Q2 2020 Yum China Holdings Inc Earnings Call
Ladies and gentlemen, thank you Ms. Danny.
To the Yum, China, Twentytwenty second quarter earnings Conference call.
Participants are in listen only mode.
Following the presentation, there will be a question and answer session to ask a question today, you just need to press star one on your telephone.
But I would now hand, the conference to your first speaker today. Thank you and please go ahead.
Thank you operator, Hello, everyone and thank you for joining me I'm trying to second quarter 2020 earnings conference call joining us on todays call our field Mr., we've locked in our CFO Mr. India.
Well, we get started I like to remind you an hour oneq <unk> investor presentation contains forward looking statement, which are subject to future events and uncertainty I read results my much deeper maturity from these forward looking statement.
All forward looking statements should be considered in conjunction with upholstery steaming our earnings release, and the risk factors, including our funny, but that's easy.
Well also includes certain non-GAAP financial measures you should carefully considered the comparable GAAP measures reconciliation of non-GAAP and ethanizer, including our earnings release.
Today's call Incruse reception for Julie will provide an update regarding recent development then she will offer some highlights around the quarterly result.
And he will then cover the financial results and provide an update on her for you.
Finally, we'll open the call to crushing you can find a lot, possibly school and upon my presentation, which content operational and financial information for the <unk>. Our IR website, no I would like to turn the call over to meet Joey Wat CEO of Yum, China Julie.
Thank you Debbie.
Hello, everyone and thank you for joining us today.
I will update you on cobot to vitamins and Dan will move onto a cover performance in more detail.
Well the codependent damage, we have been committed to safely providing good food great value and convenient for customers.
Whatever deal.
Safety is the key what here.
It all stores temperature Chet faith massive and frequent did in Michigan and cleaning protocols remain in place.
A saving healthy environment creates confidence for customers and employees, which helped drive recovery in our business.
We approached that challenge with no within open line.
With flexibility beat and courage to try new things.
Nimble marketing and able to buy all digital infrastructure.
Okay driving improvement, both almost korbren compared to the first quarter.
Yes, he launched I won't get one weekend in June for the first time for men good.
Pizza hut Tropic with its Bose.
As Oh, you can't eat promotion.
Featuring stake in fake crayfish.
We focus our resources, both engaging with them but.
Targeting.
Oh specific older and promotion.
Privilege programs drive frequency span and cross sells.
However, we are still experiencing significant headwinds.
The recovery path, it's more lenient and uneven.
April and May sales improved sequentially, well June was impacted by delays school holidays and stringent so so distancing due to resurging regional inspection.
Oh transportation tourist locations continue to experience significant yeah, a year volume decline.
Which impacts can't see more thing pizza hut.
Around 60 about Dorothy Hi, and loss in China remain.
It was for the time being.
Even with little to no certainty, we are enthusiastic about long term prospects.
In the incredibly challenging environment.
We celebrate three important achievement.
But we opened our 10000th store in July.
This is truly incredible achievement that would not have been possible without exceptional employees.
We are seizing this opportunity to expand our footprint.
Second Pizza Hut has now been saying all a Chinese consumers for 30 years.
Beginning June we kicked off outlets that if anyone should be celebration without O'neill menu and all you can't eat promotion, we saw long queues and new customers.
We're now at pro Foodservice sponsor of the 2022 Olympic and Paralympic wouldn't have games in Beijing.
We're honored to what was the Olympic Committee to promote Olympic but it was an excellent respect and friendship here in China to 'em millions of members and customers.
These achievements show how young China has become deeply ingrained in our lives and memories millions of Chinese people.
The first pays I'll catch the 1987 in Beijing to trying something new at Pizza Hut, we're proud to be the largest is still growing restaurant company in China.
Well the combined asphalt although team would continue sales recovery and importantly remained profitable in this quarter.
Its profitability is a reflection of of the Cillian Oh at that the ability and the strong dedicated execution although team.
As we entered the so quota I look forward to continuing our innovation journey.
We are cautiously optimistic.
The reason regional outbreaks highlight that the recovery is known me uneven.
Well this summer season will be challenging I'm grateful to be leading a dedicated team and sure that we're building a strong and stronger Yum China.
So let's talk about digital strategy benefit overall digital strategy, what particularly evident over the past few months.
I'd like to take some time to talk about how amend the program and digital ecosystem has built our Brazilian fulfil the short and long term.
Oh, the 265 million members rely a strong base full engagement, we interact with members within that digital ecosystem supported by up to put up strategic partnership with online platform and install digitization.
Well, they're letting all customers know about our content less delivery model or promoting weekend specific office, we leach members faster.
With greater flexibility and at lower cost.
Member sales accounted for over 60, but then in the second quarter.
While overall sales decline during the outbreak.
Our year on year member sales grew by double digits.
We acquired new members <unk> innovative ways, using social media ABS and website, we convert online travel into install so.
We also engaged at the corporate level.
The 10000 Corporation have signed out to our corporate delivery program, bringing entirely new groups of customer through Yum China.
