Yum Brands Inc (YUM) — Q3 2021 Earnings Call Transcript

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, I would like to remind you that this conference 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 announcement and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings releases and relevant sections of our filings with the SEC to find disclosures and definitions of non-GAAP financial measures and other metrics that may be used in today's call, as well as reconciliations of non-GAAP financial measures. Please note that during today's call, all system sales results exclude the impact of foreign currency and references to temporary store closures only include stores that were fully closed as of the end of the quarter, but have, or are expected to reopen. 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. This call is also being recorded and will be available for playback. 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. Disclosure pertaining to outstanding debt and our restricted group capital structure will be provided at the time of the Form 10-Q filings. Fourth quarter earnings will be released on February 9th, 2022, with a conference call on the same day. Now, I would like to turn the call over to Mr. David Gibbs.

Thank you Jodi and good morning, everyone. I'm pleased to share our strong third quarter results, underpinned by record-breaking unit development, continued strong digital sales, and the adaptability of our brands to meet the needs of our consumers in an ever-changing environment. During the third quarter, we delivered 5% same-store sales growth, or 3% same-store sales growth on a year basis. Despite a challenging operating environment due to the ongoing COVID pandemic, I'm extremely proud that we opened 760 net new units. A Q3 record with broad-based strength across our portfolio. While Yum China continues to be a leader in development, we opened 379 net new units across the rest of our portfolio, roughly equivalent to our Q3 2019 global net new units, including China. Our continued positive development momentum this quarter is a testament to the strength of our iconic brands fueled by strong unit economics and a healthy, well-capitalized franchise system primed for sustained growth. Now I will discuss our Q3 results and 2 of the 4 growth drivers that underpin our recipe for growth. Our relevant, easy, and distinctive brands for red, for short, and our unrivaled culture and talent. I will also share an update on our ESG agenda, which we call our recipe for good. Then Chris will talk about our other 2 growth drivers. Our unmatched operating capability and bold restaurant development in addition to providing more details on our third quarter financial performance and our strong balance sheet and liquidity position. First, a few highlights from the quarter. Overall, Yum's third quarter system sales grew 8% led by same-store sales growth of 5% on a two-year basis, and same-store sales grew 3%, which includes the impact of around 500 stores or 1% temporarily closed due to COVID as of the end of Q3. COVID restrictions that limited mobility in a few markets primarily in Asia had a significant impact on sales. However, our sales momentum remains strong as evidenced by the fact that our global two-year same-store sales growth excluding Asia accelerated since last quarter. Sales strength continued in many developed markets, including the U.S., U.K., and Canada, with significant recoveries seen across Europe as restrictions eased throughout the quarter. We've also seen pockets of strength in our portfolio of emerging markets, including the Middle East, Latin America, Africa, and India, to name a few. As we've previously shared, looking across the more than 150 countries in which we operate, our recovery will neither be consistent from country to country, nor linear within a country reinforcing the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off premise channels. A key growth driver for our business remains the continued acceleration of our digital and technology strategy, including how we leverage our global scale with technology investments to enhance the customer and employee experience, strength in restaurant unit economics, and provide a competitive advantage for our franchisees. We're seeing strong and sustained momentum through our digital and off-premise channels across our global business, even as customers return to our dining rooms. We posted over $5 billion in global digital sales with a near 40% digital mix during Q3. We continued to expand delivery capabilities across the globe, setting a record this quarter with over 41,000 stores offering delivery to our customers. Most recently, we acquired Dragontail Systems, which will allow us to tap into the powers of artificial intelligence to streamline the end-to-end food preparation process and further enhance our delivery capabilities. Where we've deployed Dragontail's cutting-edge technology, we found that it makes it easier for team members to operate and run a restaurant and helps our franchisees strengthen store operations, all resulting in a better customer experience. This is the perfect segue to talk about our KFC Division, which accounts for 52% of our operating profit. Q3 system sales grew 11% driven by a 6% same-store sales growth and 7% unit growth. On a two-year basis, Q3 same-store sales were up 1%, which included the impact of 1% of the stores being temporarily closed due to COVID. At KFC International, same-store sales grew 6% during the quarter. Same-store sales declined 1% on a two-year basis. As previously mentioned, increased COVID case counts and limited mobility in a few key Asian markets pressured top-line trends in the quarter. This quarter, several Western European markets joined the group of resilient markets leading the recovery where sales have fully recovered to pre-COVID levels. Strong digital and off-premise growth, newsworthy products, and doubling down on value offerings have fueled top-line growth in these markets, coupled with the continued strength of the chicken category across the QSR segment. Next at KFC U.S., same-store sales grew 4% during the quarter while same-store sales increased 13% on a two-year basis. The continued success of our chicken sandwich and the strength of the group vacation remains significant drivers of our same-store sales growth. Additionally, as of July, our year-to-date digital sales in the U.S. surpassed our full-year 2020 digital sales, which speaks to the results we're seeing from our investments in this critical growth channel. Now onto the Pizza Hut Division, which accounts for 17% of our operating profit. Q3 system sales grew 