Good day and thank you for standing by. Welcome to the Yum China's Second 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 would now like to hand the conference over to your first speaker today, Ms. Michelle [indiscernible]. Thank you. Please go ahead.

Thank you, Sabrina. Hello, everyone, and thank you for joining Yum China's second 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 second 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, Michelle. Hello, everyone, and thank you for joining us today. Our business has recovered remarkably well. Although the pandemic is still impacting our business and will continue to do so, we have learned to live with it and we are focusing on the future. We focus on our core, good food, great value, and customer experience. We penetrate further into lower tier cities, we increase our store network density to shift to off-premise dining post-pandemic. KFC remains resilient and continue to grow at a very fast pace. Pizza Hut achieved stellar performance and expect to become another growth engine of Yum China. [indiscernible] are making good progress. We delivered a solid second quarter. System sales grew 14%, operating profits grew 83%. We expand the store footprint at accelerated pace, opening 404 new stores in the quarter. In less than one year, we add more than 1,000 net new stores and increased total store count to over 11,000. Our team is laser-focused on driving sales. Our powerful digital platform enable us to swiftly adjust our marketing campaigns. We can reach members directly with targeted offers. In the quarter, we recruit over 10 million new members, ending the quarter with over 330 million members. Notably, off-premise and home consumption are becoming more popular in a post-pandemic era. Our delivery sales grew over 60% compared to 2019. We also launched retail products across our brands, leveraging our online and offline assets. We intend to learn and innovate to address evolving consumer needs. Let me update you on our core brands. First, let's start with KFC. KFC led our new store opening. We increased store density in existing cities and entered over 100 new cities in the last 12 months. With 280 new stores opened in a quarter, we now have over…

Thank you, Joey and hello everyone. Let me now provide additional details on our second quarter financials and then share our perspective on this year's outlook. Unless noted otherwise, all percentage changes before the effects of foreign exchange. Let me first cover our second quarter financial results. Total revenue grew 17% year-over-year and reached $2.45 billion. System sales increased 14% led by same-stores sales growth of 5% and accelerated new unit development. Similar to last quarter, we are providing pro forma measures here for convenient comparison with 2019. Same-store sales recovered to approximately 94% of the second quarter 2019. System sales grew roughly 9%, benefiting from new unit and the consolidation of Huang Ji Huang. Sales were recovering in April and May, but this was actually was disrupted by the Delta varmint outbreak in Guangdong Province, at the end of May. Guangdong province is the largest economy in China and one of the largest market, housing two of the four Tier 1 cities. The outbreak led to temporary closures in the regions and affected consumer behavior across China. Same-store dine-in volume is still well below 2019 level, while off-premise occasions continue to grow rapidly. KFC remained resilient and delivered robust growth. On a year-over-year basis, system sales of KFC grew 14% led by strong unit growth and same-store sales growth. On a two-year basis, system sales grew an impressive 7% is at 2% faster than the Chinese restaurant industry growth of 5%. Despite suppressed traffic as transportation and food location, same-store sales recovered to approximately 93% with the same-store traffic at approximately 86%. Average ticket grew roughly 8% versus us 2019, mainly due to the increase in delivery mix. Pizza Hut delivered exceptional performance. On a year-over-year basis, system sales grew 16%, same-store sales grew 11%. On a two-year basis,…

Thank you, Andy. We will now open the call for questions. In order to give as many people as possible the chance to ask questions, please limit your questions to one at a time. Sabrina, please start Q&A.

[Operator Instructions] Our first question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.

Hi, Joey, Andy. Congrats for the very good result again during this environment. My question is about the labor costs and also the new guidelines on government to protect delivery riders are introduced. So, we all understand that YUMC has been taking care of the employees, but still want to hear management's thoughts on the future labor cost management? And more specifically, given we have high revenue contribution from delivery business, so how should we think about the delivery cost increase due to government's requirement? And also since we are also talking about the Delivery 3.0 to enhance the efficiency, so like can we expect some efficiency outside to offset this potential cost increase? Thank you.