Once members that quiet, we are able to these I'm more talcott pet promotions, we improved the stickiness of amend the and they use also put Apple Muni program.
Eventually upsetting members into ups with each program, we have so close to 10 million privileged wishes this year.
Frequency and spending of these loyal users is more than double pre subscription levels.
Overall, we doubled the average revenue per active members over the past few years.
Our members increasingly loyal to our brands.
Engagement is crucial for a member retention over.
Well the use of consumer insight, we have the bulk of what we don't game marathon clubs.
Even one of the largest online shoot 'em bookstore and allocate C S.
Well, that's the sold some promotions.
Long term member engagement, all digital strategy extends across brands and channels.
From dying delivery to pick away.
With this solid digital foundation, we are well positioned to capture future growth opportunities.
Oh premise dining remains a key put enough growth.
Delivery sales at content, well 29 has now selling a quota.
36, nothing year on year cool.
Oh, the luxury business is top of mind with all consumer.
It's consistency IRET, Heidi intake convenience and value.
Our dedicated delivery riders once more support role during this time.
At Pizza hut digital engagement drove incremental take away growth.
With me designed a menu and packaging suitable for take away, we use all digital channels to communicate a value and convenient about one person's that Neil.
Oh, the hop off or take away orders what done through a mobile.
I'm profile achievements, so far but that's much more we had targeting from ready to cool corporate and late night deliveries, we have to scale the resources and the vision to capture those future opportunity.
Oh, let's move on the menu innovation and that a promotion.
Oh digital initiatives rely on and and tightening innovative menu to get pessimistic side.
Pizza hut launch as Neil Clifton No menu.
In conjunction with its Thirtyth anniversary celebration people.
Learning from successful limited time offer.
This menu is substantially fresher, extending our appeal to young and family oriented customer.
We showcased a pizza innovation without pizza S series or sweeping de Healy I.
I think crust pizza to appeal to smaller appetite.
We extend our leadership in the state category with a Angus steak and quantity mystic available what they look like.
When they have to know he said.
With virtual reality effect of money paintings and select stores.
That appeal to our young social media savvy customers.
Many menu item also got an eye upgrade.
Bake crayfish what she's.
Hi, Mark on value and I Lasagna was appreciate it by young and Oh a lot.
I'm really excited about all the inhalation email thirtyth anniversary menu.
The look and feel show a piece the Oh piece of positioning which is always something you. So I hope you would try it soon.
Yes, he brought that favorites, each rep and Taco junior during the quarter with crayfish into Taco to showcase abundance and premium.
We send that range.
Good.
And they like the livery line.
Oh breakfast toll put in which it seems yeah well wait so.
Quickly became a crowd favorite and we showcased festival innovation with exciting products, such as Scott Upsell T. H Youre right something like Chinese that's done bake in Taiwan, Bob I'll soon.
The tries try they can't see also launched body campaign throughout the quarter.
Ups on based poaching pilot was successful.
Introduce across KFC Pizza hut, and Taco Bell they sold out quickly.
On the domestic production maybe scaled.
It has potential to bring how bren tuniu and deciding 'cause it comes from us.
Now let me a the up with a few brand specific observation.
So I can't see 'cause it continued to demonstrate is resilient and operational excellence.
Second quarter transaction substantially improved compared to the first quarter.
Compared to the rest of the portfolio CFC has a higher concentration of stores located in transportation tourists.
And they are impacted by the time to <unk> business and the day travel.
He laid and short term school holidays.
Together with lingering effects all the upgrade on consumer behavior will continue to pressure so.
We will work on providing value allocation to draw customers in the recovery is likely to take an extended period of time.
He's.
Oh, Thirtyth anniversary or you can he campaign went viral.
With all the 80 million to use any comments on social media driving long queues and also.
We have seen encouraging signs of transaction recovery, however that the laid and short term to summer holidays will impact our business as well.
We will shrink been Oh earnings for individuals unfold ILUVIEN take away what family dining volumes recover.
Third Taco Bell has now expanded beyond Shanghai.
Open up unless you still incident, and we'll be opening so im thinking.
We are excited to bring this new kids seem to love China.
And we're working hard to create an appropriate business model just right for Chinese customers.
Finally integration, although Chinese dining unit is on track.
Oh little sheep on coupon store, so a recovering and we are leveraging the young see network in areas of the luxury retail logistics to philadelphians sequence capabilities.
With that I'll handle the coal plus sample ending young Andy.
Hello, everyone.
The trucks financials and development in different important.
Well why some color on Oh.
Unless otherwise figures mentioned, we've heard through the second quarter of 20 Twond.
All percentage changes.
Before the effects of foreign exchange.
Now, let me start with the second quarter results.
With over 99% off the open.
You welcome you, we copper to 93%.
Yes.
The first quarter revenues were 79% argue level.
Oh, okay.
I'll hold Brian <unk>.
<unk>.
Actually going however, tropic his view.
Levels.
Jeff These same store sales, we cover 90% power.
Compared to 89% for sports.
We saw sequential increases in every.
Unit volumes in April amid.
Today, we did you.
Well, we said, we'd date and die he would comfortably benefited from our motion or something.
