Q1 2020 Earnings Call
He is being recorded I know you hear the conference over to your first speaker today instead meeting. Thank you. Please.
Thank you operator, Hello, everyone. Thank you for joining me on China first quarter, two sons Twentys earnings conference call joining us on today's call on our CEO Mr. <unk>, our CFO Mr. Andy.
Before we get study I like to remind you that are on these calls and investor presentation contains forward looking statements, which are subject to future events and also <unk>. Our actual results may differ maturity from these forward looking statement.
All forward looking statements should be considered in conjunction with the Fortunately steaming our earnings release and the week factors, including our filings, let's say you see.
These cool also includes certain non-GAAP financial measures you should carefully consider the comparable GAAP measures.
We considerations of the non-GAAP and find that matches she'll be easy, including our earnings release.
Today's call includes three sections first we will provide an update regarding recent developments in the Corona. If I were situation. Let me she will offer some highlights around our first quarter results.
And he will then cover the financial results and provide an update.
For your outlook finally, we'll open the floor to fashion.
You can find the last half of the score I know pop from presentation, which contains operational and financial information for the quarter on the IR website now I'd like turn the call overcome these Joey Wat seal Yum, China Joey. Thank you. Thank you Debbie. Thank you all for joining US today I hope all of you.
Yeah and.
Remain safe and healthy.
Before covering our quarterly performance I would like to update you out actions regarding to 19 situation.
Well this crisis, we make sure that Oh, parati, what's the health and safety, although in Raleigh and customers.
Stores were closed.
But with local authorities to issue a quick implementation Oh health measures.
Oh, we wanted to ensure everything.
<unk> commitment to value.
Commitment to surprise and a commitment to quality.
We wanted to make sure that in a panel prices KFC pizza hut and other brands.
It would be did you provide reliable quality moves to a customers.
Especially those in the frontline fighting this outbreak.
About 65% was our stores remain open throughout this period.
Either way, especially in cases, where rising installed close shows a celebrating.
Employees and delivery riders continue to show up.
They will not.
Oh, so strict hygiene.
And so our customers.
Providing a vital service in this time of neat.
Employees out the better about business, we support them and their families.
Extending holiday pay even if the stores were closed.
Encouraged.
Please turn up the charter.
We shrink and medical insurance coverage for stuff and more importantly their families.
Extended corporation two parent.
<unk> restaurant managers up to the age of 75.
This is important as providing for Karen is a key cultural duty for us in China.
This is simply the right thing to do.
So why didn't they support Gevo managers, the peace of mind, so focused on what and culture built to our long term success.
Also in response to the damage myself and D. C. Next I would have been bought members have agreed to full go 10% Oh salaries for the rest of this year as contributions to some additional assistance coal supply and probably and their families impact by cobot Nike.
[noise] all this stuff that's it.
Being handled impressed.
The dedication Sudan, and creativity and probably even.
Even if you have done in all stores closed.
Oh people, how was the delivery of news to frontline medical stuff.
We provide over 117000 neos at no cost to over 1450 hospitals.
Health centres in 20 provinces.
A woman stay on the eight Oh my Gosh, a day, we usually drive holiday sales, we make a decision to close almost all of that day ingelheim. They had just open.
Oh, we open.
We instead dedicate so these stores to 7003 meals to medical workers that come from all over China physical huh.
We saw reputation for quality safety and by do those older 30 years in China.
Oh, great resonate well with consumers.
This trust is a key enabler also said.
Pivot to delivery and pick away program during this quarter.
Importantly, we live our mission to beat was most innovative pioneer in a restaurant industry.
The tiny it.
The last delivery and took away pizza hut increased its take away already and started delivery I'm ready to cook stake.
We adapt quickly to changes in consumer need.
Relying on outside its accuse you and market leading digital capabilities.
Reasons to be the situation appears to have turned a corner.
Approximately 99, but they all stores [noise].
[laughter].
With some stores offering delivery and pick away only operating with shortened hours.
Hi stores I'm, mostly back in business.
We'll pull up to again, giving our customers.
What they expected from young China, good food, great value present dining the convenience and value about digital experience.
Nevertheless, the recovery is not guaranteed.
Lenient.
40 has not yet returned to pre outbreak levels.
They remain differences across regions and friends at the country gets back to work social distancing kind of communicating.
And reductions in travel May become then you'll know.
Fiscal fundamentally impacts the way, we work and the services we provide.
2020.
We'll be a very challenging year.
I'm grateful to lead the dedicated team at young China.
Oh culture of innovation I was strong operational excellence and our leadership in digital and delivery in our industry.
Let's see show us to thrive.
This crisis, so all the us opportunities to grow to create and to build a stronger Yum China.
Now, let's move to our first quarter performance.
System sales were down 20%.
Approximately 35 is now hospital base was closed during the peak off the outbreak.
Those that upgrade at suffer Oh, great related declines in sales.
We opened 179, new stores, mostly I can't see.
Mostly all Oh I'm newfield.
Well compete to aim.
Generally we still opening is gradually resuming elite much.
Same store sales declined 15%.
Sales declines were particularly for nine Oh tourist and transportation location with regional and T. a defensive.
We mitigate sales decline with menu innovation and a shift.
Good so delivery and take away.
Oh this is modeled proved resilient.
With that dedication all the employees across time delivery and take away and a strong digital pen.
We look at that.
From inventory management to rental relief, we tackled every opportunity.
