Ladies and gentlemen, thank you for standing by, and welcome to the Yum China 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. I will now hand the conference over to your first speaker today. Thank you, and please go ahead, Debbie.

Thank you, operator. Hello, everyone, and thank you for joining Yum China’s second quarter 2020 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 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. Reconciliations of the non-GAAP and GAAP measures are included in our earnings release. Today's call includes three sections. First, Joey will provide an update regarding recent developments, then she will offer some highlights around the quarterly results. Andy will then cover the financial results and provide an update on our full-year outlook. Finally, we’ll 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. I will first update you on COVID developments, and then we’ll move on to cover performance in more detail. Throughout the COVID pandemic, we have been committed to safely providing good food, great value, and convenience for our customers wherever they are. Safety is the key word here. At our stores, temperature checks, face masks, and frequent disinfection and cleaning protocols remain in place. A safe and healthy environment creates confidence for our customers and employees, which helps drive recovery in our business. We approach this challenge with an open mind, with flexibility, speed, and the courage to try new things. Our nimble marketing, enabled by our digital infrastructure, helped drive improvements at both of our core brands compared to the first quarter. KFC launched a buy-one-get-one weekend in June for the first time for members. Pizza Hut’s foot traffic was bolstered by its first-ever all-you-can-eat promotion, featuring steak and baked crayfish. We focus our resources on engaging with our members, targeting specific orders and promotions. Our privilege programs drive frequency, spend, and cross-sells. However, we are still experiencing significant headwinds. The recovery path is non-linear and uneven. April and May sales improved sequentially, while June was impacted by delayed school holidays and more stringent social distancing due to a resurgence in regional infection. Our transportation and tourist locations continue to experience significant year-on-year volume declines, which impacts KFC more than Pizza Hut. Around 60 of our stores in Wuhan and Northern China remain closed for the time being. Even with short-term uncertainty, we are enthusiastic about our long-term prospects. In this incredibly challenging environment, we celebrate three important achievements. First, we opened our 10,000th store in July. This is truly an incredible achievement that would not have been possible without our exceptional employees. We are seizing this opportunity to expand our footprint. Second, Pizza Hut has now been serving our Chinese consumers for 13 years. Beginning in June, we kicked off our service anniversary celebrations with an all-new menu and all-you-can-eat promotion. We saw long queues and new customers. We are now a proud food service sponsor of the 2022 Olympic and Paralympic Winter Games in Beijing. We are honored to work with the Olympic Committee to promote Olympic values of excellence, respect, and friendship here in China to our millions of members and customers. These achievements show how Yum China has become deeply ingrained in the life and memories of millions of Chinese people. From the first phase of KFC in 1987 in Beijing to trying something new at Pizza Hut, we are proud to be the largest and still growing restaurant company in China. With the combined effort of our team, we continue our sales recovery, and importantly, remained profitable in this quarter. This profitability is a reflection of our resilience, our adjustability, and the strong dedicated execution of our team. As we enter the third quarter, I look forward to continuing our innovation journey. We are cautiously optimistic. The recent regional outbreak highlights that recovery is non-linear and uneven. While the summer season will be challenging, I’m grateful to be leading a dedicated team, ensuring that we are building a stronger Yum China. So let’s talk about our digital strategy. The benefits of our digital strategy were particularly evident over the past few months. I would like to take some time to talk about how our member program and digital ecosystem have built our resilience, both for the short and long-term. Our over 265 million members provide a strong base for engagement. We interact with members within a digital ecosystem supported by our Super App, strategic partnerships with online platforms, and in-store digitization. Whether letting our customers know about our contactless delivery model or promoting weekend-specific offers, we reach our members faster with greater flexibility and at lower costs. Member sales accounted for over 60% in the second quarter. While overall sales declined during the outbreak, our year-on-year member sales grew by double-digits. We acquire new members in innovative ways using popular social media apps and websites; we convert online traffic into in-store sales. We also engage at the corporate level. Over 10,000 corporations have signed up for our corporate delivery program, bringing entirely new groups of