Yum! Brands Inc

NYSE:YUM

Earnings Call Analysis

Robust Growth Despite Mixed Sales Performance

Despite a 2% decrease in same-store sales influenced by Middle Eastern conflict, overall system sales grew 5% including a 4% rise in unit numbers and a 2% uptick in same-store sales over the year. Pizza Hut International's flat quarter was balanced by ongoing international promotions, while Pizza Hut U.S. saw a 4% same-store sales drop, but trends are expected to improve. The Habit Burger Grill notched a 6% system sales increase and 380 basis point margin boost through operation optimizations. Commitments to sustainability advanced, with a focus on lowering greenhouse emissions by nearly 50% by 2030 and expanding the use of recyclable plastics. Yum China highlighted its robust operations, engaging 470 million loyalty program members and promising 2-3 year paybacks on KFC and Pizza Hut investments. A strategic growth execution led to a 10% increase in system sales and 6% in same-store sales, with noteworthy expansion from KFC and Taco Bell in the U.S.. Financially, the company controlled costs effectively, as general and administrative expenses fell by 4%, while core operating profits rose by 8-12%. Full-year special EPS saw a 14% climb to $5.17. Alongside this, Yum! opened nearly 1,900 new units in the last quarter, primarily internationally.

Understanding Top-Line Performance and Same-Store Sales

The company experienced varied performance across different regions and brands. There was a modest 2% decline in same-store sales as geopolitical tensions in the Middle East dampened consumer sentiment. Despite these headwinds, the company managed to grow its system sales by 5% for the full year, supported by 4% growth in unit numbers and a 2% increase in same-store sales globally.

Focusing on Key Brands - Pizza Hut International and U.S., Habit Burger Grill

Pizza Hut International maintained stable same-store sales, while Pizza Hut U.S. faced a 4% decline in the quarter, though it still achieved 1% growth for the full year. The Melts platform launch earlier contributed to a challenging comparison quarter. Despite a tough upcoming quarter projected for the U.S. market, the company is optimistic about improvement and plans to introduce new offerings like Hot Honey Pizza and Wings. Meanwhile, the Habit Burger Grill showed resilience with a full year system sales increase of 6% and significant unit growth of 8%, accompanied by a notable 380 basis point improvement in store-level margins, underscoring effective operational enhancements.

Investing in Talent and Sustainable Growth

The company bolstered its Good Growth strategy with a focus on People and Planet pillars. Notable leadership transitions include Sean Tresvant assuming the CEO role at Taco Bell Division, and Pizza Hut's Global Chief Technology Officer, Joe Park, being promoted to Yum!'s Chief Digital and Technology Officer. These changes reflect a strategic emphasis on nurturing talent and driving technological innovation. On the environmental front, there is progress toward greenhouse gas reduction and more sustainable packaging, with Yum! receiving recognition for these efforts.

Capitalizing on Competitive Advantages and Expansion

The company's diversified business model proved advantageous, allowing it to navigate a challenging environment marked by inflation and regional conflicts. The year was marked by strategic unit growth across 110 countries, advancements in technology, and collaborations across brands, culminating in sales and profit surpassing long-term growth expectations. The acquisition of 218 KFC restaurants in the U.K. and the strong performance of Yum China, with its robust loyalty program, highlight key achievements and competitive strengths.

Financial Highlights and Growth Drivers

Yum! celebrated an exceptional 2023, with same-store sales surging 6% and an impressive record of opening over 4,754 new units, translating to 13 restaurants a day. The emphasis on Bold Restaurant Development and Unmatched Operating Capability is evident in the company's financial results: a 10% increase in full-year system sales and a 5% increase in fourth quarter system sales, accompanied by strong unit and same-store sales growth. This was achieved while effectively controlling general and administrative expenses, which decreased by 4% year-over-year in the fourth quarter, excluding special items. Core operating profit and earnings per share also reflect positive trends, with 8% and 14% year-over-year increases, respectively.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, and welcome to the Yum! Brands, Inc. 2023 Fourth Quarter Earnings Call. My name is Charlie and will be coordinating the call today. [Operator Instructions]

I will now hand it over to our host, Matt Morris, Head of Investor Relations, to begin. Matt, please go ahead.

[Matt Morris, executive]

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 statements in our 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 Yum! Brands business units report on a period calendar basis, including all U.S. and Canada brands, KFC U.K. and KFC Australia. When forecasting 2024, please keep in mind that this year will include an extra week in the fourth quarter for those entities. For more information on our reporting calendar for each market, please visit the Financial Reports section via our website.

We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback.

We'd like to make you aware of upcoming Yum! investor events in the following. Our first quarter earnings will be released on May 1 with a conference call on the same day. Finally, please mark your calendars for an in-person Taco Bell Consumer Day in December at the Taco Bell headquarters in Irvine, California. Stay tuned for more details and invitations to follow.

Now I'd like to turn the call over to David Gibbs.

[David Gibbs, executive]

Thank you, Matt, and good morning, everyone. Before I discuss our results, I want to express our continued concern for those impacted by the ongoing conflict in the Middle East. We continue to prioritize the safety and well-being of our franchisees and employees in the region.

