Q4 2019 Earnings Call

At this time, all participants are willing to listen only mode. After the speakers presentation. There will be a question Im not sure session to ask a question Dream to session you will need your press star and one on your telephone please be advised to today's conference is being recorded.

I would now like they had to CAD French over to your speaker today that'd be doing. Thank you. Please go ahead.

Thank you operator, Hello, everyone and thank you for joining Yum, China fourth quarter 2019 earnings conference call.

Joining us on todays call Joey Wat seal Yum, China, and Mr., Andy CFO up something.

Before we get started I like to remind you that are are you, calling investor presentation 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 Fortunately stealing our earnings release, and the risk factors, including New York funny, but that DC.

Lisa will also include person non-GAAP financial measures, you should appear pretty complete or the comparable GAAP measures and we considerations there too.

Today's call include restructuring first Joey will cover Yum, China, 2019, <unk> fourth quarter highlights.

Recent developments of the Corona virus situation, then Andy will cover the financial result in Twentytwenty Aldo.

Well then open the call it to production.

You can find the webcast of this call an apartment presentation, which contains operational and financial information for the Porter, our I O. The upside and this time I'd like to turn the call over somebody's Joey Wat seal I'll be Yum, China.

Thank you Debbie.

Hello, everyone and thank you for joining us today.

We dig into the details of the quota I Wonder stepped back and also some perspective on the part here.

And on our long term strategy.

We achieved solid performance Eattwenty 19. This was supported by L. unique competitive advantages.

Including our leading to vitamins and supply chain, but Pete.

Well oh ability to innovate.

Customers are drawn to us football season, one a delicious food.

Great value suite, a pleasant customer experience.

Which is enhanced by all digital.

Pool convenience to delivery and mobile ordering.

Let me briefly review the progress we made in 2019 each of these strategic area.

Let's start with the fundamental cool Oh business the food.

Okay estimate expect delicious, new many alternatives and we exceed those expectations last year.

He wants to screen all crayfish the thus.

We introduced a kids eat in Q1 or the double chili chicken in Q3 or the Christmas No Pizza featured at Pizza Hut in Q School, we are continuously refreshing our menu.

To support menu innovation, we opened our innovation center in Shanghai last February.

That facility represent alphaville commitment to sustain our leadership in offering delicious high value menu alternative.

Second we have focused oh, great great value to all customer.

Oh said I suppose with greater efficiencies in order to keep price increases to a minimum.

We kept customer engage through various not value promotion and digital offering.

Finally.

We used the promotion in a more strategic and pocket that men.

Crazy Thursday at KFC, and Scream Wednesday at Pizza hut remain effective.

And we continued to spoil a member with exclusive or catered office.

Sure a digital engagement is key to creating a closer relationship with our customers driving the loyalty and shopping.

In general digital significantly improves our marketing efficiency with digital membership program, we can't understand customer behavior like.

Like industry like price sensitivity et cetera, you name it.

We can then paid a promotions onto the individual.

Oh, it's Barry this is far more powerful <unk> any thoughts of mass marketing return to.

We introduced useful function such as young see pay in addition, saving over we seem to prefer each program drove frequency value perception and customer loyalty.

One example of the Pablo digital is cookie marketing, which is primarily driven by digital initiative.

29, key, which so 137 million cups of coffee KFC Oh, 48%.

Cool and finally, we are committed to creating more convenient ways for customers to assess our menu.

Delivery continued to ramp significantly during the year accounted for 21% of says.

So I wasn't buying our own channels grew faster than that Biocept potty aggregated.

Oh convenient mobile ordering and kiosk all doing becoming more popular.

It also free up I was still stuff for the in store sanctions, making a restaurant most fishing.

Each of these strategic initiative and April to meet or exceed go in 29 team.

We opened over 1000, new stores. This was the highest and you still opening in our history.

We also remodeled almost a thousand stores soda defined appeal sold on your design.

Uh huh of the Remodels well the neo design at Pizza hut.

Same store sales group growth was 3%.

Reflecting strain acasti, everybody Analyzation Pizza hut.

KFC and Pizza Hut's combined digital membership grew by over.

Two 240 million.

Those numbers contribution half of our selves.

Importantly, all of these without a solid profit growth.

We also continued to develop our emerging brand portfolio.

She has 300 stores in 11 countries, including New Zealand Me Am I wish I knew mark as we enter into any 19.

We opened 40 coffee enjoying unit, bringing us to 53 total intensity.

Although not at seven still in Shanghai.

In addition to the customer facing digital and delivery initiative, we have further leveraging technology across out and tie in business.

We are using technology to enable operation to be nimble and flexible.

That coupled with our in house integrated supply chain and able us to launch new products and promotion at national regional or even store level with increasing speed and efficiency.

Oh I can't imagine, it's also enabling greater efficiency in stocking we have utilized AI based technology to implement stope based on these cells forecasting which supports labor scheduling and inventory management.

We also started to roll out Smartwatches and.

A neighboring AARGM managers to closely monitor the old domain and serving status in old restaurants.

We will step up investments in infrastructure and supply chain.

This is money well spent as it helps us to create a tremendous amount of flexibility and agility in out 80 occasion.

Now lets drill down into the fourth quarter performance.

We're pleased with our strong performance in a full quarter.

We delivered our 13th consecutive quarter off system sales growth since the spin off with positive same store sales and expanding margins.

Let's start with menu innovation.

This and we launched several exciting limited time offer otiose during the quarter.

And care C., we launched new products for our premium Bulls eye line, including to Turkey, and spicy chicken Burger.

And it's pretty tough Australia stake Bogo.

Oh, ARPU proving quite popular.

Perfect.