customers through Yum China. Once members are acquired, we are able to design more targeted promotions, which improves the stickiness of our members as they use our Super App or mini programs, eventually upselling members into our Privilege program. We have sold close to 10 million Privilege subscriptions this year. The frequency and spending of these loyal users are more than double the presubscription levels. Overall, we support the average revenue per active member over the past few years. Our members are increasingly loyal to our brand. Engagement is crucial for our member retention. Over years of consumer insights, we have developed award-winning games, marathon clubs, and even one of the largest online children's bookstores on our KFC app. Whether through short-term promotions or long-term member engagement, our digital strategy extends across brands and channels from dining to delivery and takeaway. With this solid digital foundation, we are well-positioned to capture future growth opportunities. Off-premise dining remains a key pillar of growth. Delivery sales accounted for 29% of sales in the quarter, reflecting a 36% year-on-year growth. Our delivery business is top of mind with our consumers. It’s consistently rated highly in taste, convenience, and value. Our dedicated delivery riders once more support growth during this time. At Pizza Hut, digital engagement drove incremental takeaway growth. We’ve redesigned the menu and packaging suitable for takeaway. We use our digital channels to communicate the value and convenience of our one-person set meals. Over half of all takeaway orders were placed through mobile. I’m proud of our achievements thus far, but there’s much more we are targeting. From ready-to-cook, corporate, and late-night deliveries, we have the scale, the resources, and the vision to capture those future opportunities. Now let’s move on to menu innovation and value promotion. Our digital initiatives rely on an enticing innovative menu to get customers excited. Pizza Hut launched its new platinum menu in conjunction with its 30th-anniversary celebration kickoff. Learning from successful limited-time offers, this menu is substantially fresher. It extends our appeal to young and family-oriented customers. We showcase our pizza innovation with our Pizza Air series, thin crust pizzas that appeal to smaller appetites. We extend our leadership in the steak category with thicker Angus steak and importantly, made steak available for delivery. Our Monet afternoon tea sets feature a virtual reality effect of Monet paintings in select stores that appeal to our young, social media-savvy customers. Many menu items also got an upgrade. Our baked crayfish with cheese received high marks on value, and our lasagna was appreciated by young and old alike. I’m really excited about all the innovation in our 30th-anniversary menu. The look and feel show our Pizza Hut positioning, which is always something new. So I hope you will try it soon. KFC brought back favorites during the quarter, with crayfish in the taco to showcase abundance and premium. We extended drinks, desserts, and late-night delivery lines. Our breakfast tofu pudding quickly became a crowd favorite, and we showcased festival innovations with exciting products such as scallops and salted egg yolk rice dumplings. To drive traffic, KFC also launched value campaigns throughout the quarter. Our plant-based protein pilot was successful. Introduced across KFC, Pizza Hut, and Taco Bell, they sold out quickly. Once domestic production may be scaled, this has great potential to bring our brands to new and discerning consumers. Now let me wrap up with a few brand-specific observations. First, KFC. KFC continued to demonstrate its resilience and operational excellence. Second quarter transactions substantially improved compared to the first quarter. Compared to the rest of our portfolio, KFC has a higher concentration of stores located in transportation and tourist hubs. They are impacted by the downturn in business, holiday travel, and delayed and shortened school holidays, together with lingering effects of the upgrade on consumer behavior will continue to pressure sales. We will work on providing value and occasion to draw customers in, but recovery is likely to take an extended period of time. Next, Pizza Hut. Our 30th Anniversary all-you-can-eat campaign went viral with over 80 million views and comments on social media, driving long queues in our stores. We have seen encouraging signs of transaction recovery. However, the delayed and shortened summer holidays will impact our business as well. We will strengthen our offerings for individuals and for delivery and takeaway while family dining volumes recover. Third, Taco Bell has now expanded beyond Shanghai. We opened our first flagship store in Shenzhen, and we’ll be opening soon in Beijing. We are excited to bring this new cuisine to more of China, and we are working hard to create an appropriate business model just right for Chinese customers. Finally, the integration of our Chinese dining unit is on track. Our Little Sheep and Huang Ji Huang store sales are recovering, and we are leveraging the Yum China network in areas of delivery, retail, and logistics to further Huang Ji Huang’s capabilities. With that, I will hand over the call to our CFO, Andy Yeung. Andy, please?

