Q4 2020 Yum China Holdings Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Yum, China fourth quarter and fiscal year of tomato plenty earnings conference call. At this time all participants are in a listen only mode of sort of speaker presentation. There will be a question and answer session to ask a question on during the session you will need the price far one of your.
Telephone please be advised that today's conference is being recorded I would now like the head of contracts over at your first speaker today Ms. Debbie day. Thank you. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining Yum, China fourth quarter of Tucson, 'twenty earnings conference call joining us on today's call our CEO of Ms. Joey Wat and all of our CFO Mr. Andy Yeung before we get started I'd like to remind you of the our earnings call at Investor presentation contains forward.
We're looking statements, which are subject to future events and uncertainties are at.
Actual results may differ materially from these forward looking statements.
All forward looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This.
Call also include certain non-GAAP financial measures you should carefully consider the comparable GAAP measures reconciliations of the non-GAAP and GAAP measures.
Including our earnings release.
Call includes three sections first Joey will highlight our accomplishments over this past year end review, our strategy and key priorities.
And he will review our financial performance and all of those in greater detail. Finally, we'll open the call at Depression, you can find the webcast of this call and appalling swim presentation, which contains operational and financial information for the quarter on our IR website.
Now I would like to turn the call over to Joey Wat our CEO.
Thank you Debbie.
Hello, everyone and thank you for joining us today I Hope you and your families are safe and healthy no matter where you're at.
I want to acknowledge the great work of our 400000, plus employees and express my heartfelt appreciation with their dedication creativity and tireless efforts.
We have been navigating the difficult times.
Actively managing our business.
Looking back at the past year, we've put their health and safety of employees and customer as our number one priority at.
<unk> kept most of the stores opened even at the peak of the outbreak.
Our execution capabilities and agility helped us overcome many challenges.
We kept good off premises consumption opportunities and sort of recovery in banking volume.
On travel recovered sequentially since the first quarter.
Our operating profit remained solid.
And grew double digits year over year in the second half. This is the result of strong execution and efficiency improvement.
Can see remained resilient, we accelerated store expansion with attractive return and maintain solid profitability.
We made remarkable progress in strengthening the fundamentals at pizza hut across all aspects of.
That is reflected in net sales and margin improvement.
Going forward, we will continue to fortify the resilience of Pizza hut business model.
At the core of all of these is our ability to innovate tariffs is premium while group beef Burger resonate well with consumers and we're sold out within Inc.
And yes, we're counting on G.
Men's at non Guangzhou is the perfect item for the winter.
Part of these two concurring at Pizza hut became an instant hit on the delivery menu.
With demonstrate our commitment to be a responsible corporate citizen.
The pandemic, we import all at the termination total up to our employees.
We extended family care coverage designed for our restaurant managers to 13000 restaurant management team and supervisors and their families.
Our efforts are recognized in the industry for the third consecutive year, we were satisfied at the top end prior in China, Inc.
Included in the Bloomberg gender equality index.
We were also recognized for our commitment to sustainability and we were named an industry leader in of 2020 at Dow Jones Sustainability Index.
Let's move on to growth strategy.
Despite the challenges we are on.
MS day about the future opportunities in China.
We have been staying the course with our long term strategy centering around three key growth initiatives. Let me give you some updates on our latest thinking.
Store growth, we opened 1165, new stores in 2020, marking the highest new store openings in the 33 year history of operating in China.
This is equivalent to opening one new store every eight hours.
Our new stores Paypal remains healthy at approximately two years for KFC and three to four years for Pizza hut.
We intend to sustain their store building momentum into 2021 and beyond and reached a net 10000 stores much faster than the first.
There's still plenty of white space in which we can expand we are tracking over 700 cities in which we have no presence in China to.
To penetrate new market KFC is piloting smart on model designed for the needs of tier six cities or the low.
This model has localized menu store layout and operating models that require less capex.
We are encouraged by the initial result of these part of stores and we will open more small type of model stores in 2021 and KFC.
A more established cities, we will increased store density with our multiple store formats at.
The mix of off premise occasions continues to increase we.
We have further reduced the average store size end Capex per new store. One example is pizza hut hub and spoke model, which we introduced in 2019 Investor day.
I'm excited to report that with nearly 50 stores.
50.
Our hub and spoke stores at the end of 2020, the result of very promising.
We will roll out of more of these stores and other small store formats and at that our store models to evolving consumer needs.
To create an even stronger foundation to accelerate expansion, we are stepping up investments in our infrastructure more details will be provided by end day later on.
<unk> portfolio of growth, while KFC and pizza remain key growth drivers. We are also leveraging Yum, China has resources institution capability and learning to develop our emerging brands.
Briefing our brewing in coffee, we now have three distinct brands with clear segmentation strategy. We are committed to accelerate expansion of our coffee business and make it meaningful pulp Yum China.
K coffee fulfills that daily ritual with good quality coffee at affordable prices at over 7000, KFC restaurants in China.
140 million Cups of coffee was sold in 2020, making us one of the tops of the payers in terms of <unk>.
A copy of enjoy has evolved to offer of specialty coffee coffee lovers, while utilizing an asset light model. We are working on improving the profitability of Sanjay and exploring other potential avenue of growth.
Newmar lovaza over premium coffee indulgence atmosphere, we now have five beautiful stores in Shanghai and we are pleased with the initial results we plan to we plan to.
At salary openings in 2021 to test different store models, ranging from many two flagship store.
On the Chinese QC marker of post acquisition integration of quantity of one has progress well, we have driven synergies in product innovation franchise at the vitamin Enterprises, Inc.
<unk> sales recovered sequentially and delivered solid profit since acquisition.
We will further work on the menu and operations for our Chinese QC and brand to drive store expansion and growth in the seasoning and packaged foods business.
The third growth initiative is digital and delivery.
Covid pandemic highlight at the power of digital from member engagement delivery to operations.
Membership has grown to over 300 million member sales now account for 60% of ourselves per.
<unk> subscription program is effective in boosting frequency.
We sold 38 million subscriptions in 2020, the average spending of privilege members doubled during the end subscriptions.
More targeted promotions helped us keep marketing expense done.
Delivery has been growing rapidly and even faster during the pandemic.
Now accounts for 30% of ourselves.
In 2020, we upgrade our radar platform with AI enabled zoning rider routing optimization and real time monitoring.
On the test Montes on turn rates customer satisfaction and efficiency have improved.
We also test at Ryder share in between KFC and Pizza hut in Eastern China, where low expenses initiative into more brands and more market.
In 2021 and beyond we are allocating more capex to further strengthen our digital and delivery capabilities.
To make our organization more efficient in the long run, we will deploy AI and automation and more of our operations and continue to advance end to end Digitization from farm to Fork.
We are committed to driving long term growth with the three growth initiatives.
Investments across all three of necessary to build our leadership and agility.
Let's move on to.
2022 four.
And I would like to make a few comments.
First.
Sales improved sequentially from the third quarter.
Although the pace of recovery was impacted by regional operating of Covid.
October sales benefit from the National Day holiday sales in November December was pressured by increased regional outbreaks.
Traffic at transportation health remain significantly below the prior year due to reduced travel.
<unk> remained pressured but recovered a bit sequentially.
Gary and takeaway remained popular options and accounted for over 50% of sales.
Digital orders increased to 83%.
Pizza hut payable aside mobile ordering has increased in popularity as we enhance the user interface Inc.
Now accounts for over 35 per <unk> sales up from just 7% in the prior year period.
Operating profit grew $280 million, Andy will cover the financials in detail in his session.
As we look into the first quarter of 2021, we see the resurgence of COVID-19 adversely impacting our business.
Nationwide.
Royalties have tightened preventive measures.
And advised against travel large gatherings and dining out.
Especially during the Chinese new year holiday period.
Given the current situation, we see significant headwinds for the first quarter.
Our teams are closely monitoring the situation and leveraging learnings from the past year.
Our marketing progress on encompass a wide array of compelling of a targeting both dining and off premise locations in different party sizes.
It will stay agile to adjust our marketing programs and operations to the evolving situation.
Most importantly, we remain confident in the long term potential of China and stay focused on generating sustainable shareholder return with that I will turn the call over to Andy Andy.
Thank you, Joe and Hello, everyone I will first address key financial developments in the fourth quarter simple, what's some color on our 2021 outlook on that.
Not at otherwise all percentage changes.
Before the effects of foreign exchange.
Let me first couple of our Q4 financial results.
Revenue grew 5% and same store sales recovered to 96% of the prior year period.
The sequential improvement was supported by continuous strength in delivery and takeaway at wild.
<unk> in volume gradually recover.
KFC same store sales with all of a 296% of the prior year period.
Compared to 94% in Q3.
Our transportation of tourists hop sales improve but remain challenging.
System sales grew 3% year over year, reflecting the contribution of new Butte acceleration.
Pizza hut same store sales recovered to 95% of the prior year.
Compared to 93% in Q3.
Same store transaction volume recovered to 98% of the prior year period.
While <unk> and the consolidation of Suzhou KFC contribute at two 4% of total sales revenue.
We opened 505 stores in Q4, which help us achieved a record level of new store openings on a year.
Restaurant margin was 15, 1%.
Up two 7% compared to last year.
I want to thank our team for their excellent work in driving operating efficiencies at.
And managing costs.
Cost of sales was 31%, one 2% better than last year.
This was mainly helped by lower poultry prices and more targeted value promotion episodes.
Cost of Labor was 24, 2% almost flat year over year wage.
Wage inflation and increase in light of cost associated with delivery volume increases were largely offset by labor productivity improvements.
<unk> shortage in parts of on brokers.
Occupancies and others was 29, 7%, one 7% better than last year, mainly attributable to reductions in advertising and savings in our operating costs.
We also receive of around $7 million in rental and government.
Which is expected to phase out in 2021.
G&A expenses decreased 9%, mainly due to lower performance related compensation.