4% driven by 1% unit growth and 4% same-store sales growth. For the division, two-year same-store sales grew 1% during the quarter, which included the impact of 1% of stores being temporarily closed as of the end of Q3 2021. Pizza Hut International same-store sales grew 6% during the quarter. On a two-year basis, same-store sales declined 4% while our Pizza International business continues to be pressured given our substantial value index that sustained strength in our off-premise business, as reflected by 21% same-store sales growth on a two-year basis that bodes well for the future of the brand and continues to fuel franchisee interest in investing in assets focused on serving the off-premise occasion. Our markets continued to demonstrate what it means to be relevant by focusing on strong value propositions and innovative partnerships, including Beyond Meat product offerings in 2 markets this quarter. At Pizza Hut in the U.S., we continued to see positive momentum with 2% same-store sales growth. On a two-year basis, same-store sales grew 8%, and the off-premise channel grew 17%. Pizza Hut continues to delight customers with our premium innovation with the launch of the Edge Pizza and the return of the successful Detroit Style Pizza in Q3. Additionally, we promoted the big dinner box during back-to-school season as an easy dinner solution for our Pizza Hut customers. Moving onto Taco Bell, which accounts for 31% of our operating profit. Third quarter system sales grew 8%, driven by 3% unit growth and 5% same-store sales growth. Two-year same-store sales growth was 8% for the quarter. Taco Bell continues to focus on long-term growth opportunities by expanding into multiple category entry points, including the re-launch of breakfast in August and the fried chicken category with the Crispy Chicken Sandwich Taco during the quarter. Meanwhile, Taco Bell International remains focused on their vision to make tacos cool around the world, while also ensuring the brand is culturally relevant in each market. In the UK, we gave away three tacos to the country to celebrate England advancing to the finals in the European Championship. Players on the English team even tweeted on behalf of the brand, resulting in Taco Bell being one of the top trending brands on Twitter during the final. Finally, at the Habit Burger Grill, we saw our system sales grow 19% during the quarter, driven by 11% same-store sales growth and 7% unit growth. On a two-year basis, same-store sales grew 7%, which included the impact of about 1% of stores being temporarily closed as of the end of Q3. We continued to see strong results through our digital channels, even as customers returned to our dining rooms. During the quarter, we launched the culinary forward balsamic grilled chicken and asparagus salad that highlighted our unmatched chargrilled chicken and seasonal ingredients. Now I'll discuss our unrivaled culture and talent growth drivers. The whole market beyond was our people-first culture. We have tremendous leaders across our organization that have been developed internally to lead our brands. Because of our culture, we're able to attract world-class external talent. This quarter we had the opportunity to announce some exciting internal promotions with planned leadership transitions. First, Tony Lowings, CEO of KFC, will be retiring on March 1st, 2022. I want to thank Tony for his more than 25 years working at Yum!. He has embodied what it means to be a people-first leader throughout his career and will no doubt leave a lasting legacy on the KFC brand. Tony's successor will be Sabir Sami, KFC's Global Chief Operations Officer, who is an incredibly well-respected and experienced leader who has played a pivotal role in the KFC Global Business. Sabir's promotion to CEO of KFC provided an opportunity to elevate another internal talent with Dyke Shipp stepping in as President of KFC after serving as KFC's Global Chief People and Development Officer. With their combined experience of over 40 years with Yum!, both Sabir and Dyke will assume their new roles effective January 1st, 2022. I couldn't be more confident in our ability to unleash the power of this iconic brand with both Sabir and Dyke leading KFC. Next, we recently announced that David Gibbs, Pizza Hut, U.S. General Manager, will be promoted to President of Pizza Hut U.S. effective January 1st, 2022. Alongside Kevin Hockman, David has helped architect the Pizza Hut U.S. strategy and is the right person to lead the way forward for the brand by continuing to partner with our franchisees. With this promotion, Kevin Hockman, Interim President of Pizza Hut U.S. and President of KFC U.S. will return full-time to KFC U.S. I would like to thank Kevin for his unwavering commitment and leadership over the past 2 years as he led the Pizza U.S. business and franchisees for a critical turnaround that has shown tremendous progress to date while simultaneously taking KFC U.S. to new heights. These internal promotions demonstrate that our deep bench of experienced leaders is a real competitive advantage for us across the restaurant industry. Lastly, we recruited significant external talent with the appointment of Aaron Powell as Chief Executive Officer at Pizza Hut. Aaron joined us from Kimberly-Clark where he most recently led their Asia-Pacific business. We're thrilled to have Aaron join our leadership team with his seasoned CPG executive experience and believe his leadership alongside David Graves will help fuel the brand growth strategy. Equally as important as our recipe for growth is our recipe for good. I could not be prouder of the progress Yum! Brands has made this year in sharpening the focus and execution of our ESG agenda, particularly on climate action and sustainable packaging, alongside our global unlocking opportunity initiatives to tackle inequality. We are advancing our plans to reduce greenhouse gas emissions across our global system and supply chain by nearly half by 2030 while we work to implement, learn from, and scale pilots for reusable, recyclable, and compostable packaging in the front of our restaurants to meet our 2025 public commitments. Across all programs, we're focused on building a resilient business for the future with purpose and sustainability as the core. Our iconic brands and unmatched scale put us in a class of our own. We're competitively advantaged given the size and capabilities of our franchise system, and I'm thrilled with our teams as we continue to be nimble and meet the consumer where they are. Overall, I'm proud of how our business is performing and I'm confident that we're positioned to win in a post-COVID world. With that, Chris, over to you.