Thank you, Joey, and hello, everyone. I will first address financials and developments in the second quarter, then provide some color on our outlook. Unless noted otherwise, figures mentioned refer to the second quarter of 2020. All percentage changes are before the effect of foreign exchange. Now let me start with the second quarter results. With over 99% of stores opened, total 2Q revenues recovered to 93% of the prior year. In the first quarter, revenues were 79% the prior year level. Both of our core brands had quarter-over-quarter improvement in transaction volume. However, traffic is still below pre-COVID levels. KFC’s same-store sales recovered to 90% of prior year compared to 89% in the first quarter. We saw sequential increases in average unit volumes in April and May but a weaker June. While weaker weekday and dining recovery benefitted from our promotional campaign, regional differences persist. Our transportation and tourist hub sales, which accounted for a high single-digit sales mix, were still significantly and negatively impacted. The higher mix of younger school-age customers meant that the delayed and shortened school holiday had a bigger impact on KFC and Pizza Hut. Lingering effects of the outbreak on consumer behavior remained a headwind. Pizza Hut same-store sales recovered to 99% of the prior year’s figures, a significant improvement from the first fiscal quarter. We used segment sales were 69% of the prior year. Relative to KFC, Pizza Hut has significantly lower exposure to transportation hub locations. Our stores in lower-tier cities continued to perform better than those in higher-tier cities, partly driven by a higher concentration of transportation hubs and tourist locations in higher-tier cities. Our strong brand equity also helped market performance in lower-tier cities. The sales recovery is nonlinear and uneven. As Joey mentioned, growth momentum was slowed by the resurgence of regional infections, delayed and shortened summer holidays, and continued anemic sales at major transportation and tourist locations. We opened 169 stores, mostly at KFC. Construction activities have mostly normalized, and the pace of new deals is on track. Restaurant margins were 13.7% compared to 14.7% last year, mainly due to sales leveraging, which was partially offset by our efforts to control costs and one-off benefits. The cost of sales was 32.9%, a 1.4% year-over-year increase. While protein supply eased in the second quarter, our contracts are generally signed three to six months in advance. Commodity inflation for the quarter was 3%. Value promotions are key to driving traffic into our stores, which will also impact our margins. The cost of labor was 22.7%, a 0.7% year-over-year decrease. Productivity improvements and temporary relief more than offset the impact of sales leveraging and wage inflation. Within this figure, wage inflation was 3%. This was used in many of our markets as government-mandated increases in minimum wage were deferred. An increased proportion of delivery sales contributed to higher labor cost percentages. These factors were mitigated by digital scheduling tools and profit management real-time monitoring, which drive improvements in productivity. Lastly, reductions in social insurance payments were roughly $30 million. We negotiated approximately $10 million in rental relief in this quarter. We implemented cost realignment measures and benefited from reduced social insurance payments. However, due to the timing of government incentive receipts, G&A costs increased by 8% year-over-year. Excluding the impact of timing shifts of government and other one-time expenses, G&A would have decreased slightly year-over-year. We recorded impairment charges of $24 million. We achieved operating profit of $128 million, bolstered by cost realignment and one-time relief. Looking below the line, our gain from equity investment in Meituan was $45 million, which is before $40 million in U.S. income tax related to gains recognized during the second quarter and prior periods. Our effective tax rate was 25.2%. Net income was $132 million. Our diluted EPS was $0.34, and adjusted diluted EPS was $0.35. Now I will turn to our outlook for 2020. The situation is still evolving. However, resilience, adaptability, and innovation are key strengths as we navigate an unprecedented environment. Our outlook is based on certain key realities. One, transportation and tourist volumes continue to be anemic; two, the delayed and shortened school holidays will impact sales momentum; three, the COVID situation is unpredictable. With its lingering effects and regional outbreak, we expect the recovery to remain nonlinear and uneven; four, sales deleveraging will continue to pressure margins, especially as one-time government and rental relief are phased out. In response to this reality, we need to be patient and vigilant in rebuilding our sales momentum, focusing on our strengths in menu and digital innovation. Successfully leveraging our member base and digital ecosystem to drive frequency and spending will be key. Our promotions are adaptable. We have seen some successes in building weekend recovery through greater value offering. Lastly, we are taking decisive actions to realign our cost structure. As we look ahead, we continue to target 800 to 850 new stores for this year. Investment in digital, technology, and supply chain continues. Our 2020 CapEx plan is unchanged in the range of $500 million to $550 million. We expect wage inflation to stay at mid-single digits this year as minimum wage increases have been delayed in many provinces. Finally, while protein supply in China appears to be loosening, our best estimate of 2020 commodity inflation is for low single-digit. Risks to the global supply chain remain, which may have potential implications for our domestically sourced products. As previously announced, we will increase our stake in the Suzhou KFC joint venture. The transaction is expected to close in August, subject to the satisfaction of closing conditions. We see the new normal of reduced travel and social activities while bouts of disruption occur as secondary regional outbreaks are contained. The lingering effects of COVID will impact consumer behavior. That being said, with our digital infrastructure, solid execution, and strong balance sheet, we are prepared to capture opportunities for recovery and growth. With that, I will pass you back to Debbie to start the Q&A. Debbie?

