Yum China Holdings, Inc.

Good day and thank you for standing by. Welcome to the Yum! China's first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. And I'd like to hand the conference over to your first speaker today, Ms. Debbie Ding. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining Young China's first quarter 2021 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 presentations contain 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 measure is included in our earnings release. Today's call includes three sections. Joey will provide an update regarding recent development and our first quarter 2021 results. Andy will then cover the financial performance in greater detail. Finally, we will 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 Ms. Joey Wang, CEO of YamChina. Joey?

Thank you, Debbie. Hello, everyone, and thank you for joining us today. Our first quarter results demonstrate the resilience of Yum! China. We delivered $342 million in operating profit. System sales grew 34% year-over-year as same-store sales recovered with 10% growth. We accelerated our store expansion, opening 315 new stores in a quarter. First quarter trading was adversely affected by the resurgence of COVID outbreaks and tightened public health measures. The impact was particularly pronounced in northern China where cases spike and in transportation locations due to sharply lower passenger volumes. I would like to thank our 400,000 plus employees and riders for their contributions during this difficult period. Many of them did not return to their hometown to celebrate a holiday with their families, instead serving our customers and communities. We delivered these strong results with the dedication and agility of our people. The pandemic has introduced volatility and uncertainty to our trading patterns. Our team acted and reacted nimbly to changing conditions. By planning for a variety of possible situations, and deploying resources flexibly, we overcome operational challenges. Partnering with our suppliers and through inventory and production planning, our in-house supply chain managed complexities and potential disruptions to fulfill the demand of our 10,000-plus store network. Our operations team ensured best possible level of restaurant staffing and delivery riders. Our operational effectiveness is facilitated by our digital capabilities. Amid the fluid situations, we were able to quickly adjust offers and deploy labor as demand patterns shifted. It certainly reinforces our determination to continue investment in digital technology and supply chain to fortify our competitive advantages. Let me now update you on our core brand. First, let's start with KFC. KFC delivered Operating profit of 327 million. System sales grew 24%. KFC continued to rapidly expand, opening 253 new stores in the first quarter. During Chinese New Year, we kept our operations simple to address the heavy food traffic. We focused on our signature products of fried chicken and burger. Our golden bucket, Xin Chuan Jing Tong, offered abundant value and resonate well with customers. With a variety of buckets, we captured different party sizes. In the off-peak period, we brought back KFC's signature beef wrap, and add crayfish to make it more premium and exciting. We also launched the new Chongqing chili pork burger, . As part of the offering, we ran a special promotion with the popular action role-playing game Zhenxing Impact Yuanshan, which was very well received by younger customers. Our leading digital and delivery capabilities enable us to stay agile in this fluid situation. Despite the recovery in DaYin, delivery remains popular and accounted for 28% of sales, up 10% compared to pre-COVID level in first quarter of 2019. We drove this rapid pace of growth through our hybrid delivery model. Omni-channel marketing in our own super app and aggregators drive demand, while fulfillment is done by our own dedicated riders. This allowed us to capture delivery demand with sufficient riders, which was especially crucial in ensuring the success this Chinese New Year. Delivery growth was also enabled by our continuous investment in strengthening our delivery capabilities. We started trade zone-based rider sharing in 2019. Last year, we upgraded our rider platform to improve zoning, rider routing, and monitoring. We also started testing rider sharing between KFC and Pizza Hut. This is the first time we put the platform to test during Chinese New Year peak period, and we are pleased with the progress. Leveraging our digital assets and direct connections with our over 290 million members, we were able to shorten the lead time of our marketing campaigns and modify them so that we can be more responsive to changing market conditions and consumer demand, of course. Our digital infrastructure also allowed us to deploy the appropriate supply and staffing level where needed. Digitization is essential to operating efficiently. As part of our end-to-end digitization initiatives, we pilot launched an AI-enabled restaurant inventory management tool, leveraging historical data, recent trends, and real-time inventory levels. This tool improves forecast accuracy for our limited time over. This enables us to optimize inventory and improve productivity. Now let's move on to Pizza Hut. We are encouraged by Pizza Hut's strong recovery in the first quarter. Sales grew 38% and operating profit reached $60 million. These results reflect our efforts to improve fundamentals. Let me provide an update along the four key pillars. First, our product offerings have significantly improved over the past few years. We have several successful product launches during Chinese New Year, such as serving turf platter with sea bass and steak, a flower-shaped stuffed crust pizza, a year-old holiday feast set featuring signature products. These products were great for sharing and were well-received by consumers. Pizza Hut refreshed its menu, replacing 40% of the menu with new or upgraded offerings, such as beef Wellington and roast beef tapas. We also introduced Portuguese chicken curry, a popular dish on the delivery menu to dine in. We also have been unlocking the growth potential of breakfast and afternoon tea. We strengthened the menu with new offerings, such as French toast for breakfast. and a three-layer tea set for afternoon tea time. Apart from good food, we have also been actively engaging customers both offline and online. During Chinese New Year, we celebrate the festival with consumers by bringing in some of China's intangible cultural heritage, such as shadow puppetry and paper cutting into our stores. And then on the digital front, we have been strengthening our membership program and super app to engage members and improve customer service. Our member base exceeded 90 million and contributed 55% of total sales, up 9 percentage points year-over-year. Digital ordering increased to over 80% of sales from 65% a year ago, as table-side mobile ordering became more popular. We are also applying digitization and automation in our kitchens to improve operations. As part of a multi-phase intelligent kitchen project, we started to roll out an AI-enabled tool to pace food preparation and provide real-time metrics of kitchen performance. Initial results have shown improved efficiency and customer experience. Third, Pizza Hut is strengthening its delivery takeaway and ready-to-cook offerings. Delivery accounted for 35% of sales an increase of over 10% from pre-COVID level in first quarter 2019. While growing from a small base, we are expanding our takeaway and ready-to-cook business through manual innovation and making them more convenient for consumers. Lastly, we enhanced our store portfolio through accelerated remodels and new store formats. Since 2018, we have refreshed nearly half of Pizza Hut stores to make them more relevant to our consumers. This is over 1,100 stores. As we promised in the 2019 Investor Day, average store age is now below three years. The stores look great. The new small store format, which includes the hub and spoke model, which is also mentioned in the 2019 Investor Day, is creating more opportunities for Pizza Hut's expansion, enabling us to capture the growing demand for off-premise dining. Of the 44 new units that we opened in the first quarter, over half are in small store format. I'm confident that we will unleash Pizza Hut's growth potential through this combination of much improved fundamentals, strong digital capabilities, multiple sales channels, and rejuvenated assets. In summary, we're pleased that our brands react quickly to the fluid market conditions and deliver strong operating profits despite those pressures. Most importantly, we remain optimistic about our long-term growth opportunity in China. We will continue to accelerate store expansion for our core brands, grow our emerging brands, and enhance end-to-end digitization and intelligent supply chain to build a bigger and nimble Yum! China. While we are optimistic about our future, we remain cautious about near-term conditions. Occasional COVID outbreaks, like we saw recently in Vietnam, are a constant reminder that we are not back to normal yet. Tightened public health measures continue to be a daily routine and continue to have a lingering impact on consumer behavior. Dying volume is still well below pre-COVID levels, but we are not sitting still. our nimble and innovative culture enable us to adjust marketing and operations quickly as things evolve. With that, I will turn the call over to Andy. Andy?