Q3 2020 Yum China Holdings Inc Earnings Call
And our CFO Mr. MGM before we get started I would like to remind you that our earnings call. An investor presentation contains forward looking statements, which are subject to future events and uncertainties.
Our actual results may differ materially from these forward looking statements.
All forward looking statements should we consider in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC.
This call also includes certain non-GAAP financial measures you should carefully consider the parable GAAP measures reconciliation of the non-GAAP and GAAP measures, including our earnings release.
Todays call includes three sections first Julie will provide an update regarding recent developments then she will offer some highlights around our quarterly results.
Andy will then cover the financial results and provide an update on our full year outlook. Finally, we will open the call to expressions.
You can find the webcast of this call and a Powerpoint presentation, which contains operational and financial information for the quarter. Our IR website now I would like to turn the call over to Miss Julie was CEO of Yum, China Julie.
Thank you Debbie Hello, everyone and thank you for joining us today.
Brett on this challenging period I want to expand our employees our customers our product and our shareholders for your continued trust in Yum China.
Resilience is only proven when tested.
We should enable attached to it.
Following two challenging quarters, we delivered system sales growth for the third quarter.
This is the result of the tireless dedication of our Saab and partners.
Working to safely provide your fluids, great value and convenience for customers across our 10000 plus stores.
Colfax stay true throughout.
Throughout the call that can damage, we hold to our key operating disciplines.
Puts safety employee care and customer focus guide our actions.
In the over 1400 cities, we operate we pro why employment.
Korea progression and a commitment to improving our local communities.
We stay true to our culture of innovation.
Moving on our leadership in digital and delivery all these assets to the VIX billions of Yum China.
We achieved much in 2000 twentys, despite the cobi challenges.
First we opened our 10000th store this quarter, marking a significant milestone.
Secondly, our brands demonstrate the innovation and execution excellence, capturing the shift to off premise finding early.
KFC and pizza hut pioneered content less delivery in late January.
We engage with over 20000 companies regarding corporate delivery tapping into another segment of new customers.
Pizza hut celebrate its thirtyth anniversary by driving menu innovation, improving it ticked away and individuals that alright.
Third we formed a joint venture with Lovaza and open the floor fresh coffee shop in Asia.
We will continue the journey together to explore the China coffee market.
Fourth we completed the acquisition of fund to funds and formed a Chinese finding good news unit to tap the massive Chinese cuisine market opportunities.
Last but not me.
Were listed on the Hong Kong Exchange in September becoming the first Stella incorporated company to list on both NYSE and Hong Kong Exchange.
This listing in one of the most vibrant trading market in Asia bring in that the closer to our consumers and partners.
At the same time, we maintain our strong corporate governance and discipline.
The I'm trying to have the future, we'll have a much larger footprint across China.
So we'll remain you all freshly remodeled.
We will continue to serve innovative food across day parts and locations.
Folio, Brent fields organically and through a disciplined M&A process.
We'll talk at strong growth segments.
This will be supported by key infrastructure.
In supply chain logistics or digital marketing.
We are committed to investing in the future.
A future Mako leadership, and able to buy grogan stores globally in our portfolio and growth in digital and membership capabilities.
Let me elaborate on each of these growth initiatives firstly.
Personally so girls it took us over 15 years to open the first 1000 stores in.
In the last full quarter, we opened over 1000 stores as well.
We have the capability infrastructure improvement store models to build profitable new stores at scale.
Importantly.
But over and take away become more popular we are adapting our newest stores to a smaller sizes and lower capex.
Increasing store density gets us closer to our customers serving them faster and better Wap capturing incremental sales and profit.
We are piloting so auto.
Which are tailored for lower tier cities.
To penetrate new markets with greater flexibility and efficiency lower.
Localize the menu.
Oh, layoffs, and operating models and able us to serve a more value conscious.
Customer.
China is a large diverse market with regional differences.
Economic environment and policy.
Well, it's all regions specific strategies to create the flexibility and pursue a saturday that growth trends regionally.
Multiple channels different models and regional strategies, a crucial to expansion.
Enable us to develop a strong franchisee network.
Market leadership will also require investments in our infrastructure.
From more logistics center to IP solutions.
We will need to strategically deploy capital for both offline and online asset.
Future moving all leadership as we built the next 10000 stores.
Secondly portfolio growth.
We are proud to welcome the ones you want to analyze a branch while Yum China family this year.
Visions, well call West end dining, Brian Chinese dining and coffee represent exciting new set multiple growth.
Over the past few months.
We have find opportunities to collaborate between our little sheep and once you bombed rents in the areas of franchisee the vitamin seasoning distribution and supply chain.
Do you want franchise partners are already leveraging them, China is strong delivery capabilities to improve store economics, and we are excited for for the synergies.
Similarly, leveraging our coffee enjoyed spirit upon it she was lovaza has seen early success.
Just three lovaza stores in Shanghai are receiving great customer feedback.
Yeah, I'm trying its capabilities in digital data and delivery of creating an ecosystem for consumer and will drive growth across our portfolio of brands.
The third growth initiative is in digital and membership last quarter, we shared some of our thinking around digital memberships and their importance as a growth driver we.
We will invest in creating a customer centric digital marketing platform.
Additionally, and Digitization and the application of AI technology is vital.
From Fourq to Fourq. Our goal is to try to analyze now also may across our value chain.
From receiving how good to real time control of inventories and operations.
In asthma things Digitization empower us to improve operational efficiency and drive customer satisfaction.
Crucially.
This will give us added confidence.
Isadore working with all franchisee partner and reach further into multiple area.
Strong digital and membership programs create synergies within our portfolio runs.
They improved unit economics in turn driving still growth.
All of these growth initiatives are interdependent.
