Thank you for joining us for the Yum China Third Quarter 2024 Earnings Conference Call. All participants are currently in listen-only mode. We will begin with a presentation, followed by a question-and-answer session. Now, I will turn the call over to Florence Lip, Senior IR Director. Please proceed.

Thank you, operator. Hello, everyone. Thank you for joining Yum China's Third Quarter 2024 Earnings Conference Call. On today's call are our CEO, Ms. Joey Wat; and our acting CFO, Mr. Adrian Ding. I'd like to remind everyone that our earnings call and investment 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, which is available to the public through our Investor Relations website located at ir.yumchina.com. You can also find a 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. I'm proud to share that we achieved strong results again in Q3 2024. We delivered robust sales growth as well as accelerated profit growth compared to Q2. System sales grew 4% year-over-year. Same-store sales index improved sequentially and reached 97% of prior year's level. Delivery sales achieved double-digit growth as it has for 10 consecutive years. On a comparable basis, both restaurant margins and OP margin expanded year-over-year. Core operating profit grew 18% and diluted EPS increased by 32%. As we execute our RGM 2.0 strategy, we have a new focus on operational efficiency and innovation. Savings generated from improved efficiency allow us to reinvest in food innovation and our value-for-money offers. This broadens our addressable market. It also helped us capture more traffic, drive sales growth, and expand profit margins. Meanwhile, our innovative business models KCOFFEE Cafes and Pizza Hut WOW are gaining momentum and successfully capturing new customer demand. In the first nine months, we set several new records: $8.7 billion in revenue, over $1 billion in operating profit, 1,200 net new stores, and over $1.2 billion returned to shareholders. We outperformed the industry in a challenging and fluid environment. Today, I will provide an update on our operations and store opening strategy. Adrian will then go through the financial performance and our latest capital return plan. I will start with operational efficiency. We are making great progress with Project Fresh Eye and Project Red Eye. We introduced these projects in quarter four of last year and quarter one of this year, respectively. These projects are to enhance operational efficiency through innovation across all aspects of our operations. Project Fresh Eye has reshaped our operations. We are evaluating processes through the Fresh Eyes of our restaurant managers, redesigning to support them more effectively by simplifying, centralizing, and automating key processes. We are easing the burden of restaurant managers so that they can focus on better serving customers. We are also using innovative technology and automation in our operations. This makes us more efficient. For example, intelligent energy management reduces utility costs. Project Red Eye has created a fresh mindset to innovate and deliver results by spending better and buying better. Our procurement teams are serving our marketing teams better and faster. The savings generated are passed on to our customers and fund innovation. We are also optimizing our product design to enhance ingredient use and improve operational efficiency. These initiatives have enabled us to focus on product innovation and value for money while expanding margins. On a comparable basis, Q3 restaurant margin improved 50 basis points year-over-year and core OP margin expanded 140 basis points. Importantly, these are sustainable improvements that strengthen our business capabilities while driving high levels of customer satisfaction. Turning to sales. It's true that consumers are becoming more rational and sophisticated in their choices. But we know that the demand is there; consumers seek value for money, good quality, and emotional value, which is a key driver for us. That's exactly what we are offering them and it's working. We regard both system sales and same-store sales growth as equally important. On one hand, we see ample opportunities across China to enter underserved markets and enhance customer access. On the other hand, we look to balance our unit growth with same-store sales growth. Seven consecutive quarters of same-store traffic growth and sequential improvement in same-store sales index for both KFC and Pizza Hut show the strength of our strategy. Our delivery sales grew 18%, continuing the double-digit annual growth Yum China has maintained over the past decade. In quarter three, delivery sales reached around 40% of our sales mix. We have strategically adjusted delivery fees and introduced more entry price offerings to capture incremental consumer demand. We have enhanced our presence on aggregated platforms and expanded delivery coverage. Through these initiatives and more, we have captured incremental orders, especially from solo diners and value-conscious customers. As a result, both KFC and Pizza Hut have increased their market share on aggregator platforms. Even as we expand on aggregator platforms, we continue to maintain strong control over our business. Sales outside the delivery aggregators account for over 70% of our total sales, including dining, takeaway, and delivery. Let me share a few highlights on KFC. We continue to bring fresh energy into our flagship products. Take the new original recipe chicken burger as we introduced in quarter two; it's been an exciting innovation that is not so obvious. Taking our cue from the classic way kids in China enjoy KFC's original