Yum China Holdings, Inc.

Thank you for standing by and welcome to the Yum! China fourth quarter and fiscal year 2023 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 Ms. Michelle Shen, IR Director. Please go ahead.

Thank you, Operator. Hello, everyone. Thank you for joining Young China's fourth quarter 2023 earnings conference call. On today's call are our CEO, Ms. Julie Watt, and our CFO, Mr. Andy Young. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. 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. Lease 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. You can find a webcast of lease call in the PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency unless otherwise noted. Now I would like to turn the call over to Joey Wah, CEO of Yum China. Joey?

Thank you. Hello, everyone, and thank you for joining us today. It's Chinese New Year this coming Saturday. I want to wish everyone a happy and healthy Year of the Dragon. I would like to kick off today's call by expressing my sincere appreciation to all our employees. Their incredible efforts helped Young China deliver exceptional growth in the fourth quarter and for the full year. 2023 was a pivotal time for our business. The transformation of our business fundamentals in the past few years have enabled us to seize opportunities emerging from China's reopening and evolving market conditions. In 2023, we hit record-breaking revenue of $11 billion and grew system sales 21% year over year, outperforming the industry. Operating profits soared to $1.1 billion an all-time high, excluding special items. Co-operating profits grew 79%. We opened a record 1,697 net new stores, expanding our total store count to 14,644 stores. KFC reached 10,296 stores, Pizza Hut reached 3,312 stores. On today's call, I would like to walk you through the tremendous growth opportunities we see and discuss our strategies to capture them in 2024 and beyond. For the past 36 years, we have been the market leader in China. During this time, Connors restaurant operators have passed in and out of favor. Instead of being Wang Hong, or the favor of the month, we want to be Chang Hong, or the favor of the decade, or even next several decades. In this developing market, where the restaurant industry is still growing double digits, even during 2023, we see a long runway of growth for our brand. KFC still only serves one-third of the China population. Our next ambitious target is to extend our reach to half of the population by 2026. How? By being closer to our customers. This means adding store density in existing cities and entering new cities. KFC currently operates across 2,000 cities in China and is tracking an additional 1,000 cities. For Pizza Hut and our emerging brands, the white space is even larger. China is fast, with significant regional and city-tier differences. In lower-tier cities, urbanization and long-term consumption upgrades are presenting attractive opportunities for us. With lower living costs, consumers in these cities have significant purchasing power for our products. So as an example, premium beef burgers sell well in lower tier cities, just as in high tier cities. Over half of our new stores in recent years are in lower tier cities. These stores have performed well benefiting from lower labor costs and rent. And the ticket average is as good as in higher tier cities. For now, we are mainly serving middle class consumers in these markets. As we expand, we see further opportunity in widening price points to broaden our addressable customer base. Our mission is to reach 20,000 stores by 2026. We will continue to protect our new store payback at two years for KFC and three years for Pizza Hut. Over the past years, we have been improving our fundamental capabilities to reach this target. This is the key reason we can expand and Accelerated speed. Some of these improvements include, first, flexible store format with lower upfront investment open up more site potential across 30 tiers. Second, core structure refacing lowers our rent ratio in 2023 to 8.7% of sales, the lowest level in the past 10 years. The majority of our leases are based on variable risk. Third, improved operating capabilities. AI-enabled digital tools empower our capable restaurant managers to oversee multiple stores without compromising quality. This also solves the bottleneck of having enough good RGMs as we expand rapidly. Finally, strategic franchise partnerships allow us to gain access to locations that were beyond our reach before, such as highway service centers. In addition to new store growth, our same store sales grew 7% in 2023. It was fueled by a 12% increase in transactions, indicating healthy growth. Our innovative menus, excellent value for money, and effective online channels captured over 1.7 billion transactions last year. Now, let's talk about food innovation. In 2023, we rolled out more than 500 new or upgraded products. That means we offer something new every week. Some examples include KFC's beef wrap with spicy duck blood and chicken taco with bull frog and Pizza Hut's flat stone durian pizza. These may sound a bit exotic, but I can assure you they are very popular in China. Over the years, many