With help from suppliers Atlanta as well as the support from government authorities, we achieved 97 million in operating profit in Q1.
We were teleges and principal in managing inventory issues.
Maintaining strict food safety protocols for example, we used to excess premium ice cream inventory from Hokkaido as raw material for a tasimelteon.
It's created a high quality products for customers and prevent unnecessary waste.
The only until the way it make it important contribution to operations during the crisis.
Delivery was crucial to driving online orders to outdoors, well take away over a save alternative as diving services were limited all closed.
Every sales grew 40%.
And delivery sales mix grew to 35%.
Compared to.
My team and makes it last year.
In late January we will outcome to less delivery on onto the app at both KFC and pizza Kontulis deliveries emphasize on safety.
It's both popular irresponsible.
Over 60% Oh on channel older at KFC, and Pizza hut select to the content less option with adoption, peaking at over 80%.
Having dedicated riders was crucial in supporting others is doing this time.
I'll call me moves around value surprise and quality will not have been possible without amazing Midas.
This emphasis on safety and write us upright Joel Donald channel growth above that aggregators during the quarter.
Susceptible to Delever clients digital pre order capability suitable menu and packaging and most importantly, a strong value proposition.
We have seen pizza hut has all these things.
I'm very proud of all pizza hut, Brent, which more than doubled to go away contribution in a quarter.
Establishing a clear has the option altabef dying and delivery as to the resilience of the Brent.
Turning to digital.
[laughter] communicating with our customers quickly and trust apparently was important to building trust engagement doing the outbreak.
We leveraged Oh, my gosh member pet phone he'll provide information on our safety protocols as the operations.
Membership program continued to grow with older Twinge of 50 million members, Indiana the quota.
Member sound exceed 60% can't see due to the increased shift to online so.
Digital older a time, so over 80 little bit now of KFC sales and 65% at Pizza hut mobile pay orders lows as customers increased use of pick away surfaces.
We continue to drive menu innovation that is even doing the crisis.
During the quarter, our primary focus will safety and providing equal.
We emphasis as cool product and you could some new innovation.
We continue to delight and surprise with several new products.
Okay. He infuse hot oil eight.
Yes.
Which is that traditional Chinese <unk> item and very popular did that any even talking about China.
I can't see.
And also we have teamed on doing to see me festival as well, which is the kind of a foot just for that to me Festival.
In Pizza Hut, we launched a crayfish most of that pasta, which is seldom yeah. This is young yeah [noise].
We also continued to grow like smart above them value.
Which was important in an environment all economic stress on signature Crazy Thursday, camping, I can't see and 25 be one person set meal at Pizza hut and Chinese would cause you to answer it.
All these thatll campaign were well received.
In late April we just launched tests for upon based chicken nugget in some of our tier one store.
We are excited about that new innovation in meat alternatives.
Sure Hi, presale coupon for this test so docking just one hour.
Now let me make a few brand specific observation first can't see showed its been ciliates a game.
Oh digital delivery and take away over and provide a strong basis of support for the business.
Even during the crisis.
Accessible workforce and variable rent structure across most of the will allow us to quickly adjust to assess frustration.
We have is focused on casual and family dining Pizza hut was more impacted by the outbreak as consumers congregate and less impacted social distancing.
We will continue to focus on building a young family Fannie dining environment, while strengthening our offerings for individuals and took away.
So the crisis, we continued to develop new and emerging brands, we formed a joint venture with Lovaza and opened the first of all the Asia flagship store in Shanghai.
As part of this pilot program. This though so cases, the premium elephant Italian coffee stealing Nevada has developed over the is 125 years history.
The combined this with young China's scale operational capability in that knowledge of the China market.
On April eight.
We completed the acquisition on <unk>.
Hi, Matt I'll, Chinese Simone cool casual dining loan pool.
It has all the 640, mostly franchised stores bovie in China internationally.
In addition to this acquisition, we established a Chinese dining business unit comprised of our three core Chinese dining, Brian Little sheep East Dawning LNG Juan.
I'm confident that the Chinese and west and ramping up portfolio, where synergized to delight consumers lift delicious food and the digital customized feeling.
With that I'll handle the pull into a sample Andy Andy Thank you Julie and good morning, everyone.
That's right chief financial and be Bowman's first quarter.
Well why perspective on our full year outlook.
Unless noted otherwise figures mentioned refer to the first quarter of 2020.
All figures are people foreign exchange rate effects, and all comparisons odd year over year.
The first quarter financial results.
Total revenues declined 21% due to both temporary store closure and same store sales decline arising from pullback 19 outbreak.
Public health Atlas to combat the ultimate resulted in significant fall kosher and reduced metropolis.
Seems also decline was driven by reduced siding, so partly offset by delivery can take away [noise].
Temporary social work kicking off the same store the completion that included once they would open.
FC same store sales decline of 11%, what's driven by reduced dining tropic.
Ticket average benefited from increased mix to deliver it took away.
He's out same sorts out decline was 31%.
Reduce trial, we do dying topic was also primary driver.
However, given some KFC the increase in delivery and to await mix contributed to lower ticket average.
[noise] January sales for both Brian was strong leading into Chinese new year.
But what's really impacted later in the month.
Use of the Olbrich became widely reported.
So a little different things and bother restrictions will equal.
I think bunching of infection way.
And same store we opened.
I also showed recovery, although we are still below pre OPUC level.
News the opening were robust in January before Chinese new year period.
