Q3 2019 Earnings Call
Ladies and gentlemen, thank you for suddenly buying and welcome to Yum, China 2019 third quarter earnings conference call at this time.
To sponsor window listen only mode. There will be a presentation followed by a question and answer session at which time. If you wish to ask a question you will lead you Press Star then one on your telephone I must advise you that this conference is being recorded I would now like you had begun for into over do your speaker.
So thank you. Please go ahead.
Thank you, Rob Hello, everyone and thank you joining yum China's so what's the 2019 earnings conference call joining us on todays call armies, Joey Wat seal Yum, China, and Mr., Andy Young Yeah for the company.
Before we get started I'd like to remind you that Oh earnings call an investor presentation contain forward looking statements, which are subject to future events and uncertainty.
Our actual results may differ materially from these forward looking statements.
All forward looking statements should be considered in conjunction with the cautionary statement in our earning money and we'd like to include it you know filings with the S. T T.
It's calls includes certain non-GAAP financial measure you should carefully consider that.
Comparable GAAP measures.
That concludes.
Today's call include four sections first.
Joey you a couple of Yum, China, so well into 2019 highlight and Andy will come with a financially so people, which are we provide an update on our strategic targets.
Well then open the call into question.
Pass up this call will be available now IR website <unk>.
One presentation, which contains operational and financial information reports it is debatable.
I'm, a little as well.
At this time I would like to turn the coal but to me. So we want feel okay I'm fine.
Thank you Florence.
Everyone and thank you for joining us today.
Let's start with the overview.
We're pleased with our continued strong performance and robust operating profit growth into third quarter.
We continue to build on our market leading position in China and further strengthen our competitive advantages in the area of innovation digital and delivery across the whole about business.
Let me share some highlights from the quarter.
First we delivered out 12 consecutive quarter off system sales growth since spin off with positive same store sales growth at both KFC and pizza hut.
Second we are on track to hit the high end, although news still a target of 800 to 854 29 team.
It's driven by did the performance of up right.
In particular, KFC and the many attractive opportunities to expand on portfolio across China.
We continue to innovate on multiple fronts.
It includes launching exciting new products and leveraging technology to drive sales and operational efficiency.
We continue to see strong growth in all digital <unk>, including total members.
That's contribution to sales digital order cancellations of Michigan and delivery sales.
I also want to formally welcome Andy Young who has recently joined as our new CFO .
And he brings a wealth of finance experience.
Specifically, given his tenure serving as CFO and other companies.
I think I knew he also a change list technology company.
I would like to San Jackie for his leadership over the last several years and wish him all the bad if he made okay back to Hong Kong could be closer to family.
With that I'd like to what you're through the third quarter performance.
Let me start with the progress we have made on the digital and celebrate front as they a crucial to try the that's necessary.
Maintaining our market leadership in all digital and delivery capability is a key component of our vision.
To be the world's most innovative restaurant company.
We continue to leverage our powerful digital ecosystem to drive sales improved the customized feeling increased operational efficiency.
That wrong about the sad, it's our large and growing digital membership.
Can't see M. Pesa together have grown by over a third in a lot here to 230 million digital amended and they account for huh ourselves.
Digital orders continue to grow materially as our customers embrace the comedians also.
Okay, great subscription continued to be very popular with over 4 million so during the quarter.
Other than the delivery privilege membership that youre familiar with we launched several new attractive overall, including an update a coffee privilege program at KFC and stick with age program at Pizza Hut.
Aiming to drive adoption and stickiness of these categories.
I'm showing encouraging result.
The living continues to grow and now accounts for 20 years now so.
Without via our own chanteuse growing faster than that my aggregated.
We continue to drive improved efficiency and performance was the ongoing optimization, although recently upgraded delivery dispatch system and the rebuilt although in house piece out to the but anyway.
In addition to that or did you go into every initiative. We have also leverage technology to improve operational efficiency for example, improving our real time monitoring and management of our surprising and labor productivity.
Now, let me well through the performance of I'll keep Brent starting with KFC.
Can't see would put an honest and on quota with this themselves rolls off 10% and same store sales of 3%.
We delivered margin expansion and operating profit growth of 16% in constant currency. Despite this friday moderator sales growth compared to the first half of 2019.
This is the result, lowering the intensity of promotional activity, which we highlighted last quarter.
Sure management that she can cause increased improve my any labor productivity.
Let me provide some detail about these initiatives starting with our menu innovation.
Well menu meeting and exceeding customer wishes for new and improved product has always been I'll focus.
To this end, we launched several exciting Bogo L T O us during the quarter.
We offer a boost vegetarian bogot a premium price point put the belo much from Bogota, showcasing our protein innovation capabilities.
Double down boneless chicken. The is an example of a popular okay see product launch by young brands internationally that we were able to leverage and launch in China.
Aside from bogus, we launched an exciting new trial spicy Skewers Institute, both isn't it the times I'm going away intensity.
And we are gradually expanding coverage.
Spicy she was a C trying to save the street foot, particularly popular for late night dining.
