Thank you for waiting. Welcome to the Yum China Second Quarter 2024 Earnings Conference Call. I will now turn the call over to Ms. Florence Lip. Please proceed.

Thank you, operator. Hello, everyone. Thank you for joining Yum China's Second Quarter 2024 Earnings Conference Call. On today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. You can find the webcast of this call and a PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency, unless otherwise noted. Now I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. Today, Yum China reported record levels of revenue, operating profit, and EPS for the second quarter. System sales grew 4% on top of 32% growth in the same period last year. Core operating profit grew 12% to USD 275 million. EPS increased 19%. I would like to thank our colleagues for their hard work and innovative spirit. We are navigating a complex and dynamic environment, but we see the many challenges more as opportunities. With our industry-leading capabilities and our scale, we are turning these situations to our competitive advantage. We have taken aggressive steps to drive revenue and profitability. I would like to highlight three of them. First, we took a fresh look at every key process and cost element in our businesses. We made counter innovations to improve our operational efficiency, enhance profitability, and increase resiliency. We are already seeing results. We are achieving major cost savings and reinvesting them into food and value. Second, we broadened our addressable market and held market share with our sharp focus on value for money and innovative products. Our transactions and delivery sales both grew by double digits in the second quarter. We will continue to innovate across our menu to address customer needs. Third, our breakthrough business models, K-Coffee, and Pizza Hut WOW achieved encouraging initial results. These stores delivered incremental same-store sales and incremental profit. They are showing great future potential. These strategies are working well. Q2 was our most profitable second quarter since our spin-off. Restaurant margins stabilized, and OP margin expanded to 9.9%. Let me first talk about our initiatives to drive operational efficiency. These initiatives cover all aspects of our organization. First, Project Fresh Eye, launched in Quarter 4 last year, helped improve OP margins this quarter. We are shooting for best-in-class and best-in-cost. We are assessing our operations from our RGM, in other words, store managers' point of view, supporting our RGMs better and faster. From our restaurants to back offices, we are reducing complexity and simplifying operations. All our major initiatives are now in place. The result is still unnecessarily process burden on RGMs and better efficiencies. Separately, we launched Project Red Eye at the end of Quarter 1 to improve our supply chain efficiency. Our goal is to spend better and buy better. To spend better, we are assessing our operations from our customers' point of view, identifying areas that add no value for them. We are also simplifying our ingredient SKUs packaging and menu in a certain segment of stores and select dayparts without compromising sales. To buy better, we are sourcing directly from farmers and producers for certain categories by systematically examining our operations from a fresh perspective, we are uncovering numerous opportunities. We are doing all of this while ensuring quality. Lastly, AI and automation will continue to play a big role in our business. We have automated major restaurant management tasks from sales forecasting to labor scheduling and inventory management. We have rolled out iKitchen to all Pizza stores. This integrated AI system enhances food quality and improves operational efficiency. We were among the first in our industry in China to adopt generative AI in 2023 and to turbocharge our back-office processes. We are working on a few dozen generative AI applications, including consumer insights, customer support, food safety, and new product innovation. These tools are already helping us improve efficiency and make more informed data-driven decisions. We are making great progress with these measures. Some have already impacted our second quarter results, while others will take more time to bear fruit. Importantly, these are structural improvements that will bring long-lasting benefits. With these measures in place, we have the ability to compete on value and pursue growth in this dynamic environment. With that, let me turn to our brand strategy, starting with KFC. In our 37 years in China, KFC has introduced many popular product categories. Recent innovations include our juicy burgers and whole chicken. Customers appreciate these new products, but they also love the fresh energy we bring to our iconic brand. In May, we combined our Original Recipe Chicken and mashed potatoes to create a brand-new burger, the Original Recipe Chicken Burger. By the way, the classic way to enjoy KFC's Original Recipe Chicken is with mashed potatoes, at least for kids in China. In the past, they were ordered separately. Now we put them together into one burger. As one customer told me, it is a childhood dream come true. This innovative burger sold out in many locations in just two days and drove incremental sales and profit. Since it was so popular, we launched it again for a limited time in June. K-Coffee is available in all KFC stores. Its sales exceeded RMB 1 billion in the first half of 2024, up 26% year-over-year. During this period, we sold nearly 120 million cups, up 36% year-over-year. We have been accelerating the rollout of our groundbreaking side-by-side coffee cafes since late last year. From just 100 stores in March, we tripled the number to nearly 300 in July. Side-by-side K-Coffee cafes feature a distinct dining area and menu, starting at RMB 9.9. At our campus stores, customers can enjoy our innovative coffee and a hot dog. We also took a popular sparkling Americano to the next level with the introduction of the Ice