Turning to 2023. It was a remarkable year for Yum! Brands as we crossed the $60 billion system sales threshold and exceeded all aspects of our long-term growth algorithm. Despite facing numerous challenges around the world, our incredible teams delivered another exceptional year of growth across our business. We set an industry development record for the third straight year. We made massive strides in scaling our proprietary digital and AI-driven ecosystem. And we continued to build the talent base that I believe is the best in the industry.

We delivered 6% unit growth, 10% system sales growth and 12% core operating profit growth. We enter 2024 having opened just shy of 10,000 net new restaurants over the past 3 years and are well on our way to reaching 60,000 restaurants this year. This growth would not be possible were not for our world-class franchise partners, who continue to deploy their own capital based on their confidence to invest behind the long-term potential of our brand.

Along with the record-breaking success we've had on development, our digital strategy has helped to propel top line results and improve bottom line profits. Digital sales approached $30 billion in 2023, up 22% year-over-year with mix now exceeding 45%. At the same time, we have accelerated the deployment of our proprietary technologies to optimize back-of-house operations and make it easier to run our restaurants. In doing so, we are equipping our franchise partners with distinctive capabilities that differentiate them from the competition, especially in emerging markets.

I'll now share some more details on the fourth quarter specifically. During the quarter, top line sales were impacted by the conflict in the Middle East region with varying degrees of impact across markets in the Middle East, Malaysia and Indonesia. This represented a low single-digit headwind to Yum!'s overall fourth quarter same-store sales growth. This trend has continued into the first quarter, and we expect the sales impact to decrease over the course of 2024.

Key to our growth is the performance of our twin growth engines, KFC International and Taco Bell U.S., which account for approximately 70% of Yum!'s system sales and roughly 80% of Yum!'s division operating profit. In 2023, KFC International opened nearly 2,700 new restaurants, reaching 10% growth with restaurants opened across 96 countries. More than 80% of unit growth came from our 15 publicly traded franchisees. Entering 2024, I have strong confidence in the durability of KFC's global expansion for which we continue to see an incremental 50,000 restaurant opportunity over the long term.

On a global basis, Taco Bell crossed the $15 billion system sales milestone this year, reflecting the growing scale of this powerhouse brand. Turning to Taco Bell U.S., which contributes more than 75% of our U.S. divisional operating profit, the brand maintained its 2-year same-store sales trend in the fourth quarter, outperforming the QSR industry. Taco Bell continued to deliver industry-leading margins at 24% this year while at the same time, leading the QSR industry in several key value perception indicators.

Now I'll discuss our Relevant, Easy and Distinctive Brands, or R.E.D. for short, followed by our Unrivaled Culture & Talent and Good Growth strategy. Chris will then provide an update on our fourth quarter results and balance sheet position, followed by our Bold Restaurant Development and Unmatched Operating Capability.

Starting with the KFC division, which accounts for 50% of our divisional operating profit and will soon cross this incredible milestone of 30,000 units. For the year, system sales grew 12% with 8% unit growth and 7% same-store sales growth. For the quarter, KFC achieved 7% system sales growth owing to 8% unit growth and 2% same-store sales growth.

Sales trends decelerated during the quarter in several markets as a result of the conflict in the Middle East. KFC China grew system sales by an impressive 20% during the quarter. We had several other standout markets this quarter, including 16% system sales growth in Latin America and 13% system sales growth in both Africa and Thailand.

In Latin America, we targeted new consumers and dayparts using compelling value offers, and we expanded our KFC Original nuggets. In Africa, the team boosted its breakfast daypart with new beverages, including signature coffees at a great price. The Thailand market saw strong transaction growth driven by smart value offerings across all dayparts.

At KFC U.S., same-store sales were flat this quarter with trends on a 2-year basis remaining consistent from the prior quarter. In Q1, the team has planned a range of exciting initiatives, including the Smash'd Potato Bowl, the first bowl innovation since 2019, and the rollout of KFC's first loyalty rewards program.

Moving on to Taco Bell division, which represents 36% of our divisional operating profit. At Taco Bell U.S., fourth quarter same-store sales grew 3% and 15% on a 2-year basis, outperforming the QSR industry by 3 points. Taco Bell U.S. faced tough laps early in the quarter but finished the year strong with comps up over 5% in the final period. The quarter included a record digital sales mix, which reached 31%, up 7 points year-over-year. Growth in kiosk sales was a large driver with in-store kiosk sales mix increasing 15 points from Q4 last year.

Optimizing our digital channels is also contributing to growth in Taco Bell's loyalty program with active loyalty users growing 17% in 2023. The team plans to bring exciting enhancements to the loyalty program in the second half of 2024 to capitalize on digital engagement and provide an easier experience for customers to earn and redeem points.

While not surprising, I'm always proud to see our incredible Taco Bell team's efforts being recognized with Entrepreneur magazine naming the brand the #1 franchisor for the fourth year running and with Nation's Restaurant News crowning Taco Bell the 2023 Brand Icon. With an unprecedented range of exciting innovations launching this year, including at least one new product every 5 weeks, twice the rate of 2023, I'm confident Taco Bell will remain a brand icon for years to come.

