Good day, and thank you for standing by. Welcome to the Yum China's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, Ms. Debbie Ding. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining Yum China's first quarter 2021 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung. Before we get started, I’d like to remind you that our earnings call and investor presentation contains 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 filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of the non-GAAP and GAAP measures is included in our earnings release. Today’s call includes three sections. Joey will provide an update regarding recent development in our first quarter 2021 results. Andy will then cover the financial performance in greater detail. Finally, we will open the call to questions. You can find the webcast of this call and 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 Wat, CEO of Yum China. Joey?

Thank you, Debbie. Hello, everyone, and thank you for joining us today. Our first quarter results demonstrate the resilience of Yum China. We delivered $342 million in operating profit. System sales grew 34% year-over-year, as same-store sales recovered with 10% growth. We accelerated our store expansion, opening 315 new stores in the quarter. First quarter trading was adversely affected by the resurgence of COVID outbreaks and tightened public health measures. The impact was particularly pronounced in Northern China where cases spiked in transportation locations, due to sharply lower passenger volumes. I would like to thank our 400,000-plus employees and riders for their contributions during this difficult period. Many of them did not return to their hometown to celebrate the holiday with their families, instead serving our customers and communities. We delivered these strong results with the dedication and agility of our people. The pandemic has introduced volatility and uncertainty to our trading patterns. Our team acted and reacted nimbly to changing conditions by planning for a variety of possible situations and deploying resources successful we overcome operational challenges. Partnering with our suppliers and through inventory and production planning, our in-house supply chain managed complexity and potential disruptions to fulfill the demand of our 10,000-plus store network. Our operations team ensured the best possible level of restaurant staffing and delivery riders. Our operational effectiveness is facilitated by our digital capabilities. Amid the fluid situation, we were able to quickly adjust offers and deploy labor as demand patterns shifted. It certainly reinforces our determination to continue investment in digital, technology and supply chain to fortify our competitive advantages. Let me now update you on our core brands. First, let's start with KFC. KFC delivered operating profit of $327 million. System sales grew 24%. KFC continued to rapidly expand, opening 253 new stores…

Thank you, Joey. And hello, everyone. Let me now provide additional details on our first quarter financials. And then share perspective on this year's outlook. Unless noted otherwise, all percentage changes are before the effects of foreign exchange. Let me first cover our Q1 financial results. We experienced substantial year-over-year growth in the first quarter, as we began to lap COVID-19 impacting period last year. Total revenue grew 36% year-over-year, led by same-store sales growth of 10%, new unit contribution and substantially fewer temporary store closures. Because of the volatility induced by the pandemic in 2020, the year-on-year comparisons are less representative. Looking at the two year change give a better sense, of how we are trending back to pre-COVID levels. So we are providing pro forma measures here for convenience comparison with 2019. Same-store sales recovered to approximately 94% of the first quarter 2019. Total revenue grew roughly 7% compared to first quarter 2019, benefiting from new units and consolidation of Suzhou KFC to Huang Ji Huang. As we discussed in the last earnings call, the sales recovery was disrupted by the resurgence of regional outbreaks and significantly reduced travel. Travel volume during the 40 days Chinese New Year period was down approximately 40% year-over-year and 70% compared to 2019. These impacts were more pronounced for KFC, as it has more stores in the transportation locations. On a year-over-year basis, KFC same-store sales grew 5%, driven by the recovery of dine-in sales, while delivery remains popular. On a two year basis, sales recovered to approximately 94% with the same-store traffic at approximately 87%. Average ticket grew roughly 87 - sorry, 8% versus 2019, due to increase in delivery mix. The respective average ticket of delivery and dine-in remain flat. Pizza Hut same-store sales grew 38% year-over-year, driven entirely by…

Thanks, Andy. We will now open the call for questions. [Operator Instructions] Operator, please start the Q&A.

Excellent [Operator Instructions] Our first question is from Brian Bittner from Oppenheimer. Please ask your question, Brian.