Orange Premium Sparkling Latte. Thanks to our super supply chain and efficient operations, we are making healthy margins, too. This is a winning model. By year-end, we expect to roll out our K-Coffee Cafe to 500 to 600 stores. Delivery sales continued their double-digit growth momentum at KFC. We lowered the delivery fee in Quarter 1 to capture the underserved small-ticket segment. These strategic moves proved successful as we gained market share on the aggregator platform. We drove incremental sales and profit without impacting margins. By introducing platform riders at select locations, we optimized rider cost while maintaining service quality and customer satisfaction. Now turning to Pizza Hut. This quarter, Pizza Hut achieved its most profitable second quarter since the spin-off. On the sales side, we were up against an outsized comparison in April from a successful marketing campaign last year. In May and June, same-store sales improved. Despite sales deleveraging, we improved our profitability by enhancing operational efficiency. For example, we significantly reduced product preparation time by simplifying the menu and kitchen operations. We also deployed automated dry rise machines and robotic service to make our crews' work lighter. Additionally, we believe Pizza Hut has huge potential. Now present in over 750 cities, there are 1,300 cities that have a KFC but no Pizza Hut yet. In addition to expanding its footprint, Pizza Hut is also reaching new consumer groups with amazing value, innovative products, and business models. Here are some highlights. First, menu innovation. Our entry price pizzas are addressing previously underserved segments and grew double digits this year. Our new Pizzaburger, Pizza Dough, is attracting many solo diners. This unique burger made with freshly baked dough pizza is receiving great customer feedback. In Quarter 2, we sold more burgers than Hawaiian Pizza, one of our synergies. Encouraged by its success, we will be rolling out the Pizza Dough Burger to all 3,500 stores later this month. Second, our Pizza Hut WOW store models are a major breakthrough. We successfully attract solo diners, young people, and more value-cautious customers. The model features simpler operations, good food variety, and excellent value for money. It is a fast-casual format with lighter service. Since opening the pilot store just in May, we have converted over 100 existing stores to this model by the end of July. Initial results of the WOW model are encouraging. I visited some of our newly opened stores last month. Sales were vibrant with customers queuing. Our first batch of new stores achieved significant same-store sales uplift. Given the encouraging results, we are accelerating the store rollout. By year-end, we expect to more than double our WOW store count. Now let me talk about our store expansion. We are seeing fantastic long-term growth opportunities in China. Our flexible new store formats allow us to penetrate profitably across city tiers and locations. Our new stores maintained good returns. Their payback period held steady at 2 years for KFC and improved to 2 to 3 years at Pizza Hut. Around 80% of our new stores achieved monthly breakeven within 3 months. We focus on white space to minimize the impact on existing stores. KFC's small-time mini model is unlocking new site possibilities in lower-tier cities. We have also identified opportunities in strategic locations like college campuses, gas stations, highway service centers, and other transportation hubs and tourist locations. KFC's new store at Shanghai Xiaotong University, for example, is enjoying busy on-campus traffic. We are also leveraging partnerships with franchisees to unlock opportunities in lower-tier cities and strategic locations. In the second quarter, net new stores from franchising reached 25%. We expect this ratio will go up slightly, exceeding the 15% to 20% target we set at our Investor Day last year. Now let me recap the three key messages I want you to take away today. First, we took actions to drive operational efficiency, which enable us to invest in value for money and to support our margins. These efforts were not just one-off cost cuts. They were structural improvements that should deliver benefits for years to come. Second, we embrace consumer needs and succeed in driving robust transaction growth. We are confident that our sales initiatives will drive sustainable long-term system sales and same-store sales growth. Third, innovation in new store models will continue to power our long-term growth. Our Q2 results show that our strategies are working. Great companies thrive in tough conditions and turn challenges into opportunities. I'm confident in our ability to navigate the current environment and emerge stronger than ever. Before we move on to our financial results, I would like to take a moment to recognize the tremendous contribution that Andy has made to Yum China. Andy has played a critical role in enhancing the company's financial strength, establishing robust cost discipline, and supporting our growth strategy. Under his leadership, the finance team further strengthened its core capabilities and upgraded its systems and processes in key areas. He also successfully led the completion of our listing in Hong Kong. I would also like to thank Andy for his commitment to transitioning Adrian Ding into the acting CFO role. Please join me in wishing Andy the very best. I am very pleased that Adrian will step up as Acting CFO. Adrian is our current Chief Investment Officer and General Manager of Lavazza. Over the past 5 years, Adrian has led multiple investments and capital market projects to enhance our portfolio and organizational strength. She was instrumental in establishing the Lavazza joint venture and building the Lavazza business in China. With her financial and operational expertise, I'm confident that Adrian will support our growth objectives to create sustainable value for our shareholders. With that, I will turn the call over to Andy. Andy?

