Q2 2021 Yum China Holdings Inc Earnings Call

[music].

Good day, and thank you for standing by and welcome to Yum, China second quarter 'twenty 'twenty.

And 1 earnings conference call at this time, all participants are in a listen only mode of fair to speak of presentation. There will be a question and answer session to ask a question and I'm doing day session you will need to press star 1 and your telephone please be advised at the base contract is being recorded if you require any further assistance. Please press.

I would now like to hand of conference Oberdorf for Speaker at the day needs to Michelle Chang. Thank you. Please go ahead.

Thank you Davina Hello, everyone and thank you for joining Yum, China second quarter 2021 earnings conference call joining us on today's call are all see opened a store you walk in.

<unk> CFO Mr. Andy you before we get started I'd like to remind you that our earnings call and Investor presentation contains forward looking statements, which are subject to future events and uncertainties and actual results may differ materially from these forward looking statements.

All forward looking statements.

And I wish and considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with SEC.

This call also includes certain non-GAAP financial measures you should carefully considered of comparable GAAP.

GAAP measures reconciliation of non-GAAP and non-GAAP measures is included.

Included in our earnings release.

Today's call includes 3 sections Joey will provide an update regarding recent developments and our second quarter 2021results.

Andy will then cover the financial performance in greater detail.

And finally, we will open the call to questions.

You can find the webcast.

It should be called and the Powerpoint presentation, which contains operational and the financial information for the quarter on our IR website.

I would like to turn the call over to MS. Joey Wat CEO of Yum, China.

Thank you, Michelle and Hello, everyone and thank you for joining us today.

Our business has a.

Of these hovered remark and it very well.

Total pentameter at still impacting our business and we'll continue to do so.

We have learned to live with it and.

And we are focusing on the future.

We focus on our core.

Food and great value and customer experience.

We penetrate further into lower tier cities, we increased our store net what density to suit the shift to off premise dining post pandemic.

Kenzie remains resilient and continues to grow at a very fast pace.

Pizza hut achieved stellar performance and expense.

Bad debt to become and lot of growth engine of Yum China.

You're enjoying lovaza and making good progress.

We delivered a solid second quarter system sales grew 14% operating profit grew 83 per cent.

And the store footprint at.

At accelerated pace.

Opening 400 for new stores in the quarter end of that.

And 1 year at more than 1000, net new stores and increased total store count to over 11000.

Our team is laser focused on driving sales.

Powerful digital platform.

And enable us to swiftly adjust our marketing campaigns.

And we can reach members directly with targeted offers.

In the quarter, we recruit over 10 million, new members and ending the quarter with over 330 million members.

Notably off premise.

Premise at home consumption of becoming more popular in a post pandemic era.

Delivery sales grew over 60% compared to 2019.

We also launched retail products across our brands, leveraging our online and offline asset.

We intend.

And to learn and innovate to address evolving consumer needs.

Let me update you on our core brands for let's start with KFC.

TFC, let our new store openings, we increased store density in existing cities and.

And and Ted over 100, new cities.

In the last 12 months.

With 280, new stores opened in the quarter, we now have over 7600 stores across China.

More impressively new store cash payback and profitability remains very healthy across city tiers.

For themselves.

10%.

And by same store sales growth and accelerated new store openings.

<unk> successfully navigated this tough operating environment with reduced volume at transportation and tourist locations.

Our operating profit grew by 50%.

$2.240 million at.

Those without saying the crucial role <unk> plays in our business.

And the second quarter Kenzie at the Ragu and Angus beef burgers to the permanent menu.

KFC also launched the <unk> and <unk>.

T funnel.

Chicken Sandwich estimate limited time offer.

And these innovations generated strong social buzz and.

And Ah well received by consumers.

We know our consumers well and cater to local taste buds.

<unk> has introduced regional menu item such.

As hot dry noodles.

We look at EMEA.

And steamed dumplings show mall and Hangzhou.

We also launched at <unk> spicy Pam based fees Rep at.

And and mill latte to provide more choices to consumers.

With our growth.

We also all of the great value because of all of the quota will launch attractive promotions to drive traffic.

Our main labor day holiday bucket.

First of a mix and match buckets for dining locations.

On the digital front, and we focus on growing our member base and driving their spending.

We launched a new privilege subscription plan.

Our members at choice of pumps from a range of offerings.

This provides visibility for our members and drive incremental sales.

We sold 8 million privilege membership in.

In the quarter for every spend.

Bob privilege member doubled that of regular members.

Now, let's move on to Pizza hut.

Our transformation initiatives in the last for years.