Investments across all three are necessary to build on our leadership and agility.
Now a few observations from this quarter Tim.
KFC sales demonstrate the improvement.
In the third quarter.
Supported by all value campaign and digital initiatives.
Domestic tours and transportation hub volume slowly recover but international travel and tourism is still weak.
Pizza hut continued to make great progress.
With new offerings refresh restaurants, and strong execution capabilities Pizza hut recovered fell to 93% of prior year period.
Our actions across the pillars of revitalization continued to bear fruit.
Ticket average improve sequentially.
Restaurant margins improved by over five percentage points and operating profit grew 59% year over year in constant currency.
Value for money is important to consumers during this difficult period.
Across our brands we insured.
A strong value proposition can they extend that crazy Thursdays two Wednesdays and Fridays.
He is a hot roll up that's a hugely popular all you can eat a program in September.
Oh from great value, our innovative product excite customers.
At the National level, we launched Duavee in chicken Burger at KFC and a Chinese style raised beef pizza from corn, you wrote a pizza hut.
We also trial regional phrases in selected markets, such as well Hot Hot dry noodles, well, how luck on hand, and late night delivery of each one spiky crayfish since one notch up yeah.
And then really drove strong growth across our entire portfolio.
Accounting for Prosigna today, 20 acre down sales in the third quarter.
We continue improving all take away menu over to come to a month delivery.
Together off premise so many accounted for over 55% sales at KFC and fully present pizza hut.
Digital orders with 78%, so well about pre cobot levels.
Hi Fi digital members grew to over 285 million.
During the quarter, we sold 19 million Picinich memberships at KFC and Pizza hut covering multiple categories other.
Other than the signature delivery and family privileges.
We sold over 8 million chicken love the membership.
Chinese recorded one does occur.
I can't see during the summer holiday.
The pay membership tripled frequency and cells per member during the subscription period.
We generated meaningful profit in this quarter.
Despite the pressure from south of leveraging.
Our 320 million of operating profit excluding special items was the result of the strong efficiency improvement we have made.
As we look forward.
Yeah.
Of the year and into 2021, we remain cautiously optimistic.
We must continue to be vigilant and agile.
I need to remind all stake holders that China is a large diverse markets.
And region will experience varying levels of Kobe in pet until the new machines are developed.
The recovery will continue to be nonlinear and even though we are well positioned to navigate these uncertain times with that I'll hand over the call to our CFO Andy Young Andy.
Thank you Kelly and Hello, everyone I will first address chief financial and development in the third quarter and provide some color on our outlook.
Okay, otherwise figures mentioned referred to the third quarter of 2020, all percentage changes.
Before the effects of foreign exchange.
Revenue was flat year over year with same store sales recovers good 94% of the prior year period.
All brands have so sequential improvement in sales. This is a testament to the hard work and dedication of our employees.
To drive topline.
In the challenging environment.
KFC same store sales recover to 94% of the prior year period compared.
Compared to 90% in the second quarter.
The 89% in the first quarter.
The improvement was largely driven by effective body promotion and digital initiatives.
Same store topic to recover to 90% from 80% in the second quarter.
I'll talk to the patients and to help to improve.
But he will remain under pressure.
Pizza hut same store sales recover to 93% of the prior year compare.
Compared to 88% in the second quarter and 69% in the first quarter.
[music] campaign, all you can eat.
And membership initiative, while effective in driving traffic and ticket average.
Overall diving volume to recover to over 80% of prior year four hour call Brian.
Shown contribution from delivery ethical weight on to you with over 50% of our sales.
Being all permits.
Together with the consolidation of huge okay upbeat there.
In addition to total revenue was cheaper than we.
We opened 312 store you viewed it accelerated as our development teams cure favorable locations with more flexible store format also helping expansion.
Despite the same store sales decline restaurant margins were 18.6% up 2.9% compared to last year.
So you leveraging was more than offset by our aggressive effort to control costs and improve operational efficiencies.
Cost of sales was 31.2%.
Almost flat year over year.
This was largely driven by a 1.7% reduction at pizza hut as they lapped aggressive promotion maybe last year.
Kathy has a 0.7% increase in cost of sales.
Impact of more aggressive promotion and value campaign to drive store traffic and sales was partially offset by commodity deflation of 1% carefully.
In particular, we.
We worked closely with our major poultry suppliers.
The advantage of a more benign inflation environment.
Cost of labor was 21.6% almost flat year over year.
Great inflation was 3% due a subdued.
In many of our markets as government mandated minimum wage increase will differ leave.
Labor productivity improvement has largely offset the impact of wage inflation and increased in delivery wide a call.
Labor productivity improvement was accentuated by shortage of part time workers in the quarter.
We intend to increase staffing levels in the coming months, you filing service and efficiency.
Compared to 40 million in the first quarter and 50 million in the second quarter, we receive approximately 10 million in when reductions in government relief.
However, we expect this to face though.
Jen a expenses increased 6%, mainly due to lapping of prior years government incentives and impact of consolidating gn expenses at once you or as to joke FC.
Excluding the impact of consolidation yesterday, gn expenses decreased 1% year on year.
We achieved operating profit of 556 million, including a re measurement gain of.
All existing equity stake in Suto KFC of approximately 239 million.
Excluding.
Special items, such as we left them in the game.
Adjusted operating profit was 320 million.
Representing a.
Year over year growth of 5%.
Our effective tax rate was 25.6%.
Net income was 439 million and adjusted net income was 263 million if.
If we exclude 29 million net investment gain in late one it would be 234 million up 8% year on year.
Diluted EPS was $1.10.
And adjusted diluted EPS was 66 cents.
I will let me touch on our capital allocation strategy followed.
Following a careful review of our financial position, we will resume our cash dividend at 12 cents in the fourth quarter.