Senior to be one of our key growth drivers and grew faster than I did they pass we launched Sameet nice beef corn sheet Conti, Finland, neuro Joel to reach our Chinese menu offerings.

So drove strong sales growth in coffee with new products, such as set wide and come out my capital.

We also launched <unk> pollo teaching as new additions to the word on T. Cirrus do your own can you, which is debatable <unk> or 1400, these oculus across the country.

At Pizza Hut, we launched various new products, such as the snow Chief beef pizza.

[laughter] check keysight as he so calm merrell middle Ti to capture the fastest spirit.

Stake sustained its momentum as well sales grew mid teens and accounted for 13, but that about pizza hut south now.

Oh digital and delivery strategy.

A design to ensure great customer experience on top of great food.

Yes, the progress we made this quarter.

A privilege suspicion continued to be very popular with over 3 million so during the quarter.

Since we launched our first peer French programs, we have so 50 million suspicion.

Chris age sales continue to increase in a mix of total so.

In November we used our partnership and also the App to capitalize on the hype around single days on the 11.

The so called double 11 shopping holiday, we enabled consumers to in those themselves across the Yum, China family of friends.

The results were outstanding.

Looked a pretty carefully the boat GMB compare to last year and ran number one on chemo seemed a restaurant category.

Pizza hut really GMI, but all the once the and then number one on May twond enough food categories.

Digital orders, which includes delivery mobile order and kills older reached 61 that down south and digital payment exceed 90%, both well ahead of last year.

Now let me cover some details of the performance of our two largest bren started with KFC.

Yes, he reported another strong quarter, despite a tougher lap compared to prior quarters in 29 team.

We maintained solid momentum with 10% system sales growth. This was driven by same store sales growth of three person.

Saturday that new store openings.

Honestly, it's basis kids the open 742, new stores, which is equivalent to two stall. The day <unk> entered Olson 100, new cities in China.

Oh said elevate a chicken prices with diligent cost control and creativity in our menu. One example, although creativity is the wing tips bucket seats a deal.

We used a tentative chicken pot to develop a tasty Neal CRADA that also represents good value.

We delivered operating profit growth of 20% in constant currency.

Next piece that.

[laughter] continues to see man to progress being made it revitalization program in Q4, we achieved traffic growth in both dining and delivering margin also improved.

Addition to digital marketing campaign Pizza hut also enhance people assigned mobile ordering this better user experience they sell taking an uptick in usage.

Right.

Grew to 28%, so mainly driven by our own chanteuse sense to all digital platforms.

We are enhancing our asset portfolio through a Saturday to me models.

We remodeled 281 store in a full quarter, bringing the total to 513 for the full year, although one of the Pizza hut stores now feature at the new design.

Overall, we have seen progress at Pizza hut, Inc. operating metrics and consumer satisfaction, which tell us we're pursuing the correct longtime strategy for these Brent.

In 2020, we will continue if that customer with good food and good value, including a menu revamp.

Before I hand of clothing anybody who goes through the financial results.

I'd like to update you that how situation in China, and what we're doing.

Visible autopilot tea is the safety of our employees and customers, we're closely monitoring and implementing the requirements of local government and health authorities.

Because the situation is fast changing we are implementing all measures as rapidly as possible.

Fortunately, we have outstanding operation is approaching team that we can mobilize for example, a procurement teams secure enough face Manassas for all our stock.

Oh restaurants staff and riders are required to where faith masses and measured that body temperature.

We have stepped up cleaning and this confession <unk> areas equipment in our restaurants, and we are complying with local authorities, how big climate as.

We also took the opportunity to improve our operation by launching content less delivery. This arrangement helped to reduce the risk of human to human infection, and protect our stuff riders and customer.

Having been China for over 30 years, we had determined to overcome this challenge and do all taught to assist the communities we serve.

With the support of our staff in Uh Huh, we're providing free cash CMP sawmills to the medical stop at seven hospitals in that city. This represent over a thousand Muse today.

Also have donate RMB 3 million to assist medical workers evolve in fighting to output.

Chinese new year isn't important trading to its worth usually driving <unk> first quarter performance. This year, so outbreak right before Chinese new year is causing significant interruption to that business.

You bet, there will be material impact, so first quarter and for yourself and productivity.

Nevertheless, we believe that operating incidents and financial strain enable us to withstand challenges license.

We remain fully confident in the long term opportunity of the China markets.

With that I'll handover, the call to our CFO Andy Andy.

Good morning, everyone as we start a new year, we're going to make a small changes to how I really the financials. Because you can find all the figures and comparisons you know press release and supplement whose lawn.

We will not repeat all numbers here that we will focus on the primary factors that influence how we so [laughter].

Yes, I know otherwise any figure I mentioned referred to the fourth quarter 2019.

He goes I'll be before the cycle for the trees and all comparisons are year over year.

So for quite a financial results.

Total what news <unk> eight with it.

It's driven by both Nuseal and <unk>.

That's the same store sales growth of 3%, what's driven by higher ticket effort, which is a function of higher prices fuel promotion and more delivered.

Super hubs.

Same store sales growth was flooded.

That's tropical were offset by promotion.

That would views to get up.

There was also one less long weekend compared to 2018.

And then it's Joe you mentioned, new store openings were well I had called out Im sure expectations.

We also plan opening from Twentytwenty, it's important Nike too tough to more of the holiday selling season before the trends do you.

The strong performance I'll kick off the also allow us to open more stores than expected.

The increase in West where margin was due to better margins that both KFC and pizza hut.

Hi, KFC sales leverage and improved labor pool, the PC more than offset race and commodity inflation.

At Pizza Hut module was improved mainly due to more you fishing.

Vessel operations and contribution from wreckage welcome you like.

The jump in Gen. <unk> expense was in part due to the lapping goblins incentive.

That will receive and reduce yet a.