Hi, Michelle, this is Andy, let's -- let me first give you some color on the cost of labor. As we have mentioned in prior quarters, we were facing labor shortage in some of our restaurants. And then we also have saw moderate in our wage increase over the past year, because pandemic situations. Now, we have decided early on in the second quarter to increase wages at our market, in the -- for the restaurant staff. And so as I mentioned on my prepared remark, we have increased wages in June and July in China. So, obviously, we rolled out, as I mentioned, over the two-month period across China. And so -- and as a result, we do expect that duration increased will be higher and so -- approximate 7%, which is going to be roughly normal to we're returning to the pre-COVID level of wage increase. And so -- as a result, as I mentioned, we should expect higher COL [ph] in the second half, because of the wage increase. Now, of course, we -- as a company, we always want to pay our staff more, high salary and high wages, we always follow that with focus on also maintaining profitability and delivering value for our shareholder. Therefore, we have invested over the years and then we will continue to invest in technologies, improve our efficiency in operations, investment in automation, so that we can continue to drive that labor productivity improvement. So, hopefully, long one, we can continue to pay out our staff more, at the same time, maintain a reasonable profit margin for our business.

Thank you, Andy. Michelle, I've just -- I have one comment about the labor costs and then I'll address your question on rider labor law and Delivery 3.0. We increased our delivery sales mix from 11% right now over 30% since 2016, and I think you can see from our P&L statement that we manage to -- manage the overall delivery rider costs and also to find a saving to fund and also to continue to deliver the profit margin for our shareholders. So, we have done it in the last five years as proven in the numbers and I believe that Andy also give you some idea about will continue to do that in the near future as well. So, let me address the rider labor law question and Delivery 3.0. For the rider labor law question, I would like to make three comments. One is, we are compliant to applicable laws and regulations. And we also require our service provider to sign a Yum China Supplier Code of Conduct to ensure they are legally compliant with all applicable laws and regulations. Second is regarding the right to safety, we have a very comprehensive delivery management system clear guidelines and we conduct regular audits to ensure food safety and rider safety. Of course, we also provide a rider training equipment with safety measures. Third, very important. We actually work with our service provider to manage riders we're intensity. Our riders, unlike other riders in the market, they're dedicated to serve only Yum China brands, so, KFC, Pizza Hut, and we focus on surface quality. And one thing rather different which we have been criticized in the past, but now, I think we can see the beauty of it is our order density for rider is roughly 30% lower than…

Thank you, Joey. That is very clear.

Our next question comes from the line of Xiaopo Wei from Citi. Please ask your question.

Good morning, Joey and Andy. Can you hear me? Yes, I will go ahead.

Yes.

Yes Xiaopo. Go ahead.

Thank you. My questions are on Pizza Hut. We are glad to see the strong recovery both in sales and margin in Pizza Hut. As we know that casual dining has been very difficult segment for years for everybody. And according to the public information, while few of your competitors actually did a very weak performance in kind of dine-in sector, but you guys really surprised the market on upside. I know that Joey and team had done lot for the Pizza Hut of the puzzle four years of products, delivery, innovation, et cetera. What do you think is most important factors contributing to the surprise on the upside? And why it suddenly take off and how long this kind of recovery -- strong recovery can be sustainable? Thank you.

Thank you, Xiaopo. Well, I would say no sudden recovery is really the hard word of last four year. But it's hard to translate, but I think the Chinese way call [Foreign Language] is a good way to describe it. You work on it for over four years, day-by-day on all the key areas and then finally, we get to the inflection point that the results start to speak for itself. Let me comment on the path so far we have taken, but also what is next? Well, I think it's fair to say that our four-year revitalization programs have yield great result almost in all the key dimensions from same-store sales traffic, same-store sales, system sales, margin, operating profit, and right now, new store opening. They're all trending to the right direction. I'm not going to repeat the numbers, which you all have it. We -- if you remember, when we started journey, we had a very bold goal to turn the same-store sales positive within 24 months. And we did with deliver that, returned the same-store traffic positive first, then same-store sales. And in terms of which particular -- analytically, we like to say, there are few focus. In reality, when we come to turn around business, I have to be honest, that we have to work on all areas. There's no such luxury of just focused on one or two sector. And we roughly categorized them into four pillars, the fundamentals, delivery, digital, and store format, which you guys should be more than familiar is not bored with the with the repeat focus. So, all of them, all of them have devilized. If I really, really impressed to single out one or two, I will have to say is the great food with great value, as simple…

Thank you, Joey.

Our next question comes from the line of Chen Luo from Bank of America. Please ask your question.

