Yum China Holdings, Inc. (YUMC) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. I'm Fred Hu, Chairman of the Board of Yum China. On behalf of the entire Board of Directors of Yum China, welcome to Yum China's 2021 Annual Meeting of Stockholders. In light of the continued public health concerns regarding the COVID-19 pandemic and related travel restrictions, the Board of Directors has determined that it is prudent to hold the annual meeting in a virtual-only format this year. At this time, I would like to introduce the other Board members present at this meeting. Joey Wat, who is also Yum China's CEO; Peter Bassi; Christian L. Campbell; Ed Yiu Cheong Chan; Edouard Ettedgui, Cyril Han; Louis Hsieh; Ruby Lu; Zili Shao; William Wang. Two of our current Directors, Christian L. Campbell and Ed Yiu Cheong Chan, will not stand for reelection at this annual meeting. On behalf of Yum China, I would like to thank Chris and Ed for their outstanding service and the significant contributions to our company. Min (Jenny) Zhang, as a new Director nominee, is also present at this meeting. I would like to introduce Linda Gu and Serena Hsieh, who are representing our independent auditor, KPMG Huazhen LLP; and Angela L. Kellems of American Election Services, LLC. who is serving as Inspector of Elections for this meeting. I would now like to turn the meeting over to Pingping Liu, Corporate Secretary of Yum China, who will act as Secretary of this meeting and will lead us through the formal agenda items for today's meeting. Following the conclusion of the formal part of the meeting, management will report on the company's performance over the last fiscal year and will be available to respond to questions from stockholders. Pingping?

Thank you, Dr. Hu. Ladies and gentlemen, we have designed the format of this virtual annual meeting to ensure that our stockholders who attend will be afforded similar right and opportunities to participate as they would at an in-person meeting and refer you to the agenda and also procedure available on the virtual meeting website for information about the conduct of today's meeting and how stockholders may vote and submit questions during the meeting. On April 15, 2021, a notice of the meeting, including instructions on electronic voting and how to access our proxy statement and our 2020 annual report online was mailed to all stockholders of record as of the close of business on March 29, 2021, being the record date for determining stockholders entitled to vote at this meeting. This is reflected in the affidavit of mailing, which will be filed with the records of the meeting. The records of the meeting will also reflect forms of proxy that I'm hereby presenting to the meeting. The Inspector of Elections for the meeting has taken an oath of office and has reported to us that, on the record date, there were a total of 420,467,575 shares of the company's common stock outstanding. The Inspector of Elections also report that immediately prior to the commencement of this meeting, more than 86% of those shares are present by proxy at today's meeting. Accordingly, a quorum is present and I now call this meeting to order. The polls are now open for proposals to be voted on at this meeting. As a reminder, stockholders attending this meeting can vote their shares online from now through the closing of the polls by logging into the meeting website as a stockholder, entering their 16-digit control number included on the notice, proxy card or voting instructions that accompany their proxy materials and following the instruction on the website. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is required. As stated in the agenda, we have 4 business matters to cover at today's meeting. Detailed information concerning the matters to be voted on can be found in the proxy statement. The first order of business on the agenda is the vote to elect 10 directors. The Board has nominated the following persons as named in the proxy statement for election as directors to hold office for 1 year term to expire at the 2022 annual meeting and until their respective successors have been duly elected and qualified. Dr. Fred Hu, Ms. Joey Wat, Mr. Peter A. Bassi, Mr. Edouard Ettedgui, Mr. Cyril Han, Mr. Louis T. Hsieh, Ms. Ruby Lu, Mr. Zili Shao, Mr. William Wang, Ms. Min (Jenny) Zhang. Our bylaws require advance notice to the company of a stockholder's intent to nominate persons as directors. No such notice was received. Accordingly, I declare there are no other nominations with directors. The next order of business on the agenda is the vote on the proposal to ratify the appointment of KPMG Huazhen LLP as the company's independent auditor for 2021. The Audit Committee and Board have recommended the appointment of KPMG Huazhen LLP. The third order of business on the agenda is the vote on the proposal to approve, on an advisory basis, the company's named executive officer compensation. The final order of business on the agenda is the vote on the proposal to approve an amendment to the company's amended and restated certificate of incorporation to allow stockholders holding 25% of the company's outstanding shares the right to call special meeting. Since the company did not receive proper notice of a submission of any other matters to be acted upon at this meeting, in accordance with the company's bylaws, no other matters may be presented. So this concludes the introduction of the proposals to be presented at the meeting. At this time, we'll be taking comments on the proposals. Stockholders who have logged into the meeting website using their 16-digit control number will be able to submit questions by typing them into text box on the meeting page. At this time, we'll only respond to questions relating the matters being put to a vote. Comments or questions on other matters should be held for until after conclusion of the formal business. Okay. Since all stockholders have had adequate time to vote, it is now 8:10 a.m. Shanghai Time, and the polls are now closed. I will now read the preliminary report of the Inspector of the Elections. Any votes submitted during the meeting but not reflected in the preliminary report will be included in the final report of the Inspector of Elections and disclosed in the report on Form 8-K to be filed with the SEC within 4 business days of this meeting as well as the announcement we filed with the Hong Kong Stock Exchange. The preliminary report of the Inspector of Elections shows that each of the 10 director nominees has been elected with each director nominee having received votes for his or her election for more than 97% of the votes passed with respect to that director's election. The ratification of appointment of KPMG Huazhen LLP as the company's independent auditor for 2021 has been approved with more than 99% of votes cast in favor of the proposal. The advisory vote on named executive officer compensation has been approved with more than 92% of votes cast in favor of the proposal. And approval of amendment to the company's amended restated certificate of incorporation to allow stockholders holding 25% of the company's outstanding shares the right to call special meetings has been approved with more than 99% votes cast in favor of the proposal, which is about 75% of shares entitled to vote. So this concludes the report of the preliminary voting results. Dr. Hu, back to you.