Lastly, we drove strong sales growth in all key categories, I'll preface coffee and deal with exciting new products and captured cross selling opportunities enabled by our digital membership.
We have witnesses Oh, a perfect men, but more than doubled their spending during that the squish impurity driving incremental operating profit.
For example, a coffee marketing has been primarily driven by digital initiatives and we have sold 98 million cups of coffee in the first nine month of the year exceeding the total so for full year 2018.
With respect to promotions, we continue to focus on smart value.
Oh signature value promotion Crazy thirsty continued to grow cells.
Those from Lucky a successful campaign.
As we adjust our offer we were able to increase average ticket in gross margin.
Nick.
Let me to spend some time, describing all approach cost management.
The team has done an excellent job managing the impact from commodity inflation in particular, the reason increasing chicken prices.
This has been achieved through a combination of one leveraging our scale and long term relationship with all suppliers can negotiate lower than market increases.
And to focusing on menu innovation capabilities <unk> optimizing that makes up to 10, proudest Hughes and diversifying away from chicken through the introduction of new launch it can menu options.
On labor, we drove strong year on year productivity gains during the quarter.
This was due to a careful planning for peak summer stopping and new real time automated labor management too.
These choose what particularly effective in optimizing management of the seasonally but demand during the peak summer season.
To conclude during a quarter, we strategically located a promotion intensity and drove double digit system sales growth through 'em menu innovation digital and delivery initiatives and news so openings.
Despite the pressure from ongoing activate a chicken prices all digital close control enabled by a scale and improved labor productivity and allowed us to drive excellent operating profit growth.
This was a successful execution of the shelter strategy, we outline on quoted the results highlight I'll resilient business model and ability to effectively to changing market conditions in China.
Oh longest trotta youthful can't see remains unchanged to continue to open source across China and innovate across the business to serve our customers evolving demands while maintaining a strict focus on efficiency.
Next I'll provide some kinda on pizza hut performance.
He's a how continues to see man to progress being made in its revitalization program with near term priorities on driving traffic and south.
We achieved our first costs I got a quota of same store sales growth of both concept for the quarter of traffic growth.
By a significant increase in dying traffic.
Oh crews Union last month, and revitalizing the brand has impact operating profit so quarter.
However, we are focused on the long time and believe we're doing the right thing for the successful revised when I say half the Brent short time flexibility is required to achieve our long top get this.
Let's talk about the fall pull us off all revitalization program, starting with fixing the fundamentals, which is really about getting on menu promotions operations and service right.
Well I'll signature screen Wednesday promotion, we introduced new all the items like appetizers and desserts.
Various additional promotions what pocket it directly to a customized my I did you know memberships.
We have seen good consumer response, both in South and consumer survey results.
We also launched various new products, such as people try to and Chinese palatable Chili chicken pizza.
Stately main thing called on growth category sales all state was up strong double digit year over year to account for a bus that team has now sell.
Give me a ideal scale.
This amounted to over 30 minutes serving upstate.
During the past 12 months.
Turning to our second digital in addition to the achievements I mentioned at the beginning of the coal we launched a national task, although carry all fine show on also play Pete I see great potential from promoting that efficient off premise dining opportunity.
Delivery Oh, sorry.
Grew to 26 month themselves.
This has been powered by strings and operation as we really feel our in house delivery infrastructure.
Oh, no delivery growth has been driven by all channel on channels that to our successful digital CRM program and dedicated promotions.
Not funny.
We are enhancing how asset portfolio.
I'll focus through a Saturday to Remodels and multiple store format you.
You can see olive beautiful stores on sign 19 of the presentation.
We remodeled 126 stores they know so quota.
Significant increasing pace compared to the first half we will continue the S out already to pay aggressively in a full quota and target to complete above 504 the fleet.
Together these will put us having a very positively impacting the business.
Moving forward.
We'll maintain focus on these four pillars to drive long term missed duration of traffic that's house and then profitability we will continue.
And maintain a positive changes along the way, we're not anticipating quarterly fluctuations as we continue to invest and adjust appropriate today as the revitalization matures.
Finally, we a nice in August and agreement to acquire controlling interest in 21.
Restaurant chain, focusing on simple <unk> rule.
Category of <unk>.
I think one has over 640 restaurants.
Almost all wage a franchise upgrade it.
We will provide additional details once the deal is completed.
Turning to they expect to in early 2020 subject to satisfaction of closing condition.
With that I'll handover the call do O'neill example, for the first time Andy.
Thank you Julie and good day everyone.
Thank you for joining us today.
I'm very excited to have joined Yum, China recently, I look forward to meeting with everyone in the coming months.
Now, let's turn our attention to the third quarter price will be subs.
Total revenues reached 2.3 billion and if that quarter.
2019.
Percentyear over year, excluding foreign exchange translation.
Total system, so <unk>, 8% year over year, excluding epic.
And by the same store sales growth of 2% and new store openings.
We opened 231 new stores during the quarter.
Increasing our total portfolio to 8917 restaurants, that's off the end of September .
We have opened 646 restaurants you today.