Hi, Joey and Andy. Again, congratulations on another strong set of results. I also have some follow-up questions on Pizza Hut. I noticed in the announcement, Joey described Pizza Hut as another growth engine. We have not seen this level of confidence on Pizza Hut in the past few years. And just now Joey also elaborate on a lot of initiatives regarding Pizza Hut. And in particular, I noticed Joey mentioned that for those satellite stores, the payback could be similar to that of KFC. So, can you actually elaborate on the unit economics of those satellite stores? And also among the 1,300 store addition target this year, can we offer a rough breakdown between our brands such as KFC, Pizza Hut, and other brands? And also, lastly, in terms of margins, is it fair to say that we can -- our medium term normalized restaurant margin for Pizza Hut could possibly return to the level that we saw during the years of 2017 or 2018 before we started to turn around the Pizza Hut business? Thank you.

Thank you. I'll comment on the Pizza Hut comment and then the payback for the stores and then Andy will address the other two questions that you asked. I hope you can see our increasing confidence on our business on our Pizza Hut business in the last four years. But we did take a prudent approach and is very clear what are the steps that we have taken tried it first, and then sales, and then profit. And when we get to the point that we can get all three, then we will grow more. It's just like as I mentioned in previous earning calls, sales is vanity, profit is sanity, and we like both sales and profits. What is even better is even more profit, right? So, that's the growth that come in. The confidence of the Pizza Hut business model it does not come from one or two quarter positive results, it comes from the fact that we have been working very hard on improving fundamentals of the business. So, the pain of working on the fundamental is good thing, thus take time. And the joy of the fundamental improvement is the benefit is long-lasting. It will it will help our business model for the many years to come. It's not because of one-off promotion or et cetera, it's because the improvement in food, value for money, store, look and feel. I mean the majority of our stores is very, very nice looking right now. I mean unfortunately you guys cannot see because you -- it's very difficult for you guys to come from -- to travel from Hong Kong and China. I really look forward for your visit to our new stores, might be a bit too feminine for gentlemen, but it's okay. We care about the…

Okay. So -- hi. Let me address the question about the 1,300 new build that we’re looking at for this year. I think if you look at the breakdown, I think would obviously somewhat similar to before, mainly KFC is a very strong, powerful machines. It continued to generate very strong cash payback. So, we should continue to expect variable as well for KFC and it is going to continue to be the lion share of the new store build. As Joey mentioned, like, we continue to gain confidence in the economics for Pizza Hut. And then especially for the satellite store and a smaller store format. So you should see some accelerations on Pizza Hut’s new store opening in the second half as well. We also -- as you heard and Joey have mentioned on her prepared remarks, we're seeing obviously very strong with customer reception for Lavazza. We triple in our store count, almost triple from about five-store to 14-store in the second quarter. So, I mean, we also have a number of stores in the pipeline, so you should also expect Lavazza coffee business to be a driver. And then this [indiscernible] the Chinese cuisine business, hot dry business. Also, we'll see a uptake in store opening in the second half. So, that's generally the competition of the 1,300 stores. But again, like, I will mention that usually the store opening will be probably faster in the second half -- in the latter part of the year. So, that's generally the trend before the Chinese New Year. And so it is not completely linear, but that generally users see some acceleration in the store growth for new store opening. Now in top Pizza Hut margin, I think we're very pleased with Pizza Hut improvement. As Joey mentioned,…

Yes. Thank you Joey and Andy. This is really helpful.

Operator?

Our next question comes from the line of Anne Ling from Jefferies. Please ask your question.

Hey, thank you very much. Most of my questions been answered. But just one follow-up questions on the cost side. Andy you mentioned about the cost increase for commodity as well as labor. In the past you share with us that in terms of quantified it like for example, in the beginning of the year 2021 you mentioned about labor costs increased by mid-single-digit. Now we're in the second half, maybe I've missed it, but would you share with us that the cost increase for commodity labor costs as well as SG&A? And also may be a breakdown in terms of the CapEx for the $700 million to $800 million CapEx which is the revised number. Thanks.

Okay. Hi, Anne.

Hi.