Thank you. I hope you all are doing well and staying safe. Can you help the investors in the United States just better understand - who are not in China, better understand what type of consumer trends you're seeing in your store base that are not located in the transportation hubs? I understand the transportation locations are challenged given the transportation trends. But overall, you've already recovered 94% of your pre-COVID sales volume. So you're pretty close to a full recovery. So are you seeing a more clear path to pre-COVID sales levels in those markets that are outside the transportation hubs? Or is there still a lot of volatility and headwinds related to the pandemic in those more traditional markets?

Thank you, Brian. We are all staying quite safe in Shanghai. China is recovering quite smoothly, despite not completely out yet. Let me give you a overall picture about the Chinese New Year trend and then compare the KFC versus Pizza Hut and then a bit specific about the non-transportation hub. Hopefully, that gives some ideas about what's going on here. So let's start with the Chinese New Year. We had a lot of uncertainties before going into Chinese New Year because the trading was a bit soft. And what our company has done is to pair, have quite a few scenarios planned, so we react quickly. And as we adapt to the market condition, the trading picked up during Chinese New Year and was robust. But after the Chinese New Year, we continue to see some weaknesses in trading, particularly in transportation hub. Outside transportation hubs, to answer your question, the dine-in volume is still well below the pre-COVID level. That's why we remind our investors that we are not out of the woods yet. But what can we do? We stay agile, and we plan for the possible scenario. So that's point one. In terms of point two, which is a big picture of KFC versus Pizza Hut. We are happy with both brands recovery because the Q1 results show the resilience and the energy of both brands. The sales was disrupted, but with the scenario planning, the year-on-year same-store sales for KFC, Pizza Hut and I'm referring to two years, so pre-COVID-19 level, KFC was minus 6%, which is 94%, and that includes the impact of the transportation hub. Pizza Hut recovered to 95% compared to 2019 Q1, without much of the transportation hubs in their store portfolio. So that gives a sense because 2020, the numbers…

Yes. I just have a couple of things to add there, Brian. I think for the folks outside of China, I think it's important to keep in mind that we're still facing a higher bit of uncertainty and challenges related to COVID-19. So even though like things seems to have come down a lot here, we did have a regional resurgence at the end of last year at the beginning of this year, right? So they have an impact on our first quarter trading. So - and then when we look around, I think we still have quite a bit of health branding measures that is still in place. So that was due and the government will continue to remind folks to say alert. Not to be alarmed, but stay alert on the COVID situation. And as we look outside of China, and then we have seen resurgence in some of other countries in Asia, including Japan, and more recently, the situation in India. So that reminds us that like we're not out of the wood. So still a lot challenging - challenge ahead. As Joey mentioned, obviously, transportation hub is business for KFC, they account for high single-digit of the sales. So that will continue to be sort of like a challenge for them to overcome to reach that fully recover SSG compared to the pre-COVID level. Same thing for the dine-in, right? Dine-in, I think, in the first quarter, where traffic was still at about 87% level at the pre-COVID level. Our delivery business is doing fantastically well, right? So grew very strongly last year. I think this year we're still growing at mid double-digit number, right? So, that continues to be a bright spot for us, compared to pre-COVID level, obviously, grew more than, I think, 60%, 70%. So that's like the overall situation here. Thank you.

Thank you. Thank you both for the perspective.

Our next telephone question is from Chen Luo from BofA Securities. Please ask your question, Chen.

Thank you, Joey, and Andy. I've got a question on the margin side. So it seems that Pizza Hut posted pretty strong margins for Q1 this year. And in fact, if my - correct – my calculation is correct, it should be the highest ever since 2018 or when we started the revitalization process. So what's our future strategy with regard to Pizza Hut in terms of balancing margins and same-store sales growth? Is it fair to say that the future margin trend of Pizza Hut could be above the level that we saw during the past few years when we are in the process of revitalizing Pizza Hut? Thank you.