At Taco Bell International, we delivered 14% unit growth this year. The majority of this growth was contributed by our big 4 scaled markets, including Spain, which opened 19 new units this year and is on track to reach 150 units in Q1. As we enter 2024, we will work with our franchise partners in these markets to build brand and category awareness with Mexican food, particularly in Europe and Asia, leaning into fan favorites and expanding protein offerings. Additionally, we are working on scaling and entering new markets that will enable a broader base from which to grow.

Next, at the Pizza Hut division, which comprises 15% of our divisional operating profit and will soon eclipse 20,000 units. In Q4, system sales grew 1% with 4% unit growth and a 2% decline in same-store sales. Sales trends decelerated during the quarter in several markets as a result of the conflict in the Middle East. For the full year, system sales grew 5%, including 4% unit growth and 2% same-store sales growth.

At Pizza Hut International, same-store sales were flat for the quarter. The team continues to roll out Melts across the globe to build the individual eater occasion. Strength in the aggregator channel continues to be a bright spot across several markets, including Canada and Latin America. Buy one, get one deals coupled with aggregator promotions drove transaction growth in Canada during the quarter. In Latin America, the promotion of our own digital channels in Brazil, combined with a New York-style pizza, helped boost sales for that market.

At Pizza Hut U.S., same-store sales declined 4% for the quarter while growing 1% for the full year. The Melts launch and the promotion of the Detroit-style pizza in the prior year contributed to a difficult lap this quarter. Pizza Hut U.S. will face another challenging lap in Q1 as same-store sales increased 8% last year, reflecting full quarter of sales from the Melts platform and the Big New Yorker.

However, we expect performance trends on a 2-year basis to improve in the first quarter. In Q1, the team will launch two limited-time offers, including Hot Honey Pizza and Wings, a perfect pairing for fans to enjoy in the run-up to the Super Bowl. In the months ahead, the team will be announcing some exciting innovations to the Melts platform.

Lastly, at the Habit Burger Grill, for the full year, system sales grew 6%, led by 8% unit growth. Reflecting on 2023, Habit's new leadership team focused on improving all elements of Habit's operations, including expediting a robust kiosk rollout, implementing a sales-driven labor optimization model and harnessing Yum!'s co-op purchasing group to lower procurement costs and rationalize SKUs. As a result of these efforts, the team achieved a 380 basis point increase in full year store-level margins despite softness in sales.

Now I'll turn to our Good Growth strategy, starting with our People pillar. We take great pride in developing our talent and ensuring we have a strong bench to drive performance. And we were thrilled to be recognized in TIME Magazine's inaugural list of the Best Companies for Future Leaders with Yum! ranking an impressive 32nd among U.S. companies.

The strength of our talent is evident through Sean Tresvant's official transition to Taco Bell Division CEO on January 1. Sean joined Yum! in 2022 and is a visionary business leader with a proven track record of driving transformative brand-building through his previous role as the Taco Bell Global Chief Brand and Strategy Officer. I'd like to again congratulate Sean as he takes the helm at Taco Bell. And I'm confident he and the rest of the team will continue to successfully deliver the brand's long-term global growth strategy.

I'd also be remiss if we didn't take another opportunity to recognize Mark King for everything he did as Taco Bell Division CEO to set the brand up for future success, including handpicking Sean as his successor and ensuring that Taco Bell would be in more-than-capable hands. On behalf of the entire Yum! system, I want to thank Mark for his people-first leadership that drove strong results, inspired restless creativity and solidified Taco Bell's unique brand identity that makes it an undisputed global icon.

Additionally, Pizza Hut Global Chief Technology Officer, Joe Park, will be moving into the Yum! Chief Digital and Technology Officer role currently held by Clay Johnson, who will continue as a senior adviser. I want to thank Clay for his incredible leadership joining Yum! in 2019, including developing our digital and technology capabilities from the ground-up and establishing Yum! as a clear leader in technology in global QSR.

Since joining Yum!, Joe formed our first-ever long-range innovation team before moving on to Pizza Hut, our most digital brand, where he partnered with our global operations and technology leaders to deliver new levels of ease to our customers and improved unit economics for our franchisees. I'm confident he is the perfect person to lead us into the next chapter on our digital and technology journey.

Moving on to the Planet pillar of our Good Growth strategy. In 2023, we remained focused on efforts under our priority areas of greenhouse gas reduction and sustainable packaging. We've made progress on our goal of reducing greenhouse gas emissions nearly 50% by 2030 through investments in renewable energy and energy efficiencies in our restaurants and through ongoing commitments with our food suppliers.

In terms of packaging, we are increasing our global use of more widely recyclable plastics in our consumer packaging. And we continue to remove plastic packaging in the form of bags and cutlery in addition to eliminating styrofoam. Our continued progress in sustainability has been underscored by several recent recognitions, including being named to the 2024 Dow Jones Sustainability Index North America for the eighth consecutive year and being listed by Newsweek as one of America's Most Responsible Companies for 2024.