Our capital allocation focuses on driving long term growth of Yum, China, while providing adequate liquidity to navigate any sudden disruption to our business.
We have the capital raise.
Listing in Hong Kong.
We will focus on one exciting new Butte and maintaining stalled remodeling our cost the young trying to portfolio.
Stepping up investments.
Digital logistics and delivery infrastructures to support and drive Bliss.
Three maintain a disciplined approach to M&A and investment.
While exploring opportunities to invest in brand with excellent growth opportunity new capacities and technologies.
At this year have show having.
Having sufficient liquidity is paramount to operating in an uncertain environment.
Our strong balance sheet.
Yes, the up capacity to deal with potential contingencies, while allowing us to make targeted investments to drive growth and capturing market opportunities.
We believe this approach to capital planning, we will drive long term shareholder returns.
In terms of outlook as we look ahead to the fourth quarter we.
We are encouraged by sequential quarterly improvement. However, we must be mindful that they've had them. It is still not over yet.
The remaining journey to recovery is going to be challenging.
We expect our store traffic and sales continue to be impacted by one the lingering effects of COVID-19 on consumer behavior.
Q.
Transportation and truce volume, while recovering continues to be heavily impacted.
Sorry.
Additional caution you measure that consumer and all the tougher may take as we enter.
The colder months and at flu season approach.
At the same time, we also expect margins to be impacted by.
So de leveraging.
And a continued focus on value campaigns to drive Scott profit.
Facing I'll have COVID-19 related relief.
Increased staffing levels to balance.
Services and usage efficiency.
And finally store impairment review factoring.
In the impact of cubic Nike.
It's important to note that the full quota is not only seasonally the lowest quarter for sales, but also the biggest quarter full store remodels.
Small changes in.
Without all investment can have a significant percentage impact on operating profit.
In terms of inflation outlook for 2020, we now expect rate inflation to be low to mid single digits.
Commodity inflation to be flat to low single digits.
Driven by lower pushing price.
In term of store openings.
Including loans you are we now target to open more than 900 new store.
As a reminder, following our second new listings, we ended the third quarter with 419 million shares outstanding.
As for 2021.
We are operating under the new normal of reduced travel and social activities.
Sales momentum will continue to be impacted on to the pandemic is over.
With bouts of cubic related disruption given we should know market will likely experience varying performance.
In October.
Our recent outbreaks in Qingdao and left in China.
Which we saw the in testing for millions of people.
This is a good reminder, that with the recovery will be nonlinear an uneven.
We continue to face cost pressures on multiple fronts.
As part of our commitment to the environment, we will begin to phase out the use of plastic packaging.
This is expected to materially increase our cost of sales.
Rate increases have been mostly defer or delay in 2020, we expect this to tetra.
We will also step up investment to build out our digital logistics and delivery infrastructure.
Accelerate investment in these areas will be critical in maintaining our market leadership.
Without issue.
Infrastructure, so execution and strong balance sheet.
We are prepared to capture opportunities, while recovery and growth.
We will provide additional details on specific 2021.
Target.
With our Q4 earnings release in early twenties 21.
With that I will pass you back to Debbie This doctor to have it in Sandy will now open the call to full production in order to give as many people as possible the chance to ask questions. Please limit your questions to one at a time operator, please start the Q M&A.
Thank you so much ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question you will need to press Star then one on your telephone and written premium to be announced.
We wish to cancel your request please press the hash key.
Again, it is star and one if you wish to ask a question.
And our first question comes from the line of TG Lee from CRT. Your line is now open.
Hi management, Thank you for taking my questions.
Which weighs on the good performance.
I can ask one question right. My questions is pizza hut because for Q3, we see that the news 17 presenters restaurant margin is really high level, even through Q3, so could we know more about what's happening behind this and is this sustainable looking forward. Thank you.
Thanks. This is Andy So I will address your question regarding margins at Pizza Hut I think overall margins. If you look at the overall margin for the quarter.
We do have very strong performance on both KFC and Pizza hut.
Overall, if you look at a.
These hotspots sample certainly we rescue impact if I sell deleveraging.
Roughly no more than 2%.
For inflation as you know, we do see you know.
Continuing.
Commodity.
Pressure pricing pressures.
For for the cost of profit.
But thats more than offset by delayed productivity improvement now if we looked at each no cost item.
If you look at for example of sales.
We we see that no.
These improvements.
Almost.
Like 1.7%.
The.
The main part of that is commodity.
Commodity inflation, that's offset by lapping of a promotion.
Promotions.
In 2013 now for.
Cost of labor, we see about 1.4% improvement.
Despite sales leveraging rate inflation.
We see that level for the game.
Part of that as I mentioned on the prepared remarks.
Accentuated by shortage of profit worker from this quarter and so and also we also.
If it's a little bit from the lower so the insurance contribution.
The big improvement here is actually on local and Oh.
And in.
And that has lots to do with the.
A number of cost initiative at the restaurant level, including utilities made during the call. We also got some what would be helpful.
[music].
Okay. Thank you Andy.
Okay.
Paul.
Thank you so much.
And your next question comes from the line of Paul.
Brian Bittner from open Harmon.
Sorry. Your line is now open.
Okay.
Thank you and congratulations on navigating this environment.
Your unit growth outlook for 2020 continues to be very strong despite.
The pandemic.
Are you able to give us a look into the pipeline for 2021 or give us any color on how you are starting to think about the unit growth opportunity in 2021.
Hi, Brian This is Andy so.
So I will give you some some color and then Joey.
Joe you may want to feel free to jump in later.
I think as as you mentioned as you know.
We at the beginning of the year first half this year, we suddenly have little impact from.
Nike come across the opening.