Thank you, David. And good morning, everyone. Today, I will discuss our financial results, our unmatched operating capability, bold restaurant development growth drivers, and our solid balance sheet and liquidity position. I will start by discussing our financial results. Our results year-to-date through Q3, highlighted by 15% system sales growth, translating into strong core operating profit growth of 26%, demonstrate the resilience and strength of our economic model. The continued momentum reflected in our results reaffirms our confidence in delivering on an annual basis the long-term growth algorithm we reinstated on our last call. Specifically, 2% to 3% same-store sales growth plus 4% to 5% net new unit growth, translating to mid to high single-digit system sales growth and high single-digit operating profit growth. In the third quarter, specifically, Yum's system sales grew 8% driven by 5% same-store sales growth, or 3% on a two-year basis, which includes the impact of about 1% of stores being temporarily closed as of the end of Q3. We delivered 4% unit growth year-over-year, which included a record of 760 net new units this quarter. Core operating profit increased 3% for the quarter. In line with our internal expectations, when accounting for one-time items that impacted comparability. The largest of these items was the impact of last year's bad debt recoveries, which accounted for a 5-point headwind to core operating profit growth. EPS, excluding special items, was $1.22 representing a 21% increase compared to ex-special EPS of $1.01 in the third quarter last year. Reflected in our ex-special EPS this quarter is an investment gain on our approximate 5% investment in Devyani International Limited, an entity that operates KFC and Pizza Hut franchised units in India. Our minority stake in Devyani was acquired in lieu of cash proceeds upon the refranchising of approximately 60 KFCs in India during 2019 and 2020. During the third quarter, Devyani completed an initial public offering, and we began reflecting the change in fair value of our investments in our results during the quarter. This resulted in $52 million of pre-tax investment gains on our approximate 5% stake, which added $0.16 to EPS but did not impact our core operating profit. During Q3, we had bad debt expense of $3 million. As a reminder, we had large quarterly swings in bad debt last year due to COVID, and we're lapping $21 million in bad debt recoveries in the third quarter of last year, resulting in a year-over-year headwind of 5 points or $24 million to core operating profit growth this quarter. We expect core operating profit growth to be negatively impacted again in Q4 as we lap bad debt recoveries of $8 million in the fourth quarter last year. Our general and administrative expenses on an ex-special basis for the quarter were $249 million. On a full-year basis this year, we now estimate consolidated G&A will be approximately $1.05 billion, an increase of about $60 million above our incoming expectations for the year, driven entirely by our above-target incentive compensation based on our strong business performance. Our commitment to being an efficient growth company that leverages fixed costs with our unique scale benefits is unchanged. We expect our G&A to system sales ratio to move back to 1.7% next year on a full-year basis. Finally, we note that Taco Bell Company store margins have begun to normalize in the back half of this year due to increased staffing in our restaurants as we return to our historical daypart mix, wage investments, and recent commodity inflation. While there will be quarterly variability due to the dynamic environment, we are confident in our ability to consistently deliver Taco Bell Company store margins in line with our historical pre-COVID levels for full-year 2021 and beyond. Next, I'll discuss our unmatched operating capabilities. We continue to invest in our technology strategy to expand both our digital capabilities and restaurant technology solutions. We're prioritizing making it easier to operate our restaurants, ultimately driving efficiencies in our stores to enhance franchise unit economics while also improving the customer experience. To that end, during the quarter we closed on the acquisition of Dragontail Systems, a restaurant technology company that enhances both the team member and customer experience. Dragontail uses innovative technology that streamlines the order management process in the restaurants and optimizes delivery routes for drivers, resulting in our customers receiving the freshest possible products. Thus far, the Dragontail solution has been deployed in 13 markets and over 1,700 stores across the Pizza Hut system. Many Pizza Hut restaurants leveraging Dragontail's platform have already seen a positive impact on sales, order fulfillment, and customer satisfaction, including product freshness and delivery times. I recently participated in virtual store visits in the U.K. and in Latin America where franchisees demonstrated benefits of the Dragontail system and shared their team members' excitement. Another example of how our technology investments yield enhanced operating performance is Taco Bell's continued execution of its all-access technology initiative. This connected suite of core restaurant technology solutions is used to optimize operations and create a frictionless customer experience. These strategic efforts contributed to Taco Bell's seventh consecutive quarter with drive-thru times