Before I wrap, I want to pay tribute to our incredible partners at Yum China. In December, my team and I traveled to Shanghai to meet with CEO Joey Wat and her executive team. That trip reinforced our view that Yum China is without question the world's most capable restaurant operator. They enable rapid growth and structural cost efficiencies through their dynamic development capabilities and their robust in-house supply chain.

Our team sampled amazing new menu items in their innovation kitchen. And we saw firsthand the digital capabilities that enable Yum China to engage with an astounding 470 million members in its loyalty program. These advantages enable consistent paybacks of 2 to 3 years in KFC and Pizza Hut despite evolving market conditions, a further testament to their clear competitive advantages in the market.

As I look back over the last year, the unique advantages of our diversified system shone through. While the business faced persistent inflation across the globe and navigated shifts in consumer sentiment stemming from regional conflicts, we responded with a focused determination to execute our growth plan, including growing units in 110 countries, meaningfully scaling our technology systems, deepening collaboration across our brands and delivering both sales and profits well above our long-term growth algorithm.

We're confident 2024 will be another banner year with a number of exciting sales-driving opportunities, such as enhancing the range of protein offerings at Taco Bell, expanding new category entry points and significantly boosting the impact of our loyalty program. With a world-class team, globally iconic brands, industry-leading franchisees and a relentless appetite for growth, the future is brighter than ever. And I am confident that we will continue to maximize value for our shareholders.

With that, Chris, over to you.

[Christopher Turner, executive]

Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our Bold Restaurant Development and Unmatched Operating Capability growth drivers, followed by an update on our balance sheet and capital strategy.

As David mentioned, 2023 was an exceptional year with Yum! exceeding all components of our long-term growth algorithm. Full year same-store sales grew a very robust 6%. We opened 4,754 gross new units, the equivalent of 13 restaurants a day or 1 restaurant roughly every 2 hours. KFC set a brand development record, opening over 2,700 new units across 97 different countries. I also want to extend congratulations to the Yum China team, who crossed 10,000 KFC restaurants this quarter with nearly 40% of those restaurants built in the last 3 years.

Turning to our results. Full year system sales grew 10% with fourth quarter system sales up 5%, led by 6% unit growth and 1% same-store sales growth. Yum!'s twin growth engines, KFC International and Taco Bell U.S., grew system sales 12% this year.

Fourth quarter ex special general and administrative expenses were $344 million, down 4% year-over-year due to strict cost control. Reported G&A was $353 million for the quarter, including $9 million in special expense related to an ongoing resource optimization project. For the full year, ex special general and administrative expenses were $1.17 billion.

Core operating profit grew 8% for the quarter and 12% for the full year. Reported operating profit included a negligible impact in the quarter from foreign currency translation and a $49 million headwind for the full year. Our ex special tax rate was 26% in the quarter and slightly under 21% for the full year.

Fourth quarter ex special EPS was $1.26, a decline year-over-year, stemming from a $0.23 headwind from fluctuations in our quarterly tax rate that drove our effective tax rate above our guided range in 2023 and below our guided range in 2022. Full year ex special EPS was $5.17, a 14% increase year-over-year.

Now let me share some greater detail on our fourth quarter unit growth in the context of our Bold Restaurant Development growth driver. Yum! opened just shy of 1,900 units in the fourth quarter with approximately 87% of that growth coming from our international markets. The KFC division was the largest driver, finishing the year with units up 8%. China, India, Thailand, South Africa and Spain drove KFC's development this year and were part of a group of 15 countries that grew unit count by more than 25 restaurants.

In December, we were pleased to announce that we signed an agreement to acquire 218 KFC restaurants from our largest franchisee in the U.K. This is an exciting opportunity for us to purchase restaurants with average unit volumes above $2 million and healthy store-level cash margins in a market where we have an exceptional local management team who run our existing KFC U.K. equity store base.

We expect the addition of these units to provide approximately $40 million of incremental EBITDA in the 12 months after acquisition while the benefit to our operating profit will be largely offset over the next several years due to depreciation and amortization, including amortization of reacquired franchise rights, which will be reflected in store-level margins post acquisition. We anticipate this transaction to close during the second quarter.

At Pizza Hut, the division opened 575 units for the quarter and nearly 1,600 units for the year, a record for the brand. There were 73 markets that contributed to the brand's development. China, India, Turkey, Japan and Canada led Pizza Hut's growth internationally with more than 900 units opened across those countries. The Taco Bell division opened 201 units in Q4 and 417 units for the full year. In the U.S., unit development was also on fire with 244 gross new units. Our longer-term growth engines that include Habit and Taco Bell International opened 208 units on a combined basis and grew unit count by 12%.

We finished 2023 with unit growth occurring in 110 countries. We now have units in 293 brand country combinations, providing an unmatched level of diversity geographically as well as in consumer preference with leading brands in the chicken, pizza and Mexican categories. Looking ahead, we expect development in 2024 to continue at a robust pace.