recipe chicken with mashed potatoes, we combined them into a new burger product. It is being very successful. Building on that success, we introduced an original recipe chicken with curry gravy in August. This time, we added curry gravy to the original recipe chicken and mashed potatoes. Customers are loving it. As a bonus, it doesn't require new ingredients in the stores. We maximize the use of existing ones while delivering exceptional value and taste to our loyal customers. In the first nine months, KFC sold nearly 200 million cups of KCOFFEE, surpassing all cups sold in 2023. During the period, both sales and cups sold increased by about 30%. As our membership data indicates, a significant majority of our members have yet to try KCOFFEE. We see huge potential for growth. We have just opened 500 side-by-side KCOFFEE cafes this morning, China time, with prime locations in Shanghai and Shijiazhuang. We are also tapping into strategic locations like college campuses and transportation hubs. By the end of the year, we expect to exceed 600 cafes. Our distinctive menu of coffee, drinks, and food, stunning value proposition, and cafe ambience are resonating well with our customers. Our disruptive limited-time offer of Original Recipe Chicken Lattice has generated disbelief, curiosity, and, finally, trial. Perhaps surprisingly, it's become one of our best sellers. The KCOFFEE cafe concept is also effectively cross-selling to KFC's loyal customers, driving incremental sales and profit. The potential of KCOFFEE cafes is exciting. Turning to Pizza Hut, the brand is making solid progress. Pizza Hut opened nearly 300 net new stores in the first nine months, exceeding 3,600 stores. Since 2017, Pizza Hut has been strategically lowering its ticket average to drive traffic and enhance its mass-market appeal. We have launched more entry price products designed for value-conscious customers and solo diners, capturing more smaller ticket orders. Pizza Hut has also improved its profitability. Core OP increased 20% year-over-year in quarter three, and core OP margin was up by 140 basis points. We boost operational efficiency with simplified ingredients and redesigned kitchen processes. This also allowed us to further improve our high food quality and service level. We continue to fortify our reputation as pizza experts. We recently upgraded the hand-tossed pizza dough for better taste consistency and easier preparation. In addition, we continue to build on our signature product, Durian Pizza, now our number one best-selling pizza. One in every four pizzas sold in Pizza Hut China is now a Durian Pizza. We sold nearly 30 million Durian pizzas year-to-date. We have expanded our success with Durian to burgers, launching the Pizza dough cheeseburger with Durian and pineapple. It sounds unusual, but it's perfect for our Durian lovers and sold out quickly. Our breakthrough Pizza Hut WOW store is looking like a promising avenue for expanding our addressable market. It's been only five months since we converted our first store, and initial results are encouraging. For dining, we have seen significant same-store sales growth driven by incremental transactions despite lower ticket averages. So far, we have converted around 150 stores, expanding from Guangdong to over 10 provinces, covering Tier 1 cities to lower-tier towns. We will continue to refine the model across different locations for both dining and delivery. With our new focus on system sales and same-store sales growth in mind, let's talk about our store expansion plan. In Q3, we opened 438 net new stores, with over 1,200 net new stores year-to-date. We are on track to meet our target of 1,500 to 1,700 net new stores this year. This growth is underpinned by strong new store performance. At KFC, the payback period held steady at two years, and at Pizza Hut, the payback improved to two to three years. Around 80% of new stores opened in the past two years turned profitable within three months of opening. Alongside our successful equity flow model, we are accelerating franchise development to unlock additional opportunities. Our franchise strategy focuses on assessing strategic and remote locations as well as the lower-tier cities that were previously beyond our reach. We have built the infrastructure to support our franchisees from food safety to store management. We have also innovated new store models suitable for franchising such as KFC Small Town Mini. So we are now prepared to pick up the speed. Currently, franchisees represent 12% of KFC's store portfolio. The franchisee mix for net new stores increased from 15% in 2023 to 27% year-to-date, exceeding the guidance we gave at last year's Investor Day of 15% to 20%. We now expect this ratio will gradually increase to 40% to 50% over the next few years. Pizza Hut will be on a similar path, but it will take more time to get there. For Pizza Hut's net new stores, the franchise mix was 7% year-to-date. We anticipate this ratio will gradually increase to 20% to 30% over the next few years. With that, I will hand the call over to Adrian Ding, our Acting CFO. By way of background, Adrian has been with Yum China since 2019, leveraging his investment banking background. Adrian has led multiple successful strategic investments and capital market projects in his role as our Chief Investment Officer. He was also instrumental in establishing our Lavazza joint venture and building the business in China as our General Manager of Lavazza GE. Adrian's combination of financial background with operational experience makes him well-suited for this position. I'm thrilled to welcome Adrian to his new role. Adrian?

