I'll turn to our good growth strategy, starting with our people pillar. One of Yum!'s hallmarks is our people-first culture, which drives recruitment of amazing talent and builds a deep bench of leaders within the organization. I'm excited about the great work going on at Pizza Hut from a talent perspective, where we recently welcomed Carl Laredo as the brand's US President. Carl is a seasoned marketing leader with deep experience in delivering impressive results at some of the world's largest and best-known brands. We also welcomed former PepsiCo Executive Kalen Thornton as Global Chief Brand Officer, leading the Pizza Hut division's global brand strategy and marketing, including harnessing the power of engaging consumer connections across physical and digital touchpoints. It is also rewarding to see leaders from Yum!'s deep bench of talent assume bigger roles. Melissa Friebe recently joined Pizza Hut US as Chief Marketing Officer after spending 27 years at Taco Bell in various finance, marketing, insights, and brand strategy positions. Alongside recruiting and promoting talent and professionals, we're furthering our culture of collaboration and building capability across our company in powerful forums such as KFC's annual global marketing planning meeting. KFC gathered marketing leaders, franchise partners, and vendors from around the world to share best practices and consumer insights to keep our iconic brand relevant, discuss innovative strategies, and the sale of delicious products from various markets. Moving on to the planet pillar of our Good Growth strategy. We are making progress towards our global goal of reducing greenhouse gas emissions nearly 50% by 2030, focusing on renewable energy and energy efficiencies in our restaurants, and ongoing collaboration with our food suppliers. For example, KFC has reduced emissions by concentrating on key areas such as cooking and holding systems, refrigeration, and cooling, and lighting, while Pizza Hut and Taco Bell are collaborating with partners to reduce on-farm emissions and encourage sustainable practices. Regarding packaging, we are making progress against our global goals with many markets eliminating unnecessary plastic items like straws, cup lids, stirrers, and cutlery. Finally, we're also making a meaningful impact in the communities we serve by continuing to unlock opportunities. As an example, in Thailand, KFC partnered with non-profits and the Thai government to launch the country's first-ever flexible learning curriculum to help students who have dropped out of school gain critical job and entrepreneurial skills. To wrap up before handing over to Chris, we are pleased our second quarter led to a 10% growth in core operating profit despite system sales pressures. While our teams work to improve system sales trends, we are confident that the investments we are making alongside our efforts to be more agile, resilient, and stronger as part of the next phase in our technology journey will lead to a promising year in 2025. All these efforts underscore our commitment to being the franchisor of choice and delivering more, better, faster, cheaper, and safer technology services to our partners. I’m excited about our plans to harness the power of AI, including the expansion of drive-through Voice AI technology, with plans to roll this capability out to hundreds of Taco Bell US stores by year-end, in addition to testing with KFC in an international market. We are hard at work driving the next phase of our technology journey to unlock future growth by strengthening our business resilience and ensuring we deliver exceptional shareholder value in the years ahead. With that, Chris, over to you.

