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YUM CHINA HOLDINGS, INC.

(YUMC)
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Yum China : 1Q 2021 Earnings Conference Call Transcript

04/28/2021 | 09:42am EDT

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

Q1 2021 Yum China Holdings Inc Earnings Call

EVENT DATE/TIME: APRIL 28, 2021 / 12:00AM GMT

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APRIL 28, 2021 / 12:00AM GMT, Q1 2021 Yum China Holdings Inc Earnings Call

CORPORATE PARTICIPANTS

Debbie Ding Yum China Holdings, Inc. - Senior IR Manager

Joey Wat Yum China Holdings, Inc. - CEO & Director

Ka Wai Yeung Yum China Holdings, Inc. - CFO

CONFERENCE CALL PARTICIPANTS

Brian John Bittner Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst Chen Luo BofA Securities, Research Division - MD

Hau-YeeYan HSBC, Research Division - Hong Kong and China Consumer Analyst Kin Shun Ling Jefferies LLC, Research Division - Equity Analyst

Lillian Lou Morgan Stanley, Research Division - Executive Director

Michelle Cheng Goldman Sachs Group, Inc., Research Division - Executive Director

Yan Peng UBS Investment Bank, Research Division - Executive Director and China Consumer Staples Sector Analyst

PRESENTATION

Operator

Good day, and thank you for standing by. Welcome to the Yum China's First Quarter 2021 Earnings Conference Call. (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.

Debbie Ding Yum China Holdings, Inc. - Senior IR Manager

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 contain 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 measure is included in our earnings release.

Today's call includes 3 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?

Joey Wat Yum China Holdings, Inc. - CEO & Director

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

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APRIL 28, 2021 / 12:00AM GMT, Q1 2021 Yum China Holdings Inc Earnings Call

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 flexibly, 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 in the first quarter. During Chinese New Year, we kept our operation simple to address the heavy foot traffic. We focused on our signature products of fried chicken and burger. Our Golden Bucket, (Xinchunjintong), offered abundant value and resonate well with customers.

With a variety of buckets, we captured different party sizes. In the off-peak period, we brought back KFC's signature beef wrap, (Nenniuwufang), and add crayfish to make it more premium and exciting. We also launched the new Chongqing Chili Pot Burger, (Malaxiangguobao). As part of the offering, we ran a special promotion with the popular action role-playing game, Genshin Impact, (Yuanshen), which was very well received by younger customers.

Our leading digital and delivery capabilities enable us to stay agile in this fluid situation. Despite the recovery in dine-in, delivery remains popular and accounts for 28% of sales, up 10% compared to pre-COVID level in first quarter of 2019. We drove this rapid pace of growth through our hybrid delivery model, omnichannel, marketing in our own Super App and aggregators drive demand, while fulfillment is done by our own dedicated riders. The -- this allowed us to capture delivery demand with sufficient riders, which was especially crucial in ensuring the success this Chinese New Year.

Delivery growth was also enabled by our continuous investment in strengthening our delivery capabilities. We started trade zone-based rider sharing in 2019. Last year, we upgraded our rider platform to improve zoning, rider routing and monitoring. We also started testing rider sharing between KFC and Pizza Hut. This is the first time we put the platform through a test during Chinese New Year peak period, and we are pleased with the progress.

Leveraging our digital assets and direct connections with our over 290 million members, we were able to shorten the lead time of our marketing campaign and modify them so that we can be more responsive to changing market conditions and consumer demand, of course. Our digital infrastructure also allow us to deploy the appropriate supply and staffing level where needed.

Digitization is essential to operating efficiency. As part of our end-to-end digitization initiatives, we pilot launched an AI-enabled restaurant inventory management tool, leveraging historical data, recent trends and real-time inventory levels. This tool improves forecast accuracy for our limited time offer. This enables us to optimize inventory and improve productivity.

Now let's move on to Pizza Hut. We are encouraged by Pizza Hut's strong recovery in the first quarter. Same-store sales grew 38%, and operating profit reached $60 million. These results reflect our efforts to improve fundamentals.