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

Your first question comes from Chen Luo from Bank of America. Please ask your question, Chen.

So I noticed that we highlight a few risks and challenges throughout the conference call. And also in the earnings announcement, you also mentioned that these challenges continue to impact operations in July. Can you also help to give us a little bit more color on how we compare the July performance with June? Are we seeing any sequential improvement? And just now, Joey, you also mentioned that the summer season is likely to be challenging. Do we have any rough idea as for the trend in Q3 versus Q2? Thank you.

Hi, Chen Lou, let me take this question first, and then maybe we can add a little bit more color later. In terms of the sequential improvement in July compared to June. As we mentioned before in our prepared remarks, right now there’s a couple of headwinds that we see. So we have seen transportation hubs as well as tourist locations, which account for a high single-digit of our sales mix being impacted quite significantly, right, by the COVID effect, down 50%. So I think unless there are significant changes in the situation, I think that will continue to be a headwind for us. We also mentioned that shopping and delayed school holidays are likely to have a large impact on KFC compared to, say, Pizza Hut. As you know, normally in China, the school holiday started in June. This year, because of the COVID situation, it has been delayed until mid to late July, depending on the location and the provinces. So I think we will still have some impact in July. For the fourth quarter, this year, we have a holiday shift for the Mid-Autumn festival, which last year was in September. This year, it’s going to be in October 1, I think. This holiday shift will probably impact us upfront given that shift. So those will remain some of these challenges. Also, in June, we had this new outbreak in Beijing that impacted sales in, not just in Beijing, but the surrounding provinces. The situation has improved, specifically in Beijing; however, we do see other regional outbreaks, for example, in the southwestern areas. So we do expect that these regional outbreaks to persist until either a COVID vaccine or effective treatment is available. Obviously, this summer, we got a lot of rain here in Eastern China. In the Yangtze River basin, several provinces have experienced flooding, which is quite severe compared to the past few years. These conditions are expected to impact our operations in the eastern part of the country, which is currently our strong base. So I think we still see pretty strong headwinds and challenges in the third quarter. However, as we mentioned, we have a very strong digital platform, and we have very strong execution, including our logistics operation, which continues to work well even with the flooding situation in some regions. We will make efforts to drive sales recovery and also continue to be vigilant on our cost structure. We have made some cost alignment, as we mentioned on our prepared remarks and in our earnings release, that is showing up quite well. If you look at our labor activities for the quarter, they have improved. Our G&A, right, so excluding all these one-time and timing issues, we actually see G&A decline year-over-year, which is quite significant, given that we would normally have merit increases, wage increases, and new hires. That’s my comment. Hopefully, that addressed your questions.

Thank you, Andy. I guess, in the last earnings release, we mentioned the challenge in transportation hubs and tourist locations and the summer holiday being delayed and shortened. The delay in both June and July was around two weeks. For this earnings release, Andy just also mentioned the regional resurgence of COVID-19 and the flooding challenges in different parts of China. So I think we are ready for the next question. Thank you.

Thank you.

Your next question comes from Lillian Lou from Morgan Stanley. Please ask your question.

Thank you. I have a follow-up question on the same-store sales growth. Obviously, Pizza Hut did very well, actually better than KFC in the second quarter. Well, I think Joey also mentioned in the opening remarks that KFC was more affected. Just wanted to understand a little more in detail in terms of the impact on those two major banners’ recovery pace; why it’s a little bit different under the headwinds? And related to that is more the outlook: how we’re going to picture KFC and the Pizza Hut same-store sales growth recovery pace in the second or the fourth quarter? Thank you.