Timing shift of government and defense sales.
And cost controls.
Operating profit was $180 million up 78%, mainly due to restaurant margin improvement.
Please keep in mind at some of the factors driving Q4 profit are not expected to recur.
Such as lower advertising costs and perform we believe at compensation.
And onetime relief.
Some of the productivity improvements due to labor shortage because of all.
So temporary as we intend to increase staffing levels.
Our effective tax rate was 28%.
Net income was $151 million and adjusted net income was $153 million at.
Excluding 23 million of net investment gains and make loans it was $130 million.
<unk>, 5% year over year.
Diluted EPS increased.
43% to 35.
Now, let's turn our touch on our outlook for 2021.
Heading into the first quarter cluster of outbreaks of search impacting on large swaths of the countries, especially in northern and northeastern China, Beijing and Shanghai.
Kathryn implement of stricter public health measures of course, China, such as advisory against travel large gatherings and dining out.
Several cities have also been put on citywide <unk>, Inc.
So you guys saw a CD of 11 million people.
We anticipate significant headwinds for the first quarter.
Our transportation and true locations, representing high single digit of sales will likely be more significantly impacted.
Startling statistic show that the number of traveler was down over 70% in the first few day of the Chinese new year travel this year.
We started in late January.
Overall in traffic has been effective.
We expect trading during the important Chinese new year holiday period to be subdued.
With sales impacted by substantially less travel smaller gatherings and.
Generally reduce social activities.
Sales and lower CDC, low tier cities, which will of sent over half of ourselves well.
We will also be impacted of fewer people, who returned to the hometown for Chinese new year.
At KFC has a higher percentage mix of stores in both utilities and transportation hubs.
It will be disproportionately impacted.
So Q1 will be all hands on deck in response to the headwinds we have step up our value campaigns and tailor our marketing candidates according to <unk> and <unk>.
We have also adjusted our operation at delivery resources to capture shifting dining and off premise demand.
We will endeavor to do everything we can to mitigate the headwinds.
Please also keep in mind that January end of first quarter will be a tough comparison last year COVID-19 related lockdowns.
Started only in late January.
On a year over year basis last year sales benefited from strong first three weeks leading into Chinese new year.
We.
The recovery.
We will remain the anemia.
At uneven.
Influenced by regional outbreaks reduced travel and lingering effects on consumer behavior.
In 2021 module will remain subdued compared to pre COVID-19 levels as we faced several headwinds we.
We expect full recovery of sales to pre COVID-19 levels to take some time.
Compelling volume campaigns to drive traffic will continue to be our focus.
We expect two year wage increase since 2019 to be high single digits.
<unk>, 3% in 2020 at mid single digits in 2021.
We are stepping up our efforts in sustainability.
In light of the latest regulations in China, we are replacing plastic packaging with more eco friendly materials.
Is expected to increase our cost of sales by over $30 million in 2021.
On a year over year basis, we are lapping over $100 million of Covid related government and rental relief in 2020, which is mostly phase out now.
Our deposit side, our commodity prices.
<unk> to decline by low to mid single digits, mainly driven by low posted prices.
Since we usually low.
Our approach of contracts one quarter in event.
Prices may still fluctuate throughout the year.
We will build on our momentum in 2020.
And target to open approximately 1000, new stores in 2021.
We will step up investment in digital logistics and other operational infrastructures to support accelerated growth.
Total capex in 2021.
We will increase to approximately $600 million.
These investments will impact profitability in the near term, but will yield benefits in the long term.
With that let me cover our capital allocation framework.
With over $4 3 billion in cash and short term investments at.
Strong cash flow.
As much at 8 billion of capital, we will deploy over the next five years.
As we think about our long term capital allocation.
Our key goals are to deploy capital efficiently to accelerate growth and to create long term value for our shareholders.
Now before I outlined the use of cash I want to emphasize that we will continue to run a prudent financial strategy.
Ensuring sufficient cash on hand or working capital.
Sufficient we serve you with cash.
Potentially.
Organic growth remains the most important driver for our long term charges as Joey mentioned.
We aim to achieve the total installed milestone much faster than the first 10000 store milestone.
We will prioritize our capital to support organic growth.
We will more than double our capex over the next few years.
The majority of our Capex will be used for accelerating store network expansion and store remodeling for our core brands KFC and Pizza hut.
Following them, while keeping them fresh.
We also plan to invest several hundred million dollars in our emerging brands.
Especially the coffee business.
Building them into meaningful scale, and a material part of our business mix.
While expanding network of physical store is an important growth driver Inc.
Enhancing our digital and delivery capabilities and logistic infrastructure.
<unk> important to our future success.
We efficiently and adequately support a network of 20000 stores with required a bigger mobile bust and more agile digital and physical capabilities and infrastructure.
In addition, we will also like to see Richard Digitization automation and intelligence across our operations.
So we have earmarked over 1 billion at dollar investments to advance our end to end Digitization program.
<unk> digitizing, our store marketing supply chain and back office operations.
Roughly another $1 billion has also been earmarked to expand our logistic infrastructure to enhance automation capabilities to drive efficiencies.
The west of the capital will be allocated for shareholder returns and M&A.
We resumed cash dividend in the fourth quarter and have returned $1 2 billion to shareholders since the spinoff.
In the future, we expect steady returns to shareholders in line with our profit growth.
We will also maintain a disciplined approach to M&A and investments.
While exploring opportunities to invest in brands with excellent growth potential.
To acquire new capabilities and technologies and to view of support our ecosystem.
We believe these opposed to capital planning will drive long term shareholder returns.
All in all we are encouraged by the solid financial results. We delivered in 2020, we will continue to invest for the long term.
I am confident that we are on the right path to emerge from the Covid pandemic stronger and better prepare for future growth.
With that I will pass you back to at <unk> to start the Q&A Debbie Thanks, Sandy who will now open the cost pressures in order to achieve at many people as possible of the chance to ask questions.
On the material processed through one at a time operator, please start the Q&A.
Yes.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question. Please press star one on your telephone and weaker name to be announced if you wish to cancel request. Please press the pound or cash P. Please.
Please limit to one question at a time if you have follow up questions. Please your question. He joined our first question comes from the line of Shao Lee.
Please ask your question.
Good morning, Good morning, Julia Andy on the 10-Q, particularly on the first question.
On my question would be regarding the China new year.
At <unk>.
Joe you mentioned that there.
They are very challenging environment, Inc. First quarter.
But we know that Yum, China on the yourself are still good at handling the challenges as we can see last year. So.
After learning of lot of experience in coping with the Covid situation in 2020, how could you do differently on the mature this is more flexible to to capture any emerging demand will protect yourself on the downside in terms of loss of business in the op comm insurance new here.
Any color would be of highly appreciate it. Thank you.
Thank you Paul.
The quota one which is driven mainly by the Chinese new year will be at will.
It will be of quota, that's rather difficult to model.
Because as I mentioned earlier, we do anticipate significant headwinds.
And we do expect recovery will take some time because of situations do fluid.
Three things for sure in terms of trend one is the 13 cluster outbreaks.
And that result in Titans preventive health measure of advised of days Travelodge group.
Gathering and dining out.
<unk> is.
On the traveling and associated activities significantly reduced so we already have seen the first few days of the travel volume is down significantly.
And then.
And then the lower tier city.
<unk> sales, which is more than 50% of ourselves, particularly efficacy and large party size ticket will be reviewed and also we do also expect more competitor will stay open during Chinese new year versus 2020.
The first the first thing we know at KFC is slightly more impact that Ben Pizza hut because of higher mix in lower tier cities and transportation locations.
The next important question is how are we going to deal with their end certainly we take all of the learning from 2020.
The.
The overall tone at the importance and of parity.
His view of the safety of our employees and customers and on that on that foundation.
On the forecast is to stay nimble and agile we.
We do closely very closely monitoring.
Closely monitoring the situation.
And at that to focus here in terms of staying nimble and agile to step up the value of campaign and two of lineup of all of our digital and delivery resources, including our membership program.
Two two to prepare for the Chinese new year.
Second is we adjusted our marketing calendar according to sit at tier trades on party size and location.
I suppose compared to.
2020 program at this time.
When we plan the marketing campaign, we have you can see we have multiple scenario planning.
And that show help us stay even more agile compared to last year last year same happen before we know it's going to happen. So we lead.
With a fast and our team is doing a fantastic job for this year.
We have more scenario planning and dash that show help on our team.
Jim Steele.
At <unk> to the evolving COVID-19 situations. Thank you.
Okay.
Quick follow up on a new store.
At a great job of <unk> opening many stores book if you look at the result, actually we didn't see that of the new store really dragged down the restaurant margin. So looking forward shall we see that of new store will be the key driver for the growth without compromising on margin on a sustainable basis.
Thank you share pool.
A quick quick answer as well when we open stores as you as you guys know at already.
We have ruff.
Idea of how many stores, we want to open but the most important decision is.
Whether this is of goods store or not.
So if we see opportunity to open the store will open more or less depending on the quality. So we.
We always keep our quality.
And as you can see we still opening more stores in lower tier city.
Our quality control continue there. So it's always the disciplined approach that we have been following and will continue to pursue thank you.
Thank you.
Our next question comes from the line of <unk> Yang from HSBC. Please ask your question.
Hi, Thanks management for the presentation and congratulations on the very good results. My question is also related to the store opening.
We have seen like at the very high quality store opening in for Q, but I would also like of normally like if there will be more remodel meaningful Q and a couple of assets like the new stores might knock on.
Contributing so much to profitability.
So I'm wondering whether what we have seen for Q is sustainable.
As.
On the call.
Earlier like on like of when we expect like at the store opening might continue to beat expectations, whether it's going to be too hard.
The contribution to total revenue will increase as well as of the drive.
At that driving higher profit growth as well thank you.
Linda This is Andy Thank you for your question.
Let me first address the question about.
Of this all opening pace, obviously, we're very pleased that we have opened.