Thank you, Joey, and great to be with everyone today for my first earnings call. In the third quarter, we achieved strong results with major KPIs trending positively. System sales grew 4%, and same-store sales index sequentially improved to 97% of prior year levels. Restaurant margin expanded 50 basis points year-over-year on a comparable basis. Core OP margin also saw a significant rise of 140 basis points. As we grew our top line, core operating profit surged by 18% and diluted EPS grew 19%, excluding the mark-to-market gain from our equity investments. As a reminder, restaurant margin on a comparable basis excludes VAT deductions as well as temporary relief from landlords and government agencies received in the prior year. Core operating profit further excludes foreign exchange impact and special items. We are immensely satisfied with this meaningful sequential improvement in our quarter three results. They demonstrate our ability to outperform the industry in both good times and bad. With our confidence in our cash-generating capabilities, we plan to step up our capital return to shareholders. First, let's take a closer look at our third quarter performance by brand. KFC system sales increased 6% year-over-year. Same-store sales were at 98% of prior year levels with 1% same-store transaction growth. Our strategy is to widen the price range and capture lower ticket average delivery orders, yielding results. Entry price combos have driven incremental traffic and delivery sales continue to grow double-digits. Our quarter three ticket average was RMB 38, 3% lower than prior year levels, an increase from RMB 37 in quarter two. More ticket items like coffee and breakfast continue to outperform. Pizza Hut system sales increased 2% year-over-year. Same-store sales were 94% of prior year levels with same-store transaction growth of 4%. Ticket average was 9% lower year-over-year. It is in line with our strategy to transform the brand to increase mass market SKUs. Our entry price pizzas, burgers, and single-person meals attracted incremental traffic from value-conscious consumers and solo diners, which, of course, lowers personal spending. The WOW store model is positioned with even more accessible pricing. Pizza Hut's traffic has grown in response to our strategy, and profit margins have improved year-over-year, thanks to our team's relentless drive for operational efficiency and innovation. Now let's go through our margin and key cost lines. Our OP margin as a percentage of revenue was 12.1% and 100 basis points higher year-over-year or 140 basis points higher on a comparable basis. Resilient restaurant margin and savings in G&A expenses helped us achieve that. Our restaurant margin was 17%, steady year-over-year. On a comparable basis, restaurant margin was 50 basis points higher. Savings in the cost of labor and occupancy and other costs offset the increase in cost of sales. Cost of sales was 31.7%, 60 basis points higher year-over-year or 30 basis points higher on a comparable basis. We kept cost of sales rather stable compared to 31.5% in quarter two while continuing to offer excellent value for money. Key factors include favorable commodity prices and savings from spending better and buying better initiatives under Project Red Eye. Cost of labor was 25.1%, 20 basis points lower year-over-year. Improved operational efficiency more than offset wage increases from our frontline staff and the impact of sales deleveraging. Occupancy and other costs were 26.2%, 40 basis points lower year-over-year or 60 basis points lower on a comparable basis. This came from more efficient marketing and advertising initiatives as well as other cost optimization. Our G&A expenses decreased by 19% year-over-year. This was due to operational efficiency gains and lower performance-based compensation this year, among other factors. G&A expenses as a percentage of revenue were 4.5% in the quarter, down by 130 basis points from 5.8% a year ago. For the full year, we aim to keep the G&A ratio around 5%. Operating profit was $371 million, growing by 14% year-over-year. Core OP increased 18% year-over-year. Our effective tax rate was 27.3% in quarter three, on par with the same period last year. We expect a full-year effective tax rate in the high 20s. Net income was $297 million, growing 21% year-over-year. Our mark-to-market equity investment had a $26 million positive impact in quarter three this year compared to a negative impact of $3 million in the same period last year. Excluding this impact, our net profit grew 9%. As a reminder, we received lower interest income this year from a lower cash balance. Diluted EPS was $0.77, growing 32% year-over-year or 19%, excluding the mark-to-market equity investment impact. Now let's turn to capital return to shareholders. Since our spinoff, we've returned over $4 billion to shareholders. In the first nine months this year, we already returned more than $1.2 billion, including over $1 billion in share repurchases and $187 million in quarterly dividends. We bought back more than 27 million shares, around 7% of our total shares outstanding, partially contributing to our EPS growth. Our cash position remains healthy with net cash of $3.1 billion as of the end of the quarter. We're committed to returning excess capital to our shareholders. A year ago, we set our three-year plan to return $3 billion to shareholders through dividends and share repurchases from 2024 to 2026. With our cash generation capabilities proven in good times and bad, we now plan to step up our capital returns by 50% to $4.5 billion over the same period. This includes $1.5 billion in 2024. Finally, moving on to our outlook. We're encouraged by the recent stimulus policies. These measures are a positive step forward, but as you all know, such things can take quite a while to trickle down to consumers and thereby affect businesses like ours. Entering the fourth quarter, we do not expect significant changes in market conditions and consumer sentiment. Despite this, we remain confident in China's midterm and long-term growth opportunities. Quarter four is traditionally a low season for us with smaller sales and profits. We maintain our focus on operational efficiency and innovation to pass on savings to our consumers. We expect these efforts to continue driving overall sales and profit growth. I am confident in our strategy and our ability to navigate this complex and evolving environment and achieve sustainable long-term growth. As a reminder, in quarter four last year, we benefited from $6 million in temporary relief, equivalent to around 30 basis points in OP margin, which we do not expect to repeat this year. Let me pass it back to Joey for closing remarks.