Thank you, Joey, and hello, everyone. As this will be my last earnings call with Yum China, I want to express my sincere gratitude to Joey, my colleagues, shareholders, and our analysts. Over the past 5 years, it has been a rewarding experience working closely with such a talented and dedicated leadership team. I'm proud of the accomplishments that we have achieved together, navigating the challenges posed by the pandemic and its aftermath. Yum China emerged from the pandemic more resilient and ready to accelerate growth. I'm confident in the company's continued success under the capable leadership of the existing management team. Now let's turn to our financial results. In the second quarter, we delivered a solid performance and set numerous new records, including revenue of $2.68 billion, operating profit of $266 million, operating margins of 9.9%, and diluted EPS of $0.55. That's for sure impressive given the current market conditions. As Joey shared earlier, the initiatives that we launched beginning in the fourth quarter of last year to drive sustainable growth and protect margins are beginning to pay off. While top-lapping and current market conditions impacted same-store sales, our margins stabilized. Our sales growth was led by healthy traffic. Total transactions grew 13%, and same-store transactions grew 4% year-over-year in the second quarter. It's a testament to how well our brand, product, marketing, and promotions resonate with consumers. We attract new customers and capture more occasions from existing customers by broadening our price range and offering delicious food at affordable prices. Despite a lower ticket average, restaurant margin was markedly flattish year-over-year on a comparable basis. Core operating margin actually improved year-over-year, setting a new quality record for operating margin, thanks to our economy of scale and cost measures. Taking a longer view, our system sales grew 25% compared with the second quarter 2019, outperforming the restaurant industry. Operating profit increased even more by 38% compared to 2019, excluding foreign exchange. Now let's take a closer look at our second-quarter performance. By brand, KFC system sales increased 5% year-over-year. Same-store sales were at 97% of prior year levels, with 4% same-store traffic growth and 7% lower ticket average. Looking at it from a longer-term perspective, our ticket average in the second quarter was RMB 37, higher than the RMB 35 ticket average in the second quarter of 2019. Our strategy is to widen the price range and capture low-ticket average delivery orders are paying off. Our entry price combo drove incremental traffic. Delivery sales grew 12%. Pizza Hut system sales increased 1% year-over-year. Same-store sales were at 92% of the prior year level with traffic growth of 2% and a 9% lower ticket average. Pizza Hut continued to tap into more value-conscious consumers and solo diner segments. With entry price pizzas, burgers, and one-person meals, the ticket average went down in keeping with our strategy, but improved year-over-year to our team's relentless efforts to drive efficiency. Now let's go through our margin and key cost lines. Our operating margin as a percentage of revenue was 9.9%, the highest second-quarter record since our spin-off. We still win restaurant margins, and proactive savings in G&A expenses help us achieve that. Our restaurant margin