Thank you, Lillian. For KFC and Pizza Hut, as I mentioned in my presentation earlier, both brands faced challenges in Q2, but they performed well in their own different ways. Let me make a few comments one at a time. KFC rebounded to 89% same-store sales in the first quarter, which was very quick, supported by a few weeks of strong sales positioned before Chinese New Year and also very few trust restaurants opened during the pandemic time. Pizza Hut, due to the closure of dining business in many of our stores during Q1, saw more impact. However, once the dining business was allowed in Q2, Pizza Hut's dining recovery bounced back quickly. I can share with you that the Pizza Hut dining business recovered from 40% to 55% during Q2. This has helped significantly. In terms of recovery path and outlook, both brands' fortunes depend on resilience, adaptability, and innovations. For the short-term initiatives, we have been pushing value promotions in response to challenges and opportunities. We see that the weekends have been particularly challenging. During Q2, we shifted our promotions toward more weekends and holidays, and we are seeing results. Our product innovations for KFC and Pizza Hut have been quite impactful as well. For KFC, we launched the breakfast tofu pudding, which became a crowd favorite. For Pizza Hut, we released the steak rice and crayfish pasta, which were very popular. In Wuhan, our crayfish pasta was sold out very well. These are the short-term initiatives that we have been focusing on. We’re transforming not just because of COVID but also to work toward a long-standing business model throughout innovations. For KFC, we are transitioning into the B2B2C framework with corporate delivery memberships, and we've already signed up more than 10,000 companies in this program. This initiative has significantly impacted our transaction numbers in both Q1 and Q2; for Q1, we saw a 27% increase in KFC transactions, and for Q2, a 12% increase. This is driven by corporate delivery and large orders, providing us another source of traffic. The COVID-19 situation gave us the push we needed to innovate our delivery system. In these efforts, we’re also placing emphasis on digital capabilities. We worked hard on digital initiatives even before the pandemic, and the COVID-19 situation shifted the focus on mobile orders, with Pizza Hut’s digital orders rising dramatically from 29% to 61% year-over-year in Q2. The changes in our delivery capacities have manifested in very strong growth for our takeaway business, especially in the one-person meals, with more than 40% of non-dining business from sales generated through delivery or takeaway platforms. Membership continues to be a prominent focus area. Right now, Pizza Hut has over 80 million members, and more than 50% of sales come from this member base, providing us strong engagement opportunities at a low cost. These factors allow us to see strong potential for revitalization and ongoing growth going forward. Thank you, Lillian.

Thanks a lot, Joey.

We have our next question from Michelle Cheng from Goldman Sachs. Please ask your question, Michelle.

Hi, Joey, Andy, a question about Pizza Hut. The second quarter improvement is quite encouraging, as you mentioned. We are pushing these takeaway, one-person set, etc. So can you share with us what we are going to focus on in the second half? Given this kind of sales mix change, are we going to see some downsizing of the store or some new store format going forward? Thank you.

Thank you, Michelle. For the revitalization of Pizza Hut, I stay away from the term ‘turnaround’ because Pizza Hut was never so bad that it needed a turnaround. It has always been a very profitable business. But for the revitalization of Pizza Hut, we have a clear step-by-step process. Good things take time. In the last few years, it took us 18 months to turn same-store sales from negative to positive, which is no small feat. Let’s look at what we have done in the past years. One is about providing value for money and the quality of products. Last year, we upgraded more than 70% of our menu. This year, when we launched the 30th-anniversary platinum menu, we further enhanced the quality of our offerings, keeping in mind that Chinese customers demand good food at a fair price. Additionally, we took our time to rebuild our delivery infrastructure and to ensure that our delivery service quality remained high. This upgrades our delivery model and improved the delivery rider training. Without quality delivery, growing sales would have been difficult. We've seen the results from the delivery model since improving it in 2019. We have also worked on the digital infrastructure and projects, which include enhancing our mobile ordering and digital payment capabilities. Currently, we have a significant increase in pre-orders and digital orders, leading to successful takeaway results. This success has not come immediately; it requires hard work. We've been upgrading our team, and I’m proud of the focus, innovation, and execution demonstrated by our team. Regarding our store environment, we are focused on store refreshes instead of building new stores right now. Over the past three years, we have refreshed about 50% of our entire Pizza Hut store portfolio, which includes reducing store sizes for better returns on investment. This strategy allows us to improve the quality of delivery. We will continue to refresh stores aggressively while maintaining a stable overall store count. We will adapt our new store models based on these insights. Additionally, the ongoing cost realignment is not just a reactive measure; we will work on an efficient long-term cost structure realignment. Our learnings from this challenge will reinforce our advantages in cost structure that will benefit us for years to come. Thank you, Michelle.