Great results.

Compared to pre COVID-19 levels in the <unk>.

For 2019 same.

<unk> of sales continue to recover.

System sales growth turn positive at.

Operating profit more than doubled from the same period last year.

We accelerate our new openings and at 17 net new built.

In the first half of this year. This is the highest total.

And those net new units we at in the first half since 2016 at shows our confidence in the business model now.

Hub and spoke and other small store format and have proven to be successful.

And now account for most of our new stores.

Store economics continue to improve.

New store.

Store payback remains healthy and particularly for the hub and spoke of and small store.

We will continue to increase density and penetrate into more new cities.

And our March new menu, we changed 40% of the menu items compares to the previous year.

In the second quarter, we continue.

It'll improve our product offerings for better customer experience.

In June we upgrade our hand tossed store with more premium flower and low temperature long segmentation net.

Makes the pizza dough Christie outside and solve inside.

2 of base, particularly good.

And and very very suitable for delivery.

We also launched thorough and stick with parmesan cheese, and nice slides noodles not of great proper translation, but the Chinese name, it's called <unk> EMEA is.

Is that a traditional and specialty.

A total of strength since the province there.

This is of great fusion product combining elements of east and west.

2 and enable value proposition and.

And hence our value proposition Pizza hut has expand the price range of its T cell offerings in June.

13, new piece of flavors at more affordable price points.

And.

Mainly for the new.

Upgrade of hence hostile.

We also launched and non is successful all you can eat campaign offering abundant value for <unk>.

Pizza and membership reached.

We'll lock and milestone of 100 million members.

Remember sales now account for over half of system sales.

Digital and technology continue to play an important role in driving sales.

Digital ordering increased to 84% of cells from just 29.

And event 2 years ago.

The low rate and tableside mobile ordering became more popular.

Coffee, our coffee business, making good progress and Nevada Triple a store can although the base is abysmal index in the second quarter.

Initial results of our new store.

For opening are encouraging.

We now have 14, Nevada store in Shanghai, and we are opening of first beautiful store in Hangzhou, which is the first of all outside China and about 1 hour today.

We are confident in of potential of this.

9% of 126 years of Italian coffee brands.

Carver enjoyed double is per unit sales compared to 2019 and had a meaningful number of stores breaking even at the end of the quarter.

We are reinforcing of specialty coffee brand positioning expense.

1 day parts with more food choices.

Broadening the customer base and have better value for money.

To conclude my assessment.

We are well positioned to capture the market opportunities in China.

Our store network is growing at.

And press.

And the enterprise.

We are investing ahead to fortify and future proof our infrastructure and Digitization.

China, we are committed and confident to achieving sustainable growth in of many years to company with that I will turn the call over to Andy Andy. Thank you Joe.

<unk> and Hello, everyone. Let me know Hawaiian additional details on our second quarter financials, and then share our perspective on this year's outlook.

Unless noted otherwise all percentage changes before the effects of foreign exchange.

Let me first cover of our second quarter financial results.

Total revenue grew 17% year over year and reached $2.4 billion.

And some sales increased 14% led by same store sales growth of 5% and accelerated new unit development.

Similar to last quarter, we are providing pro forma measures here for convenience.

Comparison with 2019 sales.

Same store sales recovered to approximately 94% of our second quarter 2019.

System sales grew rough.

Roughly 9% benefiting from new units and the consolidation of <unk>.

Sales for recovery.

And being in April and May.

For the trajectory was disrupted.

But at Delta wherein outbreak and Guangdong province at the end of May.

Total province is the largest economy in China and <unk>.

1 of the largest markets.

Housings 2 of their for tier 1 cities.

And Albert led to temporary closures and the regions and affected consumer behavior across China.

Same store volume volume is still well below 2019 levels.

And while off premise occasions continued growth rapidly.

KFC, we mainly.

Cleveland and deliver at robust growth on a year over year basis system sales of KFC grew 14% led by strong unit growth and same store sales growth.

On a 2 year basis.

<unk> sales grew an impressive 7%.

He is at 2% faster.

And within the Chinese restaurant industry growth of 5%.

Despite subdued traffic of transportation and <unk>.

Louis locations.

Same store sales recovered to approximately 93%.

At the same store traffic at.

Approximately 86%.

Average ticket.

Roughly 8% versus 2019, mainly due to the increase and delivery mix.

Pizza hut delivered exceptional performance on a year over year basis system sales grew 16%.

Same store sales grew 11%.

On a 2 year basis system sales.

Growth in the quarter returned to positive.

Same store sales and cover to approximately 97%.