was 15.5%, 60 basis points lower than last year or approximately the same on a comparable basis. Savings in cost of labor and occupancy and other costs offset increases in cost of sales. Cost of sales was 31.5%, 80 basis points higher year-over-year or 70 basis points higher on a comparable basis. COS was at a healthy level and consistent with our long-term range of 31%, plus or minus 1%. We managed our COS piping despite offering more value for money. Our food innovation capabilities and super supply chain allow us to invest in sales-driven initiatives and promotions. Cost of labor was 26.3%, 10 basis points lower year-over-year. Improved operational efficiency more than offset last year's rate increases for our frontline staff and the sales deleveraging impact. Occupancy and order was 26.7%, 10 basis points lower year-over-year or 50 basis points lower on a comparable basis. This comes from lower marketing and advertising expenses and other cost optimization. Our G&A expenses decreased 11% year-over-year. We drove operational efficiency gains. We also saved on lower performance-based compensation this year. G&A expenses as a percentage of revenue was 5% in the quarter, improving from 5.8% a year ago. For the full year, we aim to keep the G&A ratio around 5%. Our effective tax rate was 25.2% in the second quarter, on par with the same period last year. We expect our full-year effective tax rate to be in the high 20s. Operating profit was $266 million, a second quarter record, growing 7% year-on-year. Core operating profit was $275 million, growing 12% year-over-year. Diluted EPS was $0.55, also a second quarter record, growing 19% year-over-year. Finally, moving on to our outlook. The market conditions remain challenging. We will continue to invest in value for money and step up product and marketing innovations to drive transaction growth. Our operational efficiency buy better and spend better projects are not temporary measures. We expect cost savings from Project Fresh Eye and Project Red Eye to continue in the second half. These transformative changes should position us well to remain best in class and best in cost in our business, making our value proposition sustainable and profitable in the long run. Our disruptive new business model, like KFC side-by-side K-Coffee Cafe and Pizza Hut WOW store, are promising to further same-store sales growth potential. As a reminder, we recorded around $150 million in temporary relief and VAT deductions in the third quarter of last year. We do not expect this to recur this year. We expect wage inflation for our frontline staff to remain at low single digits. We opened a record 779 net new stores in the first half and reached 15,423 total stores. We are on track to achieve our full-year target of 1,500 to 1,700 net new stores. We are also on track to return $1.5 billion to shareholders. In the first half, we returned nearly $1 billion, including buying back 21.7 million shares. This is equivalent to over 5% of our outstanding shares. Our strong cash flow generation and healthy cash position continue to power our capital return to shareholders. At the end of the second quarter, we had $3.1 billion in net cash. Our 3-year growth targets remain unchanged. We are committed to returning at least $3 billion to shareholders while driving long-term and sustainable growth. Now with that, I will pass it back to Florence.