<unk> hundred five store in the fourth quarter.
But I also want to remind folks of that.
Even though is probably still higher than what we expected, but we have on.
We told folks that because of Covid impacts.
At the store opening will be more back end loaded and so with the little bit easing in the COVID-19 situations in fall.
In winter.
Half year.
Our development team have reaccelerate at the pace in chartering of advantage of that that window and open as many of his call as possible and then we also tried to push.
Some of those store openings earlier.
In the fourth quarter, so in anticipation of the Chinese new year holiday period.
So as we mentioned we expect to open one thousands of all of this year.
And at.
And it is a very high pace right. So you think about our hours at all right now we know we have of modern.
More of them and Arkansas Index golf ball of late openings.
No.
Episode of of New store now.
Putting full effect of all year last year, we opened almost like.
Once saw every eight hours and so thats at a very very fast pace. So we will see maintaining at a fast pace.
But probably not at the level that we're seeing.
Every quarter of 500 plus store flow.
And I think I don't think that is sustainable at least.
On the near term, we do have plans as we mentioned on the prepared remarks to accelerate store that were expansion.
And we and allocate resources to do that now in terms of the profitability of our new store as Joey mentioned.
Is.
We have a disciplined approach who saw openings. So if you look at the payback period for KFC as restaurant two to three year end have been very consistent over the past few years now pizza.
At the hub, it's about like three to five years.
And also reversal of reserves. So we have a lot of incentive to open at all estimates at all as possible.
Within that framework of disciplines opposed to saw openings make sure that we have Wi financial income.
So hopefully end than the one thing as you can tell you know obviously with that kind of fast pace of.
Fall opening.
It demonstrates our confidence in the market in China and also the potential opportunities here in China. So we always encourage investors to look at the overall system sales.
Lot of Air then.
To focus on those.
Same store sales growth.
China is still a growth market.
Okay. Thank you very much indeed.
Our next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
Hi, Joe Hi, Andy Congrats political results at Mcclatchy.
While pizza hut, I think clearly last year.
On the last question was hockey Sneaker Pant or we see of strong margin improvements on those bookings for fourth quarter of <unk>, We actually opened on the hospital. So can you share with us.
Like I told you on.
It's all volume revitalize of implants of swap all of our Newbuild cost on into 2021, and whether we will see improving cancel of loss trend and also further margin offline. Thank you.
Thank you Michelle.
For Pizza hut.
At.
Overall, we we.
At what we.
Profit about sales first profit later in our turnaround journey and on second half <unk> more than doubled compared to the previous year.
And.
The focus of of Pizza hut in the last few year is about improving the fundamentals.
The business with.
We believe we will have an impact for years to come and I think at that kind of set the tone of our focus going forward. So our focus going forward is to continue to improve.
All of these key aspect to cement the changes made in the last few years and make pizza hut of resilience. This is model I think this is a very important word because I think we believe we have of resilient P&C business now and at the affiliate network piece.
Pizza hut business will be also resilience as well so in terms of focus maybe I'll just highlight three things.
Of that we have done we have were very high end of in the past three years and they will continue to do at that in the coming period, one is the new menu.
Our new menu rollout in late Q2.
At 75%.
Item of new or upgraded compared to two years ago and food is at.
EMEA kind of emphasized how important it is right and one example, I mentioned earlier at the Portuguese to concurrent.
It's fantastic fluid end is innovative and we will continue the innovation.
And then the second highlight is our double digit growth in off premise dining.
Which including the delivery and takeaway.
Because we all understand our concern to us dining business rightly. So so at a few years how at what you can see the mix right now is not healthier.
At.
<unk>.
40%, 40% plus of the total sales so that also makes our overall business more resilient.
Digital order digital capabilities.
So really critical in any.
Restaurant business right now the ability to come at the online and offline operation is part of the efficiency of ton of the.
Customer service experience.
Let's take one example, the table side ordering.
We move the mix of table side ordering.
Q4 at today is 37% to 37% of our order on the tables at them digitally and that compared to five months end during 2019, and we only started.
<unk>.
<unk> worked on this back to 2018, and you can imagine that full of improve.
Improve the customer service.
And then of course, the labor cost.
So so so on top of that the full thing.
We also launched ready to Cook steak and pasta to catch of home consumption trends.
Our demand and that is partly.
As a result of the pandemic.
Such growth is.
At the opportunity of new growth opportunity has become even more visible and we kept at that so.
As a result of of all these once at least neutral and more.
Asphalt and initiatives, we have seen the improvement of our.
Money to value.
On perception of value for money perception and also on.
Overall customer perception on towards to the floor at the service level of the value at the dining environment.
Therefore, the fundamental on the momentum is is promising and net.
As I mentioned earlier sales growth profit later, so now the sales at a good at this.
Great and we start to see the improvement in profit and we want a bit of pulp going forward. Thank you Michelle.
Company volume.
Yes.
Our next question comes from the line of Anne Ling from Jefferies. Please ask your question.
Hi, Thank you very much I have a question of general regarding Capex and also like in our investments.
And the passion of we have around 400 of 500 million Capex and depreciation of roughly you know similar as well so with the step up in terms of like.
Most of opening and also a step up in the Capex of 600 million.
Doesn't mean that we will have end dissipation of increase in terms of of depreciation from year 2020 at one of what I E. No EBITDA growth will be higher than that of the EBIT growth and then all of our.
<unk> 1 billion each investment in Digitization on also on the logistics.
Does that include this 600 million cash.
Capex.
And how does that roll out like off.
For each year.
How much will be spent on this part and how will it impact our P&L. Thank you.
Thanks, Dan.
So capex spendings.
If you look at our historical type of spending.
<unk>.
That's very efficient.
On this stretch actually.
You look at over the past five years of three five years, our capex spending was roughly.
$415 million plus or minus.
Tom.
And then we have been opening installed more and more so if you look back a few years ago, we opening maybe like five 600 store.
A year and now we are opening more than 11 under store in 2020. So we were able to do more with less and the team have been very frugal in how we spend money book.
Booking into savings in Salt development.
And in infrastructure.
Now what we want to do with this.
Couple of outpatient appliances.
Sort of like <unk>.
This is <unk>.
Plan to focus more on growth driving more efficiencies and the thing about the longer term.
So we will still have a bed discipline.
<unk>.
Investment strategy as we have mentioned earlier on new store openings.
But we will definitely look into ways to accelerate.
Our market penetration.
Both in terms of low E series.
We have trucking so at 100 cities that we have not.
Of our present yet for KFC.
Of helping more fearful of pizza hut, so theres a lot of likely ahead of us.
And then for Cds that have already.
A restaurant.
We likely going to try to increase density on.
On a special week.
We will invest more installed at terra to delivery and takeaway.
So definitely the majority of our average spending is going to be in store expansion ex I would've thought of expression for our core brands KFC and P value.
Now if we.
Look a little bit.
<unk>.
Longer and we also tried to growth our margin growth on our specialty coffee as I mentioned in the prepared remarks.
Where are the growth out and to scale and also become a material part of our visit volume.
Going to invest more.
And so no vote Leslie Nu.
Your line of business in the near term, you're likely going to see an impact on some of the.
Sure.
Of course in expenses, because obviously ramping of our new Bryan require some investment.
The other one I think for Capex spending.
<unk> is digital.
$1 billion and do so it will be.
A very large investments over the next few years, but this is a very important transformation for the restaurant industry.
As a company have undergoing that for a number of year, but we're going to accelerate at a much bigger way.
And you would see more technology being deployed.
Through at our operations you will also see more automation deploy in a restaurant in our supply chain.
You will also see more intelligent data analysis that would help us in marketing supply chain.
And overall operations in the back office so all of this.
So when you think about this sort of like if you think about.
30 years ago Capex as part of our investment in store opening a two day no less.
Investment in digital with digital capabilities, having the rival but infrastructure to support a very low ash network of.
At all.
We require.
The increase of investment so we're basically training.
Capital.
Labor. So do you think about our store operations we have.
One more store over the past few years.
Watson will be stable workforce somewhere between 402 of 500000.
Our employees and all of that.
It is possible because of the investment in infrastructure that we have built so as I mentioned.
The question is important.
<unk> investment in digital infrastructure is equally important.
Set of our future.
Yes, so we can of near term.
As we wrap up as mentioned we over the next few years, we're going to ramp up doubling our capex spending that would have the impact on depreciation.
But I think at the long run you would see gains from other area of productivity quicker sales.
And then all of it will be a.
Fantastic return for investors.
Of that address your question.
Yes.
One of at a point of at.
For full end.
We look at these things.
Savings in terms of efficiency from automation and technology investment just thinking about at 2015, we have roughly about 7000 per store.
<unk> we have.
10000 store.
Our number of employees actually still stay on.
At the number of 400000 plus.
So.
That gives you a sense of the achievement of the last five years end.
Our fleet that gives you a sense about.
What kind of.
Potential achieved loans, we would like to achieve with the.
And last months of investment in.
Digital delivery.
And our supply chain infrastructure.
Because on.
Okay.
Before opening the stores, we need to get the infrastructure in place.
All of the two to enable the acceleration of store expansion otherwise the influx of if the infrastructure at just catching up to the store expansion.
And we are dragging our feet.
Well, if I could describe it that way if that makes sense. Thank you Anne and also I want to give you one more anecdotal evidence of.
On digital and infrastructure investment, yet and how that how bud.
<unk> actually would be more productive and keep costs down you think of our membership program. We developed at an investment that over the past couple of years.
Our whole digital CRM program will help us to keep.
Low.
Lower compared to our revenue growth and that's all is possible because we have the ability to reach our customers and effectively utilized at that technology.
You may see cause increasing part of the P&L, but hopefully in the long run you see also improvement on the LSI.
Again as mentioned.
You think about China two day notes.
Got it thank you.
Our next question comes from the line of Channel from Bank of America. Please ask your question.