No differences <unk>.
Oh transportation a too so.
Which accounted for high single digit sales mix.
With steel significantly negative.
The high mix of younger school age customers meant that the delay shortened school, how they have a big impact on KFC and pizza.
Lingering effects of the outbreak on consumer behavior, you mean.
[music].
It seems so those would cover 80% are yours.
Nothing improvement from the fiscal quarters.
Border.
Weve said when sales were 69% of five years.
Welcome to KFC Pizza hut, that's a significantly lower exposure.
How many patients.
Oh, so in low TCT continued to perform better than store hike usage.
Partly driven by higher concentration of talk [laughter], [noise] and truth location in height usage.
Oh Stone brand equity also help walk you before new boat usage.
So the recovery is non union.
And even.
So you mentioned.
Mental was slow Ida surgeons, so usually functions delayed shorten summer holidays and come to you and your mix. So.
Maybe just compensation through its location.
We opened 269 stores.
I can't speak.
Construction, a 50, mostly normalized.
Based on the new views you on truck.
Especial margin was 13.7 per cent compared to 14.7% last year.
Many due to so leverages, which was partially offset by.
Click to call and what often.
Total sales was 32.9.
A 1.4% year over year.
Well coating supply.
Second quarter how contracts.
Generally fine three to six month November.
Commodity inflation.
At quarter three.
Multiple promotions are key to drive.
Traffic into our model, which will also impact on margins.
Cost of Labor was 22.7 cents.
<unk>, 0.7% decrease.
Well look to the improvement in temp <unk> more than offset the impact of those leveraging <unk>.
We can just bigger.
Switching patient was 3%.
Just one used in many of our markets as government mandated increases.
<unk> would be for.
And increased <unk> proportions of delivery sales contributed to higher labor costs percentages.
These factors were mitigated by <unk> and cost management real time monitoring.
Driving improvements in productivity.
Lockwood.
Options and so the insurance payments were roughly.
No.
We negotiate at approximately $10 million less who leave this quarter.
We implement cost realigning measures.
For the reduce shows insurance payment.
However, due to timing of government incentive.
Just a cost increased by 8%.
Excluding the impact.
Of timing shift of government and all the onetime expenses.
Hey would have decreased slightly year over year.
We recorded impairment charges of $24 million.
We are chief operating officer, <unk> hundred $28 million boasted by cost realignment and one time do we.
Looking below the line Oh Gingell equity investment made one was $45 million, which is before $40 million you impacts we are two games with nine during the second quarter implied here.
Oh, you're Lucky factory was 25.2%.
Net income $132 million.
Yes.
Uh huh.
Yes.
35 cents.
No I would onto our outlook for 2020.
The situation you walking.
However, we see ones, probably an innovation our key strength that's we.
Navigate.
Oh look is based on certain key realities, one facilitation of two as volumes looking to be anemic.
<unk>.
The delay and children school holidays impact sales momentum.
Three cubic situation is unpredictable with lingering effects, we show over it.
We expect the recovery to remain non linear.
Even.
Paul So do you envision will continue to pressure margins.
Especially a onetime guffman rental leave a pizza.
In response to these reality, we need to be patient and vigilant and reducing hours that was momentum.
What was going on I was trained in menu and digital innovation.
Successfully leveraging our member base.
The ecosystem to drive frequency and spend will be cheap.
Okay motion a comfortable.
We have.
Some successes during weekend recovery.
The value offer.
Lastly, we are taking decisive actions to realign our cost structure.
As we look ahead, we called into target 800, <unk> could be useful for this year.
Investment in digital technology supply chain continues.
Our 2020 Capex plan is unchanged in the range of $500 million to $550 million.
We expect wage inflation, you stay up mid single digits just yet.
Minimum wage increases have been delayed many public.
Finally, well potent supply in China peas appears to be losing.
Our best estimate of 2020 commodity inflation is for low single digits.
Bruce to a global supply chain remain which may have potential locations throughout domestically. So.
[laughter] peacefully and now we will increase uptick you Tsujino KFC joint venture.
The transaction is expected to close in August subject to satisfaction of closing conditions.
We see the new Dalmo have reduced travel she was about 50000 disruption a secondary regional outbreaks will occur and or something.
Lingering you FICA koby will impact consumer behavior.
That being said.
Without vishal infrastructure solid execution and strong balance sheet, we are prepared to capture opportunities for recovery.
With that I will pass you back Sabby Dystopic unit.
Thanks, Andy well now open the call for Q Preston.
In order to Steve as many people as hospitals, a chance snacks crashes. Please limit your questions. One at a time operator piece now the Q in Asia.
Okay. So.
And again, we'll begin that Q and I session.
We should ask a question again, you can just press star one on your telephone keypad and just what's your name to be incomes.
But your first question comes from Ching Lu from Bank of America. Please ask your question Jim.
[noise].
I noticed thought we highlight a few weeks and challenges throughout the conference call I also easy.
Last month, we also mentioned dog or how does it continue to impact coffee races into lot [laughter] correct, you're up to the telco people more color Oh, we compare the two life woman's please to.