Full quarter in 2018, but where we see the quota in 2019.

We also have high performance related compensation in 2019.

Oh go.

To keep she has a increase in line for less.

Let me go.

[noise] real chief operating profit growth of 16% due to sell 11.

No we were going to grow.

And productivity improvement, which more than offset higher cost inflation promotion and unit [noise].

Net income increased 23% 90, Louis driven by the operating profit growth just mentioned and the mark to market game.

Our equity investments somebody point.

This is partially offset by the lapping tax benefits the fourth quarter 2018 that wasn't later to the U.S. people.

Oh, Hi Tech the cool Doc Nike.

Similar to that income.

Yes, it adjusted EPS growth was partially driven by the maxing working for me couldn't investments excluding that adjusted diluted EPS grew 5% <unk> fourth quarter and 13% the full year.

Next let me cover our capital allocation.

In full year 2019, we generated over $1.1 billion mm no who in California.

Hi, both took off that cash flow will start rather two topics.

Okay about was about 60% or over $440 million once we turn to shareholders, who deal with it and share repurchases.

Including what we returned in 2017 in 2018, we have now we've heard over a billion dollars <unk> shareholders since our spinoff.

The bonds off I'll pass the truck from investment remains strong at 1.66 to one dollar.

We maintain our code there within the 12 says for sure.

We also have approximately $700 million authorization remaining for the share buyback.

Now, let me turn out.

Turning to our outlook for 2020.

The recent <unk> wireless.

Outbreaks have caused significant interruptions golf business.

The impact come from temporary closure of our restaurants as well as some specialty coin in cells. The restaurant that we make open.

We stopped closing some of our restaurants right before the trend is two years.

As recent days.

More than 30% off a restaurant workflows.

The Tropic at this restaurant that remain open what impacted by troubles section suspended that's 50 and shopping operating hours as people avoid going public.

For the West showed that we leave open.

Seems also seems the Chinese new year declined by 40% to 50%.

After adjusting for the timing of the trends do you called it.

Well Titan topic was hockey lets people avoided public gathering.

Delivery is holding up well.

Well to better serve our customer and political employees, we roll out populist Liberty, which is very well, we see filed customer.

In addition, we also roll out older online pick up install Cotellic services and saw some encouraging early results as well.

However at this time, we tend not forecast when no at what rate.

Whos restaurant Ruby we open.

And the Tropic Ruby we still.

Furthermore, we may be required or otherwise decide to close at the show stalls or modifying our operations in response you outbreak.

The situation is rapidly evolving.

While we cannot yet fully gossiping expected impact.

We may experience operating losses for the first quarter of Twentytwenty.

The sales trend continues.

Full year 2020.

Commercial operations cash flow and financial position, maybe materially and adversely influenced by the FOTA development to the Oprah.

Including potential additional announcements.

Action from the central local authorities.

For other reasons.

However.

Despite the headwinds from the current situation.

Optimistic.

Committed to the long term opportunity in China.

So we will continue to roll out more useful.

As some of our.

Hi, this new stores in 2024 accelerated to open in 2029 team.

We expect to view 800 to 850 used all this year.

Obviously this is subject to revision based on the impacts from the commodity wireless.

We will you bodyweight through delta year and be buys the target that's needed.

Seem to clear power of our digital strategy, we intend to step up investments.

It's still technologies as a pricing this year.

We expect full year capex for Twentytwenty to be in the 500 to find the $50 million right.

Which include useful so upgrade digital IP related investments as well as composition of infrastructure was a good.

We will continue to invest in our emerging brands.

Which we believe is the right thing to do for a long term cool okay.

The won't see won't acquisition is on track and is expected to close.

2020.

We expect rail inflation to stay at the mid to high single digit this year.

That's what commodity inflation do stewards Holly.

Paul shortage puts pressure not only on the price of chicken.

On all coating.

We do not yet.

I have told was the movies for the full year.

Our best estimate of the commodity inflation now useful low to mid single digit the first top 2020.

By the end of 2019 on be have depreciated focus it through the course up the year.

If the exchange rate continues at current level.

We expect there will be again.

Foreign exchange translation pressure in 2020.

So all in all we expect 2020 will be very challenging <unk>.

It's difficult and trucking time, we'll continue to focus our efforts to protect and who will serve our customers.

<unk> and our communities that we operate mean.

And we yeah I'm trying to.

Used for the long run so we will continue getting back into future.

To ensure that we are well positioned for long term growth opportunities in China.

Oh pass you back to type to stop acuity.

Thanks, Andy will now open the call for questions.

In order to give as many people as possible the chance to ask questions. Please leave me a limit your questions to want edifying operators. They started a few any.

Thank you so much ladies and gentlemen, who will now begin to question answer session. As a reminder, if you wish to ask a question you will need to fresh start in one towards home and wait for your name to be unknowns.

I wish to cancel your request wooden specially hashed again, it's starting one if you wish to ask a question.

And our first question comes from the line of Michelle's Chang from Goldman Sachs. Michelle Your line is now open.

Oh, Hi, Ah Joy, Hi, Andy Oh, Congrats on a go to resolve and I really appreciate the color is on the recent all development and my question was about the cost can you show with.

More details about how you can manage the coffee <unk> situation, maybe like relating to how to possibilities. We negotiate the ran with landlords or does that calls and others that we use a lot a part time. So is there like a potential that would have saumen Frenchman up how time or the staffing management and also.

Is there any like insurance kabi, each I can you kind of situation for business interruption. Thank you.

Let me take these question Doug.

So I was just Oh, you know the question about cost. So if you look at yields in the short term obviously no during the Chinese new year Ah we have planned for the try to can you are selling season. So I seem to short term you know those calls I'll walk right.