Alright, Thank you I will carry on.
So I apologize if my.
Question on has been addressed by our previous speakers of mine.
<unk> gross disconnect.
And then move on to call on so on more interested on the pay per call site.
So we understand that.
Some cough is coming down pretty dramatically.
Meanwhile, we are also stepping on our value initiatives during our recent channel checks, we also noticed us.
Actually pulse of them have actually reached price a little bit for PSD at the beginning of the year. So we can distribute more than enough to offset the costs associated with our eco friendly initiatives. So given all of these kind of moving pieces is it fair to say that split on paper cost is not going to at the end mutual.
For total company one thank you.
Hmm.
Thank you Shane and I thing.
That's right. So if you think about the cash.
Most of our poultry.
<unk> came down over the last few months, we have locked up the contract of months ahead of time. So I think at near term that will be a tailwind for us the cost of sales.
As you correctly mentioned.
Megan.
We see quite a bit of headwind for the first quarter net.
Low traffic.
In terms of transportation hubs, let's kind of lowest traffic of the trust with your company for CMI sectors.
And then we also see out of having this until us lessors of category.
The small size groups.
Let's go to at <unk>, So we do see some headwinds for us.
Our first quarter sales.
So at this stage of the.
Recovery is very important for us to continue to focus on value proposition too.
Consumers and so you should expect.
Stepping up that campaign as you have seen in earlier part of the first quarter.
And traditionally we don't do as much value campaign of Chinese new year.
At this year, you're probably receivable.
Now on the on the other hand I think.
Sustainability initiative this.
This year as I've mentioned.
From a cost of about $30 million.
For the full year.
Packaging, we've by replacing.
Our plastic with other Eagle valley of materials for packaging.
Yeah.
It will be ongoing initiatives too.
To the ESG.
So in the future.
We will see additional initiatives as well so is number one off events both of us to build up yesterday of initiatives, so but no I think.
For <unk> so at.
Can you talk commodity prices that would that would probably at least.
Sure.
Low side of it we'd like to just at the philosophical comment on food cost.
All of Yum, China in front of you on note that we believe in saving.
All of the costs, we can save particularly the G&A hotel, Neil whereas we don't save on the full cost of all customer asos.
It's all sincerity and now believe that we show.
Served at best we could sort.
True to customize it.
We do get some savings from the commodity cost, we actually will reinvest at saving big part of the same day.
Two to treat our customer of that as well and we believe.
That is the right thing to do in the short term and the long term Inc.
Alright, Thank you Victoria and so just a very quick follow up if I may at least.
Net of week lots of headwinds coming into Q1 on Meanwhile, we also need to bear in mind with a very week of February and March last year.
Of course.
On the is taking some measure of movement on last year, we were talking about nationwide lockdown with almost every single day shutdown.
Two months so on.
Two of the boots off heading into February and March skus or comps.
Looking much better so it's fair to say that we actually could see year on year recovery.
In Q1 on may be could be at.
It's difficult for us to return to the level of about the stores in Q1 of 219 without the fear of comments. Thank you.
China, Let me address these questions.
<unk>.
I really appreciate the challenge to model the first quarter and in total we also see lots of moving parts.
And one thing I want to <unk>.
Emphasizes that day.
Definitely this year.
The number of orphan type of cases.
No.
Lots of of limited 4000, plus.
However.
It does not mean set of corrective measures.
In fact.
The opposite.
The learnings from last year government authorities of more cautious on consumer more cautious and taking a lot of vault preventative measures. So as we have mentioned if you look at the CMI.
Chinese new year period for travel and the government have put our advisory against travel and encourage folks to stay put and of cities to celebrate Chinese new year, and we have seen.
Wearable tropic of.
Air traffic as well.
More than 70% in just the first few days of very important.
Chinese new year period, now of Chinese new year periods have been historically bearing parts of our business.
And then for KFC.
Which have high single digit of of sales and especially in China, new year period of double digits and net income of the sales are coming from the channel.
Within hub in tourist locations that would be disproportionately impacted.
If you also look at the <unk>.
Trading situations.
At some time.
It's awfully was folks go home, we celebrate at go out of the families.
We generally see a.
On a boost in sales at both of your cities. So given the people of thing in the cities that will be a little bit different situation. So again this would call will have a bigger impact.
On Dfc.
Of course.
You have presence in the model at <unk>.
And so so that's one complexity there now at the other complexity that goes on there is that.
If you think about last year, we go into the first few weeks.
In January last year with restaurant momentum.
And then a lot of that only happens.
In late January.
Don't have that benefit this year.
That's one of the other thing.
Is that you can go at KFC you have recovered very strongly.
In.
In in March and later part of the.
2020.
The reason is because.
We were able to cap a lot of our store opened we able to ensure safety of our employees on customer we see tremendous book.
<unk> in our delivery business.
And then even though of pipe you install our close at that time, we were able in Russia of trade zone to serve those customers now with most of them moving forward.
Most of our store open.
A few stores closed less than what the sales of both of those of impact per day.
At the traceable delivered trades, we're having which are so therefore things on capacity, but also more challenging.
So all in all I think.
That's why we want to highlight that opened out of preparing.
Mark.
Also in our earnings release, so that we can give a full of picture.
Folks outside of China, and Hong Kong, and the U S and Europe, so that they can understand even though the.
Pandemic.
In fact of cases, maybe less but.
Credit measures.
Strict appropriate measures.
All of us.
Behaviors, but nonetheless.
And then.
With the Chinese new year of complexity.
More charging per People's models, but we tried to give you of that.
That's quite a lot happening in the first quarter.
Looking at the.
TC in Ta of last year at tier one.
Summarize what Andy just described because although at the same store sales for Q1 last year was minus 11, which as you know.
A pretty pretty decent number given the pandemic.
Due to all of the phase of Andy just described the TC was was down 30%.
However, with everything that we fit including when when people are going back to work because of stores with many of our stores still open with benefit of law from at.
And also we focus on the high ticket item of delivery of the Ta increased by 27% of Pcs was down 30% Ta was up 27, 7%.
And that supports the same store sales for launch year tier one at.
And you were in that you can imagine for this year.
Such benefit of the ticket increase.
Would be very difficult to true to that.
Thank you.
Thank you Julia and actually at sort of transform Shanghai Hangzhou last week, so kind of kind.
Kind of hard to registrations on at the moment on order trends you said you're facing.
And I hope of real attrition for the higher profile, you're looking to sustain the business. Good luck. Thank you. Thank you.
We tried to restrict for at present, the full of picture here on.
On the growth.
Our next question comes from the line of Lillian Lou from Morgan Stanley. Please ask your question.
Thank you Joanna at D. A.
On top of my question also I have a simple.
<unk> profile up a question on costs.
Joey at the beginning you mentioned this year on a going forward on in the next couple of years of multi format store gonna be of focus just trying to understand the economics of.
The small format I eat of small towns.
On the unit sales spaces.
How much lower on a per unit sales versus our previous average because of I understand.
If.
If we look at the <unk> store sales pre COVID-19 level, it's about $1 1 million on U S dollars per year per store and the trust of trying to get at some picture of how low it could be when we get more on new stores in a smaller format.
Thank you.
Lillian I just have two quick comments, one is we forever Yum, China at least one of the.
<unk> is going through such high growth, we are always struggling to balance of system sales growth our same store sales growth.
Because it is absolutely right thing to do to drive the system sales when we kind of open that many stores, but it has certain price.
Pressure on the same store sales growth as well.
But we have to continue to do the right thing.
Hopefully at delivery delivering both system sales and same store sales growth.
For the smaller store.
The revenue is smaller, but we can't open more stores one of the profitability level is is comparable to a big store and that I think is very important.
Therefore.
Net net.
System sales.
Is improving when we open more smaller store.
In the price no.
Not only now pant.
We actually have already have multiple store format.
Six stores smaller store, depending on the the low.
Location.
But it just right now when we are going into tier six cities and the loans.
You know we are open.
Even smaller store.
And with lower Capex, but the <unk> will still be compatible.
I just.
At a little bit too on what do we mentioned obviously with the store format.
We'd like to see.
Smaller sales throughput, but we have a disciplined profit.
No.
And that help us to to be comfortable that the the possibility will be comparable and the returns while the rest of them at the comparable.
Now I think the couple of couple of reasons. These assets like most of all of us call to penetrate.
We are also the above them dropping low smaller store that adhere to what mall delivery and takeaway, especially into urban center area.
I think it's important to note at.
For delivery and takeaway, that's a net what effects right there closer more impacts of more dense network.
That helps customers of improvement of delivery speeds.
And then also drive incremental.
Got you know folks.
You often do work at.
<unk> two formula.
All of that going to do at takeaway right.
And then if you want delivery for like five miles of hydrometer at par.
At the leader, but when you.
And shrink that into three mile in Chengdu walking distance to 500 meter.
Probably we'll be happy to do that so that is some of the things that we're doing.
And we have been doing that for the last couple of years, but obviously the COVID-19.
<unk> accentuated at an accelerated that plus maybe go which behavior change and so so we are going to accelerate at that.
Kind of development as well.
So hopefully.
We have addressed your question.
Thanks, a lot of Dewey and Andy Yes. Thank you.
Yeah.
Our next question comes from the line of C. J Muse from CIC. Please ask your question.
Thank you management.
And congratulations on the strong reserve salaries.
We have no plans of here you would you mind.
A little bit please.
I'm, sorry could you hear me at all.
Better.
Okay, Okay sure.
So thank you for taking my questions and I have one question on margin Kfc's margin recorded a year over year of decline in Q3, but to recorded significant YY increase in Q4, So I wonder what's the reason behind US and will continue into next few quarters. Thank you.
Well, thank you Sanjay.
In total margins, obviously as we have mentioned a little bit.
In their prepared remarks.
There are some of some of the factors in the fourth quarter.
That was.
Not expected to recur for example.