This is Andy. So let me try to address your questions. And then see if Joey have any follow-up. So I think if you look at Pizza Hut, obviously, we're very pleased with the execution there. I think over the past couple of quarters, they have demonstrated that they have excluding the revitalizing [ph] program really well, and then they are building on that resiliency, right. So I think some of those, as we mentioned before, obviously, is improvement. I think if you look at the fundamentals, we continue to look at that improvement based on the fundamentals that we will have laid out before, right? Store remodeling, menu, the food, we also work on the digitalization program, which worked out very well for us in the pandemics, right? We are able to give it very quickly. So – and if you look at our digital number for table top motors, it's quite incredible right now. It's almost 3% of that. So I think they have – did a very good job in revitalizing fundamental. We still – I mean, the recovery is quite strong, but I don't think we can say like, as a whole company, we cannot say that, we are out the wood compared to pre-COVID level. So the top priority for them still is driving traffic, and we're glad that for the first quarter in 2021, we see actually, the traffic increased not only year-over-year, but also compared to the 2019 level in the first quarter. So the next one is obviously driving that sales number, and so there's still some work there. And I think we will continue to emphasize on value for money. While, as Joey mentioned, same point for consumer now as they're coming out of the impact from COVID-19. So again, we…

I think I just want to add two comments. One is we have been very consistent with the path of recovery for Pizza Hut since the time we commit to a turnaround. We have always been very clear about our priority, which is sales first, profit later and we focus on improving the fundamentals of the business in the last few years, and we are grateful that we are seeing the results. So that's point one. Point two is, what is next? The next is to focus on improving all aspects of the changes that we made in the last few years and cement the changes to make Pizza Hut a resilient business model. That's what we want, because that's what we have been trying hard to achieve for KFC, which is a very resilient business, and we want Pizza Hut to be a resilient business model as well. And at least in two aspects, we want to continue. One is sales first populated [ph] that’s the path in the last few years. Next, we want both sales and profit. As I mentioned on other occasions before, sales is vanity, profit sanity, and we want a bit of both. Second, the second aspect of the resilient business model. You can see we have been increasing, building our off-premise business. So now between the delivery and takeaway, the off-premise business is over 40% of the business. And this is important because we are not relying too heavily on dine-in business. It's much better to have dine-in, delivery and right now takeaway or ready to co-product as well. Four pillars - four pillars of the business instead of two pillars. So these are two examples of resilience that we are looking for. Thank you, Luo Chen.

Thanks a lot, Joey and Andy.

Our next telephone question comes from Michelle Cheng from Goldman Sachs. Please ask your question, Michelle.

Hi, Joey, Andy. My question is about the occupancy and other costs. We actually noticed that these cost line has been a huge savings in the past few quarters. So, can you give us more colors on the breakdown? And also more specifically on rental ratio, we heard from other like leading restaurant trends, they have a pretty favorable rental time post-COVID. So just wondering that compared with the pre-COVID level, are we also seeing a good rental saving? And how sustainable these other cost savings can be seen in the next few quarters? Thank you.

Michelle, thanks. This is Andy. So, regarding your question on O&O, I think you're right, like we've seen quite substantial improvement coming from the O&O segment, 7% year-over-year lower, and then roughly 1.4% lower than 2019 same period. I think as you can see, these two numbers, O&O in a big part is driven by sales leverage. So that's the most important factor that's driving that. The other one is that, if you look at utilities, there's two things that's going on there. I think over the past few years, so the government have sort of reduced the utility cost to basically try to improve the business environment, especially during the pandemic. So that also help, power [ph] this last, I think, maybe end of the year or early next year. The other one is, obviously, over the past couple of years, we have tried to improve our kitchen automation and operations. We have mentioned smart utility device that we have installed in some of the store, some of the procedure. So that also lowered that. And then also, we mentioned that some of the saving is due to rent relief, temporary relief and some of the government relief in terms of security payments and whatnot. So that, I think, in the first quarter, we still have some $6 million. So, all these combinations help us sort of improve that to [indiscernible] as a percentage of our sales. But I think - so I think some of those is carry forward. But, a big part of that would probably have to do with the sales leverage that we process.