below 4 minutes, enabling the brand to serve more customers through the drive-thru while also delivering a great customer experience. Moving onto our bold restaurant development growth driver, I am thrilled to discuss how we delivered another record development quarter with 760 net new units, including meaningful contributions across multiple geographies at our KFC, Pizza Hut, and Taco Bell global brands. While we continue to see strong development from Yum! China, our brands are also seeing broad-based development across other markets. The widespread strength in our store level economics and cash-on-cash returns, improving relative to pre-COVID levels, are key drivers contributing to the acceleration in development we're seeing around the world. KFC International markets have seen impressive development as China, Russia, India, Latin America, and the Middle East continued to deliver strong unit development during the third quarter. Additionally, over the past year, Pizza Hut International has driven a significant inflection in their unit growth, going from negative net new units in 2020 to opening nearly 200 net new units during the third quarter. We expect this momentum to continue, a further testament to the confidence our franchisees have in the future of the brand. At Taco Bell International, we continue to see strong development as key markets are approaching scale. Not only are we seeing strong development across our brands, but given the continued strength of digital and off-premise growth, our teams continue to evolve the asset types being developed into more digitally-enabled formats. As an example, we now have 23 Go-mobile locations at Taco Bell U.S. The technology-forward restaurants, which include dual drive-throughs with a dedicated mobile pickup lane, mobile pickup shelves, and a faster bell-honk experience, among other things, have been a big hit, and we have more in our development pipeline. Next, I'll provide an update on our strong balance sheet and liquidity position. In August, we completed our third whole business securitization issuance at Taco Bell in the past five years, issuing $2.25 billion of new securitization notes. The weighted average yield of the new notes was approximately 2.24% and the proceeds were used to opportunistically repay $1.3 billion of existing higher-coupon Taco Bell securitization notes, and to support our share buyback program. We still expect our 2021 interest expense to be approximately $500 million in line with 2020. We ended the quarter with cash and cash equivalents of $1 billion excluding restricted cash. Due to our continued recovery in EBITDA, our consolidated net leverage continues to be temporarily below our target of approximately 5 times. With respect to our share buyback programs, during the quarter we repurchased 2.6 million shares at an average share price of $127 per share, totaling approximately $330 million. Year-to-date, we've repurchased $860 million of shares at an average price of $117. Capital expenditures, net of refranchising proceeds during the quarter were $49 million. We now expect net capital expenditures of approximately $175 million for the full year, reflecting roughly $75 million in refranchising proceeds and $250 million of gross capex. Lastly, our capital priorities remain unchanged: invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash to shareholders via share repurchases. Before wrapping up, I'd like to take a moment to address both labor and cost inflation pressures and how Yum! is well-positioned to navigate these challenges. U.S. labor availability remains tight across most industries, driving wage inflation and staffing challenges that have resulted in a small number of our stores limiting operating hours, particularly during the early morning and late-night dayparts. While our franchisees are not immune to these market pressures, we believe the power of our scale and the larger average size of our franchisees relative to those of our QSR peers enables our system to manage the inflationary environment better than most. For example, while many small chains and independent restaurants experienced difficulties adapting to these market dynamics, our franchisees continue to invest through this environment, accelerating investments that helped widen their strategic advantage. Additionally, our people-first culture is a true competitive advantage in both attracting and retaining team members. We're confident in the ability of our brands to respond to the dynamic market conditions and are working closely with our franchisees to assess strategic opportunities to take price as and when needed while ensuring we continue to offer compelling value to our customers. While store-level margins have moderated, franchisee unit economics generally remain incredibly healthy. Overall, I'm pleased with our performance this quarter, driven by impressive unit growth and sustained digital sales. We continue to invest in our digital ecosystem to scale technologies and provide a unique competitive advantage for our franchise operators while enhancing the customer and team member experience. Our franchise system is healthy and well-positioned to invest through near-term pressures fueling our development engine and future unit growth. Our unit growth and sustained sales momentum, despite lingering COVID impacts, only make us more confident in our ability to deliver on our long-term growth algorithm. With that, Operator, we are ready to take any questions.