Some of the.
Guffman rental relief.
And then we also looking at.
Some of the timing shift in GAAP of incentive.
That may not recur.
Next year.
And likely not incur mixture of specialty for the Covid related rental relief at Jefferies. Please now of yet.
The second part of that is that.
Our neighborhood of improvement there have been very strong.
And we however pilot.
Part of that is also due to.
Some labor shortage.
But on workflows.
So that at that.
As we have mentioned before.
We.
Going to be temporary and when we.
<unk> of second level of that May also ease a little bit but all in all I think we have done team at a tremendous job on controlling costs.
And.
So some of those cost control.
We continue to next year.
No.
We have lived with discussion about.
Commodity prices commodity prices also use of a little bit.
In the fourth quarter, so that also helps.
Our cost of sales. Despite we are stepping up most of the activity.
So that's another part of that so.
Some of the I think in short you thought some of those cost savings some of those margin improvements due to productivity improvements with the carryforward of next year some of them would likely be at.
More temporary situations.
But all in all I think this year at 41.
Focus really because of <unk> to drive that.
Sales and traffic recovery.
So we should expect.
Stepping up in cost of <unk>.
Sales in terms of promotional activities.
Auto ex should expect end of increase in advertising spending.
<unk>.
And again the cost.
The two year period.
Impacted by COVID-19.
19, our same store growth is not.
As of a couple of years.
But if you look at our cost of range.
<unk>.
The increase would come on at four two year. So so so that's why we in our prepared remarks, we caution folks that know that 'twenty 'twenty, one margin overall competitive pre COVID-19 level with few remain subdued.
And one thing is that we still have some way to go before we see sales recover to the reported level.
So thats why despite some of the productivity improvements on even if low prices, we have a few of the cautious.
On the project.
Thank you. Thank you Julian that at M D.
Thank you very much.
Our next question comes from the line of Karen <unk> from CLSA. Please ask your question.
Okay. Thank you management, China came out of Christian.
So I'm just curious about your statement on your coffee.
Because people are then being previously I think <unk> has been okay.
Finally, the business model and growth.
I can store format for your call 50 day space, you're at periods of coffee Joy on stupid I mean, just mentioned a couple of times and you win extra rate to the expansion of your coffee.
Couple of years.
To scale up to a meaningful scale.
I'm wondering does this mean that you are at five <unk>.
Volume increased its model or the store formats.
Or you have very defined.
On a replay couple of more of those for your coffee and enjoy basically its going forward.
Could you just.
Exactly at more about your strategy of two years.
Company is funding like three to five years, especially in terms of balance.
We are still operating.
On a country ocean so.
So anything you can share result is on we appreciate it thank you.
Thank you Terence.
Let's talk about at J&J little bit and then we'll move on to Nevada.
Tien day, we still have roughly about 50 stores at.
And we have been working on the business model.
And then refine it and build on it.
The focus is on getting the fundamentals of.
For example would be the day, Paul we build of delivery, we improved the store economics.
Give you a sense of quota for all of.
Of 2020, the delivery business is already 30%.
Sales of <unk>.
Sanjay.
It's a much much higher compared to the year before.
The Delta here is availability of the system.
And also food and et cetera.
And then flow.
Sanjay we are also building the <unk> business.
It has us via partnership with the amount of company.
So that we supply of coffee in the office in Tulsa.
The office of pillar of our partner and that partnership is about.
It's about opportunity for 100 sites and we'll continue to explore that so some of the potential Avenue of growth is.
On store expansion opportunity, but also on the store economics, because while we have 50 stores. We have certain scale. Then we can really work on the economics.
It's very hard to to really have a true sense of the economy when we have the.
Few store.
But let's move on to Lovaza Lavazza, we only have five stores right now in Shanghai, However, the improvement of economics.
Feet of improvement is it's quite fun and as I mentioned earlier.
Actually quite happy with the results I mean, the brand is the brand.
Very well received by by by the customer.
On the cause of the technology in order of fundamental we work on Sanjay and that that that helps.
The delivery a day.
Paypal of Lovaza immediately as well so we our delivery at business for Lovaza, even with five stores already a quarter of the south and of course, we are also building the CRM end and we already start to improve economic end.
The Lovaza business for 2021, we do plan to accelerate the opening.
Quickbooks, Inc 2020.
And we show go out of Shanghai.
All of US this year as well, so I think without going into more and more detail of course, yet however at a couple of things I think at.
Joey mentioned.
We see the fundamentals at CN.
<unk> improving so if you look at install over open more than a year.
I think they have returned to positive SSG in late 2020.
And then.
That of sales and better mix of products. We also see more store viewing to break EBIT. So thats.
I think overall at a positive trend there.
Lavazza.
Obviously two of every new initiative.
I think what we can say at that.
The reaction from consumer and the initial sales number or better than what we have initially forecast.
So.
Still early in our Gainesville call before us, but with weight of confidence.
And more importantly, I think we internally have decided coffee is at very important category for us in the longer term and we will.
And that's what we needed to make it successful and material.
An important part of our business portfolio.
Alright.
Okay. Thanks anything of Joy.
Thank you.
I would now like to hand back at the conference today speakers. Please continue.
Thank you for joining the call today, we look forward to speaking with you on our next earnings call that concludes today's call and have a great day.
Thank you everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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Ladies and gentlemen, thank you for standing by and welcome to the Yum, China fourth quarter and fiscal year 'twenty earnings Conference call. At this time, all participants are in a listen only mode of sort of speak of a presentation. There will be a question and answer session to answer question on during the session you will need the price for one of your cash.
All of phone. Please be advised that today's conference is being recorded I would now like that of contracts over to your first speaker today Ms. Debbie day. Thank you. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining Yum, China fourth quarter of Tucson, 'twenty earnings conference call joining us on today's call our CEO Ms. Joey Wat and all of our CFO Mr. Andy Yeung before we get started I'd like to remind you of that our earnings call at Investor presentation contains forward.
Looking statements, which are subject to future events and on certainty or after him at results may differ materially from these forward looking statements. All forward looking statements you'll be kind of theater 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 comparable GAAP matter, where it comes at a show of the non-GAAP and GAAP measures is included in our earnings release.
This call includes three sections.
Joey will highlight all of our accomplishments over this past year end review our strategy at key priorities.
And he will review our financial performance and all of those in greater detail finally, well open the call lots of pressure you can find the webcast of this call and I'll point volume presentation on which content is operational and financial information for the quarter on all of our IR website now I would like to turn the call over to Joey Wat our.
Our CEO.
Thank you Debbie.
Hello, everyone and thank you for joining us today I Hope you and your families are safe and healthy no matter where you're at.
First I want to acknowledge the great work of our 400000, plus employees and express my heartfelt appreciation with their dedication productivity and tireless efforts.
We have been navigating the difficult times.
We are actively managing our business.
Looking back at the past year will put their health and safety of our employees and customers is on them.
On the one priority.
Our team kept most of the stores open even at the peak of the outbreak.
All of its the fusion capabilities and agility helped us overcome many challenges.
We kept good of premises consumption of opportunities and sort of recovery in banking volume sales.
On traffic recovered sequentially since the first quarter.
Our operating profit remains solid.
And grew at double digit year over year in the second half of this is the result of strong execution and efficiency improvement.
Can see remained resilient, we accelerated store expansion with attractive return and maintain solid profitability.
We made remarkable progress in strengthening the fundamentals at pizza hut across all aspects of.
That is reflected in the sales of margin improvement.
Going forward, we will continue to fortify the resilience of Pizza hut business model.
At the core of all of these is our ability to innovate chassis is premium while groupies broker resonate well with consumers and we're sold out within Inc.
And as we've come to income G.
Yes, it not in Guangzhou is the perfect items for the winter.
Portuguese to concur at at Pizza Hut became an instant hit on the delivery menu.
With demonstrate our commitment to be a responsible corporate citizen.
The pandemic reinforce all at the termination of total up to all employees.
We extended family care coverage designed of full our restaurant managers to of 13000 of restaurant management team and supervisors and their families.
All of those are recognized in the industry for the third of Conservative here, we were satisfied at the top end prior in China and included in the Bloomberg gender equality index.
We were also recognized for our commitment to sustainability and we were named an industry leader in the 2020 at all Jones sustainability index.
Let's move on to growth strategy.
Despite the challenges we are optimistic about the future opportunities in China.
We have been staying of course with our long term strategy centering around three key growth initiatives. Let me give you some updates on our latest thinking.
First store growth, we opened 1165, new stores in 2020, marking the highest new store openings in the 33 year history of operating in China.
This is equivalent to opening one new store every eight hours.
Our new stores Paypal remains healthy at approximately two years for KFC and three to four years for Pizza hut.
We intend to sustain their store building momentum into 2021 and beyond and reached our next 10000 stores much faster than the first.
There's still plenty of white space in which we can expand we are tracking over several hundreds of cities in which we have no presence in China to penetrate new market can be a pile of tanks small-time model designed for the needs of tier six cities or the low.
This model has localized menu.
Total sales and operating models that require less capex.
We are encouraged by the initial results of these pilot stores and.
We will open more small type of model stores, Inc, 2021 and KFC.
And more established cities, we will increase store density.
With our multiple store formats.
The mix of off premise occasions continues to increase we.
We have further reduced the average store size and Capex per new store. One example is pizza hut hub and spoke model, which we introduced in 2019 Investor day.
I'm excited to report that with nearly 50 stores.
50 of them.
Our hub and spoke stores at the end of 2020, the result of very promising.
We will roll out of more of these stores and other small store format at that all of our store models to evolving consumer needs.
To create an even stronger foundation to accelerate expansion, we are stepping up investments in our infrastructure more details will be provided by Anne day later on.
<unk> portfolio of growth, while KFC and Pizza hut remain key growth drivers. We are also leveraging Yum, China has resources execution capability and learnings to develop our emerging brands.