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our bold restaurant development and unmatched operating capability growth drivers, our balance sheet and capital strategy, and provide an update on our outlook for the remainder of the year. Beginning with our second quarter results. System sales grew 3%, driven by 5% unit growth. Consumer sentiment related to the conflict in the Middle East continued to pressure system sales growth in the quarter. The recovery trajectory we observed in Q1 for the Middle East, Malaysia, and Indonesia flattened in Q2. While hard to precisely quantify, we continue to observe conflict-related impacts in a broader set of markets. Despite these pressures, Yum! delivered an impressive 10% core operating profit growth, reflecting the resilience of our scale, global, multi-brand business model, increasing benefits from our digital and technology strategy, and expert management of the business by our leaders around the globe. A prime example of factors underpinning our resilience was profitability in our 488 company-owned Taco Bell stores in the US, our single largest estate of company-owned stores, representing approximately half of our total global company-owned store revenue. Store-level margins were 25.6%, with mature stores achieving over 27%, reflecting the strength of the Taco Bell business model and its magic formula, which enables the brand to simultaneously deliver an outstanding consumer experience, tremendous consumer value, and exceptional store-level margins for our franchisees and Yum! Importantly, Taco Bell operations leaders are taking advantage of the continued growth in digital sales mix, which is now 35% to further digitally enable our operations in ways that not only improve consumer and team experiences but also improve labor productivity. Another contributor to profit growth was improved expense leverage. As we shared in January, we expected throughout the year to see the benefits of our ongoing resource optimization program, which strategically leverages our scale to free up general and administrative expenses for reinvestment in future growth drivers like AI, which will benefit both Yum! and our franchisees, in addition to beneficial one-time G&A expense overlaps. Second quarter ex-special G&A expense was $256 million, down 9% year-over-year. Reported G&A was $281 million, reflecting $25 million of special expense related to our resource optimization program. We expect to generate additional savings on an ex-special basis from the resource optimization program in the second half of the year. Reported operating profit increased 6% as foreign currency translation continued to be a headwind, with a $12 million negative impact in the quarter. Historically, given our global footprint, foreign currency translation has at times been a significant tailwind to our reported operating profit and at other times a headwind. Since interest rates in the US began to rise in Q1 2022, our current annual operating profit reflects a headwind of nearly $180 million in foreign currency, equivalent to roughly one year of operating profit growth under our long-term growth algorithm during that period. Second quarter ex-special EPS was $1.35, reflecting a $0.20 negative impact from a higher year-over-year tax rate and lower year-over-year investment gains. Additionally, foreign currency translation unfavorably impacted Q2 EPS by $0.03. Moving on to our bold restaurant development growth driver. Yum! opened 894 units, the second highest number of Q2 gross openings in Yum!'s history, leading to our unit count expanding 5% year-over-year, contributing 4 points to total system sales growth. In the quarter, we transferred certain rights related to the trademarks of the Gino's Pizza and Telepizza brands in Latin America to our local franchisee, enabling our teams in Latin America to focus exclusively on driving growth in the Pizza Hut brand. As a result, we removed 120 low volume and low royalty rate units associated with those brands from our store base in exchange for nominal compensation. Excluding the impact of this transfer, our unit growth was 6%. Our growth remains diversified across brands and countries, with 195 brand-country combinations contributing growth during the last 12 months. Moving to brand-specific development. In the KFC division, we opened 598 units across 57 countries. This brings our year-to-date gross openings in KFC to 1,107 units, a new all-time record for KFC in the first half of the year. China, India, Thailand, and Japan led development. Over the last year, we've seen positive development trends in South Africa, the Philippines, and Brazil. In the quarter, we closed on the transaction to purchase 216 stores in the UK and Ireland, one of our highest average annual unit volume markets. Our total equity estate at KFC is now 434 stores, the majority of which are located in the UK market. The Pizza Hut division opened 236 units across 30 countries. Pizza Hut's year-over-year unit growth is trending higher from this time last year for several of our largest markets, including China and Japan, which is offsetting closures in the US and the conflict-related slowing of development in Indonesia and Malaysia. At Taco Bell, we opened 56 units this quarter, including 17 new units in our international markets across 10 countries. Our US gross openings are running higher year-over-year for the first half, and we expect international store growth to pick up in the second half of the year. Excluding China, Taco Bell's international unit count was up 7% year-over-year. Moving to our digital and technology initiatives. You will recall that on our last earnings call, David and I discussed our journey to become the leading global digital restaurant company. The first phase of this journey is focused on acquiring, building, and scaling a comprehensive suite of owned platforms that enable ownership of our data, control the digital ecosystem, speed of innovation, and cost advantages through scale leverage. Within this phase, we are accelerating the deployment of our foundational platforms, such as the Poseidon POS system, Yum! e-commerce platform, Dragontail, SuperApp, and our Global Data Hub. In the next phase, we are focused on maximizing the value creation potential of our platforms through AI and leveraging our extensive data assets. Data is becoming a crucial differentiator, enabling us and our franchisees to generate better insights and make better decisions. We believe we are still only scratching the surface of the full value creation potential of our capabilities. Let me now discuss additional digital and technology accomplishments for Q2 across our easy experiences, easy operations, and easy insights pillars. I will begin with our easy experience pillar, focused on providing frictionless experiences to our consumers. As you recall, last quarter, we discussed plans to expand drive-through Voice AI technology to more Taco Bell stores. I'm excited to announce that given our encouraging early results, the team has accelerated the rollout. As of today, we now have this technology operational in over 100 Taco Bell stores. We plan to scale the technology to several hundred stores by year-end, while the pilot test is underway in KFC Australia. In our tests, we have witnessed consistent consumer experiences and higher team member productivity. This technology leverages digital menu boards, which will be a Taco Bell brand standard in 2025 and Yum!'s proprietary point-of-sale system, Poseidon. On the e-commerce front, we have made significant progress in implementing the Yum! commerce platform at Pizza Hut US. We are currently transitioning to this platform at Pizza Hut in the UK, which will be the second international Pizza Hut market to operate on the Yum! commerce platform with Pizza Hut Canada next in line. Next, I'll discuss our easy operations pillar, where we continue to deploy our world-class technology to provide our franchisees and team members with the capabilities to operate their stores more effectively and efficiently. We have fully deployed our Poseidon point-of-sale system within Taco Bell US and are in the early stages of incorporating this system into the KFC US estate. With respect to Dragontail, our AI-enabled restaurant management system, we plan to have the system rolled out to nearly the entire Pizza Hut US system by year-end. As an example of Dragontail's impact, in the first 1,000 Pizza Hut US stores to implement the technology, we have measured a 7% increase in overall consumer satisfaction due to hotter and fresher pizzas leading to improved consumer frequency. Finally, we are in the process of scaling SuperApp, our restaurant General Manager support app, at Pizza Hut US, and we plan to achieve the 10,000 store milestone across KFC globally by year-end. Lastly, I'll discuss our easy insights pillar. We deepened our AI pursuits this quarter, taking steps to unlock the benefits of our R.E.D 360 database and engage with an innovative start-up in the AI-driven personalization space to leverage our massive first-party data assets. This partnership covers the application and integration of a deep learning AI approach known as reinforcement learning, which we expect to be broadly and easily scalable across brands. Next, I'll provide an update on our balance sheet and liquidity position. As a reminder, our capital priorities are guided by maximizing shareholder value and include investing in the business, maintaining a resilient balance sheet, offering a competitive dividend, and returning excess cash to our shareholders. Net capital expenditures for the quarter were $31 million, reflecting $50 million in gross CapEx and $19 million in refranchising proceeds. Our net leverage ratio ended the quarter at 4.1 times. We have a strong balance sheet and no debt maturities until 2026. During the second quarter, we are pleased to have resumed share repurchases by buying back $50 million in our stock, which for context is the same value of shares repurchased during the entire year of 2023. Going forward, absent any attractive investment opportunities like our recent acquisition of KFC UK restaurants, we plan to continue to return excess cash flow to shareholders through share repurchases. Finally, I'll discuss our outlook for the balance of 2024. We remain on track to achieve 5% unit growth for the full year despite the extended impact of the Middle East conflict. On a global basis, our planned number of gross unit openings for the full year is expected to be similar to our number of gross openings in 2023. We should also note some uncertainty on the future path in the Middle East markets. For example, there are approximately 210 restaurants currently temporarily closed across the Middle East, Malaysia, and Indonesia. While there are plans in place to reopen some of those restaurants starting later this month and throughout the second half of the year, there is a risk that some could close permanently depending on the future trajectory of the conflict's impact. These stores have not been producing royalties while temporarily closed, but our reported unit count would be negatively impacted if these stores were to close permanently. With respect to company store profitability, we expect full-year Taco Bell company-operated store margins to be in the range of 23% to 24%. Regarding G&A, excluding the 53rd week, we now expect ex-special G&A expense to be lower on a year-over-year basis by a low single-digit percentage. As for sequencing, Q3 G&A will be higher year-over-year as we lap last year's recovery of cyber-related insurance proceeds and as we incur costs relating to our Global Leadership Summit. Finally, despite updating our balance of year sales outlook to reflect the continued softness we're seeing tied to the Middle East conflict, we remain confident that we will deliver at least 8% core operating profit growth on a full-year basis, excluding the benefit of the 53rd week. I'm very proud of the work our teams continue to do to position Yum! as a resilient growth business going forward and to further cement Yum! as the global franchisor of choice. We are making incredible strides toward our distinctive digital and technology ambitions and our 50% plus digital sales mix and our continued rollout of distinctive digital and AI technologies are testaments to that pursuit. In markets around the world, we have the privilege of working with outstanding franchisees who are capable, well-capitalized, and committed to our system and our iconic brands. With that, operator, we are ready to take any questions.