Now I'll, let you can we look at Ah you know going forward. Obviously, if you look at all cost structure for example.

We have some level cost right as you mentioned in the restaurant level, we have a while we have some full time staff and salaried employees are we also have some oh temper Oh part time workers. So you'll portion of that you know restaurant Labor falls I will be level now if you look at another call stuff. So.

Obviously, a that and supposedly to Oh this house off the restaurant.

You look at our no operational Oh occupancy.

Other expenses or you know you know as we have who previously disclosed.

A large number of contracts Uh huh.

A little bit components to it.

And and but however, there's also some fixed costs.

No that went to a bunch with as well.

So so that would be you know a mix off level and six and an interim often go over all hope for a few any expenditure a we oh caution with people who are charging time, we were going to implement a significant cost control.

And pull them a little four Oh, so we talked to being you know obviously no there's got to controlling Oh, the labor cost creep as well as the discretionary spending like travel expenses.

So as you know out of professional service fees that we started wouldn't occur. So so income of Ah you know overall impact I mean, you know sure we'll go through them on the situation.

True cost control if necessary.

I mean, we got to your second question, which is the focus is.

Sure well, but oh.

When you know since the SaaS, Oh, but 2003, you go out business.

You know because I've got to lobby true the log or for why that kind of.

Sure. So that's not public open.

Thank you show just HM Michele just a little bit its true kinda on of course.

The moment, the we we Oh, we see the the the Impella Oprah which is a weekend on January 18.

Diminish nice if there is enough that you need to pool the N.P. immediately.

The enticing calls for Chinese new ways of thinking massman. So we have very quick to react to pool with that because otherwise we will be in a situation of lost sales, but then a sort of im that's and p. that will be that will be the unfortunate. So we did the already.

And in terms of labor cost.

[music].

You can be sure their management is doing everything we could have come to manage the labor costs. However, the timing issue here is to challenge because Chinese new year surface May day has tripled suite actually because according to the labor law and then to extend it holidays for the style.

In pride Stupples labor costs for the full of stuff as well so and these needs to come sort of fixed you know way because were confined to two outcomes among but but you can be you can be short that we actually everything we could too too.

Managed a cold, but the cost wildly everything that's the right thing for our stuff full of customer for our community as well. Thank you Michelle.

Thank you Joy.

Thank you so much and your next question comes from the line ups terrorists tourists from Bernstein, Sarah killing T cells and.

Hi, Yes, I have a question actually about say unit growth.

You know you pointed out that thousands George is the highest number and history and even before kind of Irish you were expecting a slightly lower number of gross adds in 2020 I was just wondering if.

That's out and then there's some sort of natural limit how many stores you can open again setting aside what's going on.

Now with the virus, but over time as we think about so growth rates and your store base increases I think you've been leaning more heavily on unit growth in a little bit less on comp. So as we think about the rate of growth should we think about.

Thousand units as being kind of the highest number you can open a year, because it's either human capital or real estate or whatever the gating factor somebody said, let's talk long term about what the unit growth might look like and what the limiting factors would be if you really cant opened more than a thousand stores. There. Thank you.

Thank you.

In general in general at the very high levels, the number of new stores.

It's a function of how well the businesses operating.

For example for example last year, we open said 142 can't see stool.

And now 132 piece on stones Fox.

Got to Tony said teams for the 14 15 actually will open Maltese hospitals and can't seasonal so as can't see <unk> performance in cool.

We are able to open more stores.

Those were able to pay momentum now also the quality of this dog is better so we council for more [noise].

So in general it is a functional printing business performance.

When it comes is then national Nick.

We we actually don't witty chase after a particular if it goes.

In general we have the pipeline Ah that's more bottom up.

And then we try our best to open as many good still as possible because last may Castel ignoring the good thing to up the Smith.

So.

You know, we we don't chase off the alone, but just site Plenti 19, we set a target and we see to target because the vision is doing better and we find more pipeline.

The full 2020, we set a target, but as we it's been business interruption.

We would expect we will revise the Ah that's the pipeline as we as we.

On a go to the rest of the year.

So Paul I want to make is <unk>.

<unk> business like ours.

Oh, we emphasize on new so opening.

But also at the same time management team has fallen to most effective.

One is the impact on the same store sales.

Oh, the new store opening has into I'll say still itself.

And we want a bit of both we won the news, though also we want to same store so technically in the emerging market.

We probably wont you focus on system sales growth more than just same store sales, how that's where all a learning is that.

Let us do you want to focus on [laughter] same store. So so we we kinda to deliver both news, though and same store so but again other than the same store sales. The management also has to bought into something we can remotely.

Because.

Right now you can see we reaching a number 9200 store by year end.

In China, particularly in China, we are targeting two men change <unk> age of I still see it that means if we see yes, we're going to refit a remodel or do something about is still to look to make the solo lumpy.

Thank you know customer so while we yeah, we have opened more than a thousand store last year. We also have opened a has has remodel thousands though at the same time because if we just keep opening is still below removed in his skill set quoted here I'll ask that will go that so.

You can see we not only try to open.

Hello, Good Neostell, we want to maintain it seems though so we also want to maintain that speed and the pace of we modeling we don't noting that pace, we will get to the situation on 2016, we actually we leased it almost.

1800 store during 2018 alone and the catch up and make no pizza hut. We're also going to catch up their full piece hot off the Zachi Acacia we at Wassa, although new still have the new design. So I hope that give you a us a holistic view of the way that we looked at the newest the opening it.

Yes, not only about is the opening its about the same store sales, it's up already more than its about keeping the business going it's about having good.

Nothing but a good profitable number.

For the new store as well thank you.

Thanks.

Thank you so much.

And I'm. Your next question comes from the line Ocean <unk> from Bank of America, Shannon I mean as she question.