And are on track to hit the high end up I target, which is 800 850, new store openings for 2019.
KFC same sows <unk>.
Mm 3%.
Driven by a 4% <unk> increase in ticket average.
This was due to increase your up the liver.
More promotional activities and increase pricing.
Tropic decreased 1% year over year primate due to fuel value promotion.
He was a hub achieved its third consecutive quarter. It seems also growth of one person.
Traffic increased 6% year over year remain positive for both.
Im sorry, Andrew meters.
This was largely driven by increased promotional activity year over year, which also drove a 5% you read a decrease in ticket average.
Overall young trader restaurant margin was 17.7%.
The up compared to the thinker last year.
Reaching inflation was 5%.
Well I'm, what commodity inflation was to put them compared to the same period last year.
We continue to expect overall commodity inflation to be low single digit for 2019.
Kept the restaurant margin increased 2.9% year over year to 20.1%.
It was driven.
By sales library.
Low intensity of promotion and excellent management, <unk> coal sales and labor productivity during the critical summer peak season.
Combined.
This more than offset margin pressure from wage inflation and commodity inflation.
Finally, the motor and also benefited from a onetime adjustments during the quarter.
This is related to terrorism rebate that added approximately 7.3% due to margin.
Yes, a piece of margins during the third quarter was 11.4%.
Down 2.4% year over year.
The margin pressure was primarily due to one oh investment into higher promotional activities to try tropic.
Two acceleration of Remodels.
Three ongoing wage inflation.
Partially offsetting these factors were savings in commodity calls as we leveraged upscale and optimize <unk>.
However, we begin to lap some fairly successful initiative that were implemented during the second terrible 2018.
The significant year over year savings in labor productivity.
Scene in the first half of 2019.
We're not repeated in the third quarter.
But net net you to date Pizza hut margin.
You slightly above last years levels.
A strong achievement given their long term investments being made to we bought two data like the Brian .
Just a expense was up 3% year over year, and 7% year to date fixed ethics.
The third quarter benefited from higher governments incentive.
<unk> due to some incentive received it in the fourth quarter last year.
We see that.
In the third quarter this year.
Yeah, I'm trying to operating profit for the third quarter of 2019 increased 11% year over year.
Now due to depreciation of RMB against the U.S. dollar.
Foreign exchange translation negatively impacted our total operating profit by 9 million.
Or 3% during the quarter.
Excluding ethics offering Paul.
It's 14% year over year.
Oh, you effective tax rate during the third quarter was 26 upon the right with it.
2.7% higher than the same period last year.
Primarily due to higher or could we see Joe U.S. Tech.
Our best estimate of the you effective tax rate in 2019 continues to be below 28%.
Excluding any impact from the mark to market gain or loss from equity investments in between.
Finally.
Diluted EPS was 58 cents into quarter compared to 51 cents into thing period last year.
Diluted EPS includes a mark to market game of $12 million or three cents per share from our equity investment in may toward.
Mix.
Let me cover capital allocation.
Oh strong cash flow generation continue into quarter.
In the first nine months of 2019.
We try anyway that more than one bill in.
Net operating cash flow.
And 735 middle and free cash flow.
After subtracting 210, Midwood capital expenditure.
In a third quarter, who returned 109 million to shareholder, including a cash dividend of 45 million and share repurchase of 64 million.
At the end of September there was roughly arose several hundred 50 million remaining under the share repurchase authorization.
Oh, putting people then remain at 12 cents per share.
And we will continue to review our people in policy in conjunction with the fourth.
Accordingly.
HM Okay, you to embed.
Full growth given the strong return for Newbuilds.
However.
We have tremendous effort in optimizing new store and we modeled Capex. We now expect full year Capex for 2019 to come in at the low end of our 475 to 525 million range.
Including the expected impact of currency translation.
No I would.
Oh tend to our outlook for the fourth quarter help 2019.
Well, we continue to drive sales across all of that Brian .
We are facing some tough comparisons as we begin lapping some fairly successful Celsion is initiative.
Got it into second half of 2018.
Also we will step up investments in various important areas to ensure long term vitality of our brands, including a focus when we model, which will be back end loaded in 2019.
He is important to note that the fourth quarter, he's not only seasonally lowest quarter for itself, but also the biggest corridor for stalled modeling for us this year.
So small changes in offering we sold.
Investments.
And have a significant percentage impact on operating profit for the quarter.
Turning to specifics for KFC and Pizza hut.
At KFC, Yeah, some fairly successful sales initiative implemented into full quarter of 2018.
Including the first full quarter of Crazy testing.
Lapping up these successful initiative and also to decrease in promotional intensity dupilumab to protect margins are expected to result in a moderation of sales growth in the fourth quarter.
We will talk to you our relentless efforts to manage margin pressure. Some continue however, the chicken prices.
Also investment in remote those are expected to increase year over year.
This will impact sales and margins into short term.
But he is an important investments for a long term success.
Finally, several onetime benefit in the third quarter in particular, the tariff rebate and.
And significant year over year increase in labor pool activities.