Oh, great related.
I think restrictions and construction supply construction worker supply death for yeah after impact with the pace of our store openings.
What's your margin were 13.6% KFC and so called 3% at Pizza hut.
Declines in restaurant margins across both KFC and Pizza hut were primarily driven by leveraging.
Probably offset by out.
To call.
Two cost control costs.
Equally cost of sales were 32%.
And a 1.5% year will you increase.
Commodity inflation for the quarter was 3%.
Sue decisive actions at the store level and working proactively without supplier, we were able to manage.
I don't even sure we write all install anyways.
Normally associated with salt kosher and say it was fluctuation.
Cost of labor was 25%, 25.5%, a 3% year over year increase.
Year on year wage inflation was 4%.
Increased Boston off delivery sales contributed to higher labor costs percentages.
Employees have actual holiday pay and with additional labor hours increased safety protocols and also.
We manage.
Our cost of labor.
I quickly adjusting schedule.
Oh, the shows gasoline shoes, and pocket manager a real time up.
So mento in sustaining high level of productivity across both Brian.
Lastly.
Pretty relief from social insurance payments for what it by the government was a possibly $20 million.
Rental expenses.
Over the past few years, we have made a concerted effort to increase the wearable component and lower the fixed component of our rental expenses to improve the resiliency and flexibly operations.
In general approximately 40% off of rental expenses tied to revenues, which declined proportionately to lower so the corner.
In addition, we negotiated possibly $15 million mental reduction.
Ginny costs were lower by 11% year over year.
Benefiting from cost one show as well as to certain one time government will be poems, including temporary reduction in social insurance payments and accelerated payments of southern government incentives that we received in the first quarter, which would usually have been received in the second or third quarter.
We recorded impairment charge of $9 million.
Bottom line.
Our chief operating profit of $97 million.
We are incredibly proud to have achieved.
Probably in such difficult circumstances.
The effective tax rate was 32.7% hi than usual.
Finally, due to the mark to market losses from our equity investment in May trend that is not flexible, but reduce our pretax income.
Now do you feel most $62 million driven by the operating profit just mentioned.
And the 8 million dollar Mark to market law firm our investments you made one.
How did the EPS and adjusted.
Yes, well, both 16 cents into first quarter.
Next let me cover our balance sheet and capital allocation.
Cash and short term investments remained strong at 1.5 fold Phillips.
The cobot, 19th Oprah has a significant impact on operations and we cells in the first quarter.
Well the situation in China is.
Gradually stabilizing we remain cautious cautious as our western Tropic his view the low crude help with levels.
We expect an extended recovery period.
And the pace will be uneven across regions they fall in sync with.
We will continue to implement aggressive measure to control costs.
Well the other had globally fucking continued to rise so you mean difficult to predict the full impact of the pandemic.
The polar economy, and how consumer behavior matrix.
The outlook has highlighted the importance of having a prudent financial cost.
With a challenging you have we need to proactively maintaining a strong balance sheets.
Well positioning ourselves to take advantage of growth opportunities.
Therefore, despite having a strong balance sheets, we will temporarily suspend or with share repurchases.
And for the next two quarters dividends.
We have taken this action Oh, an abundance of caution as we navigate through these challenging times.
We believe the strength of a bunch and capital structure offer us flexibility to respond to contingency if needed.
And to continued investments in load has value, creating opportunities where appropriate.
No I'm trying to our outlook for 2020.
The situation continues to evolve Oh, we sealants and another movie how avoid offering losses for the corner.
We sold was supported by strong performance.
And audit onetime we leave.
Are likely to reviews, if not terminated in early two Q.
We continue to experience significant disruption to our business.
From the over it.
Some so a few close operating under limited hours or services.
The tropical west Sean.
Just below pre Albert levels, that's people avoid going out and practice social distances.
The recovery of weekend leisure volumes have been weaker than weekdays warning.
Tropic transportation hub and tourist locations.
Also being extremely soft.
The recovery trend you scratches and choppy.
Well, we will be taking decisive actions with we talk to cost management.
So leveraging talk you through pressured margins.
The current sales run rate seems outbreak and excluding onetime relief, we have not reached levels required for subsisting profitably.
I will stop you Alcobra, Bruce Lee interrupted because we started.
We're not revising our target of 800 to 850, you still for the year. However, we will evaluate conditions at the year goes on.
You will reversing the target as needed.
The outbreak highlighted the importance of online to offline integration.
Investment in digital technology and supply chain, who continues.
Together with investment in use though and we all remodeling Oh 2020, Capex plan is unchanged in the range of 500 $250 million.
We expect rail inflation to say mid to high single digit this year.
Commodity inflation is the wage home alone.
Despite the volatility across most commodities.
Okay supply in China remains tight.
Our best estimate of 2040 commodity inflation now is for low to mid single digit.
We expect 20 clunky to be difficult.
A new normal categorized by reduced travel and show activity may persist.
As we look forward to recovery.
We will continue to focus on serving our employees customers and the committee in which we operate.
Hi, I'm trying to.
We're here for the long run.
Now before I turn the call to Debbie for acuity session I will update you on some investment we have made.
In addition to the acquisition of most you all that Joe you mentioned.
We have entered into agreement to purchase an additional 25% equity stake in Suzhou KFC for approximately $249 billion.
We expect to close this assumption in the second half of this year subject to level in closing conditions.