In the first half, KFC will reach an incredible 30,000 units and Pizza Hut will top 20,000 units. At KFC, we enter 2024 with more development commitments than last year. We recently returned from an inspiring visit to China in December and were reminded of the incredible runway for KFC's growth in the market, where Yum China has over 10,000 KFC restaurants yet serves only 1/3 of the population.

Taco Bell International will continue to expand their footprint, though the growth rate will temporarily slow as the brand looks to stabilize same-store sales performance in emerging markets and partner with franchisees to optimize site selection, leveraging KFC and Pizza Hut market-mapping data.

Moving on to our Unmatched Operating Capabilities growth driver, which I'll speak to through the lens of our digital strategy involving our Easy Experiences, Easy Operations and Easy Insights pillars. 2023 was a landmark year for successfully scaling our suite of proprietary technologies across our global restaurant base.

Beginning with our Easy Experiences pillar. We have successfully deployed our Yum! Commerce Platform to KFC U.S. and Taco Bell U.S. and are continuing to onboard the Pizza Hut U.S. system. Looking ahead, we will start to deploy this platform to two Pizza Hut International markets in the first half of 2024.

Kiosks remain an important priority in delivering a consistent customer experience, driving ticket uplift and streamlining our restaurant operations. Globally, we've increased our kiosk penetration in KFC restaurants by 70% over the past year outside of China. We ended the year with kiosks in approximately 500 KFC U.S. restaurants, a huge step-up from nearly 0 only 2 quarters before. Our KFC Latin America markets also began the rollout of kiosks using our proprietary Tictuk platform this year and plan to triple the restaurant count in 2024.

Within Easy Operations, this quarter, we continued to fire on all cylinders, significantly expanding the rollout of our world-class technology products and platforms. Poseidon, our proprietary point-of-sale system, which was expanded to an additional 1,700 Taco Bell U.S. restaurants, resulting in 5,000 restaurants having been onboarded this year.

We also ramped up the deployment of our Dragontail AI platform with an additional 1,000 locations onboarded this quarter and over 4,000 new restaurants added for the full year. We now have Dragontail in place in nearly 7,000 restaurants across Pizza Hut and KFC. Our 2024 rollout will include launching Dragontail in nearly 6,000 more restaurants, further evidence of our ability to scale software globally at a rapid pace.

Our AI-driven Automated Inventory Management system is now being used in 90% of our KFC U.S. locations and roughly half of our Taco Bell U.S. restaurants, driving more seamless and more accurate inventory ordering processes for our restaurant managers. More than 3,000 additional restaurants across KFC, Taco Bell and Pizza Hut will be onboarded to the Automated Inventory Management system in 2024.

Finally, our custom-built Super App, which provides smart automated routine management tools for our restaurant managers, is now used in over 8,500 Pizza Hut restaurants globally. And KFC has plans to roll this out to approximately 6,000 restaurants in 2024.

For the third pillar of our Easy strategy, Easy Insights, we are fully leveraging our unique global scale to bring new insights and enable even smarter and quicker decision-making. This year, we expanded the reach of our Yum! global data hub, which captures the vast majority of global transaction-level sales data and other key operational and customer metrics.

In 2024, our Easy Insights team will develop and test new AI-driven capabilities that pull from the global data hub and integrate into our own technology platforms, including personalized upsell recommendations for customers ordering on our digital platforms, intelligent menu pricing recommendations and dynamic restaurant routines for general managers.

Stepping back, it's incredibly encouraging to see this digital ecosystem come to life in our restaurants. By the end of 2024, we are likely to have our Taco Bell U.S. restaurants operating substantially all of these key technologies through the Yum! ecosystem, from the Poseidon point-of-sale system to the Yum! Commerce Platform, our Automated Inventory Management software and the [ tracks ] restaurant management application, truly a power brand powered by world-class technology.

Next, I'll provide an update on our balance sheet and liquidity position. Our net leverage ratio ended the year at 4.2x, down from 5x last year. As we had previously shared, we had planned for our net leverage ratio to drift lower during 2023 based on pausing new debt financing, paying our $279 million revolver balance in Q1 and retiring a $325 million bond maturity in Q4. Our capital expenditures for the quarter, net of refranchising proceeds, were $103 million. Our net capital expenditures for the year came in at $225 million, reflecting $60 million in refranchising proceeds and $285 million in gross CapEx.

For the full year, we repurchased approximately 400,000 shares totaling $50 million. With the November bond maturity behind us and no significant debt maturities in 2024 or 2025, we will return to using our excess free cash flow to fund the share repurchases and any accretive investments we choose to make, for example, the U.K. KFC acquisition. In addition, we were pleased to recently announce an 11% increase to the dividend. I will reiterate that our capital priorities are guided by maximizing shareholder value. This includes investing in the business, maintaining a resilient balance sheet, offering a competitive dividend and continuously evaluating the optimal use of our excess cash.

