Yum China Holdings, Inc.

Good day and thank you for standing by. Welcome to the Yom China 3rd 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Michelle Shen. Thank you. Please go ahead.

Thank you, Lyndon. Hello, everyone, and thank you for joining YamChina's Third Quarter 2021 Earnings Conference Call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Ms. Andy Yon. 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 SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. reconciliation of non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. Joey will provide an update regarding recent development and our third 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 in the 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. Zhouyi Wang, CEO of Yum China. Zhouyi?

Thank you, Michelle. Hello, everyone, and thank you for joining us today. As we shared in mid-September, we navigate a very challenging situation in the third quarter. The Delta variant outbreak that started in late July spread to 16 provinces. became the most widely spread regional outbreak since the first quarter of 2020. Strict public health measures were implemented across the country. Trading was significantly impacted during the peak summer season, which is traditionally a very strong quarter for our business. Simple sales declined by 7% in the quarter as demand fell for dyeing, although this was partially offset by growth in delivery. I want to take a minute to thank our 440,000 employees for working diligently and rapidly finding solutions in this fluid situation. In response to the sharp decline in dying traffic, we quickly adjusted marketing campaigns, operations, and supply chains to drive demand for all segments. Delivery sales grew 23% year over year, or 62% on a two-year basis, and counter-built approximately 34% of sales in the third quarter. New retail business grew rapidly, with sales in the third quarter almost equal to the first two quarters combined. Our ability to engage customers digitally was essential during this difficult time. In the third quarter, over 60% of system sales came from members. We add about another 20 million members, ending the period with a total member count of over 350 million. We sold 19 million privileged subscriptions, including the popular KFC chicken lover's car, ,, which is a summer exclusive. Having taken important initiatives to drive sales, we saw a sequential recovery in September. For the quarter, system sales growth was positive compared to last year and to pre-COVID. New unit growth more than offset the same-store sales decline. We broke records by opening 524 new stores, ending the quarter with 11,415 stores. However, we do not compromise quality for quantity. We have prudent new store approval process and carefully track the performance of each new store. New store payback remains healthy at around two years at KFC and three years at Pizza Hut. Our smaller store format enable us to increase store density in higher tier cities and further penetrate into lower tier cities with lower cap and rent. provide some color on our key brands. First, KFC. We set up value and promotional campaigns to drive traffic, and we introduced great food items. Juicy whole chicken was sold out within a week. Our meat sauce Wagyu or Angus beef burger also proved popular. Our premium beef burgers have been very successful since becoming permanent menu items. We are building a beef burger platform covering different price points. We're taking menu innovation and localization to the next level following the success of hot fried noodles, Le Gan Mian, in Wuhan. We rolled that out nationwide in September. In a week of launching, we sold over 1 million bowls. It's the best performing limited time over breakfast item in the past three years. We also introduced steamed dumplings, xiaolongbao, to more stores in eastern China. More recently, we launched hot pepper soup, the very famous hu la chan in Henan. All of these are very well received by our customers. KFC has added nearly 1,000 stores and entered 150 new cities over the past 12 months. As we mentioned during the investor day, we are now tracking 1,200 potential cities that we could enter in the future with multiple store formats. Next, let's talk about Pizza Hut. Years of transformation has improved Pizza Hut's fundamentals and resilience. In the third quarter, Pizza Hut opened 103 stores The highest number of store openings in a quarter since 2016. Satellite stores and other smaller formats accounted for over 70% of the new stores and enabled us to capture the strong demand for delivery with higher store density. We upgrade our buy one, get one pizza promotion. For the free second pizza, customers were given more flexibility to choose when, where, and what pizza they would like to have. This mechanism was a breakthrough for us, enabled by our upgraded digital platform. The promotion was exciting for customers and created sales uplift for us. During this 10-day campaign, we sold approximately 1 million buy-one-get-one pizza sets. For a limited time, we also offered new pizza flavors modeled on popular Chinese dishes, such as sea bass pizza with pickled vegetables, suan cai hai lu yu, and spicy stir-fried pork pizza, ma la xiang gu. These innovative products where pizza has taken on localization and positioned us to attract young consumers who love to try new things. Moving on to coffee, our third growth engine. We are very excited about our different partnership with Lavazza. This 126-year-old Italian brand offers a truly authentic Italian experience. Our Italian coffee exclusively uses high-quality Lavazza beans roasted in Torino, Italy. In addition to coffee, customers love the delicious food. Popular items like Emiliano which is toast sandwich, and mini croissants with ham and cheese are made fresh in our fully equipped kitchen. The high proportion of food, which is 25%, contributes to a higher ticket average. At the end of September, we have 26 Lavazza stores in four top-tier cities. We expand beyond Shanghai to Hanzhou, Beijing, and Guangzhou, where our stores receive great customer feedback. Our first Beijing store is already ranked the most popular cafe in Taoyuan District. Encouraged by the positive results, we expect to enter into more top tier cities and more than double our current store base in the fourth quarter. Despite recent challenges, our commitment to China's long-term growth remains unshaken. We are always planning for the future. and have been executing on the strategies outlined during our September investor day. Despite the difficulties posed by the outbreak, we worked diligently to build our store pipeline. We now expect to open over 1,700 growth new stores in 2021, up from 1,300. I'm also excited about our investment in Hangzhou Catering Service Group This will allow us to accelerate growth across our brand in Zhejiang province. Lastly, we continue to enhance capabilities in supply chain and digital. These are our core enablers for sustainable growth in the long term. Last week, we opened our digital R&D center with three sites in Shanghai, Nanjing, and Xi'an. The center is a key part of our strategy to build a dynamic digital ecosystem. The R&D center will consolidate and expand dedicated resources to develop solutions and services to optimize customer experience and operating efficiency. We plan to invest $100 to $200 million and to employ up to 500 staff over the next five years for this particular initiative. As for supply chain, in addition to the logistics center in Chengdu, we have another one under construction in Huai'an, which is in Jiangsu Province. There are also several sites in the pipeline. As we mentioned during the investor day, we plan to operate about 45 to 50 logistics centers and consolidation centers over the next several years to support our expansion and to further increase efficiency. With that, I will turn the call over to Andy.