Upon closing Yum, China will hold a consolidating 72% equity stake in that in the entity.
No that I will pass you back to savvy to stop acuity.
Thanks, Andy well now open the call suppression in order to give as many people as possible the chance to ask questions. Please limit your questions. One at a time operator, please does it una.
Thank you very much ladies and gentlemen, now begin the question announce session. If you wish asked a question. Please press star one on your telephone and why she needs to be now if you wish to cancel your question. Please press the pound ASCII once again, ladies gentlemen, it is star one and we've seen exynos, thanks very much.
[noise], we have multiple questions in queue. I'll first question is from shall pass away from Citigroup. Please ask your question.
Hi, Good morning, Joe you Andy.
First of all Sun Q4 hard work on social responsibility juries Koby 19 outbreak rushing Verizon and the performance, especially Campsie. So my question as what's your observation on the consumer behavior changes during the crisis all right and you also mentioned the new norm and.
Joe You mentioned a lot of innovations what's your thinking of.
Reinvent yourself in the business, especially for people.
So we believe that it pizza hardee's focus on casual dining, but it would be more impact. You then have see any used by region from the classes, which will position ourselves better for the recovery at Pizza hut before thank you.
Thank you so cool.
So the prices I think the intense they'll customer response to the first Muslims. Obviously is it's about the focus on.
Hygiene and safety, so, which which all business has has very long tradition no.
Long tradition, though in this area and we obviously.
Very well.
Well positioned to enhance that.
And then in terms so.
At the Oh.
Other behavioral change.
Basically the value for money and the.
Dial four new flu is still there. The most importantly is the availability of <unk> because.
Oh, right now is better but that to February odd lots, we have generate.
It is it's very important to to provide a service and our team has worked very hard to keep as many still open as possible on top of that we leverage our digital and and delivery and take away business model to serve all customer while protecting our employees.
And so the innovation is important as well and then.
No.
Going forward.
Is there any settled behavior change in the medium term et cetera, So social assistance, they will linger a little bit we need we continue to see that particular study we can see the cells China's steel during the weekend.
'cause it well, we say we okay. Now so we're pretty much flat to last year a level that weekend steel that's a challenge how did they do a challenge which is quite different some pod cells pets and on top of that the traffic help because all the a big deals trial.
Turning to try to help isn't a.
Challenge.
So so that the we the weekend that dying and transportation how's that looking forward.
How do we event also participated for Pizza Hut, let me talk about the three team and now I'll go to pizza dipped a bit more than three focus menu.
Innovation.
Digital innovation.
One second value for money. So its cost saving is no only about the so robust business model cost savings also about we save everything we can save and pads on the savings back to the customer.
To further improve the value for money for the customer.
So so.
In the long term well, we as well we a in a short time doing the men and innovation Vodafone money cost saving that often we're also building a you know more agile and robust business models. When it comes at Pizza Hut as I mentioned earlier in <unk> in my presentation earlier I'm very proud all piece.
Uh huh.
If this crisis, because pizza hut business has high percentage of dying business.
So naturally it was more impacted because at worst time, the dining business, even though if we managed to open a store design business were not allowed to upgrade.
Uh huh.
Tessie, because his QSR because high percentage of take away ourselves doing the worst time was.
Let me let however.
Is he has always being one of the strategic initiative to build that pick away business well pizza huts.
We we actually started.
Ah 29 team.
Chinese new year, I tried to push for them.
Pickle business it achieves certain fashion, so we get to 5% roughly the south is from pick away.
And before the 2020 Chinese new year, we we have time and we have prepare.
To take advantage of kind of Chinese new year to assign a rate to take away business.
And then the Ur Cobot Nike hit.
It actually gave people [laughter] opportunity to eat [laughter] to accelerate the articulate this is even more so for Q1 Oh. So it took a look this is for pizza hut roughly about.
Twice as before so it's like 10, 11%.
But that's for Q1.
On average during the so those are less kind of a crisis the percentage was even higher.
Due to pick away business.
It's not only just.
You know how the customer to do the to go it doesn't it required field things once it required the digital auto capability.
The mobile older capability, and we got that ready right before the Chinese media. It also require very strong value for money because that's what cousin last will take away business well and then okay also require affects the full menu. So many different more simplified menu.
During the crisis, because all the sudden closure of the still we have inventory challenges.
But is that all you know just phasing or charges. We took advantage of this as opportunity to create them.
Neil I come up with the inventory that we have and then make it into pick away menu.
So the innovation agenda, they happen right there.
With that the took away business right now is a meaningful positive business, which is fantastic and this is something I believe I shared with all of a investment community before a week. We won the television business, which is a dominant part of these opposites already.
We also want take away business because it does not require the delivery challenge Oh Wow. We we have we are trying to strengthen design business. So I hope that give you a sense all the challenges of the of the changes of cousin of behavior, and the and I'll focus on.
Feeling ourselves that and then you know it little bit that's kinda on piece I think is helpful.
Great. Thanks.
[noise] and that's what my question is from Brian <unk> No from Oppenheimer. Please ask the question Brian.
Thank you thanks to the question.
Do you expect any store closings from your competitors because of this crisis, which what is your insights regarding the ability for all of the industry capacity in China to survive. This pandemic and then secondly, you did not change your guidance for store openings for 2000.
20 can you just maybe talk a little bit more about how confident you are that you can indeed achieved the store opening goals in 2020. Thank.
Thank you, Brian it's a really good question.