Thank you, Adrian. Before we turn to Q&A, I would like just to recap the three key messages I want you to take away today. First, our quarter three results highlight our resiliency and growth strategy. With our true focus on operational efficiency and innovation, we are well-positioned to capture opportunities in this market. Both system sales growth and same-store sales growth are key focuses for us. Second, we remain bullish on China's long-term growth opportunities. Our widened price ranges, optimized delivery strategy, and breakthrough business models help us broaden our addressable market. We continue to capture underserved customer segments with both equity and franchise new stores. Lastly, we maintain our due focus on sustainable growth and capital returns to shareholders. We plan to step up our three-year capital returns to $4.5 billion for 2024 to 2026. With that, I will pass it back to Florence.

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

Thank you. Your first question comes from Xiaopo Wei with Citigroup.

Hi, can you hear me, Joey or Adrian?

Yes, we can.

Okay, thank you. Thank you for taking my question. Congratulations on the strong third quarter. I probably want to ask a long-term question. It is the first quarter; we are seeing both your core OP margin and blended same-store sales down. As you know, the market has been focusing on same-store sales for a long time, but it seemed to me that, as Joey said, system sales is equally important as same-store sales. Shall we say looking forward, shall we look more into the same-store sales base of transaction volume rather than the same-store sales value? Because, as Joey pointed out, you guys have an innovating format, and menu actually widen your pricing range. So the mix of your products or the ASP actually distorts the traditional understanding of same-store sales. If that's the case, is there any other areas you will build your economy scale in terms of enlarged volume to drive your margin resilience looking forward?