Our leasing and sequential improvement I just know jure you also mentioned Doug the summer season is likely to be challenges and Oh, we have any rough idea as to the Quinn in Q3 versus Q2 cents.
Hi, Jeff.
Let me take his question first and then maybe two reasons.
I'll leave it in.
In some of the sequential.
Improvements.
As of June and you know as we mentioned before you know on our prepared remarks, Oh right. Now you know there's couple happens every seat. So we have seen the transportation hub.
As well as you know the tourist locations.
You know, which got council high single digit Oh no smics.
Being impact us quite significantly.
Of the Qubic defect.
No doubt.
So so I think you know unless you know that's an Afghan changes in situations that we want.
We bought.
No. We also mentioned that knows trucking and the latest school holidays, which we should hobby lobby impact on KFC compared to.
As you know normally in China School holidays, a solid.
Generally you know you would be in June.
This year because of course situation.
A few mid to late July.
What location in deposits and whatnot.
So I think we do have something on that in July for the full quota. We also this year without a holiday shifts falls. So we saw me.
Oh, right, which last year, but seems like number this year is going to be in.
Okay.
So that's also a hobby should impact right so that would cause.
Yeah.
With that that kind of shift.
So so those are we mean you know some of these and then of course you know in June we have peace outbreak in Beijing.
Also impacted so not just in Beijing, but the surrounding provinces.
So.
I have to a situation has improved significantly in in Beijing. However, we do see other other regional Opex for example in building right.
And also a infringe on so we do expect that kind of Oh potential you know we didn't outbreak, which we said you know the either the Ur cobot knocking.
A a vaccine all you talked a treatment I think it was still coming to see potentially.
Regional.
Obviously you know.
This summer got lot ring here.
Uh huh.
China, even farther.
Along the entire Yancey wherever I think you know a lot provinces have flooding.
Thing is quite a weird compared to build the past few years.
So so we do expect that that would have some impact on our even population, which I'll show base. So it'll be sure right. So so I think we still see pretty pretty strong I mean, you know some of his oh difficulties no interest.
No. However, as we mentioned, we we have a very strong digital Oh I phone.
And we have strong very strong execution, including all logistics operation, which continued to what well you know even in itself the funding situation.
The region. So so we would you know Nick our efforts to one Oh the seats you too to drive sales recovery and then also continued to be vigilance on our cost front as well. So we make some you know cost alignment as we have mentioned on our prepared remark and.
We've got.
That is true up quite well so if you look at our labor productivity for the quarter.
Oh.
You look out you know our gen eight right. So excluding all this one times and timing issues, we actually see no gently decline.
Which is quite significant and given the fact that no we normally without no.
Merit increase a wage increase and new high so so that's definitely.
My comments will be addressed your question.
Thank you Andy I guess, the listen a in the last earning release, we mentioned the challenge in transportation hub and tourist location and the summer holiday he laid and shorten and the delay children to we think doing to we think Tonight and for this earning release no because you know automation divisional resurgence of the Cook.
At Nike and Oh.
No so little something challenges in different parts of China. So I think we're ready for next question.
Thank you.
Certainly your next question comes from Lilly and Lu from Morgan Stanley. Please ask your question.
Thank you I have a follow up question on the same store sales gross obviously I think a pizza hut did very well actually better than sought to in second quarter.
Well I think Joe you also mentioned they end up in opening remark that can see what's more affected just wanted to understand a little bit mine Tito in terms of what the impact you. There's two major about nurse recovery pace, why it's a little bit different right not under the hot wings and relate to.
That is more than Oh look how weak on the picture KFC and Pizza hut seems saw sales gross recovery pace a in second quarter, all the fourth quarter. Thank you.
Thank you Lillian full floor, KFC and pizza hut flow as I mentioned that in my.
Presentation earlier I'm proud of both of the progress.
It's Q2 has been difficult, but both Brent Ah fit well in Dallas different way and the me.
Make few comments one at a time can't see reached two.
To 89% same store sale within quarter, one which is very very quick supported by few we saw strong said before Chinese new year and also very few trust restaurant opened during the <unk> and that kind of so Pepsi respond very quickly and pizza hut because of the.
Coaching dilute business in many of our store during Q1, so south so small impact that no. One is does the dining business was a loud during Q2 or the dining business small piece I had a bond that quite quickly and as I can it's I can share with you that the.
It's a pizza hut signing business recover 40% to 55% during during the two too so that that helps in terms of it himself the recovery path and our little.
For both two and that will they come down to.
The theme that we talk about the resilience that that the ability and innovation and to visit specific I'm going to talk about short and long term.
So well the shelf initiative, which something to wed been doing from the very beginning all of Q1 and that's about Q2 is value.
A lot of that value promotion, because we see that as a challenge and or the opportunity and as I mentioned in the last earning release the weekend or was it was challenge and stuff in the in in the two to.
Line, we have shift a promotion to work more weekends and holidays and we're seeing the result.
And then second is initiative, which is something that we had been doing.