No expected to carry forward into the fourth quarter.
At Pizza hut.
We're very encouraged by the progress of our Brian We've worked hard station pogrom.
But we do expect totally fluctuation as we roll out our initiative at scale.
We'll be driving these viable value promotions.
In addition.
Oh, we molding program, where I'm up.
Approximately half of our full year program to be completed the fourth quarter.
Again, this initiative will impact the restaurant sales and margins in the short term.
But important component of the long term, we watch how I station Oh Hello, Brian .
Now, let me hand, the call back to Joey to comment on our current strategic priorities children Kids. Thank you Andy.
I wanted to took a few minutes, Indiana the call today to highlight our overall strategic priorities.
Sure.
We are focusing on a number of t. areas that will drive our long term growth.
First we will focus on expanding our coal brands Cassie and Pizza hut.
In the near term as Andy mentioned, we have a very busy messman program. It has a full remodels and new built in a full quota.
2020, we expect to opened its doors at a similar pace compared to 29 team.
Second.
We will continue to invest in key growth opportunities, including Oh smaller brands.
We expect to accelerate a store openings, although smaller brands in particular will be increasing I imagine <unk> expanding our presence in a coffee category. We believe coffee has a bright future in China, but it would take additional patients hotwire and that's not to fully realize this settlement but opportunity.
We see a diversified portfolio.
So we would leverage and increase our investment in our industry, leading digital and technology capabilities.
Full.
We will be vigilant on controlling costs.
And driving efficiency to protect margins.
That being said given the current pressures across to cooking surprise due to pull shortage. We anticipate 2020 would be enanta try to yeah for commodity inflation.
We will be prudent on a portion of these courses hot onto our customers.
That's a good ready for pizza.
Well, we'll continue to bill on reason gains made in our value for money perception.
We will provide additional details on specific 2020 targets without Q4 earnings release in early 2020 with that I'll pass it back of foreign to stop the kidney for thanks, Joey well now open the call for questions.
That's what gives us many people as possible to attempt a question.
Would you please limit your questions to one at a time.
Great to see stocks acuity.
Thank you so much ladies and gentleman, who will now begin to question answer session. I saw a reminder, if you wish to ask a question you will need to press star and one on your telephone and wait for you need to be in now and if you wish to cancel you request a police Christy hash key once again, it's it's star in one if you.
I wish to ask a question and our first question comes from the line of Michelle's Chang from Goldman Sachs Shell to line you sell open.
Hi, Thank you Manny on congrats for the very good result, especially can see you touched on competitive and a high point in contemplating Maki, we still do personal money [laughter]. Okay. Can you. Please give us some color about that you can cause increase all here, so a quarter or yet today and a I believe you probably have held a visibility on the.
First quarter's a cost trend can also show with us and that even though we have such a strong pipeline novation and a coffee efficiency can can we have some idea about how should we look at them onto engine into next year.
Thank you.
Okay I will take this question Oh this is Andy so regarding overall commodity price inflation.
I think it was 2%.
Third quarter for us and about 2% a into first half this year.
For full year again, we expect.
To be as low single digit.
HM.
I think you know I think all through this year, we've seen significant price increase in poking in charter.
And by the African swine flu.
And that is likely you're going to continue.
Ammonia prices above so this is hard to predict going forward a chicken prices you know its cost we know.
Almost 20% to 30% you year in trying to this year for us because we have very strong supply chain.
And for human management, So we are able to manage that significantly below that.
And and in fact, you know we you know we have probably mashed up you know.
I would have percentages here.
In term of.
You know Commodifies, it's again, it's very hard to predict because you can look at spot prices. For example in September I think you reached a new record almost 60% plus you have year. So you know I thing you know who continue to monitor situations and give you guys that updates.
Again, I want you mentioned that you know our team have done an amazing job.
Mitigating the impact of elevated chicken price inflation.
Who salting initiative supply chain relationship or 11, you know scales and long term partnership with our suppliers.
And our team also have tremendous calling innovations are creating products using a a probably chickens and also known chicken proteins office. So we have been able to manage that commodity prices throughout this year.
And so so you think about this way without you know that without the airport the impact would be more significant. So chicken you know, it's about four who sent off our costs up so and you have increased about 20% to 30%. This year, so that would normally mean, 8% to 12% commodity inflation.
Dysfunction alone.
And about like you know to qualify for you to four or 5% impact on a margin obviously, we haven't seen that kind of impact on overall.
Overall margins and yes, Oh increase so so hopefully our team accompanied you'd be able to do a good job managing that pressure as well.
Sure I just want to add to common Michelle wine is.
We are excited and committed to our vision of becoming the most innovative restaurant company in a well so in this if they think the challenge of chicken price hike.
We suddenly take this vision.
Even more serious Dan.
Otherwise it would be so full Q3 alone you know we have some really exciting new products like the problem, but a much from a burger which is you know we repaid the meet with the entire piece up public, but a much with cheese and in the middle.
