Yum China Holdings, Inc.

Thank you all for standing by and welcome to the Yum! China first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question at that time, you'll need to press star 1 on your telephone. I'd now like to hand the conference over to your first speaker, Florence Lipp, Senior Director, Investor Relations of Yum! China. Thank you. Please go ahead.

Thank you, Tara. Hello, everyone. Thank you for joining Young China's first quarter 2022 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yeung. Due to the current COVID restrictions in Shanghai, we are dialing in from different locations today. If we experience a technical difficulty during the call, please remain on the line as we reconnect. 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 a 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. 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 in first quarter. Andy will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find the webcast of this call and a PowerPoint presentation which contain operational and financial information for the quarter on our IR website. Now, I would like to turn the call over to Joey Watt, CEO of Yelp China.

Joey? Thank you, Florence. Hello, everyone, and thank you for joining us today. We are battling the most severe outbreak since COVID-19 first emerged two years ago. The challenges we face are unprecedented. The case counts, duration, geographical coverage, and restrictive measures are far more extensive than previous outbreaks. Shanghai, Tianjin, Jilin, and Guangdong were among the places to experience extended periods of lockdown. Shanghai, one of the most impacted cities, has been locked down for more than a month now. Our operational headquarters in Shanghai are all working remotely. Hundreds of millions of people across China are currently under some level of restrictions. Even regions with few cases have tightened containment measures in line with the dynamic zero COVID policy. Compared to 2020, it's far more complex to keep our stores open, get our employees to work, and obtain necessary approvals. Our store operations, delivery, and supply chain have been heavily impacted due to ever-changing restrictions. I want to thank our frontline employees at restaurants and logistics centers, our delivery riders, and our staff at the back office for working tirelessly during this difficult time. I'm extremely proud to see how quickly we adapted to each new challenge and how teams from across the company support one another. From procurement, logistics, IT, HR, to public affairs, we work as one team. Our mission is to serve the community and customers in need to the best of our abilities. hundreds of our back office staff rising to the occasion. They volunteered to serve at the front line, supporting our restaurants. They performed health checks at restaurants, delivered food using their own carts, and served as customer service representatives. Soon after the lockdown in Shanghai started, where most business activities have come to a halt, we became one of the few and first authorized food suppliers to serve the community. While we can only offer limited services, we are prioritizing food and drinks to frontline workers, volunteers, and makeshift hospitals. We also provide ready-to-eat products to the elderly living alone and cancel children's books to kids in quarantine centers. During the lockdown, the demand for KFC and Pizza Hut products surged. Many of our customers got on social media like WeChat and Douyin, the equivalent of TikTok in China, expressing their longing for our signature products. Many of them also shared their happy moments on social media when they enjoyed KFC fried chicken or Pizza Hut pizzas. I'm glad we could bring some comfort and joy to our customers in trying times like this. It also gives us energy and a renewed sense of purpose. Health and wellness of our employees is always our top priority. We delivered over 10,000 food packages to closed off employees. We also provide packages with essential supplies and upgrade medical plan for those who are infected. Our ability to adapt to the dynamic operating environment is at the core of our resiliency. With valuable learning from prior outbreaks, we have developed extensive scenario planning and toolkits to deal with different situations. Nationwide, we quickly adjusted marketing campaigns and simplified manual to streamline operations. Our hybrid delivery model with dedicated riders allowed us to maintain adequate rider capacity and continue operations in most places. Delivery grew at double digits and reached 36% of company sales. Seizing the demand for at-home consumption, we promoted new retail package products such as steak, pasta, and fried rice. New retail sales in the first quarter more than doubled over the prior year period. The surge of Omicron cases and the ensuing lockdown have turned everything upside down for us in Shanghai. Despite the city-wide lockdown, we were able to keep about 10% to 15% of our stores open for delivery or takeaway in April, to serve as many communities as possible when mobility is heavily restricted we introduced community purchasing across all brands as early as mid-March. This is a new way to group orders among residents to maximize efficiency with focus on key menu categories, offering only a few preset combos. We also promoted new retail packaged food, which are perfect items ready to eat and easy to store under this circumstance. New retail sales mixing in April surged to over 15% in Shanghai. By swiftly implementing these initiatives, we were able to generate 40% to 50% of pre-lockdown level of sales in Shanghai, despite having very limited stores offering off-premises services only. In other words, 10% to 15% of our stores generated 40% to 50% of our pre-lockdown sales in Shanghai. Community purchase created new business opportunities for our brand. KFC optimized its community purchasing menu to just one item, the fried chicken combo, as it is one of the most desired options food items during lockdown. Our customers share their appreciation on social media, quoting that having KFC fried chicken is the happiest moment in the last month, and our fried chicken is a comfort food and nourishment of the soul. People are craving for KFC, and we are working our best to fulfill them. We also look forward to serving customers at our restaurant when they come to satisfy their craving after the lockdown. Pizza Hut was one of the few places to order hot pizza during lockdown. To meet the demand, we simplified the menu to combos with two pizzas, dry rice and ready-to-cook steak and pasta. Our customers were so excited to receive high-quality, well-packaged and safe products during lockdown. Community purchasing presented fantastic cross-selling opportunities and increased brand awareness for our emerging brands. These brands captured a significant portion of sales compared to the level before lockdown with signature products and packaged food offerings, even when only a few stores were open in Shanghai. For example, Lavazza offered packaged cheese and ham in addition to its famous coffee and pastries. Taco Bell served hot quesadilla, fried chicken, and breakfast DIY package. Little Sheep offered takeaway hot pot with meat and fresh vegetables, highly sought-after items during lockdown. Let's move on to supply chain and digital. Our industry-leading supply chain and digital capabilities are critical business enablers to fulfill ever-changing demands. Our in-house supply chain team work wonders in difficult situations like this. We quickly introduced strategic redundancy in our supply chain with backups in different logistics centers to lessen the impact of supply chain disruptions and to allow us to continue operations. We immediately designed a 200-kilometer detour route to ensure supply to logistics centers in eastern China. Instead of just using trucks, we moved inventories by rail and sea freight as well. In just a few days, we set up a temporary drop-off and pick-up site not far from Shanghai to support the region under lockdown. We also repurposed ingredients from one product to another and reallocate inventory across restaurants and even brands to fully utilize our resources and minimize wastage. Digital enabled us to put innovative ideas into action. Since March, we cut back on advertising. We leveraged our membership program and our own channels to digitally engage our customers We rapidly launched a digital mini program to make community purchasing easier. Our digital infrastructure provides real-time visibility to store inventory, allowing us to precisely forecast the material demand, manage supply chain routes, and minimize food wastage.