Yum China Holdings, Inc.

Thank you for standing by. Welcome to the Yum! China second 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 Ms. Florence Lipp. Please go ahead.

Thank you, Operator. Hello, everyone. Thank you for joining Yum! China's second quarter 2024 earnings conference call. On today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yong. 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. 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 IELTS 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 Watt, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. Today, Yum China reported record levels of revenue, operating profits, and EPS for the second quarter. System sales grew 4% on top of 32% growth in the same period last year. Core operating profit grew 12% to $275 million. EPS increased 19%. I would like to thank our colleagues for their hard work and innovative spirit. We are navigating a complex and dynamic environment. Yes, but we see the many challenges more as opportunities. With our industry-leading capabilities and our scale, we are turning these situations to our competitive advantage. We have taken aggressive steps to drive revenue and profitability. I would like to highlight three of them. First, we took a fresh look at every key process and cost element in our businesses. We make countless innovations to improve our operational efficiency, enhance profitability, and increase resiliency. We are already seeing results. We are achieving major cost savings and reinvesting them into food and value. Second, we broadened our addressable markets, and health market share with our sharp focus on value for money and innovative products. Our transactions and delivery sales both grew by double digits in the second quarter. We will continue to innovate across our menu to address customer needs. Third, our breakthrough business models, K-Coffee and Pizza Hut Wows, achieved encouraging initial results. These stores delivered incremental sales and incremental profits. They are showing great future potential. These strategies are working well. Q2 was our most profitable second quarter since our spin-off. Restaurant margins stabilized. OP margin expanded to 9.9%. Let me first talk about our initiatives to drive operational efficiency. These initiatives cover all aspects of our organization. First, Project Fresh Eye, launched in quarter four last year, helped improve OP margins this quarter. We are shooting for best in class and best in course. We are assessing our operations from our RGM, in other words, store managers' point of view, supporting our RGM better and faster. From our restaurants to back offices, we are reducing complexity and simplifying operations. All our major initiatives are now in place. The result is fewer unnecessary process burdens on our RGMs and better efficiency. Separately, we launched Project Red Eye at the end of quarter one to improve our supply chain efficiency. Our goal is to spend better and buy better. To spend better, we are assessing our operations from our customers' point of view, identifying areas that add no value for them. we are also simplifying our ingredient SKUs, packaging, and menu in a certain segment of stores and select day parts without compromising sales. To buy better, we are sourcing directly from farmers and producers for certain categories. By systematically examining our operations from fresh perspectives, we are uncovering numerous opportunities. We are doing all of this while ensuring food safety and quality. Lastly, AI and automation will continue to play a big role in our business. We have automated major restaurant management tasks, from sales forecasting to labor scheduling and inventory management. we have rolled out iKitchen to all Pizza Hut stores. This integrated AI system enhances food quality and improves operational efficiency. We were among the first in our industry in China to adopt generative AI in 2023 to turbocharge our back office processes. We are working on a few dozen generated AI applications, including consumer insights, customer support, food safety, and new product innovation. These tools are already helping us improve efficiency and make more informed, data-driven decisions. We are making great progress with these measures. Some have already impacted our second quarter results, while others will take more time to bear fruit. Importantly, these are structural improvements that will bring long-lasting benefits. With these measures in place, we have the bullets to compete on value and pursue growth in these dynamic environments. With that, let me turn to our brand strategy. starting with KFC. In our 37 years in China, KFC has introduced many popular product categories. Recent innovations include our juicy beef burgers and whole chicken. Customers appreciate these new products, but they also love the fresh energy we bring to our iconic classics. In May, we combined our original recipe chicken and mashed potatoes to create a brand new burger, the original recipe chicken burger, Yuan Wei Ji Han Bao. By the way, the classic way to enjoy KFC's original recipe chicken is with mashed potatoes, at least for kids in China. In the past, they were ordered separately. Now we put them together. into one burger. As one customer told me, it is a childhood dream come true. This innovative burger sold out in many locations in just two days and drove incremental sales and profits. Since it was so popular, we launched it again for a limited time in June. K-Coffee is available in all KFC stores. Its sales exceed 1 billion RMB in first half of 2024, up 26% year-over-year. During this period, we sold nearly 120 million cups, up 36% year-over-year. We have been accelerating the rollout of our groundbreaking side-by-side K-Coffee Cafe since late last year. From just 100 stores in March, we tripled the number to nearly 300 in July. Side-by-side K-Coffee cafes feature a distinct dining area and menu. Starting at 9.9 RMB at our campus stores, customers can enjoy our innovative coffee and hot dogs. We also took our popular sparkling Americano to the next level with the introduction of the iced orange creamy sparkling