We have that Ah Ah that stuff rap instead of other than she can wrap that we traditional have we have that Oh. We also in our combo is thought to ensure the deals chicken strip to repay chicken wings. So, although it's still chicken, but the cost of chicken should we.
Essentially breast meat, which is not very popular.
On the Chinese customer the play such a constraint is it is lower.
So so I'll, probably innovation will continue for the rest of the yet and going forward. That's only here and it's very exciting we even get to the partly offsetting a lot of Ah teaching, which is the last small tip of the chicken wings, which is not something you think the weekend, so, but we could because that.
Good luck.
Huge built but that's still a group of people, who just love it.
[noise]. So that's probably 1.2 is our commitment to good food.
We look at our cost structure, let's say would take pizza hut, we can't see improvement.
Oh, the cost management eight eight almost every line.
But we will leave the for its ability to cost of goods. So cost of course ourselves why.
Because they sell commitment.
We would push ourselves to try efficiency and effectiveness.
Everything however.
We have the commitment to pass all these savings that to food to serve our customers.
Yeah, Bob what she could even though we have the business, but we need to have that sincerity and good insincerity, so customer and we have that commitment and thus we always have the sensibility. There intends off the last month two foot, but we must have the good product for us to drive good try make an income.
Thank you Michelle.
Yes, I think.
Sorry, like audio as are the same crushing some public questions, which is probably the margin trends.
The whole Kathy.
I think the couple of things right. One is that I think into fourth quarter as we've mentioned before you know we.
We're going to accelerate our saw we modeling so that would have an impact on ourselves and Oregon.
And also if you look at KFC I also benefit spend as a form some onetime items, including the tariff rebate, which impacted or benefit the margin, 5.3% and that also you also benefit as Joe you mentioned, you know a very successful rollout how some of our.
Put up 52, especially in the summer peak season are we getting a lot of productivity improvements.
And that may not be as permanent into full quarter, which is traditionally a smaller quota and then and no season was so so overall I think the office for this there was also you know if you look at KFC will be lapping some very successful initiative right.
We have to first full quarter of crazy sustain that BOE Ah you know in 2018, or so that would be a tough comparison lapping that so so oh I think you know I thing for margin trend, we have done a great job and I think better than we have expected probably.
In a in the third quarter or anything longer life more into football.
Thank you.
Thank you so much and our next question comes from the line of channel.
From Bank of America Merrill Lynch Changyou line, so pen.
Thank you management, Oh, I've got a question on the sales.
Just how Andy you mentioned that we expect more the regional sales growth.
The fourth quarter.
Are we talking about flow dolls things, both high schools as compared with Q3.
And then we also highlights out in Q3, Oh, we have a purpose awfully scaled back in the promotional intensity to achieve a balance between margins on same store sales gross.
Going forward, we are going to see very tough flops. All same store sales growth are we going to continue with this balanced strategy or you can that's three we're going to actually step off promotion again until system same store sales growth.
Any color on that front will be helpful. Thank you.
Thank you Chad so yeah, you're right like so if you look at you know to hook order at the margin.
Improve.
At KFC, partially due to you know the.
Strategic management.
We'll activities.
So again I think team we continue to look at balancing between you know.
Promotion. That's 50 works is you know I protecting margins and respond to you know to the market appropriately.
In and so, but we do expect that selective in promotion activities.
Like we are in the fourth quarter for KFC Oh so.
The answer your question.
Yeah, Okay, let's say one thing I think and do you. Just mentioned earlier is we just have to remind ourselves that.
Quarter for last year for can't see was very strong that's the first food quota of Crazy Thursday, which is one of our best promotion on now.
And and with that strong result, naturally we will have the challenge of lapping this yet for the two full.
The same time as we mentioned a few times already given the cost.
Pressure, particularly in Q3 and looking at Q4, we also look for ways to Putout marching as well.
The third point is it seems so cells would it is not the only criteria for young China. Despite the scale of our business. We are still growing very fast and the market opportunity is still very exciting there.
We will not be doing something good and and fair for our shareholders. If we do not have a good balance all seems ourselves and system sales growth. So if we look at look at Q3, Oh forecasts, either it seems ourselves 3% but decision.
I'm, sorry, 10%, which is fantastic given the scale of our business already so Q4.
As Anthony mentioned, we we we as well we are driving the same. So says. This is also very big quota for us to build new store and we must keep this pace going a tremendous hang out with dominant.
Okay leadership in our business. So so therefore, you can see the the salaries consideration from management teams point of view towards cool. Thank you Melissa.
Understood. Thank you very much and your Joey.
Thank you sound wash and your next question comes from the line of shallow poovey problems TD group.
Capital Your line is now open.
Good morning, Joey and Andy will come to the company I haven't one question or two that regarding the new openings and as you mentioned on release out you et cetera, and opening in the third quarter Interestingly, we're seeing very impressive improvement I can't see restaurant margin.
Shall we say that actually the new store restaurant margin on like for like basis actually is a better than last year. Because we are seeing you are opening more stores are looking for shall we say that is the drag of a new store.