Thank you for your question, Xiaopo. If I may take a moment to provide a detailed perspective on our long-term strategy, I believe quarter three serves as a strong example of how Yum China is implementing our RGM 2.0 strategy for the future. We are concentrating on several key areas. As CEO, I am inclined to address your inquiries regarding simple sales versus system sales. The reality is that we aim to enhance both. Same-store sales are inherently tied to transactions, so our approach is to maintain our focus—we cannot concentrate on just one aspect. As I mentioned earlier, we maintain a dual focus on system sales growth and same-store sales growth. In quarter three, we achieved a 4% increase in system sales growth and recorded seven consecutive quarters of same-store transaction growth. Over the long term, our emphasis on transaction growth will be critical for our business, bolstered by a decade of growth in delivery. In relation to your margin question, we remain committed to operational efficiency and innovation. I firmly believe that any successful company must pursue both. In the third quarter alone, we achieved an 18% increase in core operating profit through various margin improvement initiatives like Project Fresh Eye and Project Red Eye. We reinvest our savings into numerous innovations, including advancements in food and value, as well as new models like KCOFFEE and Pizza Hut. These operational efficiencies and innovations, particularly the KCOFFEE cafe model and the 150 Pizza Hut WOW stores, expand our market reach and attract new customers to support growth. Moreover, we continue to prioritize opening equity stores and accelerating our franchise development, which aids in managing our capital return. So far this year, we have opened over 1,200 new stores in the first nine months and are on track to meet our full-year goal. Eighty percent of these new stores became profitable within three months, as previously noted. Simultaneously, we are fast-tracking franchise openings to tap into strategic market opportunities, whether in remote areas or lower-tier cities. Lastly, we are committed to investing in business growth while also returning capital to shareholders. In the end, we are growing the business and returning capital concurrently. To summarize, in each of these four focus areas, we strive to avoid unnecessary trade-offs and channel all our energy, capability, and creativity towards maximizing growth, encompassing both same-store sales and system sales. Thank you, Xiaopo.

Your next question comes from Lillian Lou with Morgan Stanley.

Hey, thank you. Good evening, Joey, and congrats again, Adrian, on your position. And also congrats for the very good result. My question is more on the near-term because I think, Joey, you have been very clear on the long-term strategy. I think in the third quarter, I noticed that for KFC, our pricing actually recovered pretty nicely compared to the previous quarter's trend. And I just want to check the thinking behind it. Do we see some elevated competition that makes us less pressed by on pricing? Or have we done anything to really support the pricing? So related to that, any thinking about the pricing strategy in the next couple of quarters? Thank you.

Thank you, Lillian. In terms of competition, we see the restaurant industry continuing to grow, with global players aggressively investing in the China market. Current players are focusing more on lower Tier 3 markets, and we've noticed some companies reducing their promotional efforts in recent quarters, while other aggressive players are slowing down their store openings this year. Regarding KFC pricing, our strategy for both KFC and Pizza Hut pricing is quite transparent in the short to long term. For KFC, we aim to maintain stable pricing. This quarter, the price is RMB 38, which is slightly lower than last quarter but higher than in 2019, so it's relatively stable. For Pizza Hut, since 2017, we have aimed to be more mass-market driven by consistently lowering prices to make it more accessible. This is essentially our pricing strategy for both the short and long term.

Thank you, Joey.

Your next question comes from Ethan Wang with CLSA.

Thank you. Hello Joey, hello Adrian. So my question is on the franchising model. I think I remember back in the Investor Day, we mentioned in the future, KFC franchisee store will be 15% to 20% of new stores. But obviously, we are now having a higher hope for the franchising model. So what makes this change? And if we expect more franchising model in the future, does that also mean we should expect lower CapEx spending going forward as well? Thank you.