Yes. Thank you, Andy.

Sure.

Our next telephone question is from Anne Ling from Jefferies. Please ask your question, Anne.

Hey. Hi, Andy. Hi, Joey. I have questions regarding the operating - the leverage. It's a very good margin that we have experienced in the first quarter. I'm just wondering whether there is any like - not one-off, but it's like a catch-up because the sales have been so strong. So there are some of the investments that we need to do it, but because of the time shift that we - I mean, the question I want to ask is that, what should we be expecting in terms of the operating margin in the coming couple of quarters? Is that some of the other investment that we need to play a catch-up, because the first quarter was so good that there are some of the costs that might have left behind? So that's my question. And also a side question is on the delivery side. If we - with this efforts in terms of sharing the riders between Pizza Hut and KFC, in that case, in the past, we have - we talked about a little bit of the margin dilution for the delivery business. With all these exercise, do you think that at some point, our margin for delivery business will be a part to the dine-in, given the fact that the sales mix is getting higher and higher on the delivery side? Thank you.

Hi, Ann. This is Andy. Let me try to address your questions about some of the one-offs and whatnot [ph] So obviously, I think like last year, we have received government subsidies and whatnot. And then as you mentioned, so that is continuing to be phase-out. In the first quarter, we have $6 million, I think that that will continue to be the trend there. The other part is that, for the cost of sales, for example, we were - I think after a couple of years of poultry [ph] and in commodity prices. Beginning of second half last year, we begin to see that easing up. We benefited quite a bit in the first quarter. We see a 7% year-over-year decline in the poultry prices for example. But as you have probably noticed that on the news, like we see corn prices, all the feeding stock that prices are going up. We're already seeing like the poultry prices going up, both here in China, but also overseas. Our contract is locked up probably one to two quarters ahead of time. But we - as we mentioned, we will see that tailwind beginning to subside as the year progress and potentially and likely potentially turn into inflationary pressure later on this year. The other one is, obviously, we have embarked on the phasing-out of plastic. So - and then as we see delivery and takeaway as increasingly important part of our business, we are also investing into improving the packaging for those operations. So you will probably also see like packing costs would go up, as the year progresses as we continue to roll that out. In term of labor, I think this - part of that is obviously labor productivity that we have been ongoing for a number of…

Anne…

Hi.

Hi. I just want to add three points to Andy's comment. In terms of cost side, we continue to work on, of course, such as the delivery 3.0 upgrade with rider personal upgrade, AI-enabled zoning, rider routing optimization that helps. But I really, really want to point out point two and point three, these are the other aspect of the equation. Point two is about the sales upside during peak trading period and peak trading hour. If we can have enough riders, we actually have more sales upside during the peak trading period and peak trading hour. And Chinese New Year is a very good example. So it will be a bit misleading to ourselves if we just look at the cost side. So that's point two. Point three, this been about this, when Andy said earlier is a holistic approach. It is a holistic approach. It's not necessarily that straightforward to think that having more stores help the delivery cost. But indeed, it was that way. And when we increased the store portfolio density, then we reduced the average circle of delivery distance. For example, when we have more store, we can reduce the delivery distance of the rider from 5 kilometers to 3 kilometers, and that reduced the cost. So it's not only just the cost. We have other quite a few aspect that we can do to both increase the sales and to manage the costs. And our number has shown that we have - we have been able to do that in the last few years. Thank you, Ann.

And this is Andy. Just - I want to add a little bit on Joey's comments. There is two things. One is Joey’s correctly point out. If incremental sales, the profit margin is much higher, right - opposite incremental margin higher. The other one is that in terms of the rider network effect. It's a very interesting thing that I think we're still looking to see how the dynamics work, right? The high density network. That's enabled by the fact that we run our own delivery network. We have a hybrid model.