Thank you, Joey.

Your next question comes from the line of Kevin Yin from JPMorgan. Please ask your question, Kevin.

Thank you, Joey and Andy. I have two questions. The first one is a technical question for Andy. Can you help us to understand why the operating leverage impact on Pizza Hut is not as severe as that on KFC? Because if you look at the first quarter, second quarter, their margin—restaurant margin—has remained pretty stable whereas KFC’s has declined. So that is a technical question. Second, I’d like to know more about the impact from the flood. Can you give some specific examples of how badly store sales were impacted in specific regions due to the flooding?

Thank you, Kevin. Let me take your first question regarding the operating leverage impact on Pizza Hut and KFC and how they differ. As we mentioned, KFC had a significant improvement in same-store growth compared to previous quarters; in the first quarter, it was down by about 10%, while Pizza Hut showed a 12% decline. The growth improvement we observed does mask the actual performance. If we look at both brands, the SSG calculation excludes temporary store closures. The store reopening in Q2 contributed to system sales recovery rates improving both brands. Year-on-year, for Q2, total system sales improved from negative 20% in Q1 to about 1% in Q2. This indicates that, overall, we recognize improvement trends at both brands. Notably, there were positive sequential gains observed in both SSG and system sales. However, both brands faced headwinds in June from regional outbreaks and the delayed summer holiday along with flooding impacts in several provinces. Pizza Hut has significantly lower reliance on transportation hubs compared to KFC. The key determinant for Pizza Hut’s operational resilience lies in its lower exposure to transportation and tourist hubs. This aspect influenced the comparative stability in operating margins across both brands. Considering long-term growth, labor productivity and effective cost controls will drive the improvements. In regard to the floods, some precise impacts include low-traffic stores, particularly affecting higher-tier cities like Wuhan. For example, our stores in lower-tier cities generally regained business faster. In a small town where the entire town was affected by gas supply issues, it actually benefitted our stores, which are electric-based. This meant customers came to us for hot meals, helping drive business during adverse conditions.

Why are the sales in lower-tier cities holding out? One reason is that only a pocket of stores in lower-tier cities faced impacts, as opposed to tier-one cities where larger geographic areas experienced dips due to tourist and transportation hub sales influences. We have seen stores in small towns performing well, partly due to scarcity of competition in those areas. Our delivery model's rapid growth is another contributing factor. Delivery service saw a higher uptake in lower-tier cities compared to higher-tier cities. I hope that provides insight into our sales dynamics despite flood challenges. Thank you, Kevin.

Thank you, Joey.

Your next question comes from Anne Ling from Jefferies. Please ask your question, Anne.

Hey, hello, management. Thank you very much for taking my call, my questions. I have a question regarding some of these one-off benefits. Andy, you mentioned about the $30 million in the second quarter related to social insurance payment reductions and also about $10 million rental relief. I just wonder: looking at recent start-ups results, they mentioned some VAT exemptions and how they supported same-store sales and profitability positively. Are you experiencing any similar VAT exemption benefits? If so, how soon will they be enacted, and what procedures are involved? Will you have any additional one-time benefits in this quarter? Thank you.

Hi, Anne, thank you for the questions. The VAT and its impact is a bit complicated. We're aware of and have evaluated the VAT reductions and temporary suspension introduced by the government earlier in the year. Generally, the VAT we collect from sales is less than our VAT credits from company services, so there are offsetting factors at play. After a careful analysis, we do not foresee any meaningful impact on our top line or bottom line from these VAT exemptions initiated this year. However, we will continue monitoring since the topic of tax is complex. Regarding other one-offs, as stated, we received reductions in social insurance payments in both Q1 and Q2, but the government launched that program in February and extended that to June. Unless there’s a new update from the government regarding its extension, we may see these one-time benefits dwindle in Q3. The rental relief offered in Q1 will not be as impactful now compared to the first quarter, given that businesses are beginning to recover. We do expect these one-time benefits to lessen as the economy stabilizes.