We have mentioned.
Prior earning calls I'll give him teams.
I have a lot of prosigna pipeline at the time, but no obviously because of the academic there was some delay in San Francisco.
That limited mobley.
In March April timeframe.
So they have been trying to catch up obviously.
And they have done a pretty good job.
This quarter.
Here, we are in we have that's why we're confident that we can meet the target.
With that too.
From previously we guided to about 802, and 50 store to now more than I understand.
As we have mentioned after you mentioned our.
Next milestone would be another 10000 store.
Helped us quite a while to get to the first 10000, who was almost 33 years.
We certainly anything that we would do it much faster this time around.
Some of the pipeline for 2021, I think why now with you in the planning process. So too early to provide you that information, but we would.
No.
Give more detail planning however, it but if you look at our current situation right. Now we do think that we still have a lot opportunity in China for growth for store network expansion.
If you look at the number of city that we have we have redeemed by now a little bit more than 1400 for Kathy.
I think 800 plus.
For copies huts lift we still tracking about nil.
Probably closer to five 600.
More cities that that we can penetrate.
In the future. So those are the white space also.
Also in term of no.
Increasing penetration.
In there in the top tier cities.
I think it was and also if you see we think there's also a lot opportunity as well looking at the store.
Well density.
To not only to North America, but also other.
Measured country and region.
I'll stop density.
You are welcome to below.
So.
Regularly with the shift to a smaller store formats.
And also.
Catering more to delivery and take away I think we do have a lot more opportunities come up.
Using a penetrations of Oh store network.
In the existing market that whittling away.
Hopefully I'll address that question.
Thank you Andy.
Brian I would just like to add three comments on your question one is.
We always emphasize also on the quality of stores.
Joel.
We will be aggressive and open minded about new store, if we see opportunity of opening Gustav.
Profitable stores.
Or at least breakeven levels. So thats the bottom line, we hope very very close to our hearts.
And Doug bottom line at the bottom up approach if we find those were open them.
Second it as men and Dave mentioned earlier I, just want to make it more specific it is at a tier one city tier one tier two city we.
You know going forward smaller stores.
To adjust our store portfolio strategy they call it the growth of delivery and take away and also to handle the rent and other cost as well and is there is a quite efficient model to fill in a gap of the trees.
For the lower tier city.
We have been working on the.
Lower tier city store models and this year, we have further.
Third the breakthrough in our models no.
Not only the investment cost for the lower tier city and model is getting at.
Even though what we find a innovations to do that but also we have customized menu.
For the lower tier city, just give you. An example, we have opened a few deals such stores this year we.
We feature something called a crazy store manager also.
Which will feature a combo a lunch set of 15 yen R&D, which is a bit more than $2 and our normal combo for full item in tier one tier two city will be 30 to 35 et cetera. So you see the gap and Thats the process of different were not.
No sells the same CRADA as such fake price gaps.
But the lower tier city in some particular study in a in the Weston and an awesome pot of China requires a different understood.
Understanding of our menu.
0.3 Pizza hut, we have been talking about a satellite store models since last year and we'll be working on the cost essentially.
What the satellite store means is huge reduction in terms of capex investments and and quite a different store operating model. For example, our kitchen need to move from 140 square meter to as much monetize cut by half a per se.
And as you.
You know the menu aside it has been too and it's also this year, we are going to have about more than 20 satellite stores and I was LP I'm happy to say that the initial result.
Encouraging and we are happy to see what we are seeing right now.
Both satellite so for pizza hut and for the lower tier city.
Stalls for KFC.
Thank you Brian.
Thank you Jody Thank you Andy.
Thank you so much.
And your next question comes from the line of Linda Wong from Macquarie. Please go ahead. Your line is now open.
Hi, Manish man I have one question regarding for the store expansion because I notice that the payback period.
Specialty 40 Pizza has slightly increased before I think pay they pay back pay rise for three to four years around Odyssey to five years. So I just want to know that.
Whether in the future we continue to expand to the store and do we worry about operation efficiency issue and can you also share with us about a funky wrong. It's a payback period. Thank you.
[music].
Uh huh.
Hi, there.
Linda so let.
Let me address the ones you are and then I go back to the profit that.
For once you all is mostly a franchise model. So you know.
Almost all of this for large majority of the store.
Thanks, guys model that same Goepel leadership.
The ownership and so so we can kind of give us is not very meaningful.
For us and.
Specialty region, though that the franchisees, but what we can say is that the franchise.
Venture has become so actually markedly happy with that payback and Thats why we continue to see pretty pretty decent due out in some of the franchise.
I think over there.
The.
Well as I can.
Yes.
The make.
Except Europe for Pizza hut.
Okay, Linda for the for the.
Fees are paid better I think you know because of the COVID-19, and the way that we calculated number it's a rolling number. So so of course during Q1 Q.
Q2 impact I'll pay back a little bit, but we we we still overall confidence.
So although a trend of the pit that pizza hut, particularly with the innovation on satellite so we.
We are quite happy to see what we see right now in Pizza hut.
Thank you Andy.
Right right. So Linda so I just want to remind folks that you know when we disclosed the payback period generally we are using actual number so so they do reflect the impact.
The recent month, which is I guess, Joe you mentioned like the.
By Cook Nike right. So.
But overall I think if you look at the store recovery in term of the.
The south recovery, we on a I.
I think you're right directions overall, even with that SSG.
Back to 94% for KFC and 93% pool.
Is hot and so so in that sense I think you know we may still be dosing that long average being impacted but that's that should I mean, we can fundamentally we haven't seen a material change in term of how install a performing and then also in terms of long lived.
No I think.
As to the recovery, even though it's going to be.
The linear and uneven but I think.
Eventually.