of our most popular products have entered our 100 million club in U.S. dollar sales, and 2023 was no exception. Our Golden Spar Chicken Burger, Kwan Jin Spar Ji Pai Bao, launched in quarter four of 2022, joined our 100 million club in 2023. with very little spend on marketing. It offers amazing value for money using chicken breast meat and is very popular with younger customers. Chicken breast meat is very high quality protein, but the cost of breast meat is much cheaper in China than fat meat. Our juicy whole chicken, Mi Zi Quan Ji, is another remarkable success story. We launched it in 2021, and by 2023, we sold over 50 million whole chickens. Whole chicken and beef burgers combined now contribute close to 6% of our sales, more than the original recipe chicken that we have been selling in the last 36 years. K-coffee also grew rapidly in 2023. driven by product innovation and improving accessibility. 190 million cups were sold last year, a 35% increase year over year. Our coffee offers great value for money at below 9.9 RMB per cup. Great value for money remains a key factor to drive traffic. in addition to the great food that I just mentioned. We have strategically enriched our menus with entry price point products to attract incremental customers. Our superb in-house supply chain empowers us to innovate and offer fantastic value while protecting margins. At KFC, Apart from our long-lasting value platform, Crazy Thursday, we identified entry-price combos as huge underserved market segments. Last year, KFC expanded the choices of its 20 RMB combo, including our recent Chinese burger, Bing Han Bao, which has been well-received by customers. For pizza, the under 50 RMB segment represents a significant portion of the market, but it's underserved at Pizza Hut. In November last year, we launched four entry-price pizzas, including the delicious Texas BBQ Chicken Pizza. We will continue to add more cost-cautious choices to our menu this year to capture incremental sales. We also see amazing potential to further grow delivery sales. We are adjusting our delivery pricing structure to be more aligned with market norms. This will help us capture incremental traffic, especially in the smaller ticket segment and from more price-sensitive customers. Our third traffic driver is the effective use of our own and third-party online channels. In 2023, our digital sales surpassed $9.2 billion. Of that, about one-third came from our own super app, one-third from mini programs, and one-third from aggregators. Our own super app sales grew rapidly last year, up 35%. We continue to actively recruit and engage members. Our loyalty programs exceed 470 million members, who contribute a record 65% of our sales. The purchase frequency of our key friends, our most loyal customers, was more than 100 times a year. Our collaborations with major e-commerce and social media platforms extend our reach beyond physical stores. This allows us to attract new customers and promote new offers in a cost-effective manner. We consistently led the industry in terms of sales generated on these platforms. Our brands are deeply ingrained in China, well-loved and trucked by consumers. We continue to deliver amazing growth despite operating in a challenging environment. KFC is thriving and remains our key growth engine, with a record operating profit of $1.2 billion in 2023. Pizza Hut is picking off. adding 409 stores in 2023 alone, compared to just 41 stores in 2019. Their 2023 core operating profit tripled year over year. Levada is on the right track, with sales doubled and notable improvement in store economics. Taco Bell is making notable progress, yet There's more work in store model refinement and manual localization to be done. Little Sheep returned to profitability in 2023. Its innovative store model, which caters to smaller party sizes, has achieved initial success. We expect good momentum in opening stores both in China and overseas. Huang Jinhua continues to be resilient, maintaining profitability every year since we acquired it in 2020. In 2023, Huang Ji Huang tripled profits and opened 40 net new stores. We will continue expanding our store footprint in China and overseas this year. Onward into 2024, We are serving up a combination of exciting menu items, awesome toys, and games for Chinese New Year. KFC's newest innovation, the Happy Fried Egg in Spicy Sauce Chicken Burger, is absolutely delicious. It's comfort food for your soul. We are also offering our wildly popular golden bucket again this year. It has a very lucky and sound-to-earth name, Kuai Fa Cai, which means get rich soon. And the first letter also stands for KFC. So right now, it's getting around, getting more popular to reach each other KFC in China. Pizza Hut is launching 18 new products, including Wagyu beef pizza, Xiehua He Niu pizza, at just 69 RMB. The abundant choices and value are amazing. Although consumers are more rational and price sensitive in the current economy, there is a strong desire to indulge, especially during holidays. Our enticing offers are designed to generate excitement and attract traffic. I eagerly anticipate this vibrant trading period. With that, I will turn the call over to Andy. Andy?