Briefing of brewing in coffee, we now have three distinct brands with clear segmentation strategies, we are committed to accelerate expansion of our coffee business and make it meaningful pulp Yum China.
K coffee will fuse that daily ritual with good quality coffee at affordable prices at over 7000, KFC restaurants in China.
$140 million cost of K coffee was sold in 2020, making us one of the top three players in terms of Soc.
Copy of enjoy has evolved to all of our specialty coffee coffee lover, while utilizing an asset light model. We are working on improving the profitability of Sanjay and exploring other potential avenue of growth.
Newmont, Nevada of the premium coffee indulgence amongst fear, we now have five beautiful stores in Shanghai and we are pleased with the initial results we plan to we plan to.
Saturday openings in 2021 to test different store model range.
Moving from many two flagship stores.
On the Chinese QC, Montana post acquisition integration of quantity of one has progress well, we have driven synergies in product innovation franchise at the vitamin Enterprises, Inc.
<unk> sales recovered sequentially and delivered solid profit since acquisition.
We will go to work on the menu and operations for our Chinese kissing brand to drive store expansion and growth in the seasoning and packaged food business.
The third growth initiative is digital and delivery.
The Covid pandemic highlight at the power of digital for member engagement delivery to operations.
Membership has grown to over 300 million member sales now account for 60% of ourselves.
Privilege subscription program is effective in boosting frequency, we sold 38 millions of discretion in 2020, the average spending of privilege members doubled during their subscriptions.
More targeted promotions helped us keep marketing expense done.
Delivery at has been growing rapidly and even faster during the pandemic and now accounts for 30% of ourselves.
In 2020, we upgrade our RIDEA platform with AI enabled zoning rider on routing optimization and real time monitoring.
In the test Montes on turn rates customer satisfaction and efficiency have improved.
We also test at Ryder share in between KFC and Pizza hut in Eastern China, where low expenses initiative into more brands and more market.
In 'twenty 'twenty, one and beyond we are allocating more capex to further strengthen our digital and delivery capabilities to.
To make our organization of more efficient in the long run, we will deploy AI and automation and more of our operations and continue to advance end to end Digitization from farm to Fork.
We are committed to driving long term growth with those three growth initiatives at Mary.
Across all three unnecessary to bill our leadership and agility.
Let's move on to.
2020 Q4.
And I would like to make a few comments.
First.
Sales improved sequentially from the third quarter.
Although the pace of recovery was impacted by regional operating of Covid.
October sales benefit from the National Day holiday sales in November December was pressured by increased regional outbreaks.
Travis Air Transportation on health remain significantly below the prior year due to reduced travel.
<unk> remained pressured but recovered a bit sequentially.
The luxury and takeaway remained popular options and accounted for over 50% of sales.
Digital orders increased to 83% pizza.
Pizza hut payable aside mobile ordering has increased in popularity as we enhance the user interface and now accounts for over 35% of himself up from just 7% in the prior year period.
Operating profit.
280 million, Andy will cover the financials in detail at his session.
As we look into the first quarter of 2021, we see the resurgence of COVID-19 adversely impacting our business.
Nationwide.
Royalties have tightened preventive measures.
And advised against travel large gatherings and dining out.
Especially during the Chinese new year holiday through it.
Given the current situation, we see significant headwinds for the first quarter.
Our teams are closely monitoring the situation and leveraging learnings from the past year.
Our marketing progress on encompass a wide array of compelling of the targeting both dining and off premise locations and different sizes.
We will stay agile to adjust our marketing programs and operations two of the evolving situation most.
And today, we remain confident in the launch on potential of China and stay focused on generating sustainable shareholder return with that I will turn the call over to Andy Andy.
Thank you, Joe and Hello, everyone I will first address key financial and development in the fourth quarter simple why some color on our 2021 outlook.
Unless noted otherwise all percentage changes of empty.
Before the effects of foreign exchange.
Let me first couple of our Q4 financial results.
<unk> grew 5% and same store sales recovered to 96% of the <unk>.
Five year period.
The sequential improvement on supported by continuous strength in delivery and takeaway.
<unk> in volume gradually recover.
Kfc's same store sales recovered to 96% of the prior year period.
Compared to 94% in Q3.
Our transportation and tourist hub sales improve but remain challenging.
System sales grew 3% year over year, reflecting the contribution of new view of acceleration.
Pizza hut same store sales with help of 295% of the prior year.
Compared to 93% in Q3.
Same store transaction volume recovered to 98% of the prior year period.
Once you all and the consolidation of Suzhou KFC contribute at two 4% of total sales revenue.
We opened 505 stores in Q4, which help us achieved a record level new store openings on a year.
Restaurant margin was 15, 1%.
Up two 7% compared to last year.
I wanted to thank our team for the excellent work in driving operating efficiencies.
And managing costs.
Cost of sales was 31%, one 2% better than last year.
It was mainly helped by lower poultry prices and more targeted value promotion episodic.
Cost of Labor was 24, 2% almost flat year over year wage.
Wage inflation and increase in light of cost associated with delivery volume increases were largely offset by labor productivity improvement at.
<unk> shortage in parts of on brokers.
Occupancies and others was 29, 7%, one 7% better than last year, mainly attributable to reductions in advertising and savings in operating costs.
We also received of around $7 million in rental and government relief, which is expected to phase out in 2021.
G&A expenses decreased 9%, mainly due to lower performance related compensation.
Timing shift of government incentives and cost controls.
Operating profit was $180 million up 78%, mainly due to restaurant margin improvement.
Please keep in mind at some of the factors driving Q4 profit ex.
EBIT to weaker.
Such as lower advertising costs and performance related compensation.
And onetime relief.
Some of the productivity improvements due to labor shortage because of all.
So temporary as we intend to increase staffing levels.
Our effective tax rate was 28%.
Net income was $151 million and adjusted net income was $153 million at.
Excluding 23 million of net investment gains and make loans at.
Was $130 million up 65% year over year.
Diluted EPS increased.
43% to 35.
Now, let's turn our touch on our outlook for 2021.
Heading into the first quarter cluster of outbreaks of search impacting of lost one of the countries, especially in northern and northeastern China, Beijing and Shanghai.
Gaslog implemented stricter public health measures of course, China, such as advisory against travel large gatherings and dining out.
Several cities have also been put on citywide quantity Inc.
So you guys on a CD of 11 million people.
We anticipate significant headwinds for the first quarter.
Our transportation and tourist locations, representing high single digit of sales will likely be more significantly impacted.
Startling statistic show that the number of traveler was down over 70% in the first few day of the Chinese new year travel this year.
We started in late January.
Overall dine in traffic has been affected.
We expect trading during the important Chinese new year holiday period to be subdued.
With sales impacted by substantially less travel smaller gatherings and.
Generally reduced social activities.
Sales and lower CDC, low tier cities, which represent over half of our sales.
We will also be impacted of fewer people, who returned to their hometown for Chinese new year.
At KFC has a higher percentage mix of store in low tier cities and transportation hubs.
It will be disproportionately impacted.
So Q1 will be all hands on deck in response to the headwinds we have stepped up our value campaigns and tailor our marketing candidates according to city tiers and <unk>.
We have also adjusted our operation at delivery resources to capture shifting dine in and off premise demand.
We will endeavor to do everything we can to.
<unk> mitigate the headwind.
Please also keep in mind that January end of first quarter will be a tough comparison.
Last year Covid related lockdowns.
Started only in late January on.
On a year over year basis last year sales benefited from.
<unk> first few weeks leading into Chinese new year.
We anticipate that recovery will.
We'll remain non linear.
At uneven.
Influenced by region of outbreaks reduced travel and lingering effects on customer behavior.
In 2021 margin will remain subdued compared to pre COVID-19 levels as we faced several headwinds.
We expect full recovery of sales to pre COVID-19 levels to take some time.
Compelling value campaigns to drive traffic will continue to be our focus.
We expect two year wage increase since 2019 to be high single digit Inc.
<unk>, 3% in 2020 at mid single digits in 2021.
We're stepping up our efforts in sustainability.
In light of the latest regulations in China, we are replacing plastic packaging with more eco friendly materials.
Is expected to increase our cost of sales by over $30 million in 2021.
On a year over year basis, we are lapping over $100 million of Covid related government and rental relief in 2020, which is mostly phase out now.
On the positive side, our commodity prices.
At the to decline by low to mid single digits, mainly driven by lower grocery prices.
Since we usually look at our.
Our approach of contract one quarter at an event.
Prices may still fluctuate throughout the year.
We will build on our momentum in 2020.
The end target to open approximately 1000, new stores in 2021.
We will step up investment in digital logistics and other operational infrastructures to support accelerated growth.
Total capex in 2021.
We will increase to approximately $600 million.
These investments will impact profitability in the near term, but will yield benefits in the long term.
With that let me cover our capital allocation framework.
With over $4 three buildings in cash and short term investments and strong cash flows.
As much at $8 billion of capital, we will deploy over the next five years.
As we think about our long term capital allocation, our key growth to deploy capital efficiently to accelerate growth and to create long term value for our shareholders.
Now before I outlined the use of cash I want to emphasize that we will continue to run a prudent financial strategy.
Ensuring sufficient cash on hand or working capital.
Sufficient we serve you with cash.
Potentially.
Organic growth remains the most important driver for our long term strategy as Joey mentioned we.
We aim to achieve the $20 install milestone much faster than the first 10000 store milestone.
We will prioritize our capital to support organic growth.
We will more than double our capex over the next few years.
A majority of our Capex will be used for accelerating store network expansion and store remodeling for our core brands KFC and Pizza hut.
Following them, while keeping them fresh.
We also plan to invest several hundred million dollars.
In our emerging brands, especially the coffee business.
Building them into meaningful scale, and a material part of our business mix.
While expanding network of physical store is an important growth driver.
Enhancing our digital and delivery capabilities and logistic infrastructure is equally important to our future success.
