Yum China Holdings, Inc.

Thank you for standing by and welcome to the Yum! China first quarter 2024 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 Florence Lipp, Investor Relations Senior Director. Please go ahead.

Thank you, operator. Hello, everyone. Thank you for joining Yum! China's first quarter 2024 earnings conference call. On today's call are our CEO, Ms. Joey Wang, and our CFO, Mr. Andy Yang. I'd like to remind everyone that our earnings call and investment 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. 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. You can find a webcast of this call and a PowerPoint presentation on our IRF website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currencies, unless otherwise noted. Now, I would like to turn the call over to Joey Watt, CEO of YamChina. Joey?

Hello, everyone, and thank you for joining us today. I'm proud to share that we turned in a solid performance in the first quarter. System sales grew 6% year-over-year, on top of 17% growth last year. Our revenue reached $3 billion in the quarter, an all-time high. Co-operating profits improved to $396 million from a high base of $392 million last year. Adjusted operating profit in quarter one of last year was the highest in the 30 quarters since our spin-off. This quarter was the second highest. We achieved these results in a challenging and competitive environment thanks to our resilient business model and our team's agility and hard work. We demonstrated once again our ability to adjust to changing conditions and deliver solid results. We continued to invest to accelerate growth, adding a record number of stores. We reached and surpassed the milestone of 15,000 stores. At the same time, we returned a record amount of cash to our shareholders through share repurchases and cash dividends, totaling $745 million. Let me start with our store opening strategy. We remain bullish on China. We see the China market as offering us white space for years to come. We intend to fill in by expanding our store portfolio. In quarter one, we passed the 15,000 store milestone, opening 378 net new stores. I am proud of how we have been able to accelerate. It took us 25 years to build the first 5,000 stores in China, eight years to build the next 5,000 stores, and just four years for the last 5,000 stores. We are well on our way to another 5,000 stores by 2026. Contrary to select recent reports, China continues to develop rapidly. with hundreds of new shopping malls, residential complexes, and commercial developments opening every year. Urbanization and long-term consumption upgrades in Tier 2 cities and below present particularly attractive opportunity for us. Housing and living courses are more affordable there. Tremendous consumption potential has yet to be unleashed. We expect roughly 30% of our new stores this year to be in new cities or strategic locations such as transportation and tourist locations. Our flexible store models and franchise partnerships give us the tools to capitalize on every opportunity. Taking a closer look at each of these, our flexible store models enabled us to expand across city tiers and penetrate further. In quarter one, two-thirds of new store openings were in smaller store formats. On average, our new store now takes just 1.2 to 1.5 million RMB capas to build, and we are always pushing for even lower capas and innovating new formats. KFC has recently developed a small-time mini-model for lower-tier cities. With a simplified menu and optimized equipment, per-store CAPES can get as low as half a million RMB. This has just 3,400 stores and holds significant potential for further expansion. We have developed a compact model It is smaller than our standard stores, but features more dining space and menu choices than our satellite model. These promising new models enable us to add store density and enter smaller cities more flexibly and profitably. Transportation and tourist locations represent just single digits of our store mix right now. but they are key to capturing the spike in travel volume during holiday periods. Same-store sales at these locations grew around 20% during Chinese New Year. We are opening more stores at highway service centers in over 20 provinces, capitalizing on the opportunity presented by the rising car ownership. Some of our stores will be opened through franchising. In fact, partnering with franchisees is key to unlocking opportunities in lower tiers, remote areas, and other strategic locations. At our investor day last year, we estimated about 15% to 20% of our net new stores in the next three years will come from franchising. In quarter one, this mix has reached 19% at KFC. A disciplined approach backs our accelerator expansion. Payback periods have remained consistent at two years for KFC and improved from three years to two to three years for Pizza Hut. We track these KPIs very closely to help ensure we open high-quality new stores. Let's now spend some time on our brand strategy. We have devised robust strategies to meet diverse demands in China. We satisfy our customers' taste buds with delicious, innovative food, and we build an emotional bond with them. Through a combination of premium and affordable options, we make sure there's something for everyone. We recorded over 460 million transactions in the first quarter alone, representing a 15% increase year over year. It was not easy. While our restaurants remained open this year and last year, there were a lot more other restaurants opening during the holidays this year. But our customers responded well to our offerings. The strong transaction growth also reflects our successful strategy to spread our price points, expanding into lower ticket orders. And that will allow us to capture more market shares. Now let me spend some time on each brand, beginning with KFC, our primary growth engine. Delicious, innovative food, and amazing value have been the keys to our success. Our high ticket average products sold very well in quarter one. KFC's beef burger and whole chicken sales grew double-digit. We took a holistic approach to drive traffic while protecting our ticket average. We launched the super juicy pineapple beef burger, Chao Ji Bo Si Zi Hou Niu Bao. The combination of pineapple and beef taste is exotic, and customers like it. At the same time, we add entry-price beef burgers into our weekday value combo. So we have both value and premium options to meet diverse