Yum China Holdings, Inc.

Thank you for standing by and welcome to the Yum! China second quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Michelle Shen. Please go ahead.

Thank you, Melanie. Hello, everyone, and thank you for joining YamChina's second quarter 2022 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yang. 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 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 in the second quarter. Andy will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find a webcast of this call in 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 Watt, CEO of Yum China. Joey?

Thank you, Michelle. Hello, everyone, and thank you for joining us today. Second quarter was the most difficult quarter in the past two and a half years. With our main focus always on keeping our employees and customers safe, we also want to bring joy to our customers. We kept a morale high and came together to deliver better than expected results. I'm both glad and honored to fight the battle alongside the wonderful Young China team. We operated with our Shanghai headquarters under lockdown for over two months and still managed to execute with extraordinary agility, quickly forming cross-functional and cross-brand crisis management teams while working We developed flexible toolkits to tackle each problem as it arose. Through it all, we have stood firm and built the business stronger in so many ways. We have innovated new menu offerings, delivery, and digital solutions, as well as course optimization initiatives. These solve not just the imminent problem, but can serve as our learning base to make us more agile and resilient for the longer term. During this trying time, we continued to execute our RGM strategic framework, that is resiliency, growth, and moat. Let's start with resiliency. Our resiliency shines brightest in tough situations. Let me share with you some of the measures we implemented to overcome considerable operational difficulties. During the city lockdown in Shanghai with very limited restaurant staff and riders, our goal was to sustain minimum level of restaurant operations and serve desired food to customers. With simplified menus, we reduce complexity of operations and inventory management. At the extreme, we just have one bucket of fried chicken on the menu, one item on the menu, and that's it. Fried chicken was perhaps one of the most desired food items in Shanghai during lockdown and brought our customers great happiness. We launched community purchasing, TongGo, as early as mid-March, including packaged food products, not just for KFC and Pizza Hut, but also for our emerging brands, Lavasta, Taco Bell, and Little Sheep. In the Q1 earning call, I shared that with 10% to 15% of the stores open in April, Shanghai achieved 40% to 50% of pre-lockdown sales. In May, with less than half of our stores open, we reached pre-lockdown sales level. This was a remarkable achievement. We were able to continue serving our customers thanks to our in-house and agile supply chain management system, as well as dedicated last mile delivery riders. We obtained the necessary permits and managed to serve the majority of Shanghai under severe mobility restrictions. Digitization also played a very critical role. In just a day's time, our stellar IT team launched an AI-enabled delivery route planning tool for community purchasing in Shanghai. The tool optimized four-day delivery routes covering a wide geography, well beyond our usual store-based vicinity radius. across the country where we face a challenging operating environment. We dialed down advertising and promotions to save costs. Some of you may remember the side duck, Kadiah, and other Pokemon meal companion toys we launched around Children's Day on June 1st. The side duck toy instantly went viral, becoming a smash hit with children and adults alike. The sensational buzz from this campaign drove almost 20% of sales in the first two days of the promotion. Who would have thought that we chose size up just to accommodate our reduced advertising budget? The results were phenomenal. We were thrilled to bring joy to a customer's life during an exceptionally hard time and to see their social media poses. We also focused on driving off-premise sales. Delivery grew 7% year-over-year and reached a record sales mix of 38% in the second quarter. Combined with pick-away, off-premise dining contributed to almost two-thirds of sales. Also excitingly, our new retail package for sales reached 200 million yuan in the second quarter. This more than doubled the sales compared to last year. These initiatives partially offset the reduced buy-in services. Let's move on to growth. Even in conditions like this, we don't stop delighting our customers with innovative food and value campaigns. Our ability to innovate is an important pillar to capture growth opportunities. KFC diversified into adjacent categories to drive additional growth. With Wagyu and Angus beef burgers as premium options, we launched entry price choices at only around half of the price, which is 18 yuan versus 33 yuan. On the weekends, we are now offering juicy whole chicken at 29.9 yuan to drive sales. This juicy whole chicken is one of my personal favorites now, and it's absolutely delicious. These two new categories have proven popular, accounting for mid-single digits of menu mix combined in June. Our food innovation team let their creativity fly when designing