Thanks. And good morning. I'm wondering if you could comment a little bit more about Taco Bell's performance this quarter, while it was strong in a two-year basis there was some deceleration. Stimulus may have played a role last quarter. So maybe that was a false read. That would also have seemed to be the brand just given your comments on staffing in early morning and late night that may have been impacted. Is there any notable impact of sales just from staffing shortages there? Typically just talk about the overall trends in staffing in particular. And why maybe you saw some deceleration on a two-year basis.

We are facing staffing challenges in our restaurants, similar to the industry at large. However, I believe we are excelling in employee retention efforts. If we focus on keeping our current staff, we won't have staffing issues, especially since our restaurant culture and the supportive environment created by our franchisees—through competitive pay and opportunities for advancement—help us navigate this situation better than most. We're very proud of the performance of all our brands this quarter. Notably, on a two-year basis, all four of our brands showed positive growth, as well as on a one-year basis. Importantly, we opened 760 net new units this quarter, marking a strong performance overall. In the U.S., KFC saw a 13% increase on a two-year basis, while Pizza Hut's Home Meal Replacement business grew by 17%. Taco Bell faced some challenges, particularly with late-night and breakfast sales, which tend to be more individual meal-oriented. Each brand has its own strengths and weaknesses in this environment, but overall, all of our brands are performing well, contributing to a successful quarter.

Thanks for the follow-up on John's comments, and I also have a question regarding unit growth. The Taco Bell results show an 8% increase over two years, which is below the industry average. Taco Bell has historically gained market share. Can you provide insights into potential reasons for this weakness, such as supply chain issues or challenges in the Midwest? Additionally, what are your thoughts on why Taco Bell's performance over the past two years may not be matching the average of other drive-through chains? Regarding unit growth, the results are very strong, and it’s difficult to identify any weaknesses or limitations in development from a broader perspective. However, we would anticipate some challenges given the ongoing macro issues related to COVID. Do you think there are any factors holding you back despite the strong numbers? Thank you.

Yeah, it's a great point. Obviously, the numbers that we put up in this quarter are truly record-setting, right? 760 net new units in Q3 is a record for Yum!. We're at 1,800 net new units year-to-date, basically, which is closing in on the record we set for Yum! in 2019 for full-year development. And I think you're right. There's probably some friction that we're experiencing that we haven't been able to open all the units that we could because of some challenges. But this is where the big advantages of Yum! come in: our scale, our purchasing capability, the size of our franchisees, their access to capital. We've been anticipating some of the supply chain challenges, ordering ahead of time, securing the inventory we need on equipment, for example, to get through this without having equipment delays to open restaurants. I do think there is further upside to the numbers we're putting up, and I do think if we continue these trends, we'll obviously set a record for Yum! in the fourth quarter, and we probably have a shot at setting a record for the restaurant industry all time for a number of units opened in one year. I look forward to reporting back on that in our fourth quarter call. As for Taco Bell, the Taco Bell sales are up 15%. System sales are up 15% on a two-year basis. We make no apologies for that. The business is doing quite well, very strong. It does have its own unique challenges since it skews a little bit more towards individual meals versus family occasions, you are seeing the brands like pizza, I think KFC, that's skewed towards family occasions performing even better. But Taco Bell performance is strong. In Q3, we made some investments in marketing that weren't designed to pay off on the top line, such as re-launching breakfast. We know those will have benefits for us down the road. We're proud of what's going on at Taco Bell with system sales growth like that, unit growth like we're seeing all across Yum! and Taco Bell. I'm excited about the future for all our brands.