Okay, got it. Thanks.

Your next question comes from Christine Peng from UBS. Please ask your question, Christine.

Thank you, Andy. So I have a question regarding the cost alignment you mentioned earlier in your presentation. Can you elaborate on what measures you are implementing for this cost alignment? What’s going to be the margin implication, especially for Pizza Hut, once revenue normalizes to pre-COVID-19 levels? Thank you.

Okay, Christine, thanks for your question. As we look into our cost structure adjustment, we have two main objectives: First, to bring flexibility to our cost structure to handle contingencies like we have now seen in COVID-19. Second, we’re focusing on enhancing overall efficiency in cost management. We're actively reevaluating every major category of our cost components. For instance, in terms of POS systems, we’re pushing towards more scalable and wearable options. We’re also using technology to minimize wastage at restaurants and improve inventory turnover, responding swiftly to any demand changes. For labor, we have shifted to more flexible labor arrangements, allowing us to utilize variable labor components effectively. Digital technologies, including scheduling tools and monitoring systems, have played a key role in improving productivity. We invest continuously in technology across all facets, from our storefronts to kitchen operations. With respect to occupancy and other expenses, including labor, we negotiate contracts to ensure we retain flexibility in our expenditure. We aim to enhance store-level performance by lowering costs on a per-store basis, such as depreciation procedures, and by finding new ways to manage labor costs efficiently. By maintaining flexible lease agreements as well as optimizing our rent structures, we can mitigate fixed liabilities. On the G&A side, we’ve undertaken significant actions that have led to decreased expenses year-over-year. Once we’re back to pre-COVID sales, I think these alignments will enhance our margins moving forward, particularly for Pizza Hut.

Thank you, Andy.

Thank you, Andy. Can I just ask the…

Sure.

We have one last question from Xiaopo Wei from Citigroup. Please ask your question, Xiaopo.

Hi, thank you for taking my questions. I have a very quick question on Pizza Hut. If you look at the Pizza Hut recovery, actually, not only the top line but also the profit improved a lot quarter-on-quarter. You mentioned several factors, but I think we can conclude that consumer behavior changes post-COVID may actually put Pizza Hut in a better position for revitalization. Given my observation that other dining players are recovering slower than Pizza Hut, can you give us additional insights on this?

Hi Xiaopo, thank you. We are certainly grateful to see recovery in both top lines and bottom lines. As I mentioned, recovery in dining has been beneficial, and the bottom line recovery has been, to a great extent, due to sales leverage returning. However, there are several factors that explain our stronger results. I'm not sure I would attribute this purely to COVID-19 presenting an opportunity; our preparation in the past few years played a significant role. Our innovation capabilities and food quality have kept us resilient. We possess the ability to maximize ingredient use for cost-efficient food preparation suitable for takeaway. For example, our innovative steak rice, which is prepared using the pizza oven, demonstrates both cost-effectiveness and operational efficiency in service delivery. Our consistent investments in quality delivery, bolstered by the integration of delivery riders back to our operation, ensure timely service to our customers amidst surges in food delivery demands across various channels. When it comes to digital capability, we have seen rapid enhancements, spurred by our previous efforts to enhance our mobile ordering capabilities. The efficiency in pre-orders has been a boon, giving our takeaway service a robust boost. Another point worth mentioning is our long-term focus on building membership engagement. We now have over 80 million members with significant revenue contributions per member, amounting to over 50%, allowing us to communicate offers effectively at scale. Together with improved store environments due to our commitment to renovations, our value-for-money pricing, and quality food offerings have all contributed to effective campaigns, such as our all-you-can-eat strategies. I strongly believe we have positioned ourselves to recover quicker than casual dining options, given the changes in consumer behavior post-COVID. We’re excited about our ongoing journey of revitalization at Pizza Hut. Thank you, Xiaopo.

Thank you, Joey, and stay healthy, please.

Thank you. You too.

Okay. There are no further questions at this time. I’ll now hand the conference back to your presenters for any closing remarks.

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

Thank you, everyone.

Thank you. Thank you.

Yes, ladies and gentlemen, that will conclude today’s conference call. Again, thank you all for participating. You may now all disconnect.