A 2 point sequential improvement from the first quarter 2021.

It was led by a 9% increase and traffic driven mainly by more.

<unk> growth and breakfast sales.

Gross margin was 15, 8% up 210 basis points compared to last year.

This was mainly driven by sales leverage favorable commodity prices and operational excellence.

Cost of sales force.

37% to.

220 basis points lower than last year.

<unk> prices declined by 7% year over year.

Mainly helped by lower post share prices.

Cost of Labor was 24, 2%.

150 basis points higher than last year.

This was mostly.

For delivery due to lapping of Covid related government subsidies received in 2020.

And of course and cost income.

Wage inflation of 3%.

Labor for Otp, and labor shortage, and partially offset the increase.

Occupancy and other.

Was 29, 3%.

140 basis points.

Lower than last year, mainly attributable to sales leverage and savings in operating costs.

G&A expenditure increased 10% year over year.

Amy is due to higher compensation costs.

Consolidation of Suzhou.

Mostly and of the assumption of some business travel.

Operating profits grew to $233 million.

A 65% increase year over year, or a 6% increase compared to 2019.

The increase was mainly driven by system sales.

Z and restaurant margin improvement.

Our effective tax rate of 24, 8% is.

And as similar to last year.

We expect full year effective tax rate to be 27% to 29%.

Net income was $181 million.

And as growth and net income was $185 million <unk>.

Excluding $5 million net investment gains it was $180 million up 55% year over year.

Diluted EPS increased to 42 for.

34 tenths of a year ago.

Spike and launching our share.

Okay by roughly 1% at.

Out of our secondary listing in Hong Kong last year.

Now, let's turn our attention to the outlook.

As we continue to drive sales growth and accelerate store network expansion, we need to Murray for the near term challenges.

It may sound like a cliche, but we continue to expect the at.

Impact of COVID-19 to linger.

And that there would be periodic vision of outbreak.

So for recovery of same store sales to pre COVID-19 levels due to currency.

Base those recovery will continue to be uneven and non linear impacted by a few factors.

And subdued traffic at transportation and tourist locations.

2.

Some health measures and restrictions on mobility to remain in place.

That will continue to impact direct.

And traffic.

3.

Chuck and SKU harvest.

Operating profit and margins have improved year on year.

And the first half.

Benefiting from sales leverage.

Favorable commodity prices.

At moderate wage increase and labor productivity improvements.

We expect soda and tailwind to turn into perhaps.

And in the second half.

First.

Cost of sales, which will be pressured by our focus on volume campaigns.

And increase in commodity prices.

<unk> already seen an uptick in poultry prices.

And we will lap for low prices and the prior year.

Therefore, the commodity prices will potentially kind of into inflationary pressure later this year.

Second cost of labor.

Cost of labor will.

We have in the second half of 2021 for 2 reasons first most of our store have increased.

Most of our staff ratios in June and July.

And therefore wage increase will be higher.

And the second half compared to 3% and the first half.

Increase.

We are also increasing staffing levels to ensure customer services.

As a reminder.

The speedy recovery last year creates a tougher comparison in the second half of this year.

Now despite these challenges.

We remain.

Confidence and the long term potential of China.

We're accelerating store network expansion with increased store density to capture market opportunity and to better serve the shifting demands to off premise.

We now expect to open at around 1300, new stores in.

And <unk> 21, we.

We also.

We will incubate our emerging brand for future growth.

To support this growth.

We will continue to invest ahead and technology and infrastructure.

To further solidify our competitive position.

We now expect.

In total year capital expenditure of approximately $700 million to $800 million.

As we step up the investment western margins as well as G&A will reflect higher depletion costs.

Finally.

Following and assessment of the Covid situation.

Our financial position.

Full of board has approved the resumption of share repurchases.

Debt over $690 million remaining under the current authorization.

We're committed to drive.

Long term returns for our shareholders with that I will pass you back to Michelle to start the Q&A pushup.

Thank you Andy we'll now open the call for questions and orders give as many people as possible the chance to ask questions. Please limit your questions to 1 at a time Davina please start of Q&A.

And sorry to ask a question you will need to price for 1 with telephone and withdraw your.

Sean Please press the pound or hash key please standby, while we compile the Q&A roster.

Our first question comes from the line of.

Michelle Cheng from Goldman Sachs. Please ask your question.

Hi, Joe and congrats also and a very good result, again during this environment.

Your question. My question is about other labor cost and off of the new guidelines and government to protect delivery riders of interest. So we all understand that <unk> has been taken care of the employees.