For a like for like be she's actually it will be much less than previous years, because I'm seeing the trends as you recall plans more driven by the new pending looking for rather than the same store you have your restaurant margins for the new store you do something better than previous years should we see that is the margin price Sherwin Nabil.
As much as we feared.
Normal operations. Thank you.
Thank you this out well, let me take there's no question floor. The Q3 restaurant margin yeah feel a contributing factor of what is the Andy mentioned earlier is there some one off benefit like the terrorists me.
I like a government incentives that was happening Q4 last year. This yeah. It looks for Q3, but more importantly, actually we have some very impressive fraud labor productivity gains given that Q3.
I mean that that number is big and that number is from all stores.
And there are reasons behind it and.
Because that's not go down by itself usually is a result was very aggressive and and and how the aggressive management hottelet behind so the hottelet behind or the postal labor productivity and does the restaurant margin is all aneel real time.
<unk> automated labor scheduling system in place.
All right now for all my store managers in can't see they the data of the operational did have particularly for labor scheduling isn't real time as they think that phone with Costco dieting and manager in your pocket. So that's.
Transparency of that data and then the automation of the labor scheduling skin outlet store manager a very good too so that they can't Miss bond and react immediately.
This isn't a benefit is.
Very very important and it was proven in out you'll see which is solid Pete trading season, well. There's some right. It is it's very very significant and and does and he also mentioned earlier that such benefit it's a lesser lightly to to replicate Kim.
Well because kids only this very small quota. So we spent a lot of money on labor costs and the saving that isn't I'd is slightly more impressive. So the restaurant margin really is that the improvement as a result, almost all imagine not only and new openings, but all new openings don't we do have.
We do have a bottom up approach.
Each store the decision to open one single store any still Amen Amen Amen Amen young China, we have very robust process to two to approve it.
However, when the new store mature, Dan Dan, we I spending a bit no benefit from as well.
Thank you see a pool.
I can do.
Thank you so much and your next question comes from the line of Hadley from Jefferies and you May know ask your question.
Hi, My management team, Hi, Hi, Chile, and and also Jack I have a question regarding pizza hut piece I didn't know with Oh, He's like you know I'm a promotion that we noticed that not only the screen Wednesday, but also like adult Scream Monday to sanfilippo, a and Wednesday for some of the.
Some of the weeks.
Quota, so or is that 1% himself sounds like you know off to a management's expectation and we also see like you know margin a little bit more volatile I think we can understand that but like you know what you say that you know in terms of restructuring Pizza hut, what is still missing is it more like you know.
<unk> into <unk>, and the full pellet snow or which one will be what were the ones that you know you want to highlight a little bit more about are you happy with the current A.S.P. for Pizza Hut's, you know if not we'll let you know what does not what other trends and maybe just one follow up question from Oh, the so I suppose question.
Regarding the or the ones you mentioned about a one off costs went up getting to know regarding the labor efficiency is a sad to say the initial although if it happens stuff in first quarter might not be that it's impressive seem for Q Ah Ah. This efficiency will come back again in first quarter.
And so what's the next year because it's a high season. Thank you.
Thank you. Thank you and yeah have quite a few questions here and let me add tried to I'm, sorry, I stop at the Big picture.
So for for Pizza Hut, we're we're very happy with the support Oh same store sales growth and then also the consecutive full quota of traffic growth, which is the first time, we achieved these 24 team.
And then day here today margin is actually told them full person with his last year, 11.8%. So so we've all the good F us going in despite the seasonal and despite the quarterly fluctuation Oh, we have very happy.
With the overall trends.
So it comes to come to the so same store sales growth or is it is it online with ice to patient, we always want a bit more [laughter], if we could ah, but we're happy with the positive same store sales.
And in terms of S.P. and all those full color that we oh all familiar with.
My my thought is follow.
One is.
It's very good.
For the business in the long ton when we are driving traffic.
Then when such to average oil as he is going down.
What does that mean it means that we have leave fielding value for money, which is [laughter] leak critical of office.
So far outside of business. The tray of is very obvious and the result is in process. We are increasing 10% T. C. N P. Eight go down 9%.
That's what we want it.
Good.
In comes off for goodness I.
I guess the question is what else can we give them all the assets we continue to drive.
Four pillars.
But the focus, but we'll shift slightly and on all four pillars as well as we get something under the belt. We want we move onto the next thing that we can focus on.
He gave you. A example, the fundamental we're talking about many older products at a value for money to layout et cetera. So.
All these fundamentals are good and we're very happy that the new menu or that we introduced that's a much.
That said only 77 items with its 120 before.
What is different the difference is this new many continued through the rest of the here.
That's very different because in <unk> history, we used to do too many with many taking apart and that was not give them a asphalt and this year, we manage to have one menu and a carry a.
It carry us through for the whole, yes that is good.
Now what else so we need to do well.
No we thought that by menu.
Under the control that we're happy about what about the delivery menu.
So we're going to move our focus to fixing but they don't really matter because the problem is that difference. The die menu me could be something very very minor very lean Fannie and then you can put on the media online the cake. They love it came with Florida. It does.
That's not the love it.