I have been doing quite well as menu innovation I'm talking about the Prada inhalation. So for KFC, a we have we have the exciting those are the Ah Ah. That's all gets rather than both had total insured and we have that don't class, which is a very very popular item.
An M. Pesa have we have something exciting to rose six rise and and crayfish pasta ample people you know Hans we we even launch look I met with with Crazy.
With pastor it was sold out very well in Uh huh.
So these are the short term initiative that we have been pushing and then.
On top of that we're also taking this year as the chart installs opportunity to work on our short and long term business model transformation. So that innovation here. Let me give you. Some example, so for more can see Oh, we have been working very hard to too.
Then I'll business to B to B to C, which is the cooperation delivery members.
We have seen could preparing for it.
And the Cobot 19 gave us took the opportunity to give a push so by now we have signed up.
More than 10000 companies in our corporate delivery membership.
And you can see the impact of on lumber in in T.A., increasing both.
Q1 and Q2.
Quarter, one can see ki ay increases 20% to 27%.
Q2 is 12% so as not only dry threatened by delivery is also driven by delivering very big or not to mention it gave us a lot of it so.
So first off topic.
Ooh, Yeah on Taobao, Oh, Oh Taobao App.
So that is that short term added on tense and now of course I can tell us delivery that it's very popular throughout the world right now for Pizza Hut, all hot work and in in many fundamental kept the bed at eight Oh come through so so we've been working very hard on digital approach.
[laughter] and guess, what we get our mobile ordering before Chinese new year within don't know that come at Nike was coming.
And then cobot 19 came it became a very good pep long for take away and mobile order.
So so our mobile alter our digital although just just increased significantly and pizza hut alone. So digital older for Q2 is 61% and that compared to like she has 29%. It's almost double so again the biggest mode on trunk form.
And from a pizza hut, when we add to take away business, which is very very good alert, it's very much incremental because it's for one person together with delivery the no onsite business.
Become more than 40% of up isn't it.
So we become less of it.
Reliant on dine business. So that is example, both <unk> long term a transformation and then I would like to mention the members a we have.
Reached 268 million members and the members our digital asset to allow us cross out between the brands and between the fitness within the Brent to increase frequency and cross sell as I mentioned in my presentation area Oh, Yeah, we saw the doubling of.
Average Avenue.
As to use the and that's very exciting in the past years and for the coming through yet and last but not at least as Andy.
No. It earlier, we are accelerating our digitization to help cost realignment as well and all these are very long term oh, social to last but not Neil but not a lot lease is on your bills and still refresh so not only we recovering cells we up.
We have in the late in our business model, we are saying Oh long term prospects in China, because despite the short term targets. Yeah. We are committed to China and we are very excited about the future opportunity here. Thank you Linda.
Thanks, a lot Joey.
Okay. We have a next question from Midship, Michelle King Goldman Sachs. Please ask your question Michelle.
Hi, Joe Yandi, a question about piece I hopped on the second quarter improvement ice class I encourage you know you mentioned, we are pushing these I take away one person <unk>. So I'm scale. We that's why are we going to hold cause he second half and given these kind of like a shelf mix change so like I was going to.
She likes on downsizing of the store or some store format going forward. Thank you.
Thank you Michelle.
For the for the revised I think show a piece I I stay away from the turnaround because piece that was never so bad that need to kinda. It has always you know very comfortable business.
But before that we like what I think all pizza hut, we always have a very clear step.
If I step a progress as good things do take time.
A in the last few years a it took about 18 months to come on the same store sales from negative to positive. We just know so but let's look at what are the key things that we have signed a lot here one is up all the value for money.
And the quality of the product.
So by by last year, we managed to to upgrade more than 70% of the menu and by this year. When we launched this study yeah second menu. We we saw the upgrade to the menu. So that is being woody good progress and the momentum will continue because Chinese.
And my best Wong and require good with great value for money.
So and then well the other thing. So we have thought we have we have picked up time to rebuild our fixed at delivery infrastructure. So that's the hot level of 2018, we took that delivery ride the that to our system, we read though that to improve the quality of delivery without a quantity of deliveries.
It's not ensuring pizza with retail customer lies a wall is very hard to grow the south.
So with that the hot weather and you can see the impact of that deliver business growth in 2019.
Not in the last two to three years, we also take the picked up tick a chance to refill.
Digital infrastructure.
Anywhere from Memphis out too much about up to digital or the rank.
Your name and right now that the tries Asia. So now we have seen the increase all the pre order a digital order that all helped save our labor costs also the business on a to build the business on pick away that.
That come through but it does take time.
With these infrastructure in place not to mention we have oh the away our team down a lot of people might yeah into into in the brand. The last few years and I'm quite happy with a team right. Now I think we have a fantastic team who are focused <unk> innovative who work.
Okay he well.
And what else are we doing two built the business seemed to show a long time as you mentioned Michel the new Pos still refresh I we have.
We have focused on store refresh in the last two quota is our bidding you'll still actually it will look at the last three yes, we had been very concept, but with building the new so until we get to the write business model. However, we have not seen so to upgrade our stores since 2017, we have refreshed.