Within dynamic will be over and and then I think we're comfortable that.
Not fundamentally change you know starting.
So economics, obviously, there was some operational changes in terms of how our store during mentions we will continue.
Continue to experiment with different store formats for Pizza hut picks up but we also have been.
No satellite store format that being though.
So it would do with it but.
But nevertheless, I think.
The fundamental hasn't change maybe more delivery more take away.
Total sales of smaller store format going forward.
But I think having.
We haven't changed our Oh.
[music].
On to predict the future.
Okay got it thank you.
Thank you so much.
And you next question comes from the line of sharply from Citigroup. Your line is now open.
Good morning, Julien and Andy.
Congratulations again for this long.
Recovery in third quarter. So we are now in fourth quarter, which is a low season I will be more interested in the upcoming one Q next year, which is a peak season.
In my view that is.
Julian team, we have been facing tougher choices next year first quarter, because we want high and you have to be more proactive in terms recoveries cells further on the other hand, you have to.
Patrick is any risk of disruption due to any coming back over to koby cases.
So ill, let Johnny saying Eco Hoochie unsuited base, so how could you balance the two.
Which you are striving accretion are you in terms of innovation value campaigns deliberate and the menu offerings et cetera. Thank you.
Thank you. Thank you Michelle Poole and that's a [laughter] that's a good way to put it on rentals and pray and in fact, that's exactly fellow I'll approach for this particular year assumes that.
Generally.
They're happening off COVID-19, how are we going to do that for Tony Tony Tony One is not going to be too different in terms of the general approach we will.
I'll be prepare will be our job will be flexible.
And and we'll be cautious, but we'll also be optimistic.
If we look at particularly to three this year all of our brands improve in terms of the SSH key you know the timing actually continue to recover.
But we we also were very high on strong value campaign.
To drive traffic for both KFC and Pizza hut.
But at the same time, we are very well aware of the link lingering effects of outbreak.
Dodge our repeat caution to our investors and analysts about the.
The uncertainties of COVID-19, we'll just have to have to live with it really but when we come to the business, we still have to focus on.
Each core pillars of the business.
And we have to make sure each pillar is strong and sun and agile in principle, because we are in very good position.
To to manage.
All the challenges and and actually still achieve innovations and result for our shareholders for all customers and for employees and we just real quick recap, what let's take have CNN and then pizza hut.
What will happen here for Q3 on for this year so far.
As I mentioned earlier, we focus on the data promotion LTL and new product and now we focus on the trip, which subscriptions so our membership.
Throughout the cobot Nike in particular during the most difficult times, when we actually cannot do advertisement very effectively.
We actually could focus on our membership to steal launch new product come come that marketing campaign.
And.
On top of the pillar of the membership we work on delivery.
And ultimately improve continues to grow well with double digit growth.
For Q3, Q2 and Q1.
So the live is very agile.
Agile and resilient business and transportation hub for tourists, it's it's still being challenged.
The the the cells is still below treat O <unk> outbreak turan.
It's still about 20% less but.
Well, we continue to work on it and then a regional differences regional differences also means vision opportunities too.
The Ethan China is still better than northern China into lower tier cities do better there huh.
And then the recovering weekend and weekday right not even out.
But in a positive way, we were doing a bit more promotion in weekday a bit lumpy weekend, because I'll begin traffic was worth quite stable quite encouraging and like Brian but.
I'll call it 19, the weekend traffic.
And is that the the patent change, but it's okay. We we make ourselves more agile and flexible and we learn better way how to deal with so we can when we say traffic recovery and then that's the Kashi and for the Pizza hut.
Despite the COVID-19, we still feel our promise of Salisbury than profit later, which we have been talking about for few years now and we have seen progress.
In the menu the value campaign, the perception of value and expanding pick away channel.
And Doug by Q3, we'd recover on south to 93% and driven not only due to improvement in traffic ticket average how do we do that let's just constant well actually more packet headsets Khan of marketing.
Marketing campaign.
Increased potty size and all you can eat so.
Oh with ultra capability and with our focus on each of the color that's driving the business and I think we have them entree on the Chileans.
For Twentytwenty and I would like to believe.
Oh, the Syrians and our team's ability to deliver doing vertical tunnel 2020, we show continue to do that or 2021. Thank you Michelle Poole.
Great. Thanks Joey.
Thank you so much.
And your next question comes from the line of Chen from Bank of America, killing cells time.
Thank you Kelly and Andy and also congratulations again on the strong Q2 results I've got a question on Pizza hut, which actually offer a quite big Akbar supplies for Q3 to be calling the positive same store sales growth.
We'll pick a how should be we cook on PST, but this time could to Hollywood quite close to the target.
Steve and the peso could be for heart recovery or talking to be faster.
The reason behind that is it because of all the measures we have taken to revitalize.
Uh-huh or it is also partly because of the assumption to us maybe.
Casual dining in China is gradually recovering at a faster pace for the industry as a whole.
And also with regard to marketing.
The food and paper cost as percentage of sales decline quite dramatically for the hot even if we have a.
And that seems high we're getting less promotional.
Then last year.
That is the case or how should we reconcile that with encouraging things so thats going to trend for pizza hut in Q3. Thank you.
Let me thank you.
I can't comment on the on the sales recovery side, and then a and B can can address.
Norton's question on margin.
I would say youre.
Your thoughts about the pizza hut recoveries due to the overall model recovery over business recovery is a is what I agree and what we believe and that's what we have been working on and we have been as I mentioned earlier, we'll be talking about our focus our promise of self service and profit.
Well Peter for few years now.
Actually at Pizza Hut punting 19, we deliver the first.
Recovery or traffic.
Let's look at it at buying traffic.