Hi, Thank you Julian ending.

I've got a question on our Oh the guidance in the result release.

So we are oh exceeding all doing all the scenario of US. We are lost if the current situation continues so what is the underlying revenue assumptions or what kind of.

What kind of what level of revenue decline.

Looking out to achieve that scenario.

Also it related to Dod is a more color on our cost structure.

Or just how michelle's will also about a question. So so those are put on labor cost for some people are cost is largely variable but for the.

Labour costs on open positions are those how much is variable on how much is fixing each thank you.

Uh huh.

Let me, let me sort of.

Give you some kinda about the occurrence so still.

Openings situation and now I pads on Q2 two Andy.

The Oh situation the situation, it's a very fluid. It's still early days Q2, two please state and to have a sort of more concrete number.

But we are closely monitoring the situation and following the timeline.

From the relevant authorities, let me talk about store CRO situation for us so roughly we a 30% of our store Acos and that's the sort of the current number and we don't know what as Nick.

Let me talk about the key component of the 30% then you would you would have better understand how currency translation.

We from the very beginning decider.

On the condition that Oh, sorry, [laughter] safe.

We have done everything we could.

To protect the safety of a style customer we would like to continue to serve all communities.

And that means we would like to continue to open the stole while we operationally could.

Because I think it gets crisis is very important to try very bad <unk> life going as normal as we could.

So we start to close to store in one furnace.

Because that's the center of the outbreak.

And that was the three or 4% Obama south.

Hi, its you tube attack and then as situation become.

Oh, then we closed to store in Kuwait.

Which is the province, Huh, yes right.

And then if the situation and well we closed a significant number of stores in the surrounding provinces such as calling on.

Huh such as Hunan.

So that's the.

Group after stores that we have close and then as situation evolve.

That's still most of those stores in our tourist location and transportation hubs and that roughly about 5% to 6% Oh I'll portfolio will close.

Okay, and then the situation continues to evolve.

Samsung's some stores in the lowest she is sitting in particular around the country will close because debt there a lot of Ah Ah.

So, let's fishing festive acted a diversity well, Ken so and operationally it became too challenging to open the stores. So there is so you can see the.

Progression of our store closing at the situation evolve so what it snakes, its a bit too early to tell.

So as the as the store Crows, <unk>, well, we doing oh, well, our that well on the impact on the on our fitness and what are we doing to mitigate the situation. Obviously you can imagine the same topic.

Was severely impact however, as we mentioned earlier the delivery of business pulled up but typically well.

Also says to the quick reaction.

Page and team, we launched a content last delivery service.

Who our customer and that was well they need and the little little a little something opportunity right. Now we can see is the catering opportunity.

Ah that that we can he and and part of the taken any opportunity come from the fact that due to our commitment to serve community. We leave open six.

Sean He has.

Not to do business, but just to say the three meals to the adulthood and the medical stop as our contribution sort of community and staff pool for the rest of the country or in other markets. We also follow similar practice.

And then we know we will receive a lot of request.

Hence all catering services, because we are trust and we have truly grateful to the trust that our customer and I'll community gave us so that's off the.

The oval picture, although sell side and obviously you can't imagine despite the fact that at the deliveries house hold up catering business is growing.

Same store sales or for a business.

Well, it's also impact due to the travel recession less traffic and also Shelton, Oh, upgrading our particularly in shopping mall et cetera.

So with that I'm going to a pasta pass the question to anti talk about revenue and cost side, because I'm. So [noise].

As we mentioned earlier no. If you look at you know the the interruptions caused by the output is quite significant to our business. We have basically to impact my ones. So small kosher food. They had some of its place those for you. So both.

Our store oppose way now and of course this is a very fast and evolving situation. So I just was to go what was coming mix.

Got you said no for the stalled out we remain open yoga impact on the topic was also placement because especially for buying business. So we mentioned so we saw the although our <unk> business is actually holding up pretty well so the same store.

So pro for those restaurants, Oh 40, 60% right. So so overall if you look at the impact on the total system So school.

Systems, it's actually Oh, sorry.

Yes.

So so as we mentioned you know if the trend continue.

In other credit levels.

We expect to go into operating losses.

So to address you know you all the old crushing no. We go after we have a target no for you.

What new losses, what lessons that we tried and true losses. So I can get the log level factors wake up was to address these issues. So obviously spoken is one of them and they're all going well trading try these and other ones.

And so, but we will talk a little bit about noted it was the driver. So you will fall to cause. So maybe you can help you into your model.

So.

It's funny he is a very critical trading beautiful solutions first quarter, Oh, So no as I mentioned, the conceivable often off we will cause a fix it well we incur before the trends here between Q, So and then that including no food ingredient right. So.

Sort themselves.

And then also good, especially that labor I would just pay us foods firms.

And then also so we listen to extend it to the holiday.

Sure It no.

He's also overtime.

So who I think you got a would be to be quite you know hopefully for sure the first quarter.

<unk> Oh, no the fixed cost.

Oh, what would cause these like is okay calypsos, Oh, that's emissions wearable what's your level of labor. So the restaurant level, partially fixed monthly salary employing the management team and stuff. So we do have them. So some some.

Like food there.

So you know a portion of public pushing off our food from like a workers.

Pembroke is that we didnt have more flexible.

The portion of the six calls.

And then and then you go into office occupancy right. So as we mentioned a portion of our Oh, Oh right. You can fix and then a portion of that you <unk> you know a wearable cost medicines.

It's possible number also contra actually you'll have a element.

Oh, well cost, obviously, a that element Larry quite significantly from location to location.

You know we put when we also obviously you probably have noticed a news.

Is the time, that's called for sacrifice the country way, though so no. If you look at some of the real estate company. They have also participated and then also have for what it from when we and I think you know or if you look at little or no.