We we believe the we have turned a corner but.
I.
I hate to just remind everyone that we're still in a middle of it is not over yet.
We.
We are still cautious that Q2 in Q3 will still be challenging falls in machine, China or the reason I I'll get to the competitive but let me give you the content so for the Q2.
We expect.
May and June will be very challenging full out industry.
Because cells is recovering, but still at fee rate, but still lower than free outbreak level as as Andy mentioned earlier.
In terms of cost structure to children. During Q1, I think most all most of the is actually pay a managed to get some help from the leno and from the government or even in some situation some company.
Can manage to have set an agreement with them probably.
In terms of festival pain.
But that's the only.
So when timely leaves the I mentioned, the saying they are likely to go down it's not going away by Q2 and that situation in slightly to.
Do you happen to be May and June.
So thats 0.1, 0.3, but it's always punctually what about Q3.
Q3, B B b better hopefully however in all industry, we benefit from this summer.
Because our children's holiday because our children's how did they usually give us 20% to 30% uplift ourselves.
But this year the so there's some a holiday for the kids.
Let me shorten.
To what extent it still no clear across the board, but it will be shorter so that.
That will be challenging.
So if it's a contest and then come to your question, Brian about the store closing from competitors and et cetera.
We have seen we have seen some business, mainly the smaller competitors going such difficult time, some very famous named one.
So right now this is the test for financial Prudence I suppose.
[music].
But but as I mentioned is still would take some time two to two to see the full impact.
Come to come to your question about so opening.
We have no.
Change our guidance, because while things up very tough.
We we have question, but we oh, so optimistic at the same time.
Because.
It is the time for us to continue to fill up bran further refine our business model.
And it and also.
It's possible that that will be some ah locations all store size that become available.
I pick up at a high quality one.
If they become available our financial cruises will be will be helpful to allow us to steal fan and invest in used to.
Because we are here in China, My cat for long term and Weve seen a long time, we see a belief and a market potential and does Oh Ah Ah and change guidance on Nuseal and he has anything to that.
Sure I shall we say coupons right. So.
As we mentioned we're investing for long term. So you know our fundamental view on China I have no change was do you think there's lots of opportunity there. So although into first quarter. We have done a roughly 180 or use the opening was slightly below last year's schedule and as measured before it's mostly impacted.
Hi, good pose a ur cobot nineteens outbreak, obviously topic situation there.
Some of Oh Walker has been going to work, especially a consistency.
So we will try to make it up or you know maybe make up the last time in the coming quarters and.
And so so far we have not Oh, we talk of its Oh 2020, new view pockets.
So and it seemed go for others have extended so if you look at how important you know how important IP or online operations supply chain.
All these things.
Things are a during the crisis and I think a unit in the long term I think those trends continue right. So we've seen acceleration.
For moving from offline to online.
Even more to deliveries.
Let's take away.
So we need to infrastructure to support our long term growth opportunities. So we will stick to you know my husband to find the $50 million on income of spending this year as well so.
With that helped your answer your question. Thank you Andy.
It does thing thank you Brian.
Our next telephone question is from Michelle Chang from Goldman Sachs. Please ask your question or so.
Hi, Thanks management I wanted to follow up a little bit on the Rikabi Pat Thanks, Joey Jeff mentioned that industry has seen a well be quite challenging from second quarter after quarter, but can you. Please check your salt about Oh, a recovery path for the from friends.
When do you think are the same store sales to recover to last year level and how to drive these enforcement and also I think a in announcement you mentioned on Ebony coffee across regions. They hard segment and so can you shed more color about these and potentially off of the come from I grew up slightly younger generation families.
Thank you.
Uh huh.
Thank you Ms. show, a full recovery path HM.
As I mentioned earlier or the immediate focus right now is still about protecting.
Our staff and also open as many still as possible and also we open the dining business.
So that when we were still not allowed to open.
So that's that's immediately.
And then a in terms of volcker immediate it's about getting the traffic that because for Q1 unfold for both brands, particularly for kids seen our traffic was was very heavily.
But we make up full.
Launch themselves with much higher ticket average.
By going to.
Corporate catering et cetera, et cetera, or.
Tickets delivery.
So so right now is still about getting the traffic that we we're happy to see to eat a trend improving during March and April was April right. Now the same. So says he is the aside and more than public sandwiches improvement compared to two so much.
But the full but but into in the medium term the to the journey continues because I'll try to if not better like yet yet as I mentioned earlier a ticket at it during the weekend and then constipation huh.
Then the question is what to do.
So when I talk about menu innovation I, probably should have elaborate a little bit more. So for example for both KFC and pizza hut, we adjust our marketing calendar.
Well. Good example.
Additionally, we put a lot of these value for money promotion dealing with state.
Ah, particularly for Pizza hut, because weekdays cells is slightly lower.
And piece I'd take a week they sound is significantly lower with them and weekend.
So what were put the value a program gearing we stayed however.
Now kind of change and the process as I mentioned the problem of a weekend. So we even for the same marking campaign will be shifting the weight of the value program to weekend.
And how to date just limited to sell to get the traffic that so it's so small tweaking, but incredibly important to get a bullet to focus on the right area.
Secondly, it has a menu innovation.
Truly exciting food.
I mean.
In Chinese across your chest couches seems small fortune small happiness.
During the crisis time will launch time, which is a very traditional snap like the eight that he eight.
'cause it must have a surprise and delight how do you guys.