Thank you, Pingping. All business properly brought before the meeting now having been acted upon. I hereby adjourn the meeting. Now I would like to introduce Mr. Joey Wat to give us a presentation.

Thank you. Thank you, Dr. Hu. Ladies and gentlemen, it's my pleasure to welcome you to the Yum China Annual Stockholder Meeting. 2020 was certainly a most challenging year. So I'm pleased to report that Yum China emerged stronger than ever. Before turning to the results, I want to note that we complete our secondary listing on the Hong Kong Stock Exchange in September 2020. We are the first Delaware incorporated company to list on both the New York Stock Exchange and Hong Kong Stock Exchange. I sincerely thank you for your continued support and the trust you have placed in us. Despite the challenges presented by COVID-19, Yum China achieved solid performance in 2020. We reported operating profit of $961 million. KFC remained resilient and Pizza Hut significantly strengthened its fundamentals. We continued to lay the foundation for future growth, and we accelerated new store openings, ending the year with over 10,500 stores. We delivered such strong results, thanks to the dedication and creativity of our employees. The pandemic reinforced our commitment to our people-first philosophy. For example, we extend our Family Care coverage for critical units and accidents to more employees and their families. By year-end, more than 18,000 employees and 40,000 family members were covered under this program. We always strive to be a responsible corporate citizen. To protect the safety and health of our employees and customers, we put in place strict health measures at the onset of the pandemic. We kept most of our restaurants open even during the peak of the pandemic. So the millions of people who have access to safe and healthy meals. Our commitment to sustainability is well recognized. We were named the industry leader for the restaurant and leisure facilities industry in the 2020 Dow Jones Sustainability Index. Basis for success is good for really. In 2020, we launched some 500 new or upgraded products at great prices despite the pandemic. KFC's premium Wagyu Beef Burger was a sensation and sold out within days. Portuguese chicken curry at Pizza Hut became an instant hit on the delivery menu and was later add to the dining menu. We launched regional flavors in select markets, such as Wuhan hot dry noodles, Wuhan Reganmian, and just a couple of weeks ago, steam dumpling or xiaolongbao in Hangzhou. We remain confident in the long-term market opportunity that China offers. We believe the Yum China of the future will have a much larger footprint enabled by store expansion, growth in our brand portfolio and growth in our digital and delivery capabilities. Let me tell you about our progress on our growth strategies. First, in-store expansion. In 2020, we opened 1,165 new stores. Marking the highest new openings in our 33-year history of operating in China. Importantly, we continue to generate healthy cash payback on our new stores. We intend to sustain this momentum into 2021 and beyond. We plan to reach 20,000 restaurants much faster than we did our first 10,000 stores. We are stepping up investment in our logistics and operational infrastructure to build in flexibility and responsiveness and to grow even faster. Beyond our core brands, we believe our emerging brands offer big opportunities, too. In the coffee segment, we opened Lavazza's first Asia flagship store in Shanghai last year. Since then, we have opened more stores, and we plan to accelerate openings in 2021. We are committed to making coffee a meaningful business for Yum China. In the Chinese dining segment, we completed the acquisition of Huang Ji Huang and post-acquisition integration has progressed well. We also formed a dedicated business unit to strengthen our capabilities in Chinese dining. To scale this business up, we will continue to innovate to build daypart coverage and to fine-tune operations. Finally, the pandemic highlighted the power of digital from member engagement to operations and delivery. With our digital ordering and off-premises branding menu items, we have record delivery and takeaway sales of around $4 billion in 2020, over 50% of our KFC and Pizza Hut company sales in 2020 compared to approximately 40% in 2019. We end 2020 with over 300 million members, representing about 60% of our system sales. We are leveraging our digital platform to directly engage our members, driving spending and stickiness. We are also improving our operational efficiency by leveraging emerging technologies at our restaurants, supply chain and offices. We will continue to advance our end-to-end digitization and make our business model more resilient. Our resilient business model, our leadership in core capabilities and the excellence and dedication of our people have been the foundation of our success. I'm confident that Yum China has the strategies and capabilities to sustain long-term growth and create value for our shareholders. Thank you, everyone. Please stay safe and healthy. Hopefully, next year, we'll be able to meet in person. Thank you.