So, let me address the first question about commodity price and wage increase. Commodity prices I think if you look at the first half we benefited from the lower commodity prices by almost 7% year-over-year. As I mentioned we have seen commodity prices, especially poultry prices have -- which is, I guess, the recent low in the first quarter and have been rising. And then so, we're going to see less benefit, much less benefit of the lower commodity prices in the third quarter compared to the first half. Now, we -- obviously the commodity prices is very hard to predict, but current trends suggest that based on a contract prices and whatnot, such as that maybe perhaps in metal price this year, the commodity prices could transform a favorable 7%, year-over-year, deflation pressure to a inflationary pressure, right. So that's our near-term outlook for commodity prices. Now, in current labor costs. In the first half, our wage increase was about -- wage cost compared to last year was about 3% increase. As I mentioned, we have decided to adjust how much on staff wage and so we have will that wage increases in June and July, and that is about possibly 7% year-over-year increase there. So that's second part of that. And then the third part, I think for the cost of labor is twofold. One is that, obviously delivery due to the higher mix of that. And then if you look at the hiring, I think we also have mentioned over the past two quarter that there's some labor shortage and hopefully with the salary and wage increase over there will ease that situation as well. So we're going to increase hiring. Now, obviously, as Joey mentioned, we continue to look for savings to pay for that, and then we'll continue to do so in second half to look at productivity improvement, how we can better utilize our IT technologies to help that. And then as Joey also mentioned, we continue to try to improve our delivery operation as well and drive efficiency. So -- but that's a short term outlook for us in terms of both COS and COs out. Now, the second question is about the $700 million to $800 million CapEx for this year. I think obviously, the lion share of that is going to be in new store, new view and then the second part is going to be for remodeling. Remodeling continues to be important part of our tax program. We want to keep our restaurants fresh. And so we genuinely have a pretty robust remodeling program and then there was obviously investment in our IT and infrastructure. And then those are the main categories of our spending roughly in third quarter. And then in terms of what was the…

G&A.

,: Third one and at the same point hope folks don’t forget is that last year, we have two acquisitions, one is the consolidations of our Suzhou operation, the other one is the acquisition of Huang Ji Huang both of them would absorb that G&A expenses. And then finally -- and then last year because of the pandemic, we basically would have stop almost all the business travel, and with the improvement in the situations, there will be some return to some, not all, but like some return to some business travel. I think that's normal path. And hopefully that gives you some ideas about the expense and cost environment that we're facing right now.

Thank you, Andy.

Thank you. Our next question comes from the line of Lillian Lou from Morgan Stanley. Please ask your question.

Thanks, Joey and Andy, for the very detailed explanation, I have a question on the new store expansion because I think so far, you've been doing a very good job in terms of managing both very fast store expansion and margin improvement. So I just want to understand more in detail about the increase of store density impact to the existing stores, does that have any impact on the same store sales growth of the existing stores? That's one side. And the other side is yes, the payback and return of new store are quite good. So, how are we going to look in the future with continued store increase, especially we uplifted the target again, what kind of a dynamic we should look at in terms of the new store margin and also the impact to the existing stores? Thank you

Hi, Lillian. Well, thank you for your questions. Obviously, we are very pleased with the pace of store opening with that we continue to capture the market opportunities that is presents to us, especially in the lower tier cities, but also -- and also allow us to better serve our existing market. And we have new designs as you mentioned, our store network in existing markets, so, that we can increase the density and better serve customers need for delivery and take away. So obviously, when you open a new store, especially increasing the density, it's natural to see some sales transfer. New store opening, but that also -- the impact is not the same everywhere. And today, if you look at SSG impact, I think the pandemic obviously is far most, the most important one right now. The sales overall -- SSGs sales overall is quite price sensitive to for example some of the regional outbreak, as we have seen in the first quarter, and as we have seen in June. And so, we have always asked analysts and investors to set up like pay attention to the region outbreak as we are. We don't need to be overly alarmed by that, but we need to stay alert because our experience tell us that periodic region outbreak is to be expected. We have seen that in December or January. We have seen that in June in Guangdong. Now, we're seeing a potential outbreak here in Nanjing and that is still solid situations. So, well driving SSG, there's many impacts, many, many different factors there. But again, like going back to the main point here, which is some. So for more tier cities, there will be some impact, but if you look at lower tier cities overall, the SSG focus…

Will increase store target.