Hi. Good morning. I have another question on development. First, I just wanted to see if you thought this year's development strength was due in part to some pent-up activity from delays that you saw last year or just underlying strength. And then, Chris, I think you mentioned in your comments that you're seeing improved cash-on-cash returns in a lot of markets, and I was hoping that you could elaborate what you meant there specifically. Thanks.

Thank you, David. We are very excited about the momentum in development. The primary driver is unit economics, which addresses both aspects of your question. Globally, our franchisees are experiencing strong EBITDA, which translates to better returns when they open new restaurants. It's important to note that these franchisees are using their own capital, and the strength of our brand, along with the larger average size of our franchisees, plays a significant role. They can navigate temporary fluctuations from COVID and invest for the long term. Another key factor in development is our strong development teams, who are focused and motivated to achieve outstanding results. They now have enhanced capabilities as we incorporate analytics into our development plans across various markets. We are also introducing new prototypes, such as the Go-mobile concept, which is set for digital growth with Taco Bell. Similar initiatives are in place for other brands. There is a wide range of factors driving this growth, and we've seen a noticeable shift, especially in the Pizza Hut business. Pizza Hut International achieved over 200 in the quarter, significantly improving from last year, and Pizza Hut U.S. has stabilized. These are crucial contributors to our current robust development activity.

As far as the issue of pent-up demand, I'm sure there's some units that spilled over from 2020 into 2021, but we do believe that these trends in development will continue. We think we've gotten to a new level in development, that's why we raised our development guidance on the last earnings call. Look, we're talking about net new units. Let's talk about gross new units for the quarter. In the quarter, we opened over a thousand gross new units. That's a store every other hour, basically, all quarter long. Pretty amazing. And when you think about just the side effect of that, how we're modernizing the estate with that kind of development, it's really encouraging.

Hi. Thank you very much. I think a lot of us on the call know what the U.S. issues are in terms of construction labor, and permitting, and even equipment. But I wanted you to give us a rest of the world view in terms of how supply chains are around equipment and your ability to, I guess again, keep us get current rate of development over the next couple of quarters. And of course, asset in the context of your supply chain seems to have gotten worse in the past 6 months, and perhaps some of the stores that opened in that third quarter benefited from what was ordered 6 months ago or even longer. Do you expect this momentum to continue given that pipeline, just in terms of overall supply chain constraints, however you want to define it that you feel good about on a market-by-market basis?

Yes, thanks a bunch, John. It's a good question. And I think this is where the strength of our operating model and our capability set around sourcing really shines. We saw some of those supply chain challenges related to equipment that are a global challenge. We saw those on the horizon earlier this year, and our supply chain teams were building resiliency plans at that point and they worked with our franchisees around the globe to get ahead on purchasing for that equipment and reserving capacity with suppliers. There will certainly be some local challenges here and there related to permitting. But again, this is where that capability set helped us get ahead, plus our larger, more sophisticated franchisees who invest ahead. They have sophisticated teams who are driving their development, and that's a big asset here as well. So yes, we probably left a few units on the table this year as a result of that. But in general, we don't see that as a constraint on our long-term development pattern.

Awesome. Thank you for taking the question. Just real quick in terms of thinking about the value proposition to the consumer and obviously the inflation that's running through the market today. Curious to know how your franchisees are handling the pricing situation now and that heading into '22 with obviously wage rate inflation as well as commodity cost inflation. How are you messaging to the franchisees? The best way to handle it to the extent obviously can have influence on it. In terms of new product news, are you constructing items, say at Taco Bell or KFC, for next year that will allow them to at least maintain some of the penny profits so they're not getting squeezed too much in this inflationary environment? Thank you.