Correct.

We work with executor, with the traffic and our own app. But the delivery, we manage that operation outside. We have dedicated rider, so we can continue looking to improvement on the networking factor that benefit from that. So that may be a little bit different from the US, western [ph] operators and somewhat operate most, western operator here in China. We want to create a big model.

Got it. Thank you.

Thanks.

Our next telephone question is from Lillian Lou from Morgan Stanley. Please ask your question, Lillian.

Hi, thanks. Hi, Andy and Joey. I have actually one of the follow-up questions because most of the questions were answered. That's still about the comment that Joey has made about the local business on the holistic approach. So compared to a couple of years ago, when delivery was still a relatively smaller amount of the revenue, right now it's close to 30%. And also, the store network in the lower tier cities, in density is actually higher. Compared to then, what kind of margin impact to this kind of dynamic changes? In particular, like delivery, we know that it's still probably - it depends on the calculation, it's probably still margin dilutive. But compared to a couple of years ago, what kind of margin impact of this delivery and also lower tier store changes to the margin? And what kind of projection we can make for the next couple of years? Will it be incrementally positive to margin? Thanks you.

Okay. Thanks, Lillian. This is Andy. Let me take a crack at this and then maybe if Joey have more additional add, that a little bit more later. In terms of delivery, I think it's - I don't know if it's fair to say the delivery margin is dilutive to the overall corporation. As we mentioned before, like we generally look at the restaurant operation holistically, right? So we have multiple ways of delivering the product to our customer, i.e., right, takeaway and delivery. Now it's important to look at, obviously, the restaurant margin for us, because food is unlike e-commerce, right? E-commerce, you don't need - you just need warehouse and you can distribute it to the consumer. Food you need to deliver to consumer at a certain time, right, to ensure quality of the food and then customer satisfaction. So having a production or restaurant location is almost a must. For us, if you look at the delivery, delivery has been growing very rapidly. I think we believe that - that's incremental to our overall sales. And then the other part is that, if you look at overall restaurant margin, for example, for KFC before the pandemic, it was largely bit stable, right? So it's about 18% in 2017, '18, '19. And then we are back to a similar level in the first quarter this year. So all through this period, obviously, delivery has been increasing. As I mentioned before, about - delivery was about 11% of our sales in 2017, and now it's about 30% plus, right? So we're able to maintain that margin. Obviously, it's hard work. There's a lot of work [ph] going through it. But it hasn't been particular dilutive to us. The other one is that if you look at, for example, the labor cost expenditure, for example, for KFC, like, for example, it has been also largely stable despite also, we continue to see wage inflation in China at - before pandemic to high single digit level, right? So if you look at KFC's cost of labor, which including the bio [ph] cost there was about 20% - 20%, 21%. It's stable in 2018 and '19, both markets is being is probably '21, '20, or 21%, right? So - and then in this year, we had about 22%. So overall I think as Joey mentioned, it's not necessarily dilutive for us. If these incremental sales come bring in by delivery, we actually have higher margin because the marginal contribution from additional sales is actually pretty high.

Thank you, Andy. I just have one more point to add, Lillian. Actually the shift to the delivery business actually help our rental percentage as well, just maybe bring that into the question. Why? Because, if a store is relying too heavily on dine-in business, the location cannot be compromised too much, it has to be very, very good location. Otherwise, you don't get the business. But when we are building more and more delivery-friendly stores, relying more and more on delivery, we actually open up more opportunity for locations that are at slightly lower rent, and that's not a small deal for us. So as we expand our store portfolio, moving delivery, certainly, it helps. Okay. Thank you, Lillian.

Thanks a lot, Joey and Andy.

Sure, Lillian.

Our next telephone question comes from Christine Peng from UBS. Please ask your question Christine.

