Yum China Holdings, Inc.

Thank you for standing by and welcome to the Yum! China third quarter 2024 earnings conference call. All participants are in 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, Senior IR Director. Please go ahead.

Thank you, Operator. Hello, everyone. Thank you for joining Young China's third quarter 2024 earnings conference call. On today's call are our CEO, Ms. Joey Watt, and our acting CFO, Mr. Adrian Ding. I'd like to remind everyone that our earnings call and investment materials contain forward-looking statements, which are subject to future events and uncertainty. 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, which is available to the public through our investor relations website located at rr.yamchina.com. You can also find a webcast of this call and a PowerPoint presentation on our RR website. Please note that during today's call, all-year or over-year growth results exclude the impact of foreign currencies unless otherwise noted. Now, I would like to turn the call over to Joey Huat, CEO of YamChina.

Joey? Hello, everyone, and thank you for joining us. I'm proud to share that we achieved strong results again in Q3 2024. We delivered robust sales growth, as well as accelerated profit growth compared to Q2. System sales grew 4% year over year. Single sales index improved sequentially and reached 97% of prior year's level. delivery sales achieved several digit growth as it has for 10 consecutive years. On a comparable basis, both restaurant margins and OP margins expanded year over year. Co-operating profit grew 18% and dilute EPS increased by 32%. As we execute our RGM 2.0 strategy, we have a new focus on operational efficiency and innovation. Savings generated from improved efficiency allow us to reinvest in food innovation and our value for money offers. This broadens our addressable market. It also helps us capture more traffic, drive sales growth, and expand profit margins. Meanwhile, our innovative business models, K-Coffee Cafe and Pizza Hut Vow, are gaining momentum and successfully capturing new customer demand. In the first nine months, we set several new records. $8.7 billion in revenue, over $1 billion in operating profit, 1,200 net new stores, and over $1.2 billion returned to shareholders. We outperformed the industry in a challenging and fluid environment. Today, I will provide an update on our operations and store opening strategy. Adrian will then go through the financial performance and our latest capital return plan. I will start with operational efficiency. We are making great progress with Project Fresh Eye and Project Red Eye. We introduced these projects in quarter four of last year and quarter one of this year, respectively. These projects are to enhance operational efficiency through innovations across all aspects of our operations. Project Fresh Eye has reshaped our operations. We are evaluating processes through the fresh eyes of our restaurant managers, redesigning to support them more effectively. By simplifying, centralizing, and automating key processes, we are easing the burden of restaurant managers so that they can focus on better serving customers. We are also using innovative technology and automation in our operations. This makes us more efficient. For example, intelligent energy management reduces utility costs. Project Red Eye has created a fresh mindset to innovate and deliver results by spending better and buying better. Our procurement teams are serving our marketing teams better and faster. Generated savings are passed on to our customers and fund innovations. We are also gearing our product design to optimize ingredient use and improve operational efficiency. These initiatives have enabled us to hone in on product innovations and value for money. while expanding margins. On a comparable basis, Q3 restaurant margins improved 50 basis points year-over-year, and core OP margins expanded 140 basis points. Importantly, these are sustainable improvements that strengthen our business capabilities while driving high levels of customer satisfaction. Turning to sales. It's true that consumers are becoming more rational and sophisticated in their choices. But we know that the demand is there. Consumers seek value for money, good quality, and emotional value. That's exactly what we are offering them, and it's working. We regard both system sales and think sales growth is equally important. On one hand, we see ample opportunities across China to enter underserved markets and enhance customer assets. On the other hand, we look to balance our unit growth with same-store sales growth. Seven consecutive quarters of same-store traffic growth and sequential improvement in same-store sales index for both KFC and Pizza Hut show the strength of our strategy. Our delivery sales grew 18%, continuing the double-digit annual growth Young China has maintained over the past decade. In quarter three, delivery sales reached around 40% of our sales mix. We have strategically adjusted delivery fees and introduced more entry-price offerings to capture incremental consumer demand. We have enhanced our presence on aggregated platforms and expanded delivery coverage. Through these initiatives and more, we have captured incremental orders, especially from solo diners and value-cautious customers. As a result, both KFC and Pizza Hut have increased their market share on aggregator platforms. Even as we expand on aggregator platforms, we continue to maintain strong control over our business. Sales outside the delivery aggregators attempt for over 70% of our total sales, including dining, takeaway, and delivery. Let me share a few highlights on KFC. We continue to breathe fresh energy into our flagship products. Take the new original recipe chicken burger as we