Finally, let me shed some light on how 2024 is shaping up. Despite a more challenging operating environment, including the impact of the conflict in the Middle East, we expect to deliver our long-term growth algorithm in 2024. This includes core operating profit growth to be at least 8%, excluding the benefit of the 53rd week. We have a strong unit development pipeline, thanks to attractive and reliable paybacks and growth-minded franchisees, which gives us confidence in our ability to deliver strong system sales growth.

For the shape of the year, we expect top line trends in Q1 to be the most challenged with same-store sales trends improving sequentially as laps cease and a range of sales-driving initiatives take hold. We expect full year Taco Bell company operated margins to be in the range of 23% to 24%. We anticipate flat ex special G&A growth as we manage spend across the organization. Remember that G&A can vary due to the nature of our performance-based compensation plan. Lastly, we expect our full year tax rate to be in the range of 21% to 23%.

To close, I am incredibly proud of our performance this year. Sales trends became a little more challenging in the second half and yet we delivered profit growth above our algorithm as our teams quickly adjusted marketing calendars to meet demand and kept a strict focus on managing costs. It is our teams' relentless focus to stay vigilant on all areas of the business that gives me confidence we will deliver our long-term growth algorithm in 2024. The unbeatable combination of our iconic brands, best-in-class franchisees and resilient business model will enable us to deliver growth and shareholder value creation for years to come.

With that, operator, we are ready to take any questions.

[Operator]

[Operator Instructions] Our first question comes from Gregory Francfort of Guggenheim.

[Gregory Francfort, analyst]

I mean, the question I had, as we look into 2024, there's obviously been some pockets of weakness around the world. But in terms of your development, you touched a little bit in the first half on some of the milestones you're going to reach. But what do you think about the pace of development globally in 2024 and 2025? Do you expect that to kind of hold around this 6% range? Or any thoughts there would be helpful.

[David Gibbs, executive]

Yes. Thank you for the question, Gregory. Obviously, in our prepared remarks, and I'll reiterate in my comments now, we are very confident in the pace of development. The pipeline has never looked better for us. Obviously, it varies country-by-country, but franchisees are getting great returns. You've heard yesterday, Yum China commit to continued strong growth and the great returns they're getting through development. Even Pizza Hut U.S. is picking up the pace of development. We see lots of reasons to be hopeful.

And we have a lot of good visibility into the pipeline, the development agreements that we've struck with franchisees. And the way we're evolving our asset types, I think, is another tailwind for us on development. I think we mentioned when we were in China, we've seen this new model that they've come up with, the satellite Pizza Hut delco store, which they -- we believe they can blow out and be a real growth driver for them is just one example.

[Operator]

Our next question comes from Brian Bittner of Oppenheimer.

[Brian Bittner, analyst]

As it relates to 2024, Chris, you said you expect it to be a year that you're going to perform in line with your algorithm, of course, meaning that you can grow your operating profits at least 8%, excluding the extra week. I just want to dive a little more into this and your confidence around it.

I know unit growth is a source of confidence. Clearly, you've outlined that on today's call. But what about the same-store sales required to get to that algorithm, just given the ongoing headwinds from the Middle East, a potentially more challenging U.S. environment? How do you think about what's required from a same-store sales perspective after the first quarter as it relates to the need for them to accelerate?

[Christopher Turner, executive]

Yes. Thanks, Brian. If we talk about the algorithm this year and our confidence in delivering it, I'll start by reiterating our primary growth driver, which David just talked about on development, obviously, one of our strongest pipelines in recent years, lots of reasons to be excited about development continuing at or above that 5% in the algorithm. We talked about from a same-store sales standpoint, we expect sequential improvement through the year.

Our two primary growth drivers, KFC International and Taco Bell U.S., continue to have strong positions in their markets around the globe. Obviously, we've got the Middle East headwind that we mentioned that we'll deal with. But we expect sequential improvement throughout the year. And so we're confident in the trajectory on that piece. But then you get to the 8% -- at least 8% core operating profit growth, which is really what the algorithm is intended to drive. And that's where we've got even more levers at our disposal.

So we mentioned that we expect flat G&A year-over-year, which reflects how we're managing that component of the P&L. And so we've got confidence in the actions that we're taking there. There's a component of that around our digital and technology approach. As our capabilities become more and more mature, we get more and more leverage out of those capabilities. And of course, we're doing all of that in service of our franchisees, where we're building leading-edge capabilities at the lowest cost for them and we've invested ahead.

But we also mentioned the productivity programs that we continue to drive, which in the past few years have been used to fund those incremental investments in D&T, but we're going to continue to drive those productivity improvements. And then finally, we're lapping some larger-than-normal incentive programs that will help from a G&A standpoint as well. So you add it all up, we're very confident in delivering that at least 8% core operating profit growth in our algorithm.

[Operator]

Our next question comes from David Palmer of Evercore.

[David Palmer, analyst]

Lots of great stuff on this call. I don't know if this is going to be something you can answer this call, but maybe something for the future. Your digital sales growth and mix increased very strong, a 22% growth this quarter, you said. And I just wonder how incremental you think that growth is to sales or other benefits that you see in terms of loyalty and even labor efficiency. So I know we would all be very open to hearing how incremental that is, obviously a quarter like this when you have a lot of headwinds and noise, but maybe for a future call even if you don't have that handy.