Three efficiently and adequately support a network of 20000 stores would require a bigger mobile bust and more agile digital and physical capabilities and infrastructure.
In addition, we will also likely see Richard Digitization automation and intelligence across our operations.
So we have earmarked over $1 billion of dollar investments to advance our end to end Digitization program.
<unk> digitizing, our store marketing supply chain and back office operations.
Roughly another $1 billion has also been.
To expand our logistic infrastructure to enhance the automation capabilities to drive efficiencies.
The west of the capital will be allocated for shareholder returns and M&A.
We resumed cash dividend in the fourth quarter and have returned $1 $2 billion to shareholders since the spinoff.
And of future, we expect steady returns to shareholders in line with our profit growth.
We will also maintain a disciplined approach to M&A and investments.
While exploring opportunities to invest in brands with excellent growth potential.
To acquire new capabilities and technologies and to view of support our ecosystem.
We believe this approach to capital planning will drive long term shareholder returns.
All in all we are encouraged by the solid financial results. We delivered in 2020, we will continue to invest for the long term.
And that we are on the right path to emerge from the Covid pandemic stronger and better prepare for future growth.
With that I will pass you back to Debbie to start the Q&A Debbie Thanks, Sandy who will now open the cost pressures in order to give as many people as possible of the chance to ask question. Please.
On the material process through one at a time operator, please start the Q&A.
Yes.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question. Please press star one on your telephone and weakening to be announced if you wish to cancel the request please press the pound or cash.
Please limit to one question at a time if you have follow up questions. Please your question. He joined our first question comes from the line of shelf Huawei. Please ask your question.
Good morning, Good morning, Julia Andy on the 10-Q, particularly on the first question.
On my question will be will be.
Regarding the Chinese new year.
Joe you mentioned that there.
They are very challenging environment in the first quarter.
But we know that Yum, China on their yourself are so good at handling the challenges as we can see last year. So.
After learning of lot of experience in coping with the Covid situation in 2020, how could you do differently on the mature this is more flexible to to capture any emerging demand will protect yourself on the downside in terms of business in the upcoming trends moving here.
Any color would be of had appreciate it. Thank you.
Thank you Paul.
The quota one which is driven mainly by the Chinese new year will be would.
It would be of quota does rather difficult to model.
Because as I mentioned earlier, we do anticipate significant headwinds.
We do expect recovery will take some time because of situations do fluid.
Sort of three things for sure in terms of China. One is the surge in cluster outbreaks.
And that result in tightened preventive health measure of advised of days Travelodge group.
Gathering and dining out.
<unk> is.
On the traveling and associated activities significantly reduced so we already have seen the first few days of the travel volume is down significantly.
And then.
And then the lower tier city.
Sales, which is more than 50% of ourselves, particularly for KFC and large party size ticket will be reviewed and also we do also expect more competitor will stay open during Chinese new year versus 2020.
The first the first thing we know at KFC is slightly more impacted than pizza hut because of higher mix in the lower tier cities and transportation locations.
The next important question is how have we been to deal with that and certainly we take all of the learning from 2020.
The.
The overall tone at the importance and the priority is.
Two of the safety of our employees and customers.
On that on sales.
Foundation.
On the focus is to stay nimble and agile.
Do closely very closely monitoring.
Closely monitoring the situation.
And at their two focus here in terms of staying nimble and agile to step up the value of campaign and two of lineup of all of our digital and delivery resources, including our membership program.
Two two to prepare for the Chinese new year at <unk>.
Second is we adjusted our marketing calendar according to sit at tier traded on pad size and location.
I suppose compared to 2020 of program at this time.
We plan the marketing campaign, we have you can see we have multiple scenario planning.
And that show help us stay even more agile compared to last year last year sales happen before we know it's going to happen. So we react.
With a fast and our team is doing a fantastic job for this year.
We have more scenario planning and dash that show help on our team.
<unk>.
<unk>.
At <unk> two of the evolving Kobe situations. Thank you support.
Yes.
Quick follow up on of new store.
Did a great job for cure of opening many stores book.
If you look at the result, actually we didn't see that of the new store really dragged down the restaurant margin. So looking forward shall we see that of new store will be the key driver for the growth without compromising on margin on a sustainable basis.
Thank you share pool.
Quick quick answer as well when we open stores at <unk>.
As you guys know us already.
We have Russ.
You know.
Idea of how many stores we want to open.
The most important decision is well.
Whether this is of goods store or not.
So if we see opportunity to opening per store will open more or less depending on the quality.
We always keep our quality.
And as you can see we still are opening more stores in lower tier city.
Our quality control continue there.
So it's always the disciplined approach that we have been.
Following and will continue to pursue thank you.
Thank you.
Our next question comes from the line of Lisa Yang from HSBC. Please ask your question.
Hi, Thanks management for the presentation and congratulations on the very good results. My question is also related to the store opening we have seem like on the very high quality store opening in for Q1.
I would also like of normally like if there will be more remodeling and <unk> and a couple of new stores might knock all contributing so much to profitability.
So I'm wondering whether what we have seen <unk> is sustainable.
<unk>.
I got asked earlier like a lack of when we expect like at the store opening might continue to beat expectations, whether it's going to be too hard.
The contribution to total revenue will increase as well as the tribe does.
Driving higher profit growth as well thank you.
Linda This is Andy Thank you for your question.
Let me first address.
Cash at about.
Thats all opening pace. Obviously, we are very pleased that we have opened 505 store in the fourth quarter, but I also want to remind folks of that.
Even though is probably still higher than what we expected, but we have already told folks at because of COVID-19 impacts.
Opening will be more back end loaded and so with the little bit easing in the COVID-19 situations in fall in.
As winter.
The past year, our development team has accelerated the pace in China take advantage of that that window and open as many of his call as possible and then we also tried to push.
Some of those store openings earlier.
In the fourth quarter, so in terms of patients up.
Chinese new year holiday period.
So as we mentioned we expect to open 1000 store this year.
And it is of very high paid right. So you think about our hours at all right now we have of modern sort of.
More than end, Arkansas Index golf ball of late openings.
No.
What type of setup of new store now.
Putting full effect of all year last year, we opened.
Almost day.
Once every eight hours and so thats at a very very fast pace. So we will see maintaining at a fast pace.
But probably not at the level that we're seeing.
Every quarter of 500 plus store flow.
I think I don't think that is sustainable at least.
On the near term, we do have plans as we mentioned on the prepared remarks to accelerate store network expansion.
And we and allocate resources to do that now in terms of the profitability of our new store as Joey mentioned.
Is.
We have a disciplined approach install openings. So if you look at the payback period for KFC restaurant two to three year end have been very consistent over the past few years.
Pizza hut, it's about like three to five years.
And also in threshold returns. So we have a lot of incentive to open a store estimate as far as possible.
But within that framework of visit.
Opposed to store openings mixture of that we have right financial income.
So hopefully end than the one thing as you can tell you know obviously with that kind of fast pace of.
Store openings.
<unk> demonstrated our competence in the market in China and also the potential opportunities here in China. So we always encourage investors to look at the overall system sales.
Rather than the sometimes to focus on the.
Same store sales growth.
China is still a growth market.
Okay. Thank you very much Andy.
Our next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
Hi, Julia Andy I'll, Congrats vertical results of my passion, while Pizza Hut I think clearly last year you bought.
On the <unk> hockey Sneaker Pant, we see of strong margin improvement on those bookings of fourth quarter of <unk>, We actually opened volume to the hospital. So can you share with us.
For lack of towards the top of our revitalize of implants of swap all of you forecast on into 2021, and whether we will soften at CER improving same store sales trend and also further margin upside. Thank you.
Thank you Michelle.
For Pizza hut.
At.
Overall, we did what we.
Promise about sales first profit later in our turnaround journey at.
And on second half <unk> more than doubled compared to the previous year.
And.
The focus of of Pizza hut in the last few year is about improving the fundamentals of.
Of the business, which we believe will have the impact for years to come and I think at that kind of set the tone of our focus going forward.
Our focus going forward is to continue to improve across all of these key aspect to cement the changes made in the last few years and make pizza hut of resilience. This is model I think this is a very important because I think we believe we have a very silly and casualty business now and after a period of time.
At work.
Pizza hut business will be also resilience as well so in terms of focus maybe I'll just highlight three things.
We have done we have were very high end of in the past three years end. It will continue to do at that in the coming periods. One is the new menu.
Our new menu rollout in late Q2.
At 75%.
And item of new or upgraded compared to two years ago and full is EMEA.
On May I cannot emphasize how important it is right and one example, I mentioned earlier.
<unk> two concurrent.
It's fantastic fluid end is innovative and we will continue the innovation.
And then the second highlight is our double digit growth in off premise dining.
Which including the delivery and takeaway.
Because we all understand our concerns to us signing business rightly. So so after a few is how at what you can see the mix right now is not healthier.
At.
40%, 40% plus of the total sales so that also makes our overall business more resilient.
Digital order digital capabilities.
Clearly critical Inc. Any restaurant business right now at the ability to come at the online and offline operation is part of the efficiency of ton of the.
Customer service experience. So let's take one example, the table side ordering.
We move the the <unk>.
The mix of table side ordering.
On Q4 at today is 37% to 37% of our orders on the tables at them digitally and thats compared to 5% during 2019 and we only started.
<unk>.
To work on this to 2018 and you can imagine that book.
We've improved our customer service.
The labor cost.
So so so on top of that the whole thing.
We also launched ready to Cook steak impostor to catch at home consumption trends.
Demand and that is partly.
As a result of the pandemic.
Such growth is.
The opportunity of new growth opportunity has become even more visible and we kept at that so as of resolve of all of these wonderful people and more.
Asphalt.
We have seen the improvement of our of.
Money to value.
Perception of value for money perception and also on <unk>.
Overall customer perception on towards the floor at the service level of the value at the dining environment.
Therefore, the fundamental end of momentum is is promising and that.