So we need to move off the line item that can keep the heat the temperature much better that can come off from the teach a much faster to help us drive that deliver business.
So let me also highlight digital.
[laughter] digital we launched a dose to play P. P 27 team and now we will continue to real out there [noise] taste people without altering et cetera, and when you're trying to it. So what is Neil this year well, we just roll out the carry out ordering on <unk>.
Yes, well the carry a altering right now I still single digit it's too early stage by fantastic because it does not pay all spacing I saw it does not require the live because either so no bad at it and we need to push we didn't get a rifle and push that then every oh I talk about the menu and.
We took that their last mile delivery at the end of last year and we have spent massive amount of F on what to rebuild the infrastructure. Okay. The infrastructure. It meet though now we have to go to very detailed management. The trade, though we have going through one trays Atlanta tightened the entire country that.
We have the that I've heard business and tried to make it better three deals the customer complaints.
So that is the.
Audit team and you can even see the delivery business coverage at your videos on 97% to 91 does that why so only 91 was how about still right now all the different business in southern they like seven why it doesn't make sense no. It doesn't make sense, because we realized that some stores that doing that there was a business.
Optimal scale, so if two stores across and now we combine them, we still keep ourselves, but we improved the cause and we improved the quality to the customer. So asset we have done I know 26 remodeled in Q3 as Andy mentioned, we still have probably modeling to do for the rest of the fuel month for the yet.
Because you know it's those either so of course, we're gonna well hot it ought to prepare for next year and at the hub and spoke I would love it and Oh, the so unless the day this year.
And we now have plenty of them and we come see us a test two to two to fine tune the hub and spoke model.
And then hopefully we can we cannot really out in but I guess go next year. So as I mentioned it but you know this year when we turned a corner off.
Tiny Oh, Oh, achieving positive same store, south which is fantastic, but we also mentioned that.
The the business isn't going to take another two to three years to cement all the changes.
The last that all your questions about labor productivity.
Oh for four fold can't see in particular.
So so we we have we we have seen a good good. Good result in the Q3. This year next Chinese new year they'll be to first Chinese anemia, we will go go through without Kodak and meet with all the real time automated scheduling.
And.
Every Cisco peak season, it's like a big bet on for US, we're studying trial very fast and that the dynamics different because although that Q3 is that paint trading season. The Q2 that you want to Chinese new year. This year's kilowatt nationally because it's already Oh, it's a completely different dynamic it's.
It's gonna be Enanta, a lesson learned experience and we certainly would try that.
Well I was ER.
Mostly that so like if you look at you know you know to LIBOR well, if you see a improvement into summer season. I think you know that's because you know stewing you know does this summer peak season normally we have you know a larger temporary cool.
And generally the label to 50, because at that lower but we've you know these near time almost committed.
Labor scheduling to a we're able to see significant improvement maybe with a 50 now you know we continue to expect is two to be helpful.
Moving label with these these.
Who though the year, but you know, but obviously you know the lowest hanging fruit for for that you've seen this summer season, where labor or demand and supply or a more different. So so hopefully that attracts you know your question.
So I can't.
Thank you so much and your next question comes from the line of <unk> million Lee from Morgan Stanley Civilian your line is now open.
Hi, Thanks, Joey N D. I think a lot of question what should I have a follow up question. I think is so far pizza hut dates on a very good trend still he mentioned that positive traffic is very important metrics that we need to follow at this stage. So in terms of balancing pizza hut and Catsix.
Rolling over to 2020 I know, it's still early two caveats that cited [laughter], but in terms of strategic focus between those two what's the most biggest challenge.
In 2000, Eattwenty four cap C and the Pizza hut.
Than me.
Let me share my my my thought Lillian Thank you.
The 20 Twond T for more specific pocket guidance will give in Q2 full [laughter], but I think.
As we can look at it right now a full full can't see obesity. The same stilettos because the Q on Q2. This year was very very strong. It was phenomenal I, 5% seems also put us on the news the opening that is very good.
Off to a lab and then the chicken price on to that it will continue or the chicken price pressure. It will it will continue and then Ah that's up it is the labor productivity a while we are very.
Very happy with the Q3, a improvement Q4 at full for next year.
Media is a is that it is it's a challenge because of the government minimum wage a challenge tools to the fundamental nature swap business and how are we going to.
Continue to learn to use our new automated scheduling to so these are the set off the oh, sorry challenges that stat that Oh, we are paying a lot of attention to it and last but not at least the newest openings obviously won.
Ill.
We are.
Targeting and pushing myself or what they themselves. That's all part of it seems ourselves we acted he aware that that's huge opportune opportunity at kind of non cat because we're only one thousands in the city and decile seven 800 cities that we don't have a cassie and.
We still want to keep the pace so to bottom the multiple multiple.
Sort of focus for the business, it's always a tough gate that fall fall for Pizza Hut Revitalisation will continue as I mentioned.
Many times before a the focus is still on full fundamentals and it. It does take two to three years' time after attending around the things ourselves with C met all the changes I mentioned a.