So we'll now move to the Q&A session. This question-and-answer period will be conducted in accordance with the rules of procedures that are available on the virtual meeting website and will be limited to 20 minutes. Stockholders who have logged into the meeting website using their 16-digit control number will be able to submit questions by typing them into text box on the meeting page through the end of the Q&A session. Questions and comments should be relevant to matters of concern to stockholders generally. In order to give all stockholders, who wish to speak, an opportunity, stockholders are limited to 2 questions, and the second question will be addressed only after each shareholder present on webcast has had an opportunity to submit their questions.

The first question is, are there any plans to increase the dividend once we exit the stage of COVID influences?

Thank you for the questions. In the first quarter of 2020, the company suspended dividend program for 2 quarters. In the fourth quarter of 2020, the company resumed dividend payment. The quarterly dividend in our first quarter 2021 earnings release was announced and it was $0.12 per share. Now Yum China is committed to returning excessive cash to our shareholders and then that including both in terms of dividend payment as well as a share buyback. Now we aim to maintain a return to shareholder policy that is sustainable in the long run. The factor for us to consider this policy include, but not limited to, the overall economic conditions, our operating and financial results and our capital structure and our financial obligations as well as our liquidity position, et cetera. Now the company reviewed the dividend policy as well as its share buyback program periodically, and again, we consider all these factors in order to determine an appropriate dividend payout ratio.

The second question is, the CEO pay ratio of 3,844:1 and also the recalculated ratio of 2,210:1 are each stunning. Although you say that most other employees are part-time and they are paid in accordance with employment conditions in China, so likewise, does our CEO live and work in China, but her compensation is paid along the lines of American CEO pay? Why?

Okay. Well, regarding CEO pay ratio, first of all, I have said that the calculation method is all calculated by SEC. And while this method actually typically will pose some challenges for companies like ours with sizable workforce, particularly in emerging markets. Maybe I should put this number into perspective, into context. First of all, and it has great to deal with our labor model. Close to 74% of our crew members over 360,000 crew members are part-time on hourly pay, hourly wage, spaced out in 1,500 cities with various daily wage level and 40% are university students. And most importantly, they offer different work hours based on their availability. So in 2020, the median employee identified was the part-time university student in a T2 city and the number actually [indiscernible] due to the onetime $12 million partners grant to the CEO. It is a performance-based [indiscernible] grant with a cliff vesting schedule from 2020 to 2023. And any payout, if any, is subject to the achievement of certificate set by the Compensation Committee. And of course, if the threshold is not much, no payout will be made. So hence, there are 2 numbers. One is the formal number 3,844, which is based on company -- the total amount of the partner's grant. And then in the [CNA], we have recalculated based on the annualized partners grant and the number will become 2,210. So one -- another question regarding kind of the benchmarking view. Yum China is a very unique company. We operate mainly in China, but we are Delaware incorporated company. So we have to follow all the U.S. governance structures put in place. And so when we do the benchmarking, we do a global benchmarking, not just of U.S. company, but companies in U.S., Greater China as well as in Europe. I'm happy to say that while based on analysis as well as analysis by [indiscernible], the CEO pay is aligned with the pay for performance and analysis.

The next question is, thank you very much for the opportunity. Firstly, I wish to express on behalf of our clients, our partners and myself, our sincerest thanks to entire staff, the management and the Board for the way the company handled the extraordinary situation last year. We feel the company demonstrated, by example, what it means to be a responsible corporate citizen. Thank you. I would like to ask 2 questions. The first regards demographics in China and the powerful trends we are witnessing. In a long-term sense, what challenges does that pose the company from the point of view of menu and the taste, stores and importantly staffing? The second question regards capital management. In light of the successful raising last year, could we please get an update on the overall thinking regarding our investments back in the business in new brands, dividends and buyback policy and thoughts around the medium- to long-term ROE profile of the group?