Thank you, Ethan. I guess, firstly, on your question regarding what made the change, right? I think the key reason is we're ready. For instance, for KFC, we have the new store model, KFC Small Town Mini. As we communicated previously, the capital expenditure for that model is lower than RMB 0.5 million, which is roughly one-third of our regular KFC store costs. For instance, the newly rolled-out Pizza Hut WOW model could have good potential in lower-tier cities as well and is conducive to franchising. Obviously, with the recent years, the franchisee quality in China has improved meaningfully as well. So overall, the store model revenues, our QA readiness, digital capabilities, and the readiness of the franchisees are enabling us to speed up the franchise openings here in China. As we mentioned during the prepared remarks, for KFC, we aim to gradually increase our net new open percentage in franchises to be 40% to 50% down the road over the next few years. For Pizza Hut, it takes a bit longer. But overall, we hope to achieve 20% to 30% of net new opens for Pizza Hut being franchise models over the next few years. And speaking of franchise unit economics, obviously, we want to remind everyone here that for each $100 of system sales generated by our franchisee, we recognized $40 to $45 as our revenue. And that breakdown includes 6% to 7% of the 100 being our royalty fee collected and initial fees collected as well as the other $35 to $36 out of the 100 being the transaction revenue from franchisees, which includes COS and other services. In terms of our cost, franchise expenses will include a 3% license fee we will need to pay to Yum Brands, and our expenses for transactions with franchise fees are currently in credit around our cost. However, in the future, there's a potential for us to retain certain margins in the services with franchisees because we have savings from Project Red Eye and Project Fresh Eye. And while this will lower our capital expenditure, in terms of our ROIC, that's a real question. Over the long term, we do expect that this will help enhance our ROIC, but in the near term, the impact will be immaterial because, as we mentioned, the overall pacing of step-up in franchising will be gradual over the next few years. Thank you, Ethan.

Thank you, Adrian. And congratulations on the results. Thank you.

Your next question comes from Michelle Cheng with Goldman Sachs.

Hi, Joey, Adrian. Thanks for having the time to ask questions. So my question is still more on the short term. I think, Adrian, you earlier mentioned that quarter-to-date, we didn't see significant changes yet, even we are positive on stimulus. But considering last fourth quarter, the base should be easier. So are we still seeing incremental sequential improvement in fourth quarter trends? And also, looking ahead, when we consider both KFC and Pizza Hut, it looks that KFC same-store sales are still much more resilient than compared with the pre-COVID levels and are still much closer. So when we look for same-store sales growth going forward, are we seeing that Pizza Hut's pricing trend will be gradually stabilized and KFC actually has room to see the pricing improvement next year? Thank you.

Thank you, Michelle, for your question. As I mentioned in the prepared remarks, we are quite encouraged by the stimulus policies. It will take time to influence consumer behavior and impact businesses like ours. I want to provide more details on our quarter four performance, particularly regarding the top line. Entering quarter four, as stated earlier, we haven't seen significant changes in consumer sentiment or the macro environment. During the October Golden Week holiday, our same-store sales showed a slight year-over-year improvement. However, consumer spending has been cautious following the holiday. This cautious spending pattern is something we've noted this year after a lengthy holiday. Overall, in quarter four, we are still facing top-line pressure, but we believe we can outperform our peers during both favorable and challenging times. We are also reasonably confident that our quarter four same-store transaction index will remain positive for another quarter. Importantly, we are focusing on aspects within our control and continuing to execute our effective strategy to capture incremental traffic and safeguard our margins. We believe we are well-positioned to meet consumer needs with our flagship products, impressive value, delivery strategy, and innovative models. Regarding your second question about the differences between KFC and Pizza Hut, it's clear that with consumers becoming more deliberate in their spending, Pizza Hut, which has a higher per-person spending, is facing a greater challenge compared to KFC, which has a robust and resilient model. We're taking the right steps for Pizza Hut, such as reducing TAs and professional spending, and implementing new store models like Pizza Hut WOW, which is designed to be even more accessible. As we mentioned in the prepared remarks, we have seen some initial encouraging results for WOW in both this quarter and the previous one, particularly in terms of meaningful increases in SSSG. It's only been five months since we opened the first WOW store in May, so we are still refining the model. Over time, Pizza Hut WOW is expected to allow Pizza Hut to access a significantly larger total addressable market. Finally, your last question pertains to the midterm outlook for next year regarding TA in both Pizza Hut and KFC. For KFC, we anticipate the TA to remain stable in the mid to long run, though there could be short-term fluctuations based on macroeconomic and competitive factors. For Pizza Hut, our approach is to continue lowering the TA, and we have been doing that effectively, achieving positive transaction growth over the past few quarters. We plan to maintain this strategy moving forward. Thank you, Michelle.