Our first question comes from David Tarantino from Baird. David, your line is muted. Please proceed with your question.

Hi, good morning. My question is on your outlook, given all the cross currents we're seeing in the macro environment. I was wondering if you could elaborate on how you're thinking the same-store sales could progress as the second half plays out. I know you have easing comparisons, but there's a lot of uncertainty in many markets that you mentioned. Could you provide some context on how you're thinking about your 8% profit growth or core profit guidance for the year? Thanks.

Yeah. Thanks, David. I think our thinking hasn't changed, although we learn more every week. As we said at the beginning of the year, as we progress through the year, we see sequential improvement every single quarter in same-store sales growth. Obviously, Q4 becomes a much easier comparison as we start to compare to the Middle East conflict. Q3 is actually a slightly harder comparison for Taco Bell, but in general, it's an easier comparison for Yum!. Therefore, we continue to forecast an improvement quarter-to-quarter in same-store sales growth; it's tough to forecast. But we know we have all the right levers to pull, and our brands are performing well despite some of these challenges. For example, KFC International is up 11% on a two-year basis despite the impacts from the Middle East. You saw what Taco Bell did in Q2; I think there's a lot of reasons to be optimistic. As you mentioned, it’s a choppy environment. We know we can get through it this year and then obviously move to much easier comparisons next year.