No in age.
To launch new product in the middle crisis.
And they were happy.
And it's wonderful.
To be business.
To see that we can put us now people are they doing such difficult time.
So what are doing good kind of at that time, good when you make people have.
And this long we would test launch the.
<unk> chicken Nuggets.
Very very popular so popular that you know stop cannot have a taste of that [laughter], because the that's coupons going and when I live.
And that's all right now this week.
Monday, we just launched the acquirer.
Sleep tofu, well actually more than three is if I see a is salty different favorite across China.
This is like an amazing breakfast item and the traditional one.
And it is the item.
That will bring best so much chocolate memory for every Chinese because we have out those love and we would kit, but it's pretty much a very hard to find right now because it's very strict fluid Ah. So we put put the item on our menu and respond to spend.
It's fantastic I'm, so I really look forward to that so so.
Good.
And then the value for money good price because.
Because.
Now well in a medium term even longer time, that's such uncertainty of future.
And even so people who might be up it you know relax with the money in the PUC at right now my thing twice.
So doing such difficult time, the value for money it becomes even more important with a lot raised price. So why you're probably the seven on be slightly more than one U.S. dollar well actually exactly at U.S. seven at one less dollars. So the value for money will continue at that and we.
Only make it possible if we look at all and high cost structure and look at all at the possible area of improvement. So that we have committed to pass on the savings Encirca customer is a commitment from our entire company I'm not one at a cousin enough and I am probably I'm doing though it's very difficult time, we launched we spend a metal.
Coverage, and we put that often I'm not pay or even when they're still is a crows because.
We understand the importance of our and probably in a customer during that time in good times. So that's no magic north that some fancy strategy. There. It is about a commitment in a short time and long term to deliver.
Customers.
Something that they like so that they can enjoy.
Enjoy.
Affordable and delicious food.
Either you know stole or at home or.
Whatever convenient.
To take away.
So so michelle thank you very much.
Okay.
Right. So as we mentioned on our press release Kirkland <unk>.
Listen just months rifle file our.
Topic is due.
So compared to the pre APIC level, both I think more than 10% same store sales.
Compared to last year.
And then we also clustering that as Joe you mentioned right. So we have a cycle caution all businesses.
In the transportation hub and tourist location.
As you probably know most airport US do you have a limited services.
Same go for the high featuring services. So we do see that you know that portion of that business quite depressed.
So if you look out from a coverage, which actually for example in January we go into.
The January before Chinese new year, very strong and then we were significantly impacted.
You know by outbreak.
The chocolate in February.
Though and that we we'd beginning to recover.
As you know as as you know the outbreak ease and people beginning to return to work.
And and we benefited quite bit because we have kept most of the open a turned up your time and we are one of the field options and safe and healthy options for folks to to get food right and as mentioned, it's you know like in the appears update your 20% year over year like like.
Seems ourselves declining in March and and now we have our 10% right. So.
But were still constrained.
Chris.
Locations.
How do you know.
A restricted pipe it until topic.
And then we look forward to you know.
The recovery.
I think the timing of dose.
Location, how how they will recover I think you still a little bit uncertain at this moment.
And then also as Jerry mentioned, there's some social behavior.
Change the acute lingering come from the outbreak.
So the distancing stooping practice here in China people.
On the weekend.
You have a nickel to west Sean you try to avoid provisioning.
Well right. So so I think that how long that would not and how well take for us too.
Go to be though the normal prior to the outbreak I think is doing quite a bit uncertainties and it's hard to predict, especially given the situation globally and how that rubbery back in two to Chinese economy.
How that would change was what behavior I think it was do you have yet to see clearly understood. Thank you and let me show. It I do know test at the end of your question you asked about the the regional and tier debt they are different.
East region has recovered to the best.
Then a some region I know some part of China.
You know it still is still a society behind intense all.
So did here.
I'll.
Lower tier cities at doing slightly better than the top tier city.
For a few lean and the main reason is tier one cities like Beijing ticker that they can sell husbands wilsons and.
But there isn't a beijing.
These tier one city has this proportion the higher percentage of sales from transportation hub.
And it seems that sounds pay transportation hub business, that's still a heavily in pet we.
We are talking about half of the business.
Being impacting transportation hub and does impact the overall top tier city. This is recovering.
On T.S. cities business.
It it has being quite resilient.
For full full other read them as well I didn't let go [laughter] flotation, how a in lower tier cities.
Given the most difficult time, it was not uncommon and actually it was reported by some media outside China. It. If you go too if you went to a small city at that time.
It was very likely that can't see was the only store that was creating.
And even right now as the country is recovering from from the crisis at the competition there lower tier city.
Still favor us because of our strong reputation.
Hi team for safety.
And that's the difference.
Thank you Michelle.
Our next question is from any link from Jefferies. Please ask your question.
Okay, Hi management team. Thank you for taking the question.
Two questions.
On the.
Cost side.
Richmond mentions about Latino audience that you know Pops and Pos.
Cost increase I just want to check that you know whether it's just include all these like in a onetime relief in first quarter and possibly can attend quota and it looks like you know I'm a show, especially in the what doesn't nature. You just talk about that you know some of these like pension relieving the and all that would you share was I thought you know.
What I too much in or what are these agencies nature and Oh, this plot and whether it's <unk> in our cost assumptions and all that and then and also in terms of C commodity price increase.