consumer needs. Our six-year-old signature Crazy Thursdays continue to drive major traffic to KFC. Thursdays now even outperform weekends. Leveraging full chicken utilization, we offer great value to customers at sustainable costs. Our delivery business remains strong. Delivery sales have grown double digits every year for the past decade. We identify smaller orders as an area of opportunity to tap it to see reduced its delivery fee and expand one-person meal options in late February. The initiatives attract strong incremental traffic, capturing more market share, especially in lower tier cities. To offset the lower delivery fee, we have taken actions to reduce our overall operating costs for riders. This includes introducing platform riders at selected locations where their quality actually matches our dedicated riders. We can serve more customers while maintaining service quality and sustainable margins. We are constantly searching for new growth pillars. K-Coffee continues to grow nicely, achieving a 30% increase in cups sold in quarter one. We are excited about further penetrating this segment of a growing coffee market. To this end, we have developed a side-by-side K-coffee model. We call it Jian Bing Jian. Its distinct storefront and dining area cultivates a cafe ambiance surrounded by coffee aroma. These shops are connected to KFC stores. so that we can share a kitchen to keep the investment and operating costs down. Using KFC equipment, we can serve unique products like coffee flows, and sparkling coffee, without additional investment in equipment. Summer is coming, so we really encourage our friends to try this very refreshing sparkling coffee. is indeed one of our best-selling coffee already. We see initial success of 100 side-by-side stores across 80 cities already, and we intend to work this model out aggressively. Next is Pizza Hut, which now has over 3,400 stores only and is ready for accelerated growth. In the past 12 months, Pizza Hut adds over 400 stores and increased city coverage by 10% to over 750 cities. We aim to broaden its addressable market with a strong value proposition for mass market appeal. Our strategy emphasizes widening price points, expanding into new categories, and delivering emotional value to consumers. We are widening price points. We enriched our entry-price pizza offerings. Sales from below 50 RMB pizzas grew double-digit in quarter one. Our Bolognese pizza, Yi Shi Rou Jian pizza, priced at 39 RMB, has quickly become one of our top five best-selling pizzas. It's a familiar taste inspired by our spaghetti. Well, actually, our signature dish for the past 30 years, and it has become a customer favorite. These results give us confidence that we are on the right track. Our higher ticket offerings also offer abundant value. We brought back our popular all-you-can-eat deal at 178 RMB for five days. With beef wellington, durian pizza, crayfish, and other very delicious options to choose from, this campaign generated a lot of social buzz and became a strong sales driver, particularly for those people who love to indulge themselves with the all-you-can-eat deal. We are also expanding offerings to capture our share of growing one-person meal occasions. Just last week, we launched the Pizza Dough Burger, Pizza Bao, in around 2,000 stores with existing ingredients. This made-to-order burger features pizza dough buns freshly baked in store on a daily basis. The inspiration actually comes from Chinese bun. So our pizza dough bun is chewy and fluffy. It's very unique and very different. It perfectly complements our juicy beef and chicken patties. The result is good. And we are confident that we'll unlock incremental sales. We aim to offer emotional value to our customers beyond delicious food. In quarter one, we more than doubled the number of IP collaborations with top animations and games. These campaigns attract a wave of young customers eager to join the fun. Let's turn to Lavasa. Lavasa's dual growth engines, coffee shop and retail, making good progress and driving synergies we further reduced the campus of our latest small store format and improved store economics our retail business expanded to premium outlets such as five star hotels and Michelin star restaurants by growing the two businesses we are building the Lavazza brand in China Looking forward, Lavazza Group and we are planning to partner with a local roastery for fresher beans, more competitive cost, and smoother operations. Now let's briefly touch on our Chinese dining brand. Little Sheep and Huan Ji Huan had a strong recovery last year. Huan Ji Huan remains a very resilient model with strong growth potential. Little Sheep has made good progress with their new one-person hotpot module. We achieved initial success with the pilot stores in Shanghai, resulting in a robust pipeline with our franchisees. We are also expanding internationally, such as reentering the U.S. with a new Little Sheep store in New Jersey. As we expand to serve more customers and capture incremental traffic, we are pursuing greater operational efficiency to make our business even more resilient. In the spirit of our restaurant general manager number one, or our GM number one philosophy, we launched Project Fresh Eye to assess our operational processes through the fresh eyes of our GM. Our goal is to empower our RGM, supporting them better and faster. The scope covers all aspects from our restaurants to supply chain and back office. We aim to improve efficiency, enhance agility, and drive cost effectiveness. We are streamlining processes and integrating resources to promote synergies across regions and functions. technology will continue to play a big role in driving efficiency. We are starting to use generated AI to develop creative marketing and facilitate our recruiting processes. In addition, we benchmark against the industry to identify areas of opportunities and develop targeted strategies. We aim to be best in class and best in course passing on any cost savings to our customers and other stakeholders. Our ability to address our consumers' ever-evolving needs allows us to connect with them emotionally and continually. Our pioneer digital capabilities, proprietary supply chain management, and unmatched operational efficiency enable us to do this on a massive scale. These qualities set us apart from our competition and help us drive sustainable growth in this dynamic market. With that, I will turn the call over to Andy. Andy?