Thank you. Our next question comes from Jon Tower from Citi. Jon, please go ahead.

Great, thanks. I was hoping to dive a little bit into G&A because that seems to be a large factor in your core operating profit growth for the year. Could you provide a bit more context on some of the key drivers through the first half, and then what you see unfolding in the back half? Specifically, how should we think about this piece of the business growing into 2025? Should we expect it to return back to a normal cadence, especially if incentive compensation resets again?

Yeah. Thanks, Jon. I think what you're seeing happen this year is the plan that our management team has been driving is playing out as expected. If I were to sum up what we're doing, we're reallocating and streamlining our G&A to drive faster and more efficient growth for Yum! and for our franchisees. There are a few levers driving that. We've mentioned that there are some one-time benefits this year on a net basis. Digital and technology is also an important area here. So we talked about this year; we're starting to bend the curve. What we mean by that is, over the past few years, we invested ahead on behalf of our franchisees, which burdened the P&L a bit. As we get more and more adoption of our platforms and have fee income from that, it reduces that burden. We also acquired four companies and hired a lot of people in the last several years. Those capabilities are maturing, and as we mature, we find ways to operate more effectively internally to organize better, allowing us to get more done at lower cost, which benefits Yum! and our franchisees. Finally, as we stated in the remarks, our GMs are doing a solid job of driving their plans as they assess how the business is performing on a global scale. So those are factors driving G&A trends this year. It's important to note that we are reinvesting as well. We're putting investments into AI; we mentioned on the last call, 40-plus AI projects in motion. We're investing in areas like our marketing capabilities, supply chain, culture, and talent. Therefore, we're driving the long-term health of the business at the same time. Looking into 2025 and beyond, we will continue to get leverage on the G&A line. Setting aside year-over-year factors like changes in incentive compensation, we expect to achieve good leverage on the G&A line, and I believe you'll see a normal growth rate regarding G&A for a company like ours.

Thank you. Our next question comes from Andrew Charles from TD Cowen. Andrew, please go ahead.

Great, thank you. I have a two-part question on Taco Bell. I'm looking to understand how you retain Taco Bell's US second quarter same-store sales strength as you shift promotional focus to new menu items away from Cantina Chicken while the remainder of the drive-through segment intensifies its focus on value. The bigger question is whether you can share your confidence in the ability to maintain Taco Bell's second-quarter trends in the back half of 2024. Thanks.

Sure. Taco Bell had really positive results in Q2, and we feel good about the brand moving forward for the remainder of the year. First, in an environment where the consumer may be pulling back a little bit, being the always-on value brand serves us well. Taco Bell's Cravings Value Menu is always on with 10 unique items that no one else in the industry has. These items are not junior-sized versions of core items; they stand on their own and are incredibly craveable. This has established a moat around our value proposition. Coupled with appealing offerings like the Luxe Box at a $7 price point, which delivers a tremendous amount of food for the price, we have a compelling way to play value that makes it difficult for others to compete. In addition, we've introduced items like the Cantina Chicken Cheesy Street Taco Chalupas in Q3, which are off to a great start. We will likely rehit Cantina Chicken in Q4. Moreover, Taco Bell is also improving speed of service and enhancing loyalty program launches. So we have great reasons to be confident in Taco Bell as we move forward. In this environment, I believe we are seeing Taco Bell stand out from the crowd, outperforming the QSR industry by a significant margin.

Thank you. Our next question comes from Brian Bittner from Oppenheimer. Brian, please go ahead.

Thanks. Good morning. Congrats on navigating a challenging backdrop. You delivered 8% core operating profit growth year-to-date, despite negative same-store sales for the year. This operating profit growth in the first half is on par with the full year guidance. I know the environment is still challenging, but is there reason to believe that overall, Yum! will have better sales trends in the second half versus the first half as you face easier comparisons as we discussed on this call? Given that G&A is going to remain favorable in the second half, is there an opportunity for profit growth to accelerate? Is your guidance for 8% now conservative since you've already seen that in the first half, or are there factors in the second half that I should pay closer attention to?

Yeah, Brian. As we mentioned on the call, we remain confident in delivering at least 8%. Of course, as you pointed out, it's a complex operating environment. There are many unknowns still yet to unfold in the latter part of the year. That said, as David mentioned, we anticipate sequential improvement in the forecast from a sales standpoint. We’re entering the second half of the year with a solid starting point at the midpoint. Our goal is to deliver as much profit growth as possible while still investing in the long-term health of the business, and that's what our management teams are focused on doing—driving both short-term and long-term growth simultaneously.