51 called team to seize the opportunity to minimize Oh calls opportunities for the prices Hum of no. Other so cost for example, 70. So no. So roughly six news adult stores open, but if we do not open so the utilities almost zero.

So for you to the law that flow no Ginny mentioned, Oh wait now in the short term is gonna be wants to be fixed under the current census, so, but we are we going forward or for the rest of year, we go into live.

As you know cost control, so to Florida Wallcover Junaid. So we May also you know incur some or.

Oh for our Oh.

Personalized to it so some of inventory that we have stuck up are you made maybe way off so we don't look depend on going forward was the trading conditions there.

So.

Yeah, and then you look at no. We've mentioned before we have done a lot a good work of reducing a wastage in who will be reported 50, a gene just from up low trading volumes no is possible without.

Ah waste leases and also for labor productivity.

Well I'll stop and also the riders of mills, who use as well. So has mentioned we expect a you know who's housing.

For the for the first quarter for sure and then maybe for the best Sofia and so soon so you know it makes it sometime.

Oh for business, who we copper so and so.

And then a lot of these as mentioned before you start trading conditions, it's very possible US foods. It was what would happen in the mix you a few weeks or a few months. So so it's a lot of how we felt in operation will be influenced by future developments Oh, the quote Oh situation Kulu I was situation.

Oh, so <unk>, improving though at the show focus.

Oh bought action dozens require high to low fives, so central government local sold and Oh, Oh person. So obviously, we'll meet so so hopefully that helps you.

Yes. Your questions I know you know a feel good licensing thing you know under a co situations I think we are under operating under some uncertainty later.

I think there was the first half one or so I forget you believe dog our company can overcome the situation and stuff. So hold restaurant industry is facing even bigger challenge goes up thinking.

Thank you listen.

Thank you so lunch.

Our next question comes from the line of <unk> from Morgan Stanley Yang align ourselves.

Texaco U N N D. A very quickly people asked my question is just to clarify a in himself your guidance of lossmaking swirsky, he kind of under that Seemala assumption that a 30% or more still gonna be called me of clothes and Ah you wouldn't be new store us.

Seeing kind of 40% to 50% to US himself sales decline. That's that's that's just wanted to take about roughly and the question is more on the Romankow trend because you mentioned I think until you have the Andy mentioned in the presentation that the we're still seeing some challenge a you know Roma to trend and the most recently.

I think that there are some disruption in the logistics of well for us for <unk> for the Oh supply and I'll say were seeing not necessary to us in China, but the other country elsewhere or their job Aimia foods I'll cut me off to do you see there's the additional cost pressure going for.

For the I'm not necessary to us in the virus time, but also or it could linger around for a longer period of time to depress our marching. That's that's my question. Thank you.

Okay, Yes, so I'll leave it thank you for your present.

So let's just go from you know like a assumption.

Regarding a can go the 2020 or possibly of incurring losses, yes. So you know as relations.

If we assume that occurred and so I was trying to continue Oh, we would expect snow.

Well definitely who do once where the losses, but you know it just is there and then that's based on your go to 30% plus from those fall Whos really now and then I'll see out our our.

40 to 50 cents a decline due to single cells woeful Sir.

In open so that's a current course situations and Ah, but again like you know he sees a fast evolving situation. So.

Welcome to be difficult you.

To predict what would happen Oh now in some of commodity inflation. So no I think if you look at.

No in the in the fourth quarters.

It's actually come down a little bit.

For full chicken prices.

Uh huh, but however, if you look at the market. So it's who we saw a spike.

Good prices.

Feeling November so that's mentioned.

In the prepared remarks.

You'll fall well this year Oh, we do have full with school, yet, but for the first half or we do expect no.

The commodity inflation.

At the low to mid single digit Nicholas off this year. The reason why we have little bit was fully you see cost you a log is somebody quotient, especially for chicken or we have no oh no contract. The law, so probably the quarter at least held the first and then also we have something material.

So that's how we got some will either.

So so as you mentioned you know there's a number of things that you saw moving part, though in the marketplace for the most parts and some prices.

Obviously, one is the the U.S. and try to trade you.

That's.

Why but some pockets pep boys, so, but you're lucky tells about skeptical suits are hard to see a you know the U.S. a chicken.

You are you trying to position would have democracy small so im putting me maybe being up yet.

And then also you mentioned that no to.

There should be even those who other regions.

I think new public addressing yields Oh, we're not situation.

Yeah, but you know the.

And we left to source of the border so.

That's a code weight or we don't see any material for us so no.

We continue to monitor situation for sure.

Okay. Thank you I am on <unk>.

Just one though.

At the kinda that I think.

29, King we have proven loves it could be put a good a innovating.

Not only with chicken, but with different parts of chicken different proteins.

So even with the very safe pressure on chicken price, we manage to control a close of so.

Very reasonable levels, and we did not disappoint, how customer you know anything as cookie asked a chicken wing tips, which is kinda Keith will then national customer, but it's very well received for those cuts and the who lost chicken wing tips.

So close to close it's very desirable up to the alternative proteins, such as crayfish Bogo full full kashi for the Chinese new year and also she went down one show you piece of the salty eight youre caught fish pizza.

They need that poaching.

So we we have we have we Oh, we have pretty good good good at innovating the protein and the mentality that all of our team R&D team it and we of course chef.

We have good at looking at whatever ingredient, we can't get and prepare very good footfall customer and a go is we don't disciplined customer while managing our Paula close of south include any.

Thanks, a lot to <unk> and I'd be very detail. Thank you.

Thank you so much.

And your next question comes from the line of show pulled away from Citigroup Shuffle London.