Which was very very critical for for our business because the 419 last time, we had positive traffic growth and pizza hut dining business in particular it was back in 2014. So 15 16 17 18.
It was how it will end by 2019, we get a customer and that the most most important.
Part of the improvement and we have been also talking about a few of the of the revitalization of the menu will be changed keep us out of the menu where the fleet is very very different.
The delivery, we've built our de leveraging we we took it in house it was painful.
But we got it done without impacting.
The sales growth or the margin.
We work on the perception of value prepaid surface level dining environment.
I don't know, whether it's clear to our stake holder, but we actually had the Cummins on for Peter for no increasing the price for three years.
No price increasing full swing it is a very strong commitment.
To bring back of value for money, which is absolutely critical for pizza hut business model.
And during the call that 19, Oh, we we also.
We looked at it as a as a well.
Of course is a challenge, but it's also a trigger point to do even more innovation.
And take away because we we were building the system before that the self order mobile older system before that and will launch in a big way and to pick away business took off.
So and not to make to our business. So it is not due to one or two St is do too many things that we have been doing all that she kinda. It's also complemented each transformation Ah delivering.
The result.
Yes, we are quite pleased.
To see the the the progress and I'm just me quite proud of our team's hard work.
Producing the results right now and we do believe that the fundamental change the improvement of the business model will continue to help pizza hut deliver ongoing improvement is not done yet we are still working on the threats that they pop for example, because it's still an opportunity for us.
But that's just ongoing with that I'll pass the question to Andy to give some color about the margin question for Watson.
Oh sure specifically actually I want to supplement you'll come a little bit I think it's important for us to put things in perspective, I think KFC actually have improved quite well you know.
SSG.
Last quarter, you know they asked you about Nike and this quarter CFO Larry.
Medical if you look at Pizza hut.
Quarter to assist you with new.
Obviously with the fleet that Ed you know 93, though so both brands have actually seen a quite.
Quite a bit of improvement same store growth.
In coverage and more importantly, I think.
If we look at the impact in the first quarter for example.
At the beginning of the quarter. We was do you have an impact from the original outbreak in Beijing.
I'll defer that you petrified.
This chart in school holidays.
So he left that I think we we have pretty pretty pretty pleased with both brands.
Trajectory.
Obviously, you as we mentioned before you know the recovery pace as we get closer and closer to full recovery is going to be more challenging.
Recent news because we do not help the whip. So if you look at transportation and tourist location as we mentioned you know quite a bit right more than 20%.
Traffic over there and there is an important part of our business the careful you're happy with the business.
We look for a little bit more we do have some.
Even cover did you add the diving business.
Right so the topic.
So I know you 90% of last years level. So so getting people. The the last group of people, who feel comfortable and venture out in dining make it even more fun and we so we that's why we say like no feel pretty good about it the quarter result, but we are.
Cautiously opens in the fourth quarter and the emphasis in the cautious with.
Especially with as we go into the winter season.
And then just two seasons, so that there should expect from them.
Some some potentially we should operate.
Additional measure that we'll be talking about consumer for government.
As critical Intel margins I think if.
If we look at the overall margins.
Especially at Pizza Hut I thing.
Obviously as two emotions knowhow schedule have always been.
To fix a fundamental charge gross profit and sales and then probably this is obviously over a new show an extraordinary in the sense that you know we at the beginning of year, we senior person that can decline in sales due to cope with that team and we are very glad that we have seen a very quick actions.
The income or a cost savings as well as doing new product.
For for the situation.
So when we look at you know.
Cost of sales clinical awful for Pizza Hut summit.
Emissions you know right now is probably like a 0.7%.
Better.
And you know.
We do and there's some inflationary pressure into a commodity side for pizza hut, but.
But obviously this year in order to focus on cost savings and also targeted market promotion.
We will benefit from the ramping of very heavy promotion.
The comparison to last year, so so in turn.
Hello.
Cost of labor we've.
We still have rate inflation, but much more moderated this year.
Both Brian.
Because a lot of the the minimum wage increase mandated by governments have been delayed or postponed.
So so so so it's more more benign I think if you look at wage inflation.
Probably.
Low single digit this year.
And so but we do expect some catch up there. The other one is that you know you.
Yes, I mean its.
Some labor shortage that also accentuated.
The labor productivity right. So.
People actually have to work with the actual order. So we as you mentioned or remarks.
Do you think that.
In coming months, we may have to increase the staffing levels to ensure that we have because of efficiencies as well as you know.
So its level.
In total.
You mentioned you know.
Yes, or no I think you know this.
Is there there's a lot of improvement there and I think again this is coming down to a number of things. It does what initiative, there's a lot of cost initiatives.
We have seen no lower easily.
Of course.
We also see lower meeting called ready to be there as well so I think in terms of the market perspective.
I think the commodity inflation.
One area is motoring little bit compared.
Compared to the early part of this year, but will you be looking to that especially when we go into next year.
In 2021.
Basically be stacking up your two year of tissue pressure.
Okay.
Several rate increases so I mentioned before.
Maybe you guys could be some catch up in some of those costs.
Some of this initiative I think also if you look at Nucor for example in kind of labor.
We do see both to gain from using technology as we have mentioned a few times.
Ms scheduling the profit so manager.
You know we have tracking all these would help as well.
Along with going forward to be movement, but as I mentioned earlier, the labor shortage issue the staffing levels in the coming month, you, maybe where some of those those proceeds.
So then you.
Subdued wage inflation this year.
And catch up with you this year, but.
The only thing you know I think some of those.
No there will be improvement.
They some of them maybe to ease up a little bit so that we can go forward.
In term of commodity inflation I think if you look at overall inflationary pressure easing a little bit.
Feel your partners do very elevated.
Elevated prices.
Probably 23%.