About half of the entire pizza hut <unk> portfolio in the process as you can imagine we reduced the store size, we upgrade the still look and feel we improve the efficiency and will continue at that we'll continue that kicked aggressive paid to refresh our thought at the same time, well we have repealing the the newest.
You you will be able to see the total portfolio, probably won't move that much but that content component within the portfolio would change from set up because stalled who saw smallest though because even for the news, though that we read bell in a lot to quarter. The majority of them a much smaller so which is.
That's a nice though that I introduced to and that stuff back to last year at Investor day, much smaller much better return, albeit less than that much more suitable to increase its density of their store could improve the quality of delivery.
So before the few things that we are working on and last but not leased to the cost realignment. This is no no short term I mean any anyone can do the short term cost cuts, but what we're looking for is the long term cost realignment. So that we are learning enough from this.
A challenge and also taking advantage of the open mine a situation open my opportunity for our staff. During this difficult time to really we think about our cost structure. So that we can benefit from the realignment cost structure in a very long term thinking Michelle.
Thank you joining.
Your next question comes from a lot of Kevin <unk> from JP Morgan. Please ask your Kevin.
Thank you drew you already have two questions. The first one for a technical question for Andy.
Can you help us to understand why the fall pre teen leveraging pick on the Pizza hut is.
No that bad as a cafs because if you look at the first quarter that can quote.
Our margin restaurant margins pretty stable versus KFC is continue declining so [noise], thus as a technical with second one.
To know more along the impact from the flood.
Can you give the sum of vivid example, or maybe the case that like could you give some regional province.
So badly.
Uh huh.
The sell at the store sales negatively impact I mean, you send the specific a region, which we had us I'm a very bad flat and the how bad is the the sale stuff the <unk>. Thank you.
[noise].
Thank you Kevin So let me let me pick your first question deal we called him.
The impact.
KFC and pizza hut and how the difference.
So I think there's a couple of questions about [noise].
You know the performance over to Brian I'm, No I think as we might have mentioned on the call you know.
SSG would your same store growth you know was 10%.
Fine in kept the and Oh choice and Pizza and which is a part of your credit improvement right. So you know in the no because the cases.
Well the fine and then you know more multiple now <unk>.
Ah Ah Ah at Pizza hut, or which node and Oh, you know last quarter or was it a boat 31% right. So that's quite a lot improvement there, but that's still your mouth actually improvement right. So if you look at the both Brent you know because the attitude completion actually.
You know temporary spoke kosher right Oh, and so so you know you know you can pick or you look at you know to solve opening in the second quarter two [noise].
The system sales and comfort actually pretty bad.
So Fred.
And no one of your with your basis, you know you keep coming back to 20% towards some friends from Q2.
So that's what's important and obviously you know we also see April and May improvement a sequential improvement.
In both SSG and also Google themselves.
But he mentions who got impacted you know probably from a you mentioned Oh you in June and so difficult to life. When your stuff that we shouldn't outbreak note in China and done you know this.
Later summer holiday.
And then.
Of course, as you mentioned as flooding.
Sure function into life.
There are lots loss trend.
So so I think I think that's pretty Christmas going in and as mentioned you know there obviously you know.
Jeff do you have a very strong free.
Because there.
The people over it no pizza hut.
The first quarter more impacted and therefore, you losses be better.
Right, but opened actually we have people say well into operation.
True up the margins as well so I think if you look at the margin on both at both brands.
And everything you know Pcs. So hopefully we can he read a case.
So he leveraging.
I'm going to eat we move forward coming quarter, but obviously KFC have.
Where possible before right you know the use of module was about you know.
17.
To present, a and then you know it's just so wherever you would have little bit more on that I think he will lead. The reason is because if you look which will stay in house, which is a <unk>.
Hey accounted for the high single digit sales, but also a trail for low double digit.
And in you know that impacting that so I was trying to hold reinforces our interest location I would have a disproportionate impact.
On a gift to compare.
But I think you know if you look right way before the two People's control will help us to see sequential.
Let me I'm thinking <unk> make to comment about the flooding.
This year, we do have a lot of water I mean, the water volume is compared with comparable to 1998.
Ah. The intent is is nothing like 19 that it let me give you a big picture and then I'll go through why.
The big picture as the lower tier cities says actually come the better than that off the top tier cities.
And and and that includes the to regions that would have more impact, but nothing at that namely like a junkie and pod own area, but mainly in the lower tier cities.
Well why why the the sounds a low tier cities hold up still hold up slightly better despite the funding.
Because oh, yeah. There five reasons one is a lot of these are lower tier city and that means we only.
Have.
Some some talk it will still be impacted not he is scale. So so what are some stores a impact that that is not at the still oh tier one cities. So we can handle that I know a challenge, but also due to this at the leaving is our still tend to recover much faster than outcomes.
Habitat.
So so so one example is the one little ton of the ER. The guest I'll turn now by the city government and Pat.
But actually that means more business to our store because I was still use electricity not gets so when well know cousin of could not have who who they come to Cassie. They could have hope what they are not to mention we always have three charter free all foam and athlete seawater if needed.