introduced in quarter two. It's an exciting innovation, though not so obvious. Taking our cue from the classic way kids in China enjoy KFC's original recipe chicken with mashed potato, we combine them into a new burger product. It's been very successful. Building on that success, we introduced an original recipe chicken with curry gravy in August. This time, we add curry gravy to the original recipe chicken and mashed potatoes. Customers are loving it. As a bonus, it doesn't require new ingredients in the stores. we maximize the use of existing ones while delivering exceptional value and taste to our loyal customers. In the first nine months, KFC sold nearly 200 million cups of K coffee, surpassing all cups sold in 2023. During the period, both sales and cups sold increased by about 30%. As our membership data indicate that a significant majority of our members have yet to try K-Coffee, we see huge potential for growth. We have just opened our 500th side-by-side K-Coffee Cafe, Caneer Gas Cafe, this morning, China time, with a prime location in Shanghai, Xujiahui. We are also tapping into strategic locations like college campuses. and transportation hubs. By the end of the year, we expect to exceed 600 cafes. Our distinctive menu of coffee, drinks, and food, stunning value proposition, and cafe ambience are resonating well with the customers. Our disruptive limited time over of original recipe chicken latte, ,, generated first disbelief, then curiosity, and finally, trial. Perhaps surprisingly, it's become one of our best sellers. K-Coffee cafes also effectively cross-sell to KFC's loyal customers, driving incremental sales and profit. K-Coffee cafes' potential is exciting. Turning to Pizza Hut. The brand is making solid progress. Pizza Hut opened nearly 300 net new stores in the first nine months, exceeding 3,600 stores. Since 2017, Pizza Hut has been strategically lowering its ticket average to drive traffic and enhance its mass market appeal. We have launched more entry-price products designed for value-cautious customers and solo diners, capturing more smaller ticket orders. Pizza Hut has also improved its profitability. Call OP increased 20% year-over-year in quarter three. Call OP margin was up by 140 basis points. We boost operational efficiency with simplified ingredients and redesigned kitchen processes. This also allows us to further improve our high food quality and service level. We continue to fortify our reputation as pizza experts. We recently upgraded the hand-tossed pizza dough for better taste, consistency, and easier preparation. In addition, we continue to build on our signature product, durian pizza, durian pizza, now our number one best-selling pizza. One in every four pizzas sold in Pizza Hut China is now a durian pizza. We sold nearly 30 million durian pizzas year-to-date. We have expanded our success with durian burgers, launching the pizza dough-based burger, with durian and pineapple. It sounds unusual, but it's perfect for our durian lovers and sold out quickly. Our breakthrough Pizza Hut Vow store is looking like a promising vehicle for expanding our addressable market. It's been only five months since we converted our first store. Initial results are encouraging. For Da Yin, we have seen significant single-cell growth, driven by incremental transactions despite lower ticket averages. So far, we have converted around 150 stores, expanding from Guangdong to over 10 provinces, covering Tier 1 cities to lower tier times. We will continue to refine the model across different locations for both sign-in and delivery. With our new focus on system sales and same-store sales growth in mind, let's talk about our store expansion plan. In Q3, we opened 438 net new stores with over 1,200 net new stores year-to-date. We are on track to meet our target of 1,500 to 1,700 net new stores this year. This growth is underpinned by strong new store performance. At KFC, the payback period held steady at two years. And at Pizza Hut, payback improved to two to three years. Around 80% of new stores opened in the past two years turn profitable within three months of opening. Alongside our successful equity store model, we are accelerating franchise development to unlock additional opportunities. Our franchise strategy focuses on accessing strategic and remote locations, as well as the lower tier cities that were previously beyond our reach. We have built the infrastructure to support our franchisees, from food safety to store management. We have also innovated new store models suitable for franchisees, such as KFC's Small Time Mini. So we are now prepared to pick up the speed. Currently, franchisees represent 12% of KFC's store portfolio. The franchisee makes for net new stores increased from 15% in 2023 to 27% year-to-date, exceeding the guidance we gave at last year's investor day of 15 to 20%. We now expect this ratio will gradually increase to 40 to 50% over the next few years. Pizza Hut will be on a similar path, but will take more time to get there. For Pizza Hut's net new stores, the franchise mix was 7% year-to-date. We anticipate this ratio will gradually increase to 20% to 30% over the next few years. With that, I will hand the call over to Adrian Ding, our acting CEO. By way of background, Adrian has been with Young China since 2019, leveraging his investment banking background Adrian has led multiple successful strategic investments and capital market projects in his role as our chief investment officer. He was also instrumental in establishing our Lavazza joint venture and building the business in China as our general manager of Lavazza GE. Adrian's combination of financial background with operational experience makes him well suited for this position. I'm thrilled to welcome Adrian to his new role. Adrian?