But another separate question, maybe easier to answer, you talked about the 2-year trend accelerating for Pizza Hut U.S. in the first quarter. And even if we were to say that, that was a couple of points of acceleration on a 2-year, that could imply flat comps starting in the second quarter on a year-over-year basis. I'm wondering if you think that, that sort of stabilization in comps is a reasonable expectation for Pizza Hut starting in the second quarter.

[Christopher Turner, executive]

Yes. Thanks so much. I'll start with digital. So yes, look, our digital capabilities continue to drive actually all elements of our algorithm. They support strong unit economics. As you heard, we continue to expand the Easy Operations capabilities, which make our restaurants easier for our team members to operate and it helps our franchisees drive productivity. And so that is helping us ensure that our franchisees continue to have strong unit economics, which allows them to invest in building new stores. If you look at that 10% global system sales growth for the full year, we think digital played a big part of that, both on the unit side and on the same-store sales side.

And then as I said from a profitability standpoint for Yum!, as those capabilities continue to mature, we can get more and more leverage out of the -- our digital and technology teams and capabilities in-house. And so that's part of us bending the curve on those investments that I mentioned in our G&A plan for the year. So again, we're very pleased with the progress on the digital front, and we still have a lot of that journey ahead of us. We described big plans this year to continue to accelerate the rollout.

[David Gibbs, executive]

Yes, I'll talk about pizza. But on the digital front, one thing I really want to emphasize is just the talent we've been able to attract to the digital space, both at Yum! and at the brands, is unbelievable. We are becoming a talent magnet in digital. It's a great place to work. We're investing behind this. Our franchisees are quickly adopting it. And even though we're at $30 billion of sales and growing fast, we're still in the early innings of what this can do to the business and the way it can transform us. So we could not be more excited about digital. And we will continue to report on the various metrics, loyalty and things like that, as we go forward and keep you guys informed on the journey.

On Pizza Hut, yes, obviously, sometimes we forget when you look at 1-year numbers without really looking at the full picture, Q1 for Pizza Hut U.S., we have an enormous lap. And obviously, I have to take that into account as we launched Melts last year very successfully and are now rolling that around the world. But we certainly are planned for Pizza Hut U.S. to be positive for the year. The team has a number of things planned for the calendar as we go forward. And we love the fact that Pizza Hut globally hit a new record on net new unit development and is becoming a bigger contributor to that part of our growth. And certainly, Yum China last night talked a lot about the great success and the wide runway they have for Pizza Hut in that market.

[Operator]

Our next question comes from Jon Tower of Citi.

[Jon Tower, analyst]

A quick clarification and a question. On the G&A guidance for '24, is that just on a dollar basis? Can you maybe just level set us where that -- what your expectation is? Is it flat on a 52-week basis? Or obviously, you've got an extra week in some of the divisions.

And then the question itself is more along the lines of how franchisees -- how you're working with the franchisees to approach pricing in 2024, I guess, more focused on the U.S. there, given that, that's the market where I think there's some incremental pressure on the lower-income consumer. But how are you guiding them to think about it, given some of the pressures on labor that are going to be manifesting themselves throughout the year?

[Christopher Turner, executive]

Yes. So the G&A, we ended the year ex special at $1.17 billion. We expect to be flat on that in the 52 weeks. So it should be an apples-to-apples comparison on that commentary around flat.

[David Gibbs, executive]

Yes. And as far as the U.S. consumer and pricing, just some good news to share there at least from a Yum! perspective. As we think about the U.S. consumer, the best way for us to look at it is obviously through the lens of our Taco Bell business, which is the vast majority of our U.S. sales and profits. Throughout 2024, we saw a slight outperformance from our restaurants that were in low -- 2023, the restaurants that were in low-income trade areas versus the rest of the business. So with the low-income consumer, I know there's been a lot of talk about are they dropping out.

Certainly, for Taco Bell, that actually looks -- it looks like we're doing a great job of holding on to them. And in fact, in both the entire year and in Q4, we saw the low-income consumer trade areas outperform the rest of the business. And I think that speaks to the strength of Taco Bell in this environment. It is a value leader in so many ways. When you talk to consumers about value, they win on every value perception score. And they can do value with innovation, which is also a great combination. And they can do value while having industry-leading margins.

So you think about the room that we have to compete with everybody else in the category, I really, really like our position with Taco Bell. Obviously, as we move into Q1, we've got tougher laps. U.S. weather really played havoc on sales early in the quarter. And as we've said, it's going to be the lowest quarter of the year. But we think this environment is one that obviously we can thrive in the U.S. And there will be less pricing to the point of your question, but it's not going to slow Taco Bell down in terms of being able to connect with consumers and grow transactions.

[Operator]

Our next question comes from Jeffrey Bernstein of Barclays.

[Jeffrey Bernstein, analyst]

Just following up on that, you did talk about a more challenging macro into '24. And I assume that's above and beyond the Middle East. So specific to the U.S., again just any change in behavior you're seeing in any of your three core brands, consumer trading around the menu?