Let me address the question of the long-term challenges of the taste, store and staffing first. Well, first of all, these great challenges will always continue just by various degrees. For taste, I suppose the end customers always like the food among all. Above everything we do, we must offer good food to our customers is our commission and is our commitment, and we demonstrate our commitment in offering customers good food to delight our customer, even during the pandemic. So last year, despite all the changes of supply chain and operation and everything, we still launched 500 new products -- upgrade products to our customers, which I think is pretty phenomenal commitment from our over 400,000 people. And even when we could not really use advertising to reach out to a customer about new food, but guess what, we have our membership program. We already built out over 300 million memberships since 2015, and we leveraged that to reach customers directly. Even during most difficult time, when we present new and good food to customer, we know that, that make customers happy. Good food always make people happy. It's not about expensive food. It's not about cheap food, but it's about good food, as simple as that. Second, store. We see the future of our industry is a seamless combination of online and off-line business. So obviously, in terms of online, we know how important. We don't have to convince anybody that the importance of digital delivery, the digital payment, the digital order, et cetera, et cetera. But at the same time, we must not forget about we are a restaurant business. We still want to and we still could build many, many more restaurants to cover the China market, which we still see very promising white space there for the reason that is rather clear. China over -- has over 2,000-plus cities and KFC, we are only in 1,500 cities. And then Pizza Hut, we are only in 500 cities. There are still hundreds of cities neither have KFCs nor Pizza Hut. And even in cities where we are already in, we can put in more stores because we have learned when we put in more stores, when we increase the density of stores, the average distance from the store to customer will be shorter and thus, shorter time to deliver the food to the customer as we go back to the point of good food. If the food is still nice and warm when it reach you, it's good food, and we want that. So therefore, the trend of seamless combination of hybrid online off-line is the future of our business. Third, staffing. Well, it's an ongoing almost mathematical certainty that is the challenge in the past, now and in the future. And we'll continue to do everything we could to provide optimal service -- level of service to our customer, optimal, because we have to [matter] customer can afford the level of consistent service that we offer to them. Now, it's not a challenge right now. I mean, we've been working on it. We've been working on it very hard. And as I mentioned in other occasions, it's very hard to describe how much work we have put in to save the cost of labor over 1 year. But over the last 6, 7 years, we can see it clearly. I personally joined 2014, which is 7 years ago now. And at that time, we had about 6,000-plus restaurants, and we have over 400,000 staff for the few thousand restaurants. Now we are at over 10,000 stores, 10,750 stores. We feel operating with over 400,000 staff. So we have increased -- we have built few thousand more stores with same number of staff. Over a longer period of time, we can see the picture clearly. How could we do that well? First of all, we must commit to the fact that we need to save whatever we can save to pass on the savings back to customers and shareholders. Secondly, we leverage technology, the digital capability, the automation, et cetera, et cetera. But I must say all 3 trends, these are ongoing, and we'll continue to work very hard on that. Thank you. I'll pass on the second question to Andy.

Thank you, Joey. Regarding the capital allocation questions, you're correct that we raised almost -- roughly $2 billion in Hong Kong listing last year. So as much as $8 billion of capital maybe deployed over the next 5 years, the main goal of that capital deployment is to accelerate growth and create long-term value for our shareholders. In terms of our capital allocation strategy, the most important thing for us, obviously, is to ensure that we continue to run a good financial strategy, make sure that we have sufficient cash on hand for working capital and then also sufficient reserve to deal with potential contingencies as the one that we have seen in 2020. Now in terms of the capital allocation priorities, our capital, most important thing is to help us to drive organic growth. Hence, our tax program for -- CapEx will account for the large majority of our capital deployment over the next years. Now the majority of our CapEx will be used to accelerate our store network expansion and then also store remodeling, especially for KFC and Pizza Hut. And we also plan to invest several hundred millions of dollars in our emerging brands such as coffee business, which we intend to build into a meaningful scale and a meaningful part of our business. We also identify digital technologies and automations to be an important part of our competitive advantage. And so, we have earmarked almost $1 billion over the next 5 years to further enhance our digital technologies and automations, both at the store level as well as in our back office and supply chain. And so furthermore, we won restaurant business. We have intention to greatly expand our store network, hence, we also need to build up our logistics and our infrastructure. And so we have earmarked another $1 billion in 5 years to build up our capabilities and capacity in our logistics and our critical infrastructure. Now in terms of our return to shareholder policy, I have already mentioned in the previous questions that obviously, we're committed to returning excessive cash to shareholder. And so as we mentioned, we want to make sure that we have a sustainable policy on capital return. So as I mentioned, we consider that policy and we revisit it periodically to make sure that it's still appropriate. And so I will not expand here again. And then finally, we will also look at potential investment as well as other organic opportunity for us to help us to strengthen our competitive positioning as well as to help us to accelerate our organic growth. And so I think we believe that this approach for capital planning will drive the long-term values and returns. And I think -- yes. So thank you.

We have reached the conclusion of our Q&A period. Before you go, let me just say, on behalf of all of us at Yum China Holdings, Inc., thank you for attending our Annual Meeting of Stockholders. We appreciate your support, and we hope to see you in next year's meeting. Thank you very much.

Thank you.

Thank you.