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

Your first question comes from Michelle Cheng with Goldman Sachs.

Joey and Andy, congrats on the very strong and resilient numbers, and Andy, all the best. So my question is about this new business format and store concept. It's really impressive that we have a very aggressive opening year-to-date. And thank you, Joey, also for sharing the target by year-end, but can you please give us more color about the economics and also the contributions at K-Coffee side-by-side stores in sector sales for those stores we already have these openings in the past few months? And given it's still more value-positioned, so when we think about the economics, should we see that these full cost ratios will be higher, but this will be offset by a more simplified cost structure in O&O payroll? And net-net, from the margin perspective, will we see more upside from this new model? And also, are we going to see more new concepts in addition to the K-Coffee and WOW in the next few quarters?

Thank you, Michelle. It's truly amazing for our team to have this breakthrough, and we are very excited about it. And I will answer your last question first: we are going to focus on these two breakthrough models out of KFC and Pizza Hut. The initial result is very encouraging, and we'll focus on that for the rest of the year and going forward. Regarding the economics of the new concept, first of all, we aim for a stable 12% margin. I encourage all our analysts. Just across the border, I recently visited the one in Ivanta UniCentr, which is a pizza valve, and we have a few other coffee side by side. You can see the menu and the operation, and you will have a very good feel about it. So for K-Coffee, it has its own menu. The menu is very simple. In terms of the product, we have some winning products. The Sparkling Coffee is a fantastic product, and food is also important. Another characteristic of K-Coffee is that we share the kitchen and the operation with the normal KFC store. The kitchen is shared. The operation team is shared, but it has its own distinct area. For the customers, the value for money is excellent. I will highlight one particular offer I mentioned in my remarks: at the campus takeout K-Coffee store, we actually offer sparkling coffee with a hot dog at RMB 9.9. You might naturally ask the question, how does it work for the margin? Think about it this way: for many years already, we offered our breakfast at RMB 9.9. We offer the food, and the coffee comes for free. In K-Coffee, it’s the reverse. We sell the coffee at RMB 9.9, and the food is around 3%. It's in our surprising capability that we can do this in a very competitive way. So net-net, the margin is healthy. In terms of result, the K-Coffee stores are generating incremental same-store sales and incremental profit. Now come to the K WOW Pizza Hut store. It’s a bit more fast-casual with less service—just a little bit—how do I describe this? The food offering is a bit like Pizza Hut, but better portions at lower prices. If you go in there by yourself, you can order a bit more for variety, but the total ticket average is less than in the normal Pizza Hut store. But the travel has been fantastic. Overall, the same-store sales increase is very encouraging. For the Pizza Hut WOW store, we converted some of our Pizza Hut stores into this new concept. It's a conversion basically. We currently have 100 stores converted by the end of July, and we plan to achieve over 200 by the end of the year. Regarding COS margin, it's actually better. Although it's early days, the unit economics is better because COS is—all in is a bit less. That's what we can share with you right now. But my number one suggestion across the board is to see some incentives. Thank you, Michelle.

Your next question comes from Lillian Lou with Morgan Stanley.

My question is about the recent trend on same-store sales, and again, congratulations on delivering such a good result, even under a bit challenged environment. So I want to understand getting into the fourth quarter when the top comp kind of alleviates a bit. With all these cost efficiencies put in place, how should we look at the operation on a holistic basis? Have you seen different trends in different tiers of markets in terms of the demand and cost management, like high-tier cities and low-tier cities?

Thank you, Lillian. Let me share a little bit about the learnings from Quarter 1 trading patterns and then make a few comments about Quarter 2. By region, eastern power China is still the most resilient, but lower-tier cities recover faster than higher-tier cities both year-on-year and versus longer-term, like pre-pandemic 2019. By location, the residential locations are more resilient, and shopping centers are almost back to 2019 levels. Moving on to the business environment, there has been a lot of attention to the business environment and consumer sentiment in China. We are not seeing significant changes in market conditions and consumer sentiment going into Quarter 2. With that said, we anticipate stable trends moving into Quarter 3. My management team and I share one particular philosophy: yes, business is tough right now, but much like life, it's always tough. In business, as in life, we always expect the unexpected. We don't whine about it. We accept whatever comes our way, adapt, and do the right thing. By doing so, we can turn the disruptions into our competitive advantage by deploying our scale and capabilities. In terms of how to manage the cost efficiency, we have turned every process and cost element to drive operational efficiency, making our store managers work lighter and reinvesting into our value-for-money offerings to support our margins. Secondly, we have innovated creative new products and widened our price points to broaden our addressable market and drive traffic. Thirdly, we are innovating breakthrough store models, such as the K-Coffee Cafe and the mini store for small tiers for KFC, as well as the fast-casual model called Pizza Hut WOW that I just described to power future growth. All three strategies are showing strong initial results. As a result, we are seeing robust transaction growth or actually double-digit growth in transaction and delivery sales. Our restaurant margins stabilized, and core OP grew by 12%. We see the most profitable Quarter 2 since spun-off despite the industry dynamics. Thank you, Lillian.