latte. Very long name. The mousse-like smoothness, fizzy burst, and citrus flavor are mind-blowing. Thanks to our superb supply chain and efficient operations, we are making healthy margins too. This is a winning model. By year end, we expect to roll out our K coffee cafe to 500 to 600 stores. Delivery sales continued their double-digit growth momentum at KFC. We lowered the delivery fee in quarter one to capture the underserved smaller ticket segment. These strategic moves proved successful as we gained market share on aggregator platform. We drove incremental sales and profit without impacting margins. By introducing platform riders at select locations, we optimized rider cost while maintaining service quality and customer satisfaction. Now turning to Pizza Hut. This quarter, Pizza Hut achieved its most profitable second quarter since spin-off. On the sales side, we were up against an outsized calm in April from a successful IP marketing campaign last year. In May and June, things ourselves improved. Despite sales deleveraging, we improved our profitability by enhancing operational efficiencies. For example, we significantly reduced product preparation time by simplifying menu and kitchen operations. We also deployed automated fry rice machines and robotic servers to make our crews workload lighter. Pizza Hut just hit the 3,500 store mark. We believe Pizza Hut has huge potential Now present in over 750 cities, there are 1,300 cities that have a KFC, but no Pizza Hut as yet. In addition to expanding its footprint, Pizza Hut is also reaching new consumer groups with amazing value, innovative products, and business models. Here are some highlights. First, Menu innovation. Our entry-price pizzas are addressing previously underserved segments and grew double-digit this year. Our new pizza dough burger, Pizza Ball, is attracting many solo diners. This unique burger, made with a freshly baked pizza dough bun, is receiving rave customer feedback. In quarter two, we sold more burgers than Hawaiian pizza, one of our signatures. Encouraged by its success, we will be rolling the Pizza Door Burger out to all 3,500 stores later on this month. Second, our Pizza Hut wild store models marked a major breakthrough. We successfully attract solo diners, young people, and more value-cautious customers. The model features simpler operations, good food variety, and excellent value for money. It is a fast casual format with lighter service. Since opening the pilot store just in May, we have converted over 100 existing stores to this model by end of July. Initial results of the WOW model are encouraging. I visited some of our newly opened stores last month. Sales were vibrant, with customers queuing outside. Our first batch of new stores achieved significant same-store sales uplifts. Given the encouraging results, we are accelerating the store rollout. By year end, we expect to more than double our wild store count. Now, let me talk about our store expansion. We are seeing fantastic long-term growth opportunities in China. Our flexible new store formats allow us to penetrate profitably across city tiers and locations. Our new stores maintain good returns. Their payback period held steady at two years for KFC and improved to two to three years at Pizza Hut. Around 80% of our new stores achieved monthly break-even within three months. We focused on white space to minimize the impact on existing stores. KFC's small-time mini model is unlocking new site possibilities in lower tier cities. We have also identified opportunities in strategic locations like college campuses, gas stations, highway service centers, and other transportation hubs and tourist locations. KFC's new store at Shanghai Jiao Tong University, Jiao Da, for example, is enjoying busy on-campus traffic. We are also leveraging partnerships with franchisees to unlock opportunities in lower tier cities and strategic locations. In the second quarter, net new stores from franchising reached 25%. We expect the ratio will go up slightly exceeding the 15 to 20% target we set at our investor day last year. Now, let me recap the three key messages I want you to take away today. First, we took action to drive operational efficiency, which enabled us to invest in value for money and to support our margin. These efforts were not just one-off cost cuts. They were structural improvements that should deliver benefits for years to come. Second, we embrace consumer needs and succeed in driving robust transaction growth. We are confident that our sales initiatives will drive sustainable long-term system sales and same-store sales growth. Third, Innovations in new store models will continue to power our long-term growth. Our Q2 results show that our strategies are working. Great companies thrive in tough conditions and turn challenges into opportunities. I'm confident in our ability to navigate the current environment and emerge stronger than ever. Before we move on to our financial results, I would like to take a moment to recognize the tremendous contribution that Andy has made to Yum! China. Andy has played a critical role in enhancing the company's financial strength, establishing robust cost discipline, and supporting our growth strategy. Under his leadership, the finance team further strengthened its core capabilities and upgrade its system and processes in key areas. She also successfully led the completion of our listing in Hong Kong. I would also like to thank Andy for his commitment to transitioning Adrian Ding into the acting CFO role. Please join me in wishing Andy the very best. am very pleased that Adrian would step up as acting CFO. Adrian is our current chief investment officer and general manager of Lavasta. Over the past five years, Adrian has led multiple investment and capital market projects to enhance our portfolio and organizational strength. He was instrumental in in establishing the Lavazza joint venture and building the Lavazza business in China. With his financial and operational expertise, I'm confident that Adrian will support our growth objectives to create sustainable value for our shareholders. With that, I will turn the call over to Andy. Andy?