We understand it seems that not based on some of the latest time I'm just I'm just surprised that she is set to come down. These days. So it's a sad to say that we should see some delay impact from last year's high infantry caused that I'm just happy much higher.
Like commodity pricing. Please and then subsequently it will be lower it a how do we see you know just cost trend bye bye bye bye <unk> faces and lastly, you know in terms healthy upcoming legal holidays do we have any expectation I mean, and such sad to say that you know this will.
Tests in terms of let you know how to pass out how quickly the punch above can come back. Thank you.
Okay.
Thank you Andy.
This is Andy and so I would try to address your question regarding no cost increases the onetime leaving the first quarter.
How is that look like in the second quarter.
So.
As we mentioned.
In your prepared remarks, we did receive.
Some some would be from the gaufman's.
In terms of social insurance payments.
There was a giant reductions off that across China, we benefit from that as well and so that's approximately.
20 million dollar that being the cause of labor and then and then another probably a few million dollars.
A question.
We also received when reduction right so from the landlord into quarters about $15 million.
So those in total roughly about $40 million into a one time now if you look at the show through insurance payment reduction program I think that go to expire.
In early second quarter, ending April was the last month that we would probably we see that would be no single red and most of our landlord have agreed.
To rent reductions during the.
At this but as you know the economy mystery beginning to recover.
We do exclude we do not expect.
At any rate reductions to be the same.
As we have received the first quarter.
Now and we also have about $50 million.
Though gaufman incentive.
That we received in the first quarter that we normally receive the second to third quarter. So so if you do that you'll notice that we benefited the first quarter, but although you will you comparisons will be more difficult for us going into the second.
The third quarter.
No I.
I think you also have mentioned.
The commodity price.
Chicken.
Particular I think.
As we mentioned see though we do expect a cost of sales.
No single digit level.
You know the you're right I think if he meant a declined the demand declines and logistic issues or you know we sell this from a cool that 19 or have.
You know have have caused a temporary glut of supply in poultry.
Joined up your time, and so the pricing come down a little bit.
But you know if you look at however, the overall commodity prices you at the very intuitive.
But at levels or if you look at for example home price is more than doubled year over year Super high high level that we can use because overall proteins.
We make coating product, how we're being very tight in China. So despite the deposit so and then if you would think about you know the oh, the feedstock that going to racing chicken and is it takes a lot on.
You know Lisa if you make very tight because you know transportation hub Trust vision.
And international.
Transportation being impacted like okay. So.
They have an impact later on as well so.
As as we have mentioned before.
Of course are genuinely upset you know at least the quarter.
Go ahead of time, so so as you know so I think we'll see how these would have had out but I think overall you know I think we ask for patients is that you know a protein prices in China not chicken.
Okay, and et cetera will remain elevated.
Yeah.
In the near term at this.
We just heard.
So so if we also are looking at Uh huh.
The impact of a holiday shift I think you know first of all I think the coming up is next week, we have no than me.
First labor day or long weekend.
I think if you look at you though.
It is a tricky one way because obviously you know when one upon we have been coop up you know houses well all time and then we want to go out and safety and you also tourist attractions yet on the honest and you know the government also aware of the loss Colgate people.
At this point part not a prefer options.
So you know we do see some cities in China have equal when does that give us schedule for kids household how they peers. So that you know they try to alleviate a congestions cheering for holiday hoping.
So so I think it will be you know interesting to see you know how consumer behavior, you actually going to work out for the long weekends coming up.
But overall I think you know we also it looking into other.
Holiday and kind of shift that would have impacted our business. So if you think about you know school year. This year I have ship quite that so.
The law school, how we open.
I think number so the also announced that they go to shorten the or delay the some lubrication holiday.
So would it have impact our business.
Obviously, historically summer when kids out.
People traveling so that generally is a peak season for us.
So the ship in school holidays may have impacts from though for the summer for us.
Yeah, and it's just for the maintenance holiday on some of what Andy just mentioned the transportation I Hope business was still be trumpeting. The reason is the schools.
Opening up particularly for the younger kids after the May holiday.
So that means that parents and kids and no encouraged to travel outside yes sitting.
Before that before the suicide. It so so I'll try to place transportation hub business in the train station.
I would likely to continue to suffer a little bit even during the and maybe how to think.
Thank you thanks, so that thanks.
Our next so second question is from Sarah Cynical Bernstein. Please ask your question Sarah.
Hi, Thank you I wanted to step away from the current environment and just asking about the portfolio you're building you Lovaza now and then coffee enjoy the recent acquisition of Hong Kong, sorry, if I better that increase equity stake and I think in investing so just.
How should we think about these acquisitions in terms of contribution to growth over time, because I think historically some of your smaller concepts have not performed as well as cap see breathing pizza hut and maybe just a trade off between making these investments now add suspending your share buyback you as we think about how you're allocating capital.
Thank you.
Yeah. So.
Thank you Sarah I will try to address your question.
So in terms of nodes. Our overall brand portfolio. For example, so you can think of it is tough to remain cooking for US right. We have to Weston food, which is currently.
KFC Pizza hut.
And Taco Bell.
And you know and our announcement.
Accurate investment so Joe.
FSI use to strengthen our control so.
So just kept the was a joint venture.
We are able to negotiate.
It really turned for us for the show sections. So so is so we took that shouldn't be too.
Okay.
Uh Huh control of.
The JV.
And I think over time, it would be incremental to our operation Okay.