Hi, Good morning, Julia and Andy I know that is so significant that you've learned some color on the development of the Corona others I know nobody has a principal on what could happen. So I will have a question for more beyond the meters. A long term you my understanding that the comedy <unk> do you brought up a very.

Comprehensive a business model, we some of whom blocks I just wanted to know the mid term or have you thought of Justine Youre your strategy appreciably and financially to absorb the short term shocks.

For example, where you who did a pizza Hardy revitalization as less parati and to give more party to restore themselves off KFC.

And also when you eat more grass seed who she digital until February to make hub for the cells laws are dying on the fairly I.

I seem to this situation reserve reserving the cash is very important are you thinking of reducing the.

Dividends or share repurchase to preserve our cash or any unfortunately, a magnitude so all of <unk>.

Thank you show for.

We have established our strategy for Yum, China full Tennessee for Pizza huts.

Well, we do some tweaking based on the occurrence a challenging yes, we dramatically change our strategy no.

So let me just.

Shared with you in my thought about some of your question now I pods on and be about the cash.

In terms of party a full pizza hut can't see I important we have toothpick kits now tool kit that <unk> all the kids are important.

And fall for Pizza Hut Revitalizations, rather you will continue pizza hut has his own dedicated brand team to make that happen.

And can see of course is the it's the most important business for young China, but it also has his own very strong dedicated brand team to pursue this Friday as well so both business a important into so.

A question about our focus on digital and delivery will we make it even more important.

Uh-huh being our strategy to accelerate the in Massman <unk> digital.

As a touch technology Ah as Andy mentioned earlier or we're going to invest.

Heavily in our digital and technology to pursue a end to end Digitization strategy and we'll we'll continue if we could accelerate we would ah, but we will not a push for it just for the sake of pushing.

So the ongoing strategy will continue but we will certainly a tweet and they had very quickly assess each ratio fluid I can share we view the management team, we have fady meeting to respond the yet so I guess not only strategy, but operationally.

What we need to do in a store in supply chain.

And in Ah Ah is human resources arrangement et cetera et cetera. One example is we are we pool, there or the health of the third the health program for a restaurant and management team for all week.

Nobody we are going to and nice Ah. This program in much of given given given much we're not gonna have all Oh, Okay. I'm convention would put forward because we believed that this is something down our restaurant management team appreciate where it is.

The program, it's about we're going to.

Enhance and upgrade or health coverage for all the restaurant management teams families that includes a spouse that kit and debt parents up to seven five yes age.

So that would put forward so things like that you can see will continue to manage on daily basis, So with that I'll pass on to Andy. Okay. Thanks. So [noise] regarding you know the Oh passion and dividend policy I think you know I'm very lucky that we inherit a very prudent and.

Closed so if I'm trying to come at US move Oh from here. So we have about 1.66 suing all in cash and short term cash well so in times of prices or situations that we're in right now.

This is a very very good snow so I was positions.

Our number one party obviously are used to ensure that we have enough liquidity a full operational needs as well as you know for the investments that weve been fall futures. So so so you know if you look at no Oh press, we today or we have just declared dividends or.

[noise] payout.

Well most are reflecting you know that you know how current strong liquidity position.

You know in terms of no. The current trading involvements old occurring Oh situations here a couple of officially he's very challenging. So you know as you mentioned your press release, you're going to.

And shouldn't liquidity is paramount as a financial function for us. So we will consider you know all options you know and move on to review I was given to ensure by this over a period.

You know do with reports as well so but you know so you've looked at from positions.

So with a show or whatever but when I went from six to $7.

Cash and cash flows. So as you mentioned you know we also would before the year living off the open including it'll cost controls for them. So also we'll give you all the capital allocations going forward.

Thank you very much.

Yep.

Thank you so much and your next question comes from the line of leaner yet from HSBC Neenah. Your line is now open.

Hi, I'm argument Ah thanks, very much for taking my question. So I just want to clarify Andy mentioned for existing Ah opening stores. Your same store sales declined by 40% to 50%. So does that include a delivery service. So I went to US is there any bottle that next for you to further grow your delivery service and.

If you allow I wanted to ask another question is regarding your licensee fee paid to young fine.

You'd normally pay 3%, but under current critical a situation is a possibility you can't like God have some confession young brands on that.

And if you okay sure we saw us if there's any risks to potential disruption to supply can that will be like a highly appreciated as well. Thank you very much.

So I think let me clarify little bit note for the saw that remain open oh, pushing through both Uh huh tightening and all deliver it Oh. So those same store sales growth for those restaurants, a thought about 42.

To a 50% that's including both you know tightening and also a delivery as we've mentioned before diving has been impact most significantly.

And then you know that victory. So it's actually help as well. So so you know we will continue to a submission we will Oh Hello, slippery. We also will Oh you know the.

Order pickup at school.

So kind of left so says a lot less work as well so.

Utilize you know how to do assets right to commit yourself, how customer being you know how investments into digital side.

Help us quite a bit here.

Oh situations.

Uh huh.

You know in terms of.

Bottled up to a delivery I think obviously, there's a couple of things why you know.

In China way now some of Cds does some of you stretching on travel all the Tropic ER and so that would probably have some type of delivery side and also you know if you look at sonopost or the though some of you know some of the maybe a false fall deliveries.

Please also note publicly pelletized some of these problems restrictions as well so that's good.

So if you want.

Oh, hi from there.

In trouble.

Licensing fees concessions.

Situation.

At this time, Oh, no effect difficult and challenging situation, obviously, no we see a health and from our business partners.

So, but no I think contractually does no obligation.

For Yum Yum brands.

Do they get concessions, but you we welcome any help that we think that obviously, you've got that happens who will be the great food gesture.

We should not very much.

In terms of Ah wished to supply chain disruptions.

We actually have our chief logistic supply.