Let me provide an update along the 4 key pillars. First, our product offerings have significantly improved over the past few years. We have several successful product launches during Chinese New Year, such as surf and turf platter with seabass and steak, (Kaoluyuniupaipinpan); a flower-shaped stuffed crust pizza, (Zhixinhualun) pizza, and year of the ox holiday feast set, featuring signature products, (Bishengjuniuyan). These products were great for sharing and were well received by consumers.

In March, Pizza Hut refreshed its menu, replacing 40% of the menu with new or upgraded offerings, such as beef wellington and roast

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APRIL 28, 2021 / 12:00AM GMT, Q1 2021 Yum China Holdings Inc Earnings Call

beef tapas. We also introduced Portuguese chicken curry, our popular dish on the delivery menu to dine-in.

We also have been unlocking the growth potential of breakfast and afternoon tea. We strengthened the menu with new offerings, such as French toast for breakfast and a 3-layer tea set for afternoon tea time.

Apart from good food, we have also been actively engaging customers both off-line and online. During Chinese New Year, we celebrate the festival with consumers by bringing in some of China's intangible cultural heritage, such as shadow puppetry and paper cutting into our stores. And then on the digital front, we have been strengthening our membership program in Super App to engage members and improve customer service. Our member base exceeded 90 million and contribute 55% of total sales, up 9 percentage points year-over-year. Digital ordering increased to over 80% of sales from 65% a year ago.

As table-side mobile ordering became more popular, we are also applying digitization and automation in our kitchens to improve operations. As part of our multi-phased intelligent kitchen project, we started to roll out an AI-enabled tool to pace food preparation and provide real-time metrics of kitchen performance. Initial results have shown improved efficiency and customer experience.

Third, Pizza Hut is strengthening its delivery, takeaway and ready-to-cook offerings. Delivery accounted for 35% of sales, an increase of over 10% from pre-COVID level in the first quarter of 2019. While growing from a small base, we are expanding our takeaway and ready-to-cook business through menu innovation and making them more convenient for consumers.

Lastly, we enhanced our store portfolio through accelerated remodels and new store formats. Since 2018, we have refreshed nearly half of Pizza Hut stores to make them more relevant to our consumers. This is over 1,100 stores. As we promised in the 2019 Investor Day, average store age is now below 3 years. The stores look great. The new small store format, which includes the hub-and-spoke model, which is also mentioned in the 2019 Investor Day, is creating more opportunities for Pizza Hut's expansion, enabling us to capture the growing demand for off-premise dining. Of the 44 new units that we opened in the first quarter, over half are in small store format. I'm confident that we will unleash Pizza Hut's growth potential through this combination of much-improved fundamentals, strong digital capabilities, multiple sales channels and rejuvenated assets.

In summary, we're pleased that our brands react quickly to the fluid market conditions and delivered strong operating profit despite sales pressures. Most importantly, we remain optimistic about our long-term growth opportunity in China. We will continue to accelerate store expansion for our core brands, grow our emerging brands and enhance end-to-end digitization and intelligent supply chain to build a bigger and nimbler Yum China.

While we are optimistic about our future, we remain cautious about near-term conditions. Occasional COVID outbreaks, like we saw recently in Yunnan, are a constant reminder that we are not back to normal yet. Tightened public health measures continue to be a daily routine and continue to have a lingering impact on consumer behavior. Dine-in volume is still well below pre-COVID levels, but we are not sitting still. Our nimble and innovative culture enable us to adjust marketing and operations quickly as things evolve.

With that, I will turn the call over to Andy. Andy?

Ka Wai Yeung Yum China Holdings, Inc. - CFO

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.