Thank you. Our next question comes from Dennis Geiger from UBS. Dennis, please go ahead.

Great, thank you. I wanted to ask a bit more about the strength of global unit development. Despite some macro pressures, impressive growth can still be observed, particularly at KFC. Could you discuss how the brands and franchisees are effectively managing these challenges while continuing to open restaurants at a solid rate? Additionally, do you have any visibility into development looking ahead, including how that pipeline looks?

Yeah. Thanks, Dennis. The development picture is really encouraging. Despite the conflict's impact on sales in certain markets, we still see widespread growth globally. As I mentioned in my remarks, approximately two-thirds of our brand-country combinations have opened a store in the last 12 months. This is impressive given that there are small countries with limited opportunities to develop. Our ability to open gross units is expected to be similar to the numbers in 2022 and 2023. We would like that number to increase every year, but the Middle East does have some impact reflected in our gross unit line. As Chris noted, some closures may arise in the second half of the year, but any store closures would have been lower volume stores that franchisees may prune from their portfolios. We expect full-year development to drive additional system sales, similar to last year's results. The positive development story is due to the franchisees' long-term confidence in our brands and their businesses globally, and they are achieving good paybacks on their investments. We meticulously track the paybacks in each market to ensure that our franchisees are getting solid returns.

Thank you. Our next question comes from Brian Harbour from Morgan Stanley. Brian, please go ahead.

Yeah, thanks. Good morning, everyone. You mentioned in your prepared remarks some broader impacts of the Middle East issues. I was curious about which markets you're referring to with that. More broadly, could you comment on Europe or other markets that you sometimes highlight as being stronger or weaker? Is there anything to note there?

I think in general, we've highlighted that the Middle East markets have been impacted, along with Indonesia and Malaysia as significant markets for us. It’s difficult to precisely measure the impact since it can vary greatly by trade area within any given market. The important thing here is that despite these challenges, I've mentioned earlier that we saw 11% two-year same-store sales growth for KFC globally. If we remove the markets where there's very little impact from the Middle East issues, we are witnessing mid-single-digit growth for KFC. In clean reads on our business excluding the Middle East, Latin America is a strong performer; KFC achieved 13% same-store sales growth in LA&C, leading to an impressive 23% growth over the last two quarters. The foundation of our business is robust, and we're managing through this Middle East headwind as best we can.

Operator, we have time for one more question.

Thank you. Our final question comes from Danilo Gargiulo from Bernstein. Danilo, please go ahead.

Thank you. I have a question about the sustainability of margins at Taco Bell. The margins appear quite impressive in the context of labor pressures in California and consumer spending trends. How sustainable do you think these margin improvements are at Taco Bell? Can you discuss any incremental levers you expect to deploy going forward? For instance, can you foresee margins of 26% to 27% in the next two to three years?

Yeah. Thanks, Danilo. The Taco Bell margin story is indeed impressive, especially within a value-oriented environment. Taco Bell continues delivering consumer engagement, creating buzz, introducing innovative products, and providing value when consumers need it. In doing so, we maintain industry-leading margins. This is achieved by leveraging our scale on food purchases, which our franchisees benefit from significantly. Over the long term, we believe we’ll become more productive in our restaurant operations and as we increase our digital footprint, with 35% of our sales now digital. You heard us talk about the accelerated rollout of Voice AI technology, which will further improve customer and team member experiences and back-of-house efficiency. Several developments are propelling our operations forward, and I believe our strong value offering will continue to yield solid margins for our franchisees and company stores going forward.

Well, thank you, everyone, for your time today. I appreciate all the questions. Obviously, we're proud of the results we achieved this quarter despite headwinds, but we’re even more proud and excited about the future as we advance into the second half of the year and into 2025. Inflation is moderating, margins are improving, and our brands are getting stronger in this environment, with Taco Bell delivering excellent numbers. The work we’re doing behind the scenes to reinvent our operations, reallocate G&A, and invest in digital leadership and AI is encouraging as the laps become easier. We've highlighted our twin growth engines and their outstanding performance this quarter, and I had the opportunity to meet with our international Taco Bell franchisees at Taco Con, where the excitement for the future of Taco Bell was palpable. The quality of the franchise partnerships we maintain for this brand is another reason to be optimistic regarding the future. This quarter demonstrated the resilience of our business model, the strength of our brands, and excitement for the future as we approach Q3.

This concludes today's conference call. You may now disconnect your lines.