Yum China Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the China Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press Par 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Ms. Debbie Ding. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining Young China's fourth quarter 2020 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yang. Before we get started, I'd like to remind you that our earnings call and investor presentation contains forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconsideration of the non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. First, Joey will highlight our accomplishments over this past year and review our strategy and key priorities. Andy will review our financial performance and outlook in greater detail. Finally, we'll open the call to questions. You can find the webcast of this call and a PowerPoint presentation which contains operational and financial information for the quarter on our IR website. Now, I would like to turn the call over to Joey Watts, our CEO.

Thank you, Debbie. Hello, everyone, and thank you for joining us today. I hope you and your families are safe and healthy no matter where you are. First, I want to acknowledge the great work of our 400,000 plus employees and express my heartfelt appreciation. With their dedication, creativity, and tireless effort, we have been navigating the difficult times and effectively managing our business. Looking back at the past year, We put the health and safety of our employees and customers as our number one priority. Our team kept most of the stores open, even at the peak of the outbreak. Our execution capabilities and agility helped us overcome many challenges. We captured off-premises consumption opportunities and drove recovery in dining volume. Sales and travel recovered sequentially since the first quarter. Our operating profit remained solid and grew double digits year over year in the second half. This is the result of strong execution and efficiency improvement. KFC remained resilient. We accelerated store expansion with attractive returns and maintained solid profitability. We made remarkable progress in strengthening the fundamentals of Pizza Hut across all aspects. that is reflected in the sales and margin improvement. Going forward, we will continue to fortify the resilience of Pizza Hut's business model. At the core of all these is our ability to innovate. KFC's premium Wagyu beef burger resonated well with consumers and was sold out within days. And their sweet pumpkin congee, is the perfect item for the winter. Portuguese chicken curry at Pizza Hut became an instant hit on the delivery menu. We demonstrate our commitment to be a responsible corporate citizen. The pandemic reinforced our determination to look after our employees. We extended our family care coverage designed for our restaurant managers to 13,000 restaurant management team and supervisors and their families. Our efforts are recognized in the industry. For the third consecutive year, we were certified as the top employer in China and included in the Bloomberg Gender Equality Index. We were also recognized for our commitment to sustainability, and we were named an industry leader in the 2020 Dow Jones Sustainability Index. Let's move on to growth strategy. Despite the challenges, We are optimistic about the future opportunities in China. We have been staying the course with our long-term strategy centering around three key growth initiatives. Let me give you some update on our latest thinking. First, store growth. We opened 1,165 new stores in 2020, marking the highest new store openings in the 33-year history of operating in China. This is equivalent to opening one new store every eight hours. Our new store's payback remains healthy at approximately two years for KFC and three to four years for Pizza Hut. We intend to sustain the store building momentum into 2021 and beyond, and reach the next 10,000 stores much faster than the first. There's still plenty of white space in which we can expand, We are tracking over 700 cities in which we have no presence in China. To penetrate new markets, KFC is piloting small-time model designed for the needs of tier six cities or below. This model has localized manuals, store layouts, and operating models that require less . We are encouraged by the initial result of these pilot stores, and we will open more small-time models stores in 2021 in KFC. In more established cities, we will increase store density with our multiple store formats. As the mix of off-premise occasions continues to increase, we have further reduced the average store size and capacity per new store. One example is Pizza Hut hub and spoke model which we introduced in 2019 Investor Day. I'm excited to report that with nearly 50 stores, 50 hub and spoke stores, at the end of 2020, the results are very promising. We will roll out more of these stores and other small store formats and accept our store models to evolve in consumer needs. To create an even stronger foundation to accelerate expansion, we are stepping up investment in our infrastructure. More details will be provided by Andy later on. Second, portfolio growth. While KFC and PISA remain our key growth drivers, we are also leveraging Young China's resources, execution capability, and learning to develop our emerging brands. Great things are brewing in coffee. We now have three distinct brands with clear segmentation and strategies. We are committed to accelerate expansion of our coffee business and make it a meaningful part of Yum! China. K-Coffee fulfills that daily ritual with good quality coffee at affordable prices at over 7,000 KFC restaurants in China. 140 million cups of K-Coffee were sold in 2020. making us one of the top three players in terms of cup sales. Coffee & Joy has evolved to offer specialty coffee for coffee lovers while utilizing an asset-light model. We are working on improving the profitability of CNJ and exploring other potential avenues of growth. Meanwhile, Lavazza offers premium coffee in an indulgent atmosphere. We now have five beautiful stores in Shanghai and we are pleased with the initial results. We plan to accelerate openings in 2021 to test different store models, ranging from mini to flagship stores. On the Chinese cuisine market, post-acquisition integration of Huang Ji Huang has progressed well. We have driven synergies in product innovation, franchisee development, and supply chain. Huang Ji Huang's sales recovered sequentially and delivered solid profits since acquisition. We will further work on the menu and operations for our Chinese cuisine brand to drive store expansion and growth in the seasoning and packaged food business. The third growth initiative is digital and delivery. The COVID pandemic highlighted the power of digital from member engagement, delivery to operations. Our membership has grown to over 300 million. Member sales now account for 60% of our sales. Privileged subscription program is effective in boosting frequency. We sold 38 million subscriptions in 2020. The average spending of privileged members doubled during their subscriptions. More targeted promotions help us keep marketing expense down. Delivery has been growing rapidly and even faster during the pandemic. It now accounts for 30% of our sales. In 2020, we upgraded our rider platform with AI-enabled zoning, rider routine optimization, and real-time monitoring. In the test market, on-time rates, customer satisfaction, and efficiency have improved. We also tested rider sharing between KFC and Pizza Hut in eastern China, We will expand this initiative into more brands and more markets. In 2021 and beyond, we are allocating more capacity to further strengthen our digital and delivery capabilities. To make our organization more efficient in the long run, we will deploy AI and automation in more of our operations and continue to advance end-to-end digitization from farm to fork. We are committed to driving long-term growth with the three growth initiatives. Investments across all three are necessary to build our leadership and agility. Let's move on to 2020 Q4. And I would like to make a few comments. First, sales improved sequentially from the third quarter, although the pace of recovery was impacted by regional outbreak of COVID. October sales benefit from the National Day holiday. The sales in November and December was pressured by increased regional outbreaks. Traffic at transportation hubs remained significantly below the prior year due to reduced travel. Buying remained pressured but recovered a bit sequentially. Delivery and takeaway remained popular options and accounted for over 50% of sales. Digital orders increased to Pizza Hut table-side mobile ordering has increased in popularity as we enhance the user interface. It now accounts for over 35% of sales, up from just 7% in the prior year period. Operating profit grew to $180 million. Andy will cover the financial in detail in his session. As we look into the first quarter of 2021, we see the resurgence of COVID-19 adversely impacting our business. Nationwide, authorities have tightened preventive measures and advised against travel, large gatherings, and dining out, especially during the Chinese New Year holiday period. Given the current situation, we see significant headwinds for the first quarter. Our teams are closely monitoring the situation. and leveraging learning from the past year. Our marketing programs encompass a wide array of compelling offers, targeting both dining and off-premise locations and different party sizes. We will stay agile to adjust our marketing programs and operations to the evolving situation. Most importantly, we remain confident in the long-term potential of China and stay focused on generating sustainable shareholder returns. With that, I will turn the call over to Andy. Andy?