So and and I thing going forward and we'll also look into other potential opportunity obviously to continue to grow our list includes a portfolio.
The recall right.
Now if we look at you know no the once youre acquisitions.
That is set up a couple of memory to our existing leadership operation. So.
You know how Chinese casino.
And as we've mentioned, it's important to gain market share of summit.
Hi, guys consumer or Chinese food remain launches caution.
Restaurant business.
So we like to income expertise in that area.
Fair launch and foreign markets.
So so if you think about investments.
Well once you are are which is slightly less than 200 million dollar nothing.
As a good investments in term of leveraging our existing infrastructure scaled that franchise business.
And I think long way would help us to view expertise in trying to squeeze in products and services.
So in part being put in your long term growth trunk for okay.
I don't coffee I think.
Coffee is mostly a organic initiatives so.
The.
Okay coffee is sort of a sub brand within KFC and we'll grow out that no across our restaurants have invested successful. So right. So we have so I think so follow 100.
It.
On the 37, Bill and couple of coffee, so, making us one of the largest coffee seller in China.
And soon Jason Jays, a a concept that we launched a little bit more than a year ago to almost two years now.
This view into developing phase, while it's not possible, though and you should not expect using a new brand to be possible in the first year or two.
No we havent disciplines. So if you have look at no our store number.
New given number we have been extremely disciplined on our concept is always know I'll try and experiments.
With the with the product offering with effect from.
On the up to stall out once we have a winning formula and we would scale it up.
Weekly.
Given our capability in doing saw and and building out infrastructure.
I think that would be.
Good.
First thing is finding the right products the way mix.
Model so for the full force injured no Lovaza lessees.
As a joint venture we have set up.
This is a wonderful Brian a wonderful coffee.
Brent globally.
And you know thing right now we have one flagship store.
I'll just try venture and you have been pretty well, we Steve I think our us like soft launch right and.
And.
And we will continue to a two to development do about that that pilot.
So.
In terms of our capital allocation strategy.
We number one party for us as we always mentioned organic growth.
So we'll continue to invest in store opening remodeling of I'll start.
And then you know and it's important to cooking to invest in those solve this growth initiative.
Hi, coffee like Chinese casino.
[noise] and and you know.
Yes.
Oh look at the.
The felt one is obviously, we're very committed to no return.
Excessive cash to our shareholder.
Over the past you know a couple years, we have we also obviously we have a share repurchase program. It was like $1.5 billion.
We we see you we have repurchased almost 800 million plus of our Oh sure.
We do have above 600 million dollar aim to Poland I think once you know the.
Situations.
Stabilize and become clear and we would.
Thank you that's no commitment through without excessive cash to shareholders, but when we do so as appropriate and put them.
During this time of prices are you in time of.
Uncertainty I think.
We have proven that a strong balance sheet is extremely important, especially for a restaurant operator.
So so that number on quality for us to make sure you know that we'd have to sponsor has two main kingdom operations to deal with any contingency that may have arrived.
And then continue to invest you know for our long term growth opportunity right. So that's how Harvey I Hope I Trust your question Sarah.
Yes. Thank you.
Our next question is from Christine Tang from GBS. Please ask the question Christine.
Oh. Thank you I think most of the question I have have already be attracts a battery management, but if I could ask or the last question I hopped towards Joey So given all the.
Challenge you are seeing in the restaurant industry doing to coordinate key.
Session to giving on weekends during this crisis or should we expect team, but even higher than 20, Nike all extension pace.
As he is looking into 2020 why he can solve the store opening etcetera. Thank you.
Thank you Christine.
You know you're familiar with our business and we always done emphasize that we we.
We also have a rough.
Got it ends of the number and you saw but we don't we give it as a set up but I get to the business.
We we make the stole opening position from bottom up perspective. So if we can find enough stall that meets all a financial assessment.
And the Grove assessment, well open the so.
Because.
You know financially will put enough we have the capital, but if this store so that's not pass the test with all.
So it Doesnt, therefore is very difficult to two to sort of had very very specific targets.
But if we if we see the opportunity of course will well ticket, but we never really.
Push out seem to chase after the target I mean.
It is always good to has had a bit more certainty.
Huh.
We have been doing that because we emphasis.
On the quantity of there's still more than the quantities, so and for US the quality of this still it's not something that we come from mine. So I guess, so short answer if it's possible if we find the opportunity, but if we do know find opportunity we won't.
For themselves will push our team to do it.
Right now this is Andy I want to emphasize that no for you and though we bill why set up a store opening target each year, but that you just you know sort of late guidelines.
How about seem to April we have an internal if it doesn't cost us to make sure that.
So that we opened financially viable.
Project.
So I was quite good that team.
You have another very good job over the past two years opening stores.
And as you can see from a financial performance notice. So a very good payback. So if you looked at KFC.
No.
It's roughly.
To live with one or two years.
And then if you look at the house is about three to four year. So very good by industry standard and we'll try to maintain that.
For as well so.
So you mentioned if they have a fight good targets, we are encouraged them to exceed whatever number but if you, though the though cenveo headed for himself to too to get to that.
Thank you Christine.
Okay.
Okay.
As a couple of questions I'll like to hand, the call back two speakers. Please go ahead. Thank you.
Thanks for joining the call today, we look forward to speaking with you on the next earnings call that concludes today's call. Thank you and have a good day. Thank you very much say give arranging.
Ladies and gentlemen, you may or disconnects and goodbye. Thank you.
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