Thank you, Adrian. I'll just add some color about the Pizza Hut same-store sales. So the Pizza Hut model is making good progress, one step at a time. As Adrian mentioned, we see a very nice improvement in the dining same-store sales. And out of the 150 Pizza WOW stores, actually one-third, about 50 stores, are in Guangdong in the South. Because of the scale of the Pizza WOW relative to the total stores in Guangdong, we see some meaningful improvements in Guangdong same-store sales, which is exciting. But again, we have over 3,600 stores for Pizza Hut around the country right now. So it will take some time. But the progress is good. Last but not least, quarter four is a small quarter. So a lot of the numbers could swing either way. Thank you so much.

Your next question comes from Sijie Lin with CICC.

Thank you, Joey and Adrian. Congrats on another strong quarter and general shareholder returns. I have one question. So we have seen some food safety cases overseas. So how do we balance, on one hand, the cost control, and on the other hand, the quality of the product and service? Thank you.

Thank you, Sijie. To begin, I believe you are referring to food safety incidents overseas related to raw onions. I want to clarify that we only use cooked onions, so this should not impact our business. Regarding food safety and cost control, we prioritize food safety above all else. We comply fully with regulations and address any issues directly, reporting to myself and our Board. We have a dedicated food safety committee in place. Food safety is a top priority for us, which is evident in our comprehensive quality assurance system and food safety processes that span our entire value chain, from suppliers to logistics and stores. Furthermore, I want to emphasize that our investment in our digital supply chain in recent years has been beneficial. We now have excellent digital visibility of our food safety management and automatic stock replenishment processes. It is essential for us. Additionally, we have over 300 quality assurance employees across China who are focused on this critical matter, alongside the technology we've implemented to monitor it. Thank you.

Thank you, Joey.

Your next question comes from Anne Ling with Jefferies.

Hey, thank you. Hi, management team. Just a question on KCOFFEE. Now with 500 stores, what we hear on the ground is that it's been doing amazingly well. So I just want to check whether you can share with us the incremental benefit; because it's a side-by-side store with your existing KFC. So maybe would you share with us what is the incremental same-store benefit? And also, in terms of profitability, if there's anything that you can share with us? Thank you.

Thank you, Anne. Well, long story short, the incremental sales uplift to the store we have observed is a single-digit sales uplift, and it does produce incremental profit because of our very unique operating model. So that is the short answer. In terms of the longer answer, we are indeed very excited. And today, actually, we opened our 500 stores in Shanghai right next to our headquarters and in a very prime area in Shanghai. The increase in sales and the number of cups is over 30%, roughly. This is very exciting, especially given the overall market for coffee. The opportunity here is that a significant majority of our Yum China members have yet to try KCOFFEE. In our side-by-side model, the cross-sell from KFC to KCOFFEE is amazing. So we are excited about it. It took us 10 years from selling coffee to build the first KCOFFEE cafe, but we see really good progress. We had 100 stores in March, and now we have 500 stores, and by year-end, we expect to exceed 600. We are expanding to campuses and transportation locations as well. The food is good. We have a very distinctive coffee, sparkling coffee, and our gigantic sizes. So things are looking very exciting and positive. Thank you, Anne.

Your next question comes from Walter Woo with CMBI.

Hi, hello, Joey and Adrian. Can you hear me?

Yes.

Yes.

Okay, thank you. Congratulations on your resilient results, and thanks again for all the efforts. So my question is about the Pizza WOW store performance. So can you comment on the sales and margin performance of the Pizza WOW stores and also the midterm room for potential growth? And are they suitable for all regions in China? And also, I remember the last time when I dined in the WOW stores, the menu looked really appealing and there were lots of choices and the prices were cheap. However, when I really ordered, many of the items were just not available. So this has disappointed me a little bit. Do you think this is a problem? And how do you see the WOW store format now and going forward? And also, we are also aware of your new store format called KPRO. Are there any insights you are ready to share?