I have here Denny and maybe Tony can help us a little bit.

Sure anything to.

You know any when supply chain.

Well I'm Lucky strike impact obviously, the biggest impact you since you don't want and probably is HM.

The government has imposed probably was friction that is betting on essential ceiling trip. It's you know so city, but as you know we have or the white network of logistics and is with bolt on 24 logistics and as opposed to country. So for example, the stores. There was so my view on logistics centers in the neighboring problems such as.

Say junk she is now being supply <unk> logistics and just from a chunk. So Hunan province, So really we are key elements of a couple questions really contingency planning so that mix look Obama budget centers really allows us to consensus apart.

Most of those operations, obviously as you know nationwide this increasing numbers of provinces in Cds imposing troubling real perfect restrictions as we mentioned multiple times those situations fluid monitoring on daily basis, but for now we managed we are able to deliver two or so that remains open.

So today.

Moving onto a highest we obviously have some we we have more than 300 claims supplying food and beverages matured Yum, China, a very small number off the suffice.

Ian.

Problem is again because of contingency planning, we're able to allocate the volume to other suppliers and so for now that's off now we do not foresee any disruption to our supply chain at all.

Again, like I said I want to stress that sits situation continues to evolve. So we'll continue to be ammonia and well minutes from do think thinking.

I got them.

Thank you very much for sharing a need any I just like to follow up like a Andy can I say you haven't reached peak.

Delivery capacity during this difficult peer it or you still have room to further grow on that end up my question. Thank you very much for sharing.

Uh-huh well you know I don't think no we haven't put fuel, but right now obviously as you probably know no. This is the Chinese new year period, and do a lot of times you know people at this time would be referring to work.

And but the situation is very popular all things. So it's very hard to say you know what the situation there, but in some of our online capabilities you do whatever you have probably seen a usable news report can do we help them I've heard with dropping <unk> Oh. This current however, I do agree and which is no very well received nearby consumer and.

Also a recognized as they do a good service you are doing.

Situation like we are anyway.

We know it and then so intermodal at LIBOR plus a few machines you know we quickly look a little ways to alleviate that and yields. We report we now do you.

A big fluctuations as big a new window because no.

People will be into research work mm mm next week and so so we'll see how that's going to happen.

In addition to that of the submission we also go out causing the.

Order online and pick up in store, so right, which is also a pretty well we see my customer I think Oh, we now we do have a couple who he or she served you know how oh customers due at the other application that we can do to being open.

Okay.

HM.

We have with more well take one more question. So we have we have a uncle one more question.

Yes, we do and that question comes from the line of Christian paying some Bbs Christian you line is now open.

Hi Medicine.

It's common pretty much as I've said most of my question.

Quick question.

Hi.

HM.

Yes.

[noise] fulfilled.

Absolutely.

So.

Oh.

Last year.

Mm Hmm God.

HM.

Oh well management.

Hi.

Uh huh.

Huh.

Christine and you're asking there the all of our Pizza Inn next 12 to 18 month right.

Well, so 29 key we Oh, we are pleased with the progress actually a 1% same so sounds growth. Most importantly, the I'm not saying driver of the growth is from improves tropic.

From both styrene and delivery, they're the improvement that dying try make its critical because that shows that we are doing the right thing to improve the fundamental off the thickness.

And the only those cells has improved but also the profit has improved as well and all the other consumer matrix that customer set, especially in like the how young the brand is et cetera et cetera.

We do see Pizza hut, that's neat more time to cement there so revitalization bove into into areas of the fundamental Ah such that product digital delivery and asset the full fundamental area that we have talk about many many times.

We're particularly pleased with the fundamental improvements such as such as the probably the introduction.

The product I talk about already they can now find a shade pizza, there's 38 Youre crawfish pizza, that's from National Bank quick and that's the exploration.

Ladies and right now really good appealing fluid, but so a pizza hut.

The price level and have amazing a promotion matlin subject screen Wednesday, so both the Prada is good the value proposition medical money, it's very good and enter delivery person a the infrastructure is improving very very well and then that your experience is improving site.

Through seeing the increase of the privilege membership program.

And also the real out of the Super et cetera, and then the asset once the of our store has the near these aren't they once the that's no incentive that number to prove at Wassa is important but I just based on my parents once once the of the anti asked it isn't your design, that's my perception to us the brand.

To us to the overall Brett asset start to move it's just based on my spirit. So all good however.

The current Corona virus is hitting us huh, particularly pizza hut actually it's hitting hotter in pizza hut, Dan can see because can't see has the advantage of a very high delivery percentage, but also a well established model.

Take away.

So we look at KFC fitness plays a central every 20 for them fast delivery and then actually said he does that take away so customer.

Very very familiar with the motto. So we're not when we launch it a contra less delivery not only kontulis elaborate a contest.

So so there's some stores that we opened just to provide that delivery service and pick up so customer just picked it up from the door and it's okay. So that help us hold up the business better. However, when it comes through at Pizza hut, while we have very high delivery service.

The pickup service and yet to be a well established a so the dying business deal.

Drives the bulk of the business and therefore, the impact on Pizza hut, but unfortunately, it is it's hard to Dan Dan KFC. However, we do believe it is short term.

I mean, how long that's where a lot. We don't know yet we cannot go up but as Andy mentioned from the very beginning we do Oh I'm still very much belief in the long term potential office markets and we do believe into business model of Pizza hut.

We need a bit more time would probably need a bit more time to two to see men. All the stuff that were doing two pizza hut right now thank you Christine.

Thank you that's.

That's a thank you for joining the call today, we look forward to Atlanta speaking with you on the next earnings call that concludes today's call have a great day.

Thank you. Thank you.

That doesn't Crittercam French where today. Thank you for participating you may all now.

[music].