[laughter] reason is it the let go constipation and tourist hubs in the small time city a into small time, the today show hub and and and the tourist help as much as he mentioned it is.
Almost at to get a high single digit almost double digit about sell them when its severely impact to it that input over a number but the small time, usually either so there's still a lot less impact like that and for leasing is we have one off the field Trust Brent.
In the north yesterday, so during the difficult time, we actually they benefit from it last but not least delivery growth actually even is even higher in the lower tier cities and top tier city. So I hope that give you a a better color off the dynamic or the.
Okay City. Despite the fact, they try to engine. Thank you Kevin.
Thank you.
[noise]. Your next question comes from and link from Jefferies. Please ask your question Dan.
Hello management team. Thank you very much for taking my call, but my question and so I have a question regarding the this one else Anda said and you mentioned about that you're not just like 2 million a in second quarter on the social insurance payment and also that you know tenure at 10 million a rental elite.
If we look at late yesterday.
Ah.
Starbucks resells.
And about let you know some ricci extension, which we saw the announcement back in February that or the catering business and lodging business will have this tax reduction that helps to DAP and that helped that same so south as well as that profitability I'm. Just wondering just wonder like you know whether well done.
I enjoy any sort of this kind of like you know I'm <unk> exemption benefits and and since this benefit will launch. So December may I know you know how soon we will be able to get this kind of sandoz's, what articles agents on display and set any additional a onetime.
And it says you know and this quarter and and in the foreseeable future. Thank you.
Oh.
Hi, and I will answer your question. So I can you hear Oh, yes, yes.
Okay. So so think of a question it'll be he and his impact a little bit more complicated you know, there's obviously, a we're aware and have look into you know there'll be AG Oh reductions you know temporary suspension of that other governments.
The beginning of the year and and you know generally you'll be ti that no we collect.
Oh sales are easy to use genuinely left less then I'll give you credits for our company services for the input cost. So that's offsetting factors why so your hobby so as to the consumer and we have also use oh products and services and that's all fits all settings. So after you know very careful analysis.
No we have gone.
No. We we don't see you know there's meaningful impact on our top line or bottom line from to be assumption that the company at launch.
Obviously, we'll continue to look into it because you know Texas.
South is a very calm complex issues.
But what we've gone through BHP.
Hi, Brad limited.
The impact on our Oh, so for now.
Uh-huh interim up other one times. So we obviously, we see the social insurance payment reduction.
Both from the first quarter in the second quarter, but as you know you know that was because you know the copper launched out in February and then have extended that our future left with some new update that may go away.
Quarter, so unless the government extended program again, so let me see that onetime leads to go away.
No. One is that you know no went who would be we see thought knowing the first quarter, often negotiating Lois or you know demand.
The second quarter compared to the first quarter.
We do expect that's another recovery continues that would also be phased out.
Yes.
So so so I think you know the some of these onetime impact maybe lessons.
At quarter to know who how should we also in the fourth quarter.
And our MB when will we know that the government met my extends the social social insurance payments exemption.
Yes, when Dan Knotts said, there were no [laughter] no.
That's right.
No lapping.
Policy. So yes, we have to the government's you are those.
Okay. Okay.
Your next question comes from a line of Christine paying from yes. Please ask your question Christie.
Oh, Thank you Andy So I just have a question regarding the cost not alignment you mentioned earlier in your presentation. So can you elaborate a as regard to number one what matches you have been taken odd to do this cost alignment and secondly, what's going to be the marching.
Occasion for example in 2021 won the revenue normalize.
You know to the pre a corporate 19 level, especially for Pizza hut I think you.
Okay that Christine. Thank you for your question, Yes. So obviously you know as we.
You know looking to the cost structure and we aligned on August shoes, like no Fox and go for US one obviously you to continue to make our.
Cost structure more more flexible to handle.
No contingency suggests we have seen.
19.
Oh partners that will continue to try to drive.
Our overall closer to more efficiently so that you know.
Yes, So we mentioned taking advantage of.
Current situation, where folks are more aware of the need for better cost control.
And better call Saul realignment to push to no somewhat initiative that would help us to.
Oh, Okay strategy.
Cost structure, a competitive advantage for no longer term.
So so we've got in mind. So we go through sort of like each major category of our cost component now. So if you look at our.
I think something so as you know.
Over the almost Oh wearables.
And ER and but you know you we also focusing on using technologies using innovation notes you sort of HM.
Wastage in a restaurant level manage inventory turns better or so so that can handle fluctuations.
In demand ship picks up it.
In in Labor for example, but as we mentioned before what was fine we have some of the labor component into marriage mall wearable portion.
You know with more flexible crew scheduling et cetera, again, you'll give us some we feel it's easy to handling.
Folks in sales changes.
And then also you know if you look at.
You know, obviously would benefit so little benefit by the lowest from is the labor pool see improvements that we use your technology to drive that will help us the lowest not to maintaining that.
Labor costs, if you get movement that we have seen over the past few quarters. So so we'll continue to focus on dot invest in.
Technology both.
In the soften as well as you know in the back of the kitchens as well Oh offices to make sure that leave with looks if he is going to do.