I as I mentioned earlier sales first profit later, so now the sales at a good at this.
Great and we start to see the improvement in profit and we won a bit of both going forward. Thank you Michelle.
Home sales volume.
Our next question comes from the line of Anne Ling from Jefferies. Please ask your question.
Hi, Thank you very much at all.
I have of questions regarding Capex and also looking at all.
Asthma.
And the passion of we have around 400 of 500 million on Capex and depreciation of roughly similar as well so of the step up in terms of like.
Most of opening and also a step up in the Capex of 600 million.
Doesn't mean that we will have and disappear partial net.
Increase in terms of of depreciation from year 2020 at one onwards, I E. No EBITDA growth will be higher than that after EBIT growth and then of hour.
<unk> of 1 billion each investment in Digitization on also on the logistics.
Does that include this $600 million Capex.
<unk> plan and how does that roll out.
For each year.
How much will be spent on the spot and how will it impact our P&L. Thank you.
Thanks, Dan.
Capex spending.
If you look at our historical Capex spending.
<unk>.
I'll say efficient invest stretch actually.
If you look at over the past five years of three five years, our capex spending was roughly.
$415 million plus or minus.
Tom.
And then we have been open installed more and more so if you look back a few years ago, we opening maybe like five 600 store.
A year and now we are opening more than 11 under store in 2020. So we were able to do more with less and the team have been very frugal in how we spend the money.
Looking into savings in store development.
And in infrastructure.
Now what we want to do with this low.
Capital allocation plan.
Sort of like.
This is <unk>.
Plan to focus more on growth driving more efficiencies.
And the thing about the longer term.
So we will still have a very disciplined store.
Investment income strategy as we have mentioned earlier on new store openings.
But we will definitely look into way to accelerate.
Our market penetration.
Both in terms of low E series.
We have trucking so at 100 cities that we have not.
At the present yet for KFC.
Of helping more and therefore for pizza hut, so theres a lot of likely ahead of us.
And then for <unk> that have already.
A restaurant.
Are we likely going into China to increase density on our specialty.
We will invest more installed at tailored towards delivery and takeaway.
So definitely the majority of our habit of spending is going to be in store expansions ex I would just slightly session four at all brands KFC and Pizza hut.
Now if we.
Look a little bit.
Sure.
Longer and we also tried to growth our margin growth specialty coffee Lam etch and depth of 10 months.
Where are the growth out into scale and also because of a material part of our business.
Are going to invest more.
And so none of our investment in new.
Your line of business in the near term, you're likely going to see an impact on some of the.
Sure.
Of course in expenses, because obviously ramping of our new Brian with clients on divestments.
The other one I think for Capex spending at <unk>.
<unk> is digital.
$1 billion and do so it will be.
A very large investment over the next few years, but this is a very important transformation for the rest of our industry.
As a company have undergoing that for a number of year, but we're going to accelerate at an.
A much bigger way.
And you would see more technology being deployed.
Due to our operations.
You'll also see more automation deploy in a rush on our supply chain.
You will also see more intelligence data analysis that will help us in marketing supply chain.
And overall operations in the back office so all of this.
So when you think about this sort of like if you think about.
30 years ago Capex at this part of all investments and store openings of two day no.
Investment in digital and digital capabilities.
Moving to rival but infrastructure to support a very large network of a store we require notes with an increase of investment. So we are basically trading.
Capital.
For labor, So you think about our store.
Operations, we have.
One more store over the past few years.
Walter will be stable workflow of somewhere between 402 of 500000.
Employees.
All of that is at.
As possible because of the investment in infrastructure that we have built so as I mentioned.
Especially it's important.
<unk> investment in digital infrastructure is equally important.
Success of our future.
So yes, so in the near term.
It will ramp up as mentioned we over the next few years, we're going to ramp up.
<unk>, our capex spending that would have the impact on depreciation.
But I think the long run you would see.
In some other area of productivity quicker sales.
And of all of it will be a fantastic with hurtful at Investor.
All of that address your question.
Okay.
One one of at a point to at four four end.
Overall, we look at these things.
Savings in terms of efficiency from automation and technology investment just thinking about at 2015, we have roughly about 7000 plus store.
Plenty of 'twenty, we have.
10000 store.
Our number of employees at <unk> still stay.
At the number of 400000 plus.
So.
That gives you a sense of the achievement of the last five years end.
Our fleet that gives you a sense about.
What kind of.
Potential achieved loans, we would like to achieve with the.
And last months of the investment in digital delivery.
And the supply chain infrastructure.
Because on.
Okay.
Before opening the stores, we need to get the infrastructure in place in on.
At a two to enable the acceleration of store expansion otherwise the influx of if the infrastructure at just catching up to the store expansion.
And we are tracking all seat totally well if I could describe it that way if that makes sense. Thank you Ann.
Also I want to give you one more anecdotal evidence of.
On digital infrastructure investment is and how that help us.
<unk> actually will be more productive and keep cost down you think of our membership program. We developed at an investment that over the past couple of years.
Our whole digital CRM program will help us to keep.
Low.
Lower compared to our revenue growth and Thats all possible because we have the ability to reach our customers and effectively utilized at that technology. So you may see cause increasing upon.
Out of the P&L, but hopefully all of that you see also improvement on the LSI.
Again as mentioned.
The thing about China two day note over the long term you see more labor shortage at the public H. So it's very important for us to this day one head of one step ahead of the game and anticipate that and invest in productivity and technology and infrastructure.
Got it thank you.
Our next question comes from the line of Channel from Bank of America. Please ask your question.
Alright, Thank you Julian.
So I apologize if my question.
Question has been addressed by our previous speakers at Midas.
One of gross disconnect.
I think we got to call on Friday.
Im more interested on the flip on pay per call site.
So we understand that.
The decision.
Some cough was coming down pretty dramatically.
Meanwhile, we are also stepping up our value initiatives during our recent channel checks, we also noticed us.
Actually we pulse of them have actually reached price a little bit for PFC at the beginning of the year. So we've got distributed more than enough to offset the costs associated with our eco friendly initiatives. So given all of these kind of moving pieces is it fair to say that with input cost is not going to at the end leisure.
And on for 221, thank you.
Hmm.
Thank you Shane and I thing.
That's right. So if you think about the cash.
Cost of poultry.
And over the last few months, we have locked up the contract a month ahead of time. So I think of near term that will be a tailwind for us the cost of sales.
As you correctly mentioned.
<unk> mentioned that.
We see quite a bit of headwind for the first quarter net.
Low traffic.
In terms of just stayed with hubs, let's kind of lowest of the topic of adjusted of decoupling for CMI sectors.
And then we also see at of having this until us less stores with cat of rig.
Small size groups.
Let's look at <unk>, So we do see some headwinds for us.
Our first quarter sales and so at this stage of the.
Recovery is very important for us to continue to focus on value proposition too.
Consumer and so you should expect.
Stepping up that campaign as you have seen in earlier part of the first quarter.
And traditionally we don't do as much value campaign of Chinese new year.
At this year, you, probably we feel a bit more net.
Now on the on the other hand I think.
Sustainability initiative.
This year as I've mentioned.
From a cost of about $30 million.
For the full year in packaging by replacing.
Plastic with equal value materials for packaging.
Yeah.
It will be ongoing initiatives too.
To the ESG.
So in the future.
We will see additional initiative as well so is not on one off events both of us yesterday.
ESG initiatives, so, but no I think.
For <unk> so at.
Can you talk commodity prices that would that would probably at least.
Sure.
Listen I, just would like to just at the philosophical comment on food cost.
Our young China end, probably on note that we believe in saving.
All of the costs, we can save particularly the G&A hotel, Neil whereas we don't save on the full cost of all customer asos.
Asos in surety and now believe that we show.
Some of the best flow, we could sort.
Two the customized Inc.
We do get some savings from the commodity cost, we actually will reinvest at saving big part of the savings.
Two to treat our customer of that as well and we believe.
That is the right thing to do in the short term and into long term. Thank you.
Thank you Julian So just a very quick follow up if I may at least.
Net of riskier amount of headwinds coming into Q1 on Meanwhile, we're also on Youtube bearing in mind with a very week of February and March last year.
Of course.
On the has taken some measure of movement on last year, we were talking about nationwide lockdown with almost every single day shutdown.
At two months, so I do think of it heading into February and March schemes or Commscope is looking much better.
It's fair to say that we actually could see year on year recovery.
In Q1 on maybe you could be at it.
On a typical swapped true returned to the level of both his store in Q1 of 219 without the fear of comments. Thank you.
China, Let me address these questions.
I really appreciate the challenge to model the first quarter and in total we also see lots of moving parts.
And one thing I want to.
Emphasizes that.
Definitely this year.
The number of orphan type of cases.
Lots of a limited 4000 plus power.
However.
It does not mean set of corrective measures.
In fact.
The opposite.
The learnings from last year government authorities of more cautious on consumer more caution and taking a lot of all preventative measures. So as we have mentioned if you look at the C&I.
Chinese new year period for travel and the government have put our advisory against travel and encourage folks to stay put and of Cds to celebrate Chinese new year, and we have seen.
<unk> topic.
Of course of air traffic as well.
More than 70% in just the first few days of very important.
Chinese new year period, now of Chinese new year period have been historically bearing parts of our business.
And then for KFC.
Which have high single digit of of sales and especially in Chinese new year period double digits and net income of net sales coming from the channel.
Within hub in tourist locations that would be disproportionately impacted.
Now if you also look at the <unk>.
Trading situations.
Compilers.
Historically was book score this outbreak to go out of the families. So.
We do generally see a.
Boost in sales at.
Quality of cities. So given the people of thing in the cities that will be a little bit different situation. So again. This would call will have a bigger impact on KFC.
Because.
You have presence in the model at <unk>.
And so that's one complexity there now at the outer capacity that goes on there is that.
If you think about last year, we go into.