Hi, as compared to last year.
But before poultry like chicken.
That pressure have needs of it at this point come back in.
To say that but.
But on the quarter.
Good. So however, still emissions value promotions value for money very important decisions.
Digital.
Consumer in these new logo and so so we may get back some.
Some of those savings.
Of course, you prices affecting consumer.
To drive more traffic spectra.
So hopefully address your question.
Yes, and sensor represent a loss Julia Andy and congratulations again.
Sure.
Thank you so much and your next question comes from the line of who you believe from Morgan Stanley. Your line is open.
Thank you Joey and then de and congratulations again, so I think my question I'm watching is well set up by Andy Page Lisa I think of my next question is more on the development of a.
China cuisine, so I know that the fast and the expansion of units, partially from a hunter well, but I want to check what's a more longer term thoughts behind the development of this newly set up a division. Thanks.
Hi, Dan This is Andy let me try to address your question here on the Chinese cooking business obviously.
Obviously, you know we.
We think that you know the choice between years, a very big market.
Trespassing.
The lions share for consumer here in China in until Oh, sorry.
Starting off site.
So there is more opportunity for us.
In terms of Chinese cussing, because as you know with the consolidation of loans you all.
And without some kind of leadership and in East Pony.
We formed the.
Choice was in business this year.
The unit.
Left by Pepe.
And he has to be obviously.
Oh, it's wonderful year that her role will shift over the last couple of years.
Well Charlie.
We think this is we have you know how go is we try to leverage Yum, China is scaled your supply chain for our franchise communications and our delivery partnerships with sample with a.
Different aggregator which offer significant.
Progression rate for us.
In term of you know, we also want to take advantage of the full innovation.
Ghibli. So if you look at that Lucia we launched.
Sorry.
Product or some of our.
Product.
We're also looking to do.
Evolution for example, floating or prototype barbecue.
And we also see great opportunity in the seating.
So stupid and so so we have seen leadership.
So growing that business over the past couple of years.
Once you also have a very good sauce.
Sauce that they use.
As a result, we see opportunity for them to actually leverage that up to you as a consumer business. So if you look at trying to squeeze in business.
Last year I think obviously.
Well, we'll be focusing on integration.
Of what Youre, making sure that we can drive synergy.
Cause about cost, but also the product innovations about.
Tissue, which handles about you know franchisee base opportunity there.
So so.
In sum of next year, I think we would like to see.
No moving into multiple schools are seeing more growth in the franchise base as well as the more progress on.
The seasoning in doing so.
So.
This is not a regular occurring we were looking at trying to specifically.
[noise] Central Andy.
Yes.
Thank you so much.
And your next question comes from the line of Michel churn from Goldman Sachs. You show. Your line is now open.
Hi, Joe you Andy Congrats.
Congrats whatever you don't end and jump onto I wonder whether you can share some color about the recent chan as easy.
Earlier, you mentioned that transportation hobby steel around 20% plus below our the normalized level. So I'm trying to understand whether we are seeing a more significant improvement like October seems we hear some nasty publicly they have on vod of retailers and rational. Thank you.
Hi, Michelle so.
The trends I mentioned that earlier about.
KFC the key a key pillar as for the business recovery the.
The delivery is still growing among the regional difference continue but the gap big deals.
The recovering in weekends and weekdays even out and when they come to the Troms patient hop and tourist location the chops patient hops up.
As you know for Kashi, because pizza hut does not have much business in transportation hub. So it's mainly for KFC is still below the pre outbreak curate and we mentioned about probably about minus 20%.
Even during the holidays and the international traffic and still very limited due to you know the ongoing concern on the Pacific matching up but what I'm, saying, we would also like to call sharing our our investors and analysts.
Post holiday trading is still a challenge.
That's very very interesting phenomenon because.
Usually when customers have concerns still have the little concern of the overall economic situation the job et cetera.
You tend to see pretty good trading during holidays.
But after the holiday.
The the middle weakness actually it shows the psychological impact is not only true in one country I think generally true across different cultures different country.
So we see a little bit of that too, which which would just like to caution our analysts about that.
But the overall trend is good I mean for China, we are grateful for that you know.
You know the lagging China. It is quite normal right now compared to two U.S. and in Europe.
And the trading is his wife when so we we are very very grateful for that and let's hope that the good improvement there.
Going recovery of our life back to normal will continue.
So that's when we are thinking Michelle.
Thank you Joey.
Thank you so much and your next question comes from the line of Kristen Penn from Baird. Your line is open.
Thank you Charlie before D., a very detailed explanation about result, as well as very positive outlook towards the future.
So I have a separate question, which is which you might not be related to the quarter result, but actually I want to get your thoughts. So recently, we sell from some news reports that your company is launching titles high which is a packaged food Brandon.
So out on China, starting from he can't see retail all units. So can you share with us.
Your meet two longtime sorts towards this business initial cats are any of you can share with us more color in terms of the branding pricing on distribution strategies. They will be very much appreciate it. Thank you Joyce.
Thank you Christine.
Oh, yes, they will be hard to serve you hung up on me because they need to be <unk>. It was only serving but hopefully we will be able to too.
To to have the opportunity for for yourself to to try our capital type products.
Full for our experiment in the retail business you know partly is natural.
Why why do I say that I always bring it later, partly because of the innovation that we come up with theory Ur COVID-19, so doing though COVID-19 time, obviously, we have seen the trend which is related to michelle's question earlier is one tranche.
Is the increase of the home consumption Gencorp time, right the people products and locations. So the home occasion.
Is that the consumption is increasing and we can see that and pizza hut response during the comment and I think very quickly by launching the stake the prepared state, but it is it's cook at home and the result is very good.
And can he has his own take all the home occasion opportunities.