Now if we don't shoe for example.
You can see and other expenses no we.
Kevin Global components, the part that royalty fees advertising marketing we can.
So it's somewhat tied to too soon.
But if you look at over the past few years for example, we have reduced.
Investment cost you know for for our store opening.
No doubt have a beneficial impact, which is first of all basis depreciation or have between the <unk>. Okay.
Crystal.
Is you know that ran for example.
We have you know 80% of families have food wearable components to it.
You know if you look at a rental.
Cost of FFO, only 60% fixed or so so we have doing some flexibility in our rental expenditure, obviously working very hard to negotiate but at least.
Contract whenever possible. So you know given their current situation.
Oh, you feel that you to ask you mentioned, we have done a very launch initiative looking to generic there have been on going forward not couple years now.
You know.
We continue to see no Oh I thought there. So it's called for travelers mentioned you look excluding one time in timing shift you actually would be which in a expensive declining year over year. So that there would continue to be our focus which is basically we are wide overall cost structure because more flexible.
Welcome passive Lois.
Good.
Okay.
Thank you Andy can I just talked to them.
Sure.
Sorry.
One last question from Yelp her way from Citigroup. Please ask your question shopper.
Hi, Thank you for taking my question heavily cashing on Pizza hut as you can kind of people how to recover actually not only the topline but also the profit improved a lot Q on Q you mentioned other factors. So you should I think it's really short term books, but lets you would literally coal would you have been talking about and everybody My vision.
If you thought it two years shall we say that at the behavior changes of consumer opposed to cool the may actually crude pizza hut better position of revitalization posed.
The Cobiz Oh break because were seeing all their casual dining cleared actually recover much is slower than pizza hut, you might reservations could you give us a color on that.
Hi, careful Ah thank you.
Well, we so to me.
Grateful to cede the covering both topline and Bottomline.
As I mentioned that dynamic company as well.
And the bottom line recovery caused so great thing is because of the south southeast leverage Oh, South it's back so the bottom line definitely better but with that said, they're certainly few things that happen here tool to help us because of better I don't know what the.
Lets say come at 19, as you know give us opportunity or that we just have been pad in the last few years and it just happened.
The timing is no two best for US you know the.
The innovation capability, the food improvements so to need help a lot because oh.
To my knowledge, so innovative and something that I imagine allows any delays we are able to use whatever those ingredient in outdoor to come up with very cost effective and efficient food full that take away business.
One example is did you find the good sake.
Hi, which we use actually our pizza oven to kill just go through like a [laughter]. There's a him they use the pizza oven. It goes live very efficient and and Ah efficiencies of cost structure as well and it worked very well for the took away for the ones that you didn't show once that new and.
And the sample it works and that is not because pull that gave us to do because we'd be looking on the innovation to the ability.
And then secondly that delivery, we have our own Bella Vita when we really need it as you can imagine if we do and if we did not have not deliver rider even if the business is there.
The whether you have or you don't have the delivery rider decide whether you have but they'll have to set up a simple as that.
Because everyone will be fighting for the delivery ride up at some time, such as come at 19 or or rain or snow whatever et cetera, and then that's the is the digital digital Ethel the digital can the bid it infrastructure piece I said I think behind Cassie because they can't.
See whereby they happen much faster it happened as early as 2015, and then piece that's not the later so the infrastructure foils Ah, but once we get the infrastructure that either pre or the the mobile ordering that digital payments et cetera et cetera. It just walk you know.
I'll now take away all the pick away business, just just just happened and that it was aimed at less than 5% of our business last year now is double digit about business and it's quite substantial not to mention on the long lead our long term very strategic focus members.
Ship, a pizza hut itself has has to has a over 80 million members now and the cell phone member.
It's more than 50% and that's the number.
Just imagine 50, but now that said, we can reach out to the toughmet directly at very low cost efficiency and that help us drive the business not the montney outdoor environment is much better because of the hot winter last year. So when I saw a bomb and not much nicer when the food is good and the price is good.
Hey allow us to do some very effective promotion like this one time, all you can't eat for state and crayfish and stay in Crave age we can putting the only thing he money because our supply chain is very efficient. So it all just all the hot work come together, particularly during this difficult time.
And allow us to recover probably inside a bet it and the other casual dining restaurant.
Last but not need if pizza hut does not have high proportion of cellphone transportation interest.
And that is quite a almost mid single digit cells impacting things ourselves or forecasted pizza hut. We don't have the challenge is this something at a time. So you can see why it out how pizza hut revitalization even doing the.
<unk> and we certainly hopeful and right now we have the writing right at the right rather wait fries, we're hopeful for the.
Ongoing revitalization of piece of business as well. Thank you so much helpful.
Thank you Joe.
Healthy please.
Thank you too.
Okay. There are no further questions at this time I'll now hand, the conference back to your presenters for any closing remarks.
Thank you for doing you called today, we look forward to speaking with you next earnings call and that concludes today's call have a great. Thank you.
[noise], everyone and thank you. Thank you.
Ladies and gentlemen that will conclude todays conference call again. Thank you also participating you may now disconnect.
[music].