The next question comes from Chen Luo with Bank of America Merrill Lynch.

Joey, Andy, this is Chen. And congrats again on the strong result, and also my best wishes to Andy. I'd like to take a deeper look at margins, definitely, our Q2 margin speed expectations. When you're looking into the details, I noticed, first of all, the food and paper cost as percent of sales edged down by 60 bps on a Q-on-Q basis despite the fact that our promotions seem to be very intense in Q2. So what is driving that? Is this because of the falling commodity cost, or is it because of our smart value or the supply chain initiatives? Secondly, if you look at the cost of labor, it has declined significantly on a year-on-year basis for Pizza Hut, and also for the group is largely flattish versus the usual upward trend. So what is also driving all these changes? Lastly, I noticed that our first half restaurant margin is actually pretty much on par with the first half of 2019, which is usually regarded by the market as a normalized comparison base. Is it fair to say that going forward our margins can be largely comparable to 2019 for the rest of the year?

Thank you, Chen, for your question. In terms of short-term, I think we are navigating some pretty dynamic and complex operating environments. Consumers remain very value-conscious, which is an important thing to keep in mind. If you look at Q3 last year, it was not particularly low in base. Consumer data softened in late September last year. So that's something that we keep in mind. Sales would be an important driver for margins. Nevertheless, we have taken very decisive actions to adjust our cost structure. We also made some decisive changes to our business model to embrace the market change. As a result, we see stabilized margins, and our operating margin has expanded to the highest since the spin-off. If you look at our initiatives, these are not a short-term measure, but rather long-term structural changes in the way we operate our business to make it more efficient. In the short term, regarding commodity prices, we might be benefiting from some favorable trends. Nevertheless, it is important for us to invest in value and embrace consumer changes. We always target around 31% margins, plus or minus 1%. Currently, this quarter, we are at approximately 31.5%, so we view the market for that. In terms of cost of labor, you did see quite a bit of improvement in labor productivity, and that will continue to be a focus. We will look into our operations, simplify some procedures and ensure that we only do what adds value. However, we do expect wage inflation for our frontline staff to remain at low single digits. In the short term, we do aim to keep G&A this year around 5% of total sales revenue, which is a significant improvement compared to the last year and 2019. Overall, we aim for more stable margins moving forward while continuously looking to improve our operating margins. I think we've demonstrated in the past that we can manage both growth and profitability in good and bad times. We do face challenges, but we are taking actions to embrace market changes and adjust our cost structure.

I'll just give two concrete examples for you, Luo Chen. For example, COS, right, we in select categories now go straight to the farmer and producer. We obtain high-quality ingredients at better prices, which is something you can imagine continues to be beneficial. Regarding labor cost, you can see our kitchens have automatic fry machines in around 80% of our Pizza Hut stores. You might consider to have one in your house; it's actually very small. It really addresses the labor shortage, particularly during peak times. Additionally, around 50% of our Pizza Hut stores have robotic servers. Not all stores can implement this because some stores are too small; however, this definitely serves as a structural change to the cost of labor. We have fewer SKUs for select dayparts, meaning that we remove some unnecessary offerings during specific times to reduce waste, resulting in better margins all around.

I look forward to that automatic ride machine if it's available on the shelf. And also, I send my best wishes to Andy again.

Your next question comes from Anne Ling with Jefferies.

I have a small question regarding the new format again. Moving forward, for example, for Pizza Hut WOW, does it mean that in the future on new store openings that, because currently, you're mainly doing a conversion on the store, will that also imply that some of the new openings will also be strict on Pizza Hut WOW? Based on your current network, how many of them do you think you can make this kind of shift, and how quickly can you do that? At what point will you make a decision in terms of accelerating this rollout? And then for the K-Coffee store, the same question is that under your current store network, how many stores are actually viable for this kind of adjacent store format?