And we leverage our product innovation team, which is a fantastic team there come up with all sorts of.
Yeah.
Very yummy and great CRADA and they come up with a lot of these.
Product that could be comes home consumed at home and so.
So far we have launched a chicken. So she time, we have launched last year and is a is a kind of right no telephone one she area with very strong now.
And then we have a launch at the edge like the chicken breast right.
So so so we launched a product innovation team and right now we are testing it and selling it in many top tier cities.
Because it takes time to build up the volume.
ER visit this is William game as well and the result is very encouraging and we leverage our current existing channels such as the.
E Commerce channel such as our own ATP ALM apps such.
Such as our own currents the war.
To sell the product and customer can buy the product.
Through our stores as well so they can find it by the profit in the store and they can be rather why our own.
In house delivery team.
So you can see how do we do it we leverage our the product innovation team our distribution channel our store team our delivery infrastructure to.
To expand the business so.
So so that's where we are right now and still early days, but we are quite excited about the progress and the name of capital in China, I, probably mentioned it before if I repeat I'm sorry is that is a name that customer in China at peak capacity I guess, just the local version a local name.
For for Kashi buys more in there.
You know in a funny way, we just you know to get their commitment. So we call ourselves kept on time and and people got it immediately because there has been a name being used for many many years, but never the newest officially so we make it official.
So that's where we are and of course you might notice that we have also launched a coffee cup. So we.
Hey, Dan because if they're in a little tiny small coffee Cup.
And is the upgrade version all income coffee.
With different drivers stuff like that and again, we try in top tier city and and we are happy with the with the testing and the progress. So so the retail thickness of KFC and Pizza hut is the area that we are still running and and.
Well, we are looking forward to two delivering more that's kinda yummy products to to our customers. Thank you Christine.
Thank you Charlie.
Thank you so much and your last question comes from the line of Andy from Jefferies and your line is now open.
Hi management team. Thank you for taking my question, just one minor thing retard.
Regarding management mentioned earlier that in full quota telephone.
Telephony business.
One of the key driver has been like you know the culprit delivering may.
Yeah, I know like to know if it's this copper delivery that mainly for KFC from KFC or as also for Pizza hut and what does the growth potential over here how much of the south is oh, the delivery south is actually come out from the corporate Delevering and I understand that we also start to like launch like delay.
Afraid to park and all these <unk> initiatives. So just wanted to see if not you know.
Are these like you know the the new like gross profit for the delivery side. Thanks.
Thank you and well the copper delivery, we have been working on the systems. The vitamin because all these need to be supported by very strong I T system since.
Since last year, and Allegion already and we target at two to Sal too to.
Expand our business to like 5000 companies for this year and then the COVID-19 hit.
And we deliver.
All of the Premier was about 170000 female too.
Over 1450 hospitals and community centers in over 20, a profit this and said to me would be to pay much [laughter] Oh for the contract deliveries due to our efforts in.
In in COVID-19 by trying to make the right things because no matter how difficult the the deliveries even for the full is free we always emphasize hospitals.
And that's our commitment and so that gave us each opportunity for companies that have it because when the when the fed does recalled a start to recover that too much to April.
I see and Pizza hut and have one of the few trust friends that we still have a majority of our stores open and people came to us tracking our brand into quality. So we have this unique opportunity and Stephanie.
The demand is is is much higher than we thought and we respond very quickly and the benefit of corporate delivery forecast and pizza hut and Yum China is.
We don't have to hire a new set of sales team to do that which is something quite essential if you will.
Operating the business, we have all our stores, we have more than 10000 stores right now in 1400 cities enough storm and at the end it and their managers, they often testing people and try that behind it. So as of right now we have what we have more than 20000 companies on that.
And not only the breast dress, but the over time.
Neal and that's about it I mean, it's coming you can imagine will provide rich wants to pull as well to deal with that not only it requires a more customized menu, but also require system integration the payment.
The hard we want we want it to be very convenient for SAP. So order, okay, how other branch through it.
In Dallas company website or or with the the old PML or partly such as I'd buy side a company. That's right. That's right. It could be very complicated a combination, but we'll make that o. easy convenient for them and and does that business kind of is that point.
Going from strength to strength, but with that said you know kids see and MPS Yum, China the phases, so fake or when it come to your question about potential says, it's quite small and it's very very hard to get there.
Themselves given out basis, so I think it's very meaningful, particularly meaningful for the stores that have ah that that that that they have the opportunity to support some company you can imagine south enbridge is meaningful.
So that's where we are right now we we we continue.
To expand our network, all providing the foot and ankle value for customers. So you can imagine we have a network of over 10000 or so right now between between one dollar and not in store.
There are a lot of connection yeah, we can do more by offering a culprit. There are three or working with all of this is timing to two to two.
To deliver the service required for our customers. So that's that's where we are right now and when it comes to small thing like opening stores and pot or even having a downtime to you know those are small kiosk in some very convenient location and you can see.
From the paradigm that we are trying to use our stool as a network to further increase the.
The connected point would follow the customer by improving out the.
The convenience to the customer and you actually start to see some it's not a lot yet but one example is in Qingdao is the delivery, but you know that that's a more often the red box and pet them I will pick it up.
And then at some point I said I'm spot of the of the office building et cetera, et cetera, and so.
So these are all the things that we are exploring but it's all from Cosmos point of view a good.
Good value go through and convenient thank you again.
Thank you.
Sure.
Thank you so much there are no further question at this time speakers you may continue.
Thanks, you very nice was only in Q.
Thank you for joining the call today, we look forward to speaking with you on the next earnings call. This concludes today's call have a great day.
Thank you everyone.
Thank you, okay that does that.
That does conclude your conference for today. Thank you for participating you may all now disconnect.
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