Thank you. So for Pizza WOW, I mean, let's take a step back. It's only really innovation that happened only five months ago. So I think our speed of rollout is very fast already. We are at about 150 stores. The breakthrough model is very exciting. As I mentioned in the prepared remarks, the impact on the buy-in is very promising. There will be more work to be done for the delivery side. And then in terms of profit, we continue to work on it. Well, let me just bring back our deal focus: innovations and operational efficiency, operational efficiency, and innovation. It goes both ways. So for our core business, we achieved operational efficiency, and we took those savings and invested in innovation. For Pizza WOW, we have the innovation first, and that is reflected in exciting sales. However, the operational efficiency will come later, which I hope addresses your disappointment with the product availability, because it does not happen automatically. That's another reason why whenever we turn around a business, KFC or later on Pizza Hut, we always focus on sales first and profit later, one step at a time. So for Pizza WOW, we went back to our framework, we have the innovation first and then operational efficiency later. I believe that things are in good progress. I am very pleased with what we have achieved so far for Pizza WOW, but a lot more work needs to be done. It's only been five months. Regarding KPRO, we have been opening a small number of KPRO stores in Hangzhou, Shanghai, and Guangdong actually, and it's still small right now. It obviously targets health-conscious consumers with products like energy smoothies and very healthy choices. It's still in the pilot stage, by the way. So there's still a lot to learn from it. But that's one thing that we are doing, which is sharing the learning from KCOFFEE; again, it's side-by-side. The new stores are side-by-side with the coastal KFC so that we can share some investment in CapEx, but it's still early days. Okay. Thank you.

Your next question comes from Linda Huang with Macquarie.

Yes, hi management. Can you hear me?

Yes.

Yes, Linda. Please.

Yes, my question is regarding our capital allocation. We appreciate that the company stepped up the total return to $4.5 billion. Please correct me if I'm wrong. Because based on your cash flow, right? I found that every single year, our free cash flow will be around $700 million to $800 million. But if we return back to $1.5 billion, that means that probably in three years, we can use all our cash in our balance sheet. So I'm just wondering, based on this capital return, does that mean that for the next three years, we will purely focus on organic growth, and we would not think about any big M&A opportunities? Or can we strike a balance? If there is a big deal coming up, are we willing to take on some debt to pursue M&A opportunities? So that's my question. Thank you.

Thank you, Linda. I guess there are two parts to your question. Firstly, regarding the sustainability of our capital return. Obviously, we're very confident in our ability to generate cash. As we mentioned, we have focused on our business growth and return to shareholders, dual focus again. So for 2024 to 2026, we plan to step up our return from $3 billion to $4.5 billion, which includes the $1.5 billion for this year, 2024. Regarding the longer term, obviously, as you correctly pointed out, we probably cannot do $1.5 billion every year forever. But I think in terms of our company's philosophy, we have always been shareholder value conscious. So we will continue to evaluate how best to deliver long-term shareholder value. Obviously, I will not be surprised down the road if we can return a meaningful portion of our free cash flow generated each year to our shareholders beyond 2026. We have no concrete plans yet, but we will provide some more concrete guidance down the road at the appropriate time. On your second question regarding M&A and strategic opportunities, we have been very prudent in our M&A approach. Obviously, we prudently and proactively evaluate potential M&A opportunities, both historically and in the future, and we will only go ahead with M&A to the extent that makes sense and creates value for shareholders. We will have robust discussions with our board regarding any major M&A opportunities that present themselves. To the extent that a valuable M&A opportunity comes up, we may or may not adjust our capital return plan. We may or may not take on debt to fund M&A depending on the size of the investment. Again, we are very prudent in our M&A approach, and we will only pursue M&As that are presentable to our shareholders. Hopefully, that addresses your questions. Thank you, Linda.

Okay, thank you very much.

There are no further questions at this time. I'll now hand back to Ms. Lip for closing remarks.

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

Thank you.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.