new products. At KFC, we launched a super abundant chicken bucket, Duo Duo Tong. in selected cities. This bucket features chicken feet, chicken wing tips, nets, and other parts traditionally favored by Chinese people. For some of the analysts who asked me before when would we start to sell chicken feet, we are officially selling chicken feet right now after 35 years. This follows on the heels of KFC's launch last year of its super popular late-night snack, Chicken Bone Niblets . In addition, the usage of all parts of chicken provides an intriguing variety to a customer at very good cost. Pizza Hut's new menu received amazing customer feedback and generated a boost in sales. We launched to campaign on social media and sponsored TV shows instead of using celebrities. With just one-third of the advertising cost, the menu achieved the same customer awareness as last year's menu. The new menu included 35 brand-new or upgraded items such as stuffed crust pizza with sausage and meat floss, Wagyu Supreme Pizza and deep-fried zero prawns. Yes, we put the cereal around the prawns, and it tastes wonderful. Taco Bell launched a wrist burrito, so one jam, with a lighter sauce and more vegetables tailored for Chinese customers. It gained great popularity and appealed to our more health-conscious customers. Value for money resonates well with customers under the current circumstances. As part of the 35th anniversary celebration in China, KFC offered its signature product at amazing prices. Original recipe chicken at its $19.87 price. And the family bucket at almost 60% off a la carte price. This campaign brought back fond memories and became a hit with customers. We rotate the offers weekly to have the flexibility to adjust according to the market conditions in different regions and customer response. Our iconic crazy Thursday value campaigns have won the hearts of our customers. Since we first launched it back to 2018, we have been constantly spoiling our customers with very attractive offers. The campaign now inspires scores of creative social media posts. Thursdays also generate significant sales uplift compared to regular weekdays and sometimes even weekends. At Pizza Hut, We brought back a signature buffet and sold all 400,000 buffets set in a pre-order promotion in just 15 days. We also launched a buy more, save more combo, offering more abundant options. The new combo successfully lifted ticket average and lowered our courses. Let's move on to most. Digital initiatives. and supply chain infrastructure are the key enablers in our strategic mode. Leveraging our dynamic digital ecosystem, we generated around 4 billion in digital sales in the first half of 2022. This represents 88% of our sales. Our loyalty program exceeds 385 million members as of the end of the second quarter. We share the latest launches and engage with members through our super apps, mini program, and social media groups. We also constantly upgrade these tools to improve our customer service. KSC Super App now features a senior-friendly interface option with simpler graphics, less promotion information, bigger forms for mature eyes, and streamlined ordering functions. We tailored it to the needs of our older customers. Pizza Hut also upgraded their mobile ordering manual for more flexible, buy more, save more combos and customized product displays. Our digital capabilities were crucial to streamline restaurant efficiency. Tools like our restaurant sales forecasting system and Pocket Manager gave us full visibility of the situation in each store. With these, we can rapidly adapt to changing scenarios. Our real-time inventory visibility from logistics center to stores help enable us to dispatch raw materials with greater precision. Restaurants could adjust orders daily based on their operating environment and share inventories across the stores when fulfilling community purchasing or other large orders. As an ongoing effort of delivery 3.0, which allowed rider sharing across trade zones, we now offer the same flexibility to our restaurant staff. Staff now can schedule shifts across stores and even across cities. We continue to invest. in building a world-class intelligent and digitized supply chain to improve operating resiliency and support business growth. Our first two Greenfield Logistics Center in Chengdu and Huai'an in Jiangsu are now complete and operational. And a week ago, we announced construction starting on our new Jia Ding Supply Chain Management Center in Shanghai. This project is our largest GreenView project yet and will serve as the headquarter for our 33 logistics centers across China. It will integrate the latest state of the art digital technologies and support restaurants in Eastern China. 2022 has indeed been extremely challenging. We learned many lessons and now emerge as a stronger and more resilient organization. And I'm not saying this just for KFC and Pizza Hut. Some of our emerging brands have also demonstrated great agility and potential during lockdown. I'm convinced that by executing our RGM framework, we are well positioned for sustainable long-term growth. True to our Hallmark DNA of resiliency, we are taking every action to quickly drive returning traffic to our stores by providing good food great value, and good customer experience. Going forward, we will continue to delight our customers and seize new opportunities to grow our business in China. With that, I'll turn the call over to Andy. Andy?