Hi, management. I just have one quick question regarding the outlook provided by the management earlier. So you mentioned about, there are still some uncertainties in China regarding COVID-19 situation, but having said that, we actually observed a very strong pickup in the domestic traveling activities, especially going into the Labor Day holiday. So can you maybe give us more color in terms of the sequential trend you're observing in China in the past one or two months, so that investors can get a better feeling in terms of what is the expectation we should be setting for the upcoming one or two quarters same-store sales recovery compared with pre-COVID-19 level? Thank you.

Hi, Christine. This is Andy. So I think you're correct that like if the domestic travel volume, have picked up quite a bit, I think, this year and especially spring festival and potentially going into the Labor Day, holiday's weekend. So that's the overall traffic volume side. I think that - but the difference is that the consumer behavior still remains cautious. So if you look at the trip that they say, January, are shorter trip. So if you look at overall spending level, it's still down, I think, quite significantly, probably down 40% plus compared to pre-COVID level, right? So I think there are two things that we need to separate, right? The trip that they will take but the type of trip that they take may be different. And also the spending level is different. And I think that is similar to what we observed before, right? Like Joey mentioned, generally, we see some pent-up like sort of like urge to go out and to when this holiday, right, to relax. But so we see that sometimes the holiday day sales will be relatively strong. But then there's post-holiday season, sort of like softening. People generally still are cautious about the COVID situations and then also the economy - economic situations, right? So that's obviously infused with uncertainty for folks. So that's what's going on here. Like, I think if you look at the overall situation, it's much better compared to 2020, obviously, in terms of COVID situation, even compared to - obviously, we - but again, as we have mentioned before, we need to stay alert, not to be alarmed, but alert. The reason is because if we look at - in China, we have a mini resurgence COVID situation in the end of last year and early January. So when things calm down, I think it's easy for folks to think like everything is back to normal. But I think, reality is that it's not. We also - I think what's happening internationally, it would also have an impact on the overall consumer segment here. We have seen the situation in India or go out to the folks in India that impacted by COVID-19, it's a constant reminder for us that we are not out of the wood. We need to - we continue to expect a recovery, the full recovery to be non-linear and uneven. And it's just not a thing. I think it's our firm belief, and this is how we operate and plan for different scenario or different situations. And we encourage analysts and investors to do the same not to extract in a liner way linear extrapolation. And -- but that's how we plan. That's why we say the full recovery of our same-store sales take some time.

Thank you.

And our next question is from Lina Yan from HSBC. Please ask your question.

Hi. Thanks, management, for the very detailed analysis on your performance. I have a question regarding the base effect of sales at the traffic hubs. I think you started to talk about the very negative growth in the traffic hubs from second quarter last year. So it has always been high single-digit of your sales, like from second quarter last year. So would you comment that the base for traffic hub sales will become more favorable from second quarter onwards? Thank you.

Yes, likely, right? So because we have a big impact, obviously, at the lockdown, I think last year in the beginning, in the first quarter, and then we see rebound in the traffic over the year. But I think the volumes still significantly below the pre-COVID level. So I think on a year-over-year basis, you will see improvement. But on a two year period compared to pre-COVID, I think it will take quite a bit of time for a fully recover. And then obviously, we're encouraged by the fact that the governments will - the vaccine program, the situation here in China is possibly calm after the resurgence in December and also in January period. So - but I think it would more impactful for KFC because you have more stores in the transportation hub location. The other part is that international, don't forget, we have international locations. So international travel is still pretty much immaterial right now, right? So until country open up border and we see international travel, that will continue to be a big overhang on the transportation hub.

Okay. Thank you very much. So I think every comparison is referred to a two year comparison basis? Thank you.

That's right. Yes.

There is no more further questions at this time. I'd like to hand the call back to the speakers for closing remarks. Please continue.

Thank you for joining the call today. We look forward to speaking with you on the next earnings call. This concludes today's call, and have a great day. Thank you.

Thank you. Bye-bye.

Thank you. Bye-bye.

Thank you all. You may all disconnect. Have a great day. Good-bye.