Thank you, Anne. For the Pizza Hut WOW model, it is one of our models. For both K-Coffee and Pizza Hut, we actually have multiple store models for multiple locations, formats, and city tiers, etc. Currently, for the Pizza Hut WOW, we are testing this model in different parts of the country, including top-tier and low-tier cities. We will be clearer later in the year about how many of the existing stores can be converted. You can imagine some of the new stores are suited for this model as well. We will open Pizza Hut WOW as a new store too. A similar story applies to K-Coffee, but it's a bit different. K-Coffee is not so much a conversion. K-Coffee Cafe is about identifying existing stores, and we kind of have a side-by-side distinct store to existing KFC stores. Again, we are testing it in different parts of China right now, including remote areas, tourist locations, and high-speed railway stations. We do have an aggressive goal for K-Coffee, aiming for 500 to 600 stores by the end of the year, but we continue to learn and adapt as we proceed to adjust and accelerate if needed. Thank you, Anne.

Your next question comes from Brian Bittner with Oppenheimer & Co.

Thank you. Andy, it's been a pleasure working with you. Thanks for all the help over the years, and I wish you the best. I was hoping you guys could put some guardrails on how to think about the second half of the year for same-store sales. Of course, if we look at last year, the comparison gets a lot easier in the third and fourth quarter. But given the operating environment, I'm not sure how relevant comparisons are. So is there, in fact, an opportunity for same-store sales to show some improvement in the second half versus the first half? Or is the message from you that we analysts should remain pretty conservative and maybe expect more of a similar second half to what we saw in the first half?

Brian, thank you so much for your time and for your question. I believe macro factors are important—some complexities and potential challenges in the Chinese consumer space. As a company, we continue to be able to take decisive action to drive sales, which is equally important, along with controlling costs. Some of our initiatives allow us to control costs and sell quickly. As a result, you can see our cost structure has improved significantly. There are some encouraging results. If you look at our traffic growth, we achieved same-store traffic growth of low single digits this quarter. In terms of macro outlook, as Joey mentioned, we do not see significant changes going into the third quarter, and we need to keep in mind that last year's third quarter was not particularly easy, as we began seeing consumer softness in late September last year. That said, we have numerous initiatives to drive demand. This includes the innovative business models with Pizza Hut WOW and K-Coffee Cafe model, along with our food innovations. It's clearly essential to drive consumers to the store. We'll continue to pursue demand while remaining cautiously optimistic about projections for the second half.

Thank you, Brian. I'll add some comments here. Nobody has a crystal ball, so I want to emphasize that Yum China is a growing company in a growing market called China. It seems fashionable these days to be bearish on China, but I want to add that even at our current growth rate, China accounts for almost one-third of the world's annual growth. The shift in growth to lower-tier cities is reminiscent of the push into the frontier in the U.S., where part of yesterday's Wild West became today's Silicon Valley, a shift that has already happened in Shenzhen and is poised to repeat elsewhere in China. It’s vital to focus on both system sales and same-store sales. We are opening many new stores, which will have some sales transfer, but we are maintaining a balanced approach. Even with that, we aim for 30% of our new stores to be in strategic locations or small-tier cities where sales transfer can be managed better. The K-Coffee and Pizza Hut WOW are very focused on driving same-store sales growth.

I appreciate the perspective on system sales, but the unit growth is what's known and the same-store sales is kind of what's unknown. That was the essence of my question.

The next question comes from Sijie Lin with CICC.

Congrats on the high operational efficiency and strong bottom line, and best wishes to Andy. I want to better understand our pricing strategy in the coming quarters, especially for KFC because, for Pizza Hut, we want to introduce entry-level pizza and lower the ticket average. But for Pizza Hut, the ticket average is relatively stable over a longer period, although we are expanding the price range. Recently, we observed that some other restaurant companies may hope to keep relatively stable ticket averages this year after ticket average cuts last year. So how about our pricing strategy, especially for KFC? Will we keep it relatively stable, or may we further increase promotions because elasticity is still high to pass savings to the consumer?