Store target. So, if you look at our store opening, we always have a very disciplined process. And there have been so for as many years and then this continue to be so and will continue being in the future. That's why when Joey mentioned, we're going to try to accelerate growth, she put a special emphasis on possible growth. And so, you know, and then if you look at, our payback period, for both KFC and the Pizza Hut, they will have been very robust and very stable for KFC roughly two years, and for Pizza Hut roughly three to four years. And as to imagine, for some of the smaller store, and, and it's our lifestyle nowadays. The payback period could be even shorter than that. And so, we will continue to do that maintain a balance between, faster growth, to capture market opportunity to better serve our customer, but also maintain, our financial discipline for profitable.

Thank you, Andy. The only thing, I just want to add three colors to -- three highlight to your question. First of all, we would really like to -- our focus on system sales growth in the short term and long term. Because this is not a mature market, yet, there's still a developing market with huge opportunity to open new stores. We are only in 1,600 cities in China, and there are still few 100 cities for KFC and there is 1,000 cities or for Pizza Hut. So let's look at the systems in the short term and long term. Our margin, we always have the balance on the profitable margin growth. And I would like to add three things. One is, in the past few years, both KFC and Pizza Hut, particularly KFC we have made ourselves very flexible. And that flexibility is part of resilience for us to open store -- to open more store within the gap of existing stores and to open more stores in the new cities. I'll give you a few drivers here Andy mentioned, and I would just like to touch upon it. Well, the time travel is the field right now, it probably would stay. We see that therefore what are we doing? We try to grow incremental growth from the data. You know, for example, late night [Foreign Language] is the chicken bone from [Foreign Language]. You know, it's fantastic new product innovation that really drive the sales of the late night. Is it enough to feel the tab of the diet? No. But you know, for now, is -- the dining business is challenging probably will stay but we see the opportunity for incremental business. We also see the opportunity regional menu which we did not -- we have…

Thank you, Lillian.

Thank you. Thanks a lot, Joey and Andy.

Thank you.

Go ahead, operator.

Please go ahead.

And again, our last question comes from the line of Christine Peng from UBS. Please ask your question.

Thank you, Joey and Andy to share so many colors on your company's latest operations as well as management source towards many questions investors have been asking the analysts about. So I have a question regarding the coffee business. I think Joey, you mentioned briefly about the latest operations about Lavazza coffee and enjoy. I remember when I was in China, end of last year I visited the store of Lavazza office. And when I look at some of the commentary on the social media platform, I realized there have been a lot of changes to Lavazza newly operated stores in China compare with one I visited end of last year. So Joey, maybe can you share with us more colors about the latest progress you're making to Lavazza, especially how you think about long term positioning of the brand compare with existing competitors such as Starbucks, and if you can share with us some of the financial details such as store economics, they'll be even more appreciated. Thank you.

Thank you, Christine. I hope one day you got it. You can try our [Foreign Language] and see whether you like it as a as a local person. Competitor cost EBITDA, we let's take a step back. We have three coffee brands in young China, cake, coffee, C&J and Nevada. I'll come to Lavazza. But I am very happy to report play coffee for 2021 first half, we increase the sales of coffee per cup by as much as 30% compared to the pre-pandemic 2019 number. And that shows that our focus on good coffee affordable price is a viable strategy is before the coffee business. C&J, we have been working on it now we have 30 a store. And we've been very transparent that we are learning the operation side of a business of a new business, we have huge respect towards new business. And I'm happy to report that we are there because, you know, a meaningful number of though we'll be breaking even by the end of this quarter and more will be by end of year end. And that allow us to build the people. Business is about people without good people, there's no business. So we build our operation people and we become sharper with our marketing positioning and pricing etc. And these learning are all helpful very helpful. When it comes to the experience of building Lavazza brand in China, it takes much less time compared to CNJ for us to get the operation right to get the marketing right and also with our fantastic partner Lavazza help to get the foot right together Italian flavor of the whole environment, the food, the drain, et cetera. So, Lavazza Andy said earlier, I'm going to emphasize we are going to have a stellar rate of…

Thank you.

Thank you, Christine. Before we end today's call, please know that we will host a virtual investor day on the morning of September 23. Shanghai time, we will announce more details as we get closer to today. With that, we will conclude today's call. Thank you for joining. Have a great day.

Thank you, everyone. Thank you, operator.

Thank you everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.