Yum China Holdings, Inc.

Good day, everyone. Thank you for standing by. Welcome to Yum! China four-quarter and fiscal year 2021 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any assistance during the call, please press star 0. I would now like to hand the conference over to your first speaker today, Ms. Michelle Shen, IR Director. Thank you. Please go ahead.

Thank you, Desmond. Hello, everyone, and thank you for joining YamChina's fourth quarter 2021 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Ms. Andy Yoon. 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 uncertainty. 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 findings 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 our performance over this past year and then review key actions. Andy will then cover the financial performance and outlook in greater detail. Finally, we'll open the call to questions. You can find the webcast of this call in the PowerPoint presentation, which contain operational and the financial information for the quarter on our IR website. Now, I would like to turn the call over to Ms. Joey Watts, CEO of Yum China. Yeah, Joey.

Thank you, Michelle. Hello, everyone, and thank you for joining us today. In the fourth quarter, multiple waves of outbreaks across the nation significantly impacted our business. I would like to express my heartfelt gratitude to all of our employees for taking the right actions to ensure customer safety and minimize business disruptions. For example, during the lockdown in Xi'an, our excellent supply chain team shield us from major disruptions. Our operation teams took immediate actions to quickly resume delivery and take away. They provide vital services to the community in this time of need. We also provided free meals to frontline medical and social workers as a token of our appreciation. We consider people to be a critical pillar of our sustainability strategy. We aim to have a workplace where employees can thrive while protecting them and supporting their careers in times of uncertainty. Therefore, this year, we enhanced medical insurance coverage for our RGMs, restaurant management teams, and supervisors. These greater benefits cover around 100,000 frontline employees. Despite the challenging environment, for the full year we grew revenue by 19%. We delivered operating profit of $1.4 billion, or $766 million, excluding special items. We opened over 1,800 stores, that is equivalent to five new stores per day, compared to three new stores per day just a year ago. On a net basis, we add over 1,200 stores. KFC continued to demonstrate remarkable growth and resiliency. System sales grew 8% in 2021. The brand opened more than 1,200 stores, entering 160 new cities in 2021. More than half of new stores were in lower tier cities, but we're also adding store density in higher tier cities. The business contribute to the majority of Yum China's profit. Pizza Hut came back stronger, achieving think-for-sales growth of 7% for the full year. We are happy to see the growth was driven by transaction volume increase of over 10%. Pizza Hut opened over 300 stores, a record opening since 2016. The brand also strengthened its bottom line with full-year segments, operating profit up 77%. These results reflect the remarkable improvement over the past few years. Now, let me provide some color on the fourth quarter. During the national day holiday in early October, we saw a sequential recovery from the third quarter. As regional outbreaks surged, November same-store sales were done by mid-teens year-over-year, or approximately 20% compared to November 2019. Same-store sales improved slightly in December, but were still more than 10% below both prior year and 2019 levels. Authorities implemented mass testing, regional lockdowns, and stringent travel measures nationwide. These significantly impact the overall restaurant industry in our business. At the height of the outlook, nearly 300 of our stores were temporarily closed or only provide delivery and takeaway services. But more importantly, reduced social activities, less traveling, and softened consumption impact food traffic across our brand. Let me share with you the key actions we took to stabilize our business. First, we drive traffic and sales with great products and value. The ability to innovate is one of our core competitive advantages. We again launched over 500 new or upgraded products last year. At KFC, new categories such as beef burgers and whole chicken have received great customer feedback. Beef burger sales in the fourth quarter exceed 300 million RMB and account for 3% menu mix. Juicy Whole Chicken had another successful limited-time offer promotion, and therefore, we are putting it on permanent menu this year. We also partnered with popular Chinese brands Zhou Heiya from Hubei and Wen Heyou from Hunan to design innovative new menu items. Customers love the chicken and duck sandwich, and spicy crayfish wrap will launch in a quarter. Beyond national launches, in 2021, KFC launched 12 local dishes in regional markets. We expand offerings from breakfast to late-night snacks. Beef and lamb kebab from northwestern China, and cold noodles with sesame sauce from Wuhan, are among customer favorites. We have a mechanism to roll out successful regional offerings to more places or even nationwide. Wuhan Hot Dry Noodle, Wuhan Le Gan Mian, last year was a big hit. At Pizza Hut, we launched special winter themed pizzas for the holiday season, featuring Greek cheese, tiger prawns, and filet mignon. We also offered more flexibility to our customers, allowing them the option to trade up pizza toppings, which translated into higher average tickets. In response to weakened consumption, we increased value promotions across our brand. For example, at KFC and Pizza Hut, we built on our well-established promotion mechanism, Crazy Thursday and Screen Wednesday, to offer effective value promotions. while minimizing margin impact. Second, we capture home consumption demand with all-premises services for both KFC and Pizza Hut. In the fourth quarter, delivery continued to be a key growth driver, mitigating the drop in die-in traffic. Delivery grew 60% in 2021 compared to 2019 and counter-built to approximately 32% of sales Combined with takeaway, off-premise services represent more than half of ourselves. Driving profitable growth in off-premise locations is core to our strategy. Our new retail products are designed to capture home consumption demand by leveraging our online and offline channels. We add more food choices and tripled sales to over 500 million RMB within 2021. Lastly, we unleashed the power of digital in customer service and operations. The KFC and Pizza Hut loyalty program exceed 360 million members as of the end of 2021. It is 60 million or 20% more than the year before. Member sales account for approximately 60%. We continuously enhance our super apps to address the needs of customers and improve their digital experience. For example, KFC's personalized menu display and Pizza Hut's order-together feature. With enhanced digital capabilities, digital sales exceed $7 billion or over 85% in 2021. We empower our RGMs with in-store digitalization using AI, automation, and IoT. At KFC, our system assesses real-time store-level inventory and automatically dispatches coupons to digital ordering users to reduce food waste. We also introduce a quality control system to automatically evaluate the quality of food products based on the color, shape,