Thank you, Sijie. So your question really focuses on the ticket average and its impact on the margin. The ticket average trend for both KFC and Pizza Hut is consistent with our strategy to drive traffic. Driving traffic is the most crucial element of our business, and we see robust same-store transaction growth at both KFC and Pizza Hut. We have a total 13% growth in transaction overall, which represents the health of our business. Secondly, even with the lower ticket average, Q2 saw stabilized restaurant margins and improved operating margins due to proactive steps to enhance operational efficiency. For KFC in the long term, we maintain a balanced approach to keep a steady ticket average. Although the ticket average fluctuates quarter by quarter, it's essential to note that the Q2 ticket average is RMB 37, which is still higher than the RMB 35 ticket average in Q2 2019 pre-pandemic. In the short term, we aim to sharply focus on value, widen the price range as that strategy has proven effective in driving traffic. However, we will continue to offer higher ticket items with strong value for money, such as whole chickens and family buckets, which perform well and help balance the ticket average. For Pizza Hut, our ticket average has been declining intentionally every year since 2017. The Q2 drop was slightly more than we expected, but it’s all right. In April, the same-store sales ticket average suffered due to the outsized promotion campaign last year. However, by May and June, the same-store sales had recovered and were almost at par with KFC. Pizza Hut will continue to focus on attracting value-conscious consumers and solo diner segments with entry-level pizzas and burgers. The entry price pizzas below RMB 50 are growing for us, expanding our market share.

The last question comes from Xiaopo Wei with Citigroup.

Yes. Xiaopo Wei with Citigroup. A lot of things have been discussed in the prepared remarks and the prior Q&A. I just want to understand that, given this environment, a lot of things have been done by Joey and the team on efficiency improvement. Have you thought about any disposal of smaller businesses in this environment? Because the small business was intended for the expansion of the business, but given all the environmental factors and focus on efficiency, these businesses may be a distraction of resources. I just seek Joey's thinking on this perspective.

Thank you, Xiaopo. Your thinking aligns with ours. We constantly review our portfolio with smaller businesses. For example, the new retail and packaged food businesses served us well during the pandemic when we could not open any stores in certain markets. However, now these businesses have fulfilled their historic missions, and we plan to gradually pivot from them. This is one example. Additionally, we maintain a disciplined approach, as Andy has shared in previous interactions with our shareholders and analysts. We only invest a small percentage of our profit in smaller businesses. While these provide learning opportunities, they can also pose challenges. We’ll keep reviewing our portfolio. Lavazza is making great progress; we have significantly more breakeven sold this year than last year. The retail beam business of Lavazza is turning profitable in Quarter 2 of 2024 and we expect meaningful sales growth. We are moving coffee bean production from Italy to China for fresh beans, nimble innovation, and lower costs. The Huang Ji Huang business is resilient, adding 15 new stores in the first half, bringing the total to over 800 stores globally. Little Ship is a new model where we convert parts of the store, achieving initial success, and we are building more stores this year. Taco Bell is facing challenges as it is still a softer concept for Chinese consumers, so that will require more time for improvement. We regularly assess the overall health of these smaller businesses.

Yes. Sure, Xiaopo. I will add a little bit more there. As with any capital deployment in our company, we're very disciplined about it. Every store model, albeit brand, reflects our commitment. We have demonstrated in the past that when we see potential, we will continue to invest in that area. We don't impose a requirement for these smaller brands to be profitable right away. For instance, building a coffee brand in China takes time, and we see great progress; thus we will invest accordingly. We have closed some brands like C&J, consolidating resources to focus on Lavazza and K-Coffee at the functional end of the coffee business. Our capital deployment across our overall portfolio will remain disciplined to ensure efficient use of capital for our shareholders. Thank you, Xiaopo.

Thank you for joining the call today. For further questions, please reach out through the contact information in our earnings release and on our website. Thanks.

Thank you.

Thank you so much, everyone.