Specifically, I know that from television advertising, each of your three big brands has what appears to be a pretty compelling value offer. So I'm just wondering how those value offers are performing, the consumer demand for them, maybe the mix shift of value today, however you define that, versus where it's been in years past? Any color on that would be great.

[David Gibbs, executive]

Sure. Yes, just to build on my comments about the Taco Bell business in the U.S. and how it's set up to thrive in this environment, the value menu that we've recently tweaked in the U.S. to be $3 and under is actually over-indexing a little bit with consumers versus test and expectations, which isn't a bad thing because it's a real competitive advantage for us. And it's designed to maintain franchisee profitability.

So there may be some small shifts in consumer behaviors. But as I said on previous calls, we just are slowly returning to a more normal operating environment, where value is always important in the category as is convenience and food innovation capability. And we think we just win on all those fronts with Taco Bell and why we're excited about 2024.

[Operator]

Our next question comes from David Tarantino of Baird.

[David Tarantino, analyst]

I just wanted to come back to your comp outlook for the year. And I know you mentioned several times some of the reasons you expect things to maybe get better as the year goes on. But I'm hoping that you could maybe elaborate on your view there, whether you think it's the macro getting better or you think it's more what you have in your initiative pipeline. And then I guess, the second part of the question would be if that doesn't materialize the way that you anticipate, do you have levers to pull to still deliver the profit growth that you're expecting for the year?

[David Gibbs, executive]

Well, in terms of the comp outlook, obviously, the Middle East creates some uncertainty for the environment. And Chris just talked about one of the levers that we have to pull, which is improving our efficiency and holding G&A flat year-over-year. But the bigger picture is we're really excited about the initiatives that each of the brands has going. Just to give you a glimpse, Taco Bell in 2024 is going to have twice the innovation on the calendar that they had in 2023. And I've obviously seen a lot of this innovation and excited about the impact it's going to have with consumers.

I mentioned the fact that in the U.S., it's a brand that thrives in a value environment. But around the world, just to give you some more color on Q4, we have positive transaction growth in Q4 despite the impact of the Middle East -- that the Middle East had on our overall business. So we think the year sets up where, obviously, the Middle East is a big variable. But putting that aside, we think the year sets up to be another great year for Yum! all around the world with sales growth.

And a lot of it is driven by us leaning in more on what we call category entry points opening up new lines of business for us. So I'm excited in a couple of days to head to South Africa to see the great work that, that team is doing in terms of launching breakfast and the beverage work that they're doing that's really having a positive impact on their sales. But we've got stories like that going on all around the world.

[Christopher Turner, executive]

And then David, as you mentioned, we do have multiple levers to ensure that we land the ultimate component of the algorithm, which is at least 8% core operating profit growth. We've talked about the flat G&A plan, and we also referenced in the comments some of the productivity projects that we have going on. So we're laser-focused on that component as well and have plenty of levers we can pull.

[Operator]

Our final question today comes from Dennis Geiger of UBS.

[Dennis Geiger, analyst]

Just another on Taco Bell, I guess, David, in light of the strength in the multiyear trends in December and then the initiatives that you highlight, I guess, is it fair for Taco Bell, given the fact that you're seeing pretty good strength across consumers for the brand plus the initiatives, that you could see sort of a widening market share or traffic share outperformance gap at Taco Bell this year, given the environment and given the plans you have in place, if anything to share on that?

[David Gibbs, executive]

Yes, thank you, Dennis. Yes, so look, Taco Bell in Q4, just to put a little bit more numbers around it, put up a 2-year number of a plus 15%. Again, going back to -- sometimes we forget what we were lapping. We were lapping massive Mexican pizza performance. They were able to lap that and grow on that. And in a challenging consumer environment, we think that favors them.

And absolutely, what you said is absolutely true. We're constantly looking to gain market share. And the Taco Bell business has been doing that for now for many years, and we think this is an environment that favors them. So I couldn't be more excited about the growth that Taco Bell has ahead of it in the U.S., and we've really just begun with that brand. And I'm excited about Sean and the team we've got in place to lead that.

I'll wrap up by one of my fun facts that -- we get hit with so many of them as we're preparing for these calls. But if you're not aware, in the last 3 years, 25% of all Yum! restaurants have been built. Now you're talking about brands that have been 50 to 70 years and older. But yet in the last 3 years, nearly 25% of our restaurants were built in the last 3 years.

It gives you a sense for, first of all, how the condition of our asset base around the world and how new it feels, given the age of the brands, but also the commitment that our franchisees have to this business. They're investing their capital and building those stores. And we always talk about net new units, that's gross new units. A lot of those stores replaced the stores that had reached the end of their useful life.

So it shows their commitment to the next 20, 30 years of the brand, and they have been fantastic partners. They've always been our competitive advantage. We're seeing that even just managing through the Middle East and how Americana has done such a good job of that. And we couldn't be more excited, given the development pipeline, the commitment that our franchisees have and the strength of our brands as we head into 2024. Thank you for your time today.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.