Along the for keeping limits for kept pellets and other stagnant nomination.
Because for for a ton around Oh, no for full full revitalisation process, because just emphasize seems like possible.
It just require tweaking.
So keep that many jobs that business, but also everything else.
However, that's still fundamental difference between the two business.
What are the well other differences here.
Full for all Oh Gee.
Oh, making decisions.
We are very clear.
We want to Trabi first we want itself.
Now we want to profit so so pizza hut because the way. It is we suddenly focus on the top themselves and we gave a bit more flexibility to their profit.
Because that's where the business.
However for KFC every company [laughter] not only we want to Tropic. We've all this out so we all also on the problem. It. So this is a this is is there something is someone caught her describe that south.
Vanity profit as sanity, and it's a good business people, we lost a bit up both and we certainly wasn't up both full full four Cassie and we we Oh, probably Ah Okay for Pizza hut, we have a bit more validate that salmon he for the time doing.
So thank you Lillian Andy Andy Yeah, So I I moved it up so I think you know I'm, usually but too early to Hawaii specific guidance full I'll look so if you got from 20.
So you mentioned I.
I think the couple of focus that we were going to half right. One is that we can continue to try sales through product innovation. So again, because we were going to phase I'm happy to commodity prices.
And then into sometimes is that you know we would also invest in a number of area right store remodeling will also invest in technology, that's very important for us a mix, yes, while we also confusion about you know old movie platform.
And so it would be likely or investment year for us in 2012, yes, well so I think.
Oh I think you know we will see some tough comparison for example, because both pizza hut and Kathy I first show a.
Ah first half 2000.
Nike Ah so we'll be tough comparison, if you remember like you know we achieve seems also school for almost 5% into first half will get fee, so that would be pretty tough comparisons. So.
So that's a two we mentioned we expect them to [laughter]. Both a then he and also sanity. So so that would be a and calling bombing for them.
The balance between continuing sales growth and also.
Continuing things margins going forward.
Thank you it.
That's a lot a billion Andy.
Thank you so much.
And your last question comes from the line of building Chu from C.L. assay delaying align yourself Penn.
Oh, thanks, very much thing for opportunity or actually most of my questions have been cleared so thanks for a as all those details.
I guess could I piece, maybe Oh ask about your coffee strategy because as I recall Julian mentioned this is too large potential area, but are you still need of the patients. So I'm just wondering just couldn't luxury to bid on that.
Sort of what kind of fines or would you need to see what kind of metric was when you do see before you want to invest in coffee it'd be larger scale, and what kind of finishes, which would drive to do that.
Just slightly longer term.
He certainly has the potential care degree mccarney seems I'm, mostly foods.
Drives coffee coffee sort of a supplement to our other food categories in the future reducing costs has the potential to drive a food the other way around or do you see ourselves to be pots, just any color on that would be helpful.
Thank you Dylan.
We believe in a great potential of the coffee business and we are committed to go out coffee category.
And they had two areas that we are focusing on right now why is K coffee.
Because you can't see the very very they said this is more the already and we are introducing on growing the coffee as a product inside the business. So as I mentioned Uh huh.
Yet today, we show 98 million constant ready and that's more than a total of 2018 for years, we just about 49% less run it up by 50% increase so that's very very impressive Oh and.
Vis vis number all coffee cups Chrome is you know is comparable to some other pretty significant you know.
The.
A copy paying a market hard [laughter] given the baseball business.
Our coffee business, even with almost on the melancon. So it's only Griffith Allison.
And we're very happy with a grown and and under 3%, but you just give you. This does the fans of the scale on the overall can't see busy and young town at this is there and does me.
The charge off going.
Yeah, I don't fit all the coffee strategy the C N G. The coffee enjoy.
Which we are building of rolling out and this is a new Brian when they want when it comes to building a new Graham It takes time.
Whatever sometimes well brand that we can see nothing China I can't see pizza Hot others. It does take time, because not only it. It takes it takes a great great products that kuzma no.
Already but we have two of those don't prototype is the brand b the supply chain to amend that they do that talent pool.
And the company measuring offerings, such as food in order to two to two though the Brent and right. Now we are also testing the scale and network effect as we increased density a hostile in a given trade zone. So well yeah right now we have.
And 19 stores into swayed by.
Hi country by country, and we are targeting to get to 40 45 stores by Deanna, Yeah and next year will come me. We're committed to increase I know last night, but that decision is always dynamic is a dynamic process, which is the same as pizza at pizza hut and care.
I've seen when we come to news the opening a is that dynamic process. It's up on him up process, but you know we are committed to grow the scale. So that we we can continue to learn all these building blocks off a new coffee brands, including discount and the network effects.
So that's that's that's where we Eaton comes off the coffee coffee strategy.
And Ah Thank you very much.
Thank you very much alright.
Thank you. Thank you all for joining the call today, and we look forward to speaking with you on the next earnings call.
That concludes today's call have a great day.
Thank you and thank you and thank you and that doesn't include any kind of French for a day. Thank you for participating Humi. All now disconnect speakers. Please standby.