Now 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 impact 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 2-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

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APRIL 28, 2021 / 12:00AM GMT, Q1 2021 Yum China Holdings Inc Earnings Call

2019, benefiting from new units and consolidation of Suzhou KFC and 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. This impact 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 2-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 the recovery of traffic. On a 2-year basis, sales recovered to approximately 95%, led by a 2% increase in traffic. This is a true testament to the success of the brand has achieved in executing its revitalization plan. Unlike KFC, the increase in delivery and takeaway mix contributed to lower ticket average versus 2019. Restaurant margin was 18.7%, up 8 points compared to last year. This was mainly driven by sales leverage, operational excellence and favorable commodity prices. Cost of sales was 30.2%, which was 180 basis points lower than last year. Commodity prices declined by 7% year-over-year, mainly helped by lower poultry prices. The impact was partially offset by investment in promotion to drive traffic.

Cost of labor was 23.3%, 220 basis points lower than last year. Sales leverage and labor productivity improvements more than offset wage inflation and diminished government subsidies. Given the labor shortage that we are experiencing, we are still actively seeking to hire additional restaurant staff. Occupancy and other was 27.8%, 4 points lower than last year, mainly attributable to sales leverage and savings in other operating costs. We also received approximately $6 million in rental reductions and government relief.

Compared to 2019, restaurant margin was relatively flat. The productivity gains and cost control offset sales deleverage, investment in value promotions and increased rider costs associated with the rise in delivery volume.

G&A expenses increased 24% year-over-year, mainly due to a timing shift of government incentives, gradual phaseout of COVID-19-related relief and the consolidation of Huang Ji Huang and Suzhou KFC. Excluding this impact, G&A increased 3%, reflecting our ongoing cost controls.

Operating profit was $342 million, compared to $97 million last year. The increase was mainly driven by sales and restaurant margin improvement, partially offset by the increase in G&A expenses.

Our effective tax rate was 29.6%. Net income was $230 million, and adjusted net income was $233 million. Excluding $16 million mark-to-market investment loss, it was $249 million, up 225% year-on-year. Diluted EPS increased to $0.53. This reflects common shares that were issued as part of our secondary listing in Hong Kong in September 2020.

Now let's turn to the outlook. As Joey noted, we are optimistic about our growth opportunities in China, but we remain cautious about the near-term environment. While the pandemic impact is subsiding, we must be mindful that the pandemic is not over yet. The full recovery takes time with an uneven and nonlinear recovery path.

We are confronting a couple of realities here. First, preventive measures will remain in effect. This will have a continuing impact on consumer behavior. Sporadic outbreaks remain -- remind consumer of the lingering risk. Social distancing and smaller gathering may persist for some time. Dine-in occasions are still well below pre-COVID levels.

Second, consumer spending is cautious. Government data shows that despite apparent recovery in domestic travel volume during Qingming holiday weekend in April, the related travel spending was still down over 40% comparing to pre-pandemic level in 2019. In fact, sales at our transportation location remains well below 2019 levels. Against this backdrop, we expect it will take time for same-store sales to fully recover to pre-COVID levels. We will focus on driving top line growth with compelling value propositions, more marketing campaigns, product innovations and digital engagement with consumer for both dine-in and off-premise occasions. While necessary, this initiative will pressure our margin.

Upon that, we face other cost headwinds. The tailwind of favorable commodity prices in the first quarter will likely gradually subside. At

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Disclaimer

Yum China Holdings Inc. published this content on 28 April 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 April 2021 13:41:01 UTC.


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Sales 2021 10 107 M - -
Net income 2021 869 M - -
Net cash 2021 4 977 M - -
P/E ratio 2021 34,1x
Yield 2021 0,73%
Capitalization 29 164 M 29 164 M -
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Nbr of Employees 400 000
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Number of Analysts 25
Average target price 71,51 $
Last Close Price 69,34 $
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Spread / Lowest Target -18,4%
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NameTitle
Joey Wat Chief Executive Officer & Director
Andy Yeung Chief Financial Officer
Zu Liu Hu Independent Non-Executive Chairman
Leila Zhang Chief Technology Officer
Adrian Ding Chief Investment Officer
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