Yes, thanks, John. Obviously, inflation is a story not just in our industry, but across sectors. And again, I think this is a situation where Yum's operating model sets us and our franchisees up to deal with those challenges really well. I think of three things. One, keep in mind our footprints. 60% of our sales are outside the U.S., and these inflation challenges are most acute in the U.S. We see it in a few pockets around the globe, most acutely in the U.S. Second, in the U.S., think about our scale. We purchase across all four brands together with RSCS; we have a professional team of highly talented strategic sourcing experts. They're working right now. I can tell you throughout this inflationary trend, they saw it coming. They've got plans on finding ways to offset that. So we're leveraging our scale to help manage costs against those pressures. And then third to your point, we pull a number of levers to manage margin with our franchisees. Our brands are working proactively with the franchisees. You've mentioned product design. I'm sure we're going a little bit of that. We've done some menu management. We'll think about how to optimize promotions. And of course, pricing is a lever that's available, but our franchisees and our brands, they manage and they balance the short-term and the long-term. In the short term, they want to make sure we're providing strong value to the customer so that we don't get too far ahead of the consumer. But in the long run, whenever I talk to our franchisees, they're confident that long-term margins in the restaurants will be sustained and we can continue the momentum we've seen on restaurant profit coming through the last couple of years.

Thank you. I have a two-part question about Habit. Firstly, are you considering refranchising some company-owned stores? What qualities are you looking for in potential franchise partners for that brand? Also, how far along are you in this process, and what operational goals do you hope to achieve first? Secondly, David, are you currently exploring international partners for Habit, or is it too soon to consider that?

We appreciate the question on Habit. We're really excited about Habit’s performance. If you think about it, they started pre-pandemic with 60% dine-in sales. So they had the biggest hill to climb in this environment and just put up a plus 7 on a two-year basis. So the way they've pivoted has been truly impressive. I think it hasn't gone unnoticed. We've had lots of demand from potential franchisees, both in the Yum! system and outside the Yum! system to enter. We've now started closing on a few deals. We closed on two already with Yum! franchisees entering the Habit system, and we have more in the hopper. So we're seeing strong demand and interest in becoming Habit franchisees because the unit economics are great for all the reasons why we bought them. As far as international goes, same story there. As you know, they're already in a couple of countries. I just was on a call yesterday where we were evaluating a new potential partner to enter in another country. So we've built up a little bit of capability and the team internationally to focus on Habit International and see every indication that that can become a growth driver for Yum! down the road.

Operator, we have time for one more question.

Great. Thanks for the question. Just wondering if you could talk a little bit more about Pizza U.S. both near-term momentum and then your thoughts on longer-term positioning. Just first on the near-term, any more details, current impacts, maybe driver staffing challenges if there was a bit more of an outsize impact there versus staffing challenges at the other brands across the portfolio. And then more importantly, bigger picture, just any more color on the broader strategic shifts, the benefits you're seeing, and specifically how the work that you've done across asset base, digital, new product development, etc. impacts how you're thinking about improved brand health and positioning longer-term for Pizza Hut in the U.S. Thank you.

Yeah. Look, Pizza Hut U.S. is obviously a bright spot for us right now and will be for the long term as all the work that we've been doing over the last few years, investing in digital and capabilities and working with our franchise partners has really started to pay off. This quarter, Pizza U.S. sales were up 17% off-premise basis, which is the heart of the business and the future of the business. But it's not immune to the same staffing challenges that everybody's facing. So I'm sure those sales were held back to some degree by the challenges of getting drivers. We actually saw our carryout business is now starting to grow faster. When we don't have the ability to get drivers, we're still able to pivot to carry out. But we know that there's a lot of demand for what we're offering at Pizza Hut and with a bright future in the U.S. The other thing I'll point out is our investment in digital at Pizza Hut has been really one of our leading investments in the world of digital. That's one of the advantages Yum! has in our knowledge of digital through the Pizza Hut business. You guys all picked up on the fact that we had over $5 billion of digital sales yet again this quarter. But interesting context on that is across Yum, our dine-in business started to climb this quarter. So from Q2 to Q3, we did see a return to dine-in, yet we saw digital sales go up and we saw digital mix go up, which is proving that not only is it sticky that it's still something that's going to continue to grow for us, which is a great sign for all of our brands as we move forward. With that, I want to thank everybody for the time on the call. We're obviously excited about what's going on with digital and what's going on with net new unit development, widespread same-store sales growth on a one and two-year basis across all of our brands. A lot of momentum in the business right now, a lot of enthusiasm from our franchise partners with record profits at the unit level. And I'm very excited about the path forward for Yum! and our four brands. Thank you.