And so I still want to key of management's thoughts on the future of labor cost management and more specifically given we have high revenue contribution funding of our business. So.

And how should we think about of the delivery cost increased due to government requirement and also.

I think we are also talking about the delivery of 3.0 to enhance the efficiency so like.

Can we expect some efficiency upsides to offset these potential cost increases.

<unk>.

Okay, maybe hi, Vishal this is Andy.

And let me first.

Some color on the cost of labor.

As we have mentioned in prior quarters, we were facing.

Labor shortage.

And some of our restaurants.

And then we.

Hum.

Sort of moderate our wage increase over the past year, because none of the pandemic situations now we have decided.

Early on.

And the second quarter to increase wages at our markets and the west hold of restaurants.

We also and so as I mentioned on my prepared remark.

We have increased wages.

In June and July and.

China So.

Obviously, we rolled out at the measured over the 2 months period cost China and so.

And as a result.

Non stop we do expect that.

Duration, Inc increase will be higher and so we've got partners and 7% debt.

<unk> is going to be roughly normal to returning to the pre COVID-19 level of waste.

And our wage increase and.

And so as a result as I mentioned.

We should expect.

Higher sales.

And the second half because of the wage increase.

Now of course, we at the company we always.

1 of the payoffs of staff more hi.

Hi, Valerie and high wages.

We always thought of is that with.

Focus on also maintaining.

And profitability and delivering value for our shareholders. Therefore, we have invest over the years.

And then we will continue to invest.

And in technologies and.

2 of our efficiency and operations.

Investment in automation and so.

And we continue to drive that labor productivity improvement.

So hopefully.

Low and we can continue to you.

And payout all of our staff.

That more at the same time maintaining.

For a reasonable of margin for all of our business.

Thank you Andy Michel.

Yes.

At 1 comment about the labor costs and now I'll address your question all right right of labor at.

And delivered 300 zero.

And we increased our delivery sales mix from 11% of right now over 30%.

Since 2016, and I say and you can see from our P&L statement that we manage to.

To manage the overall of delivery.

Right of course, and also to find net savings to fund debt and also to.

To continue to deliver the profit margin for our shareholders. So.

We have done at in the last 5 years as proven in a number and I believe though and also give you. Some of you about we'll continue to do.

And in the future as well.

So let me address the rider Labor label question and deliver at 310 for the variety of Labor Law question I would like to make 3 comments 1 is.

We're compliant to applicable laws and regulations and we also require our service provider to sign of Yum.

And I'm, China supplier code of conduct to ensure they are legally compliant with all applicable laws and regulation.

Second is of.

And regarding the right of safety, we have a very comprehensive delivery management system cleared guideline and we conduct regular audits to ensure for.

Safety and variety of safety.

And of course, we also provide a rider training and equipment with safety measures.

Third quarter.

Quarter end.

We actually work with our service provider to manage Brian is we're intensity of <unk>.

Right.

Unlike other writers and the market debt.

The allocated to serve only.

Yum, China brands.

Cassie Pizza hut, and we focus on service quality.

And 1 thing rather debt run, which we have been criticized and a pause but now I think we can see the beauty of it is our order density for a variety of is roughly 30% lower.

And platforms.

So you ask the questions of how do we make sure we pay the Ryder well so that we can and.

Keep them well with pay of writers more per transaction and they got paid a bit more money.

So net net the pay the take home pay for the rider.

It is competitive.

On top of that our riders and joy stable income with less triple net.

First of all what the intensity in a short term and my sounds like a disadvantage for Alcoa, but remember as I mentioned earlier, we manage the cost okay.

But.

But that's absolutely.

And right thing to do for the long term with <unk> rider better service quality and protect our brand and the long term.

So let me move on to your question of about deliveries deliveries of 3 zero.

We upgrade of rider perform in 2020 to optimize our delivery.

Free trade zone and ride of routine.

As of right now this platform cover 75% of KFC store and by the end of 2021, we will complete the low.

All for all of the KFC store at the same time at the same time.

<unk>.

On.

<unk>, we share the ride at within a few stores of field KFC store within a distinct trade zone. We are also.

Ah.

Trying and and going through the testing phase to share the rider with Pizza hut.

And as well.

And so so all of these work will continue and.

In 2021.

We do expect the.

The improvement in the.

The trade zone optimization the routing.

Whoa.

Hutton improvement improving and right of course.

Of course, there are more to be done at delivery business continues to grow but the progress is good. Thank you Michelle.

Thank you for Joey and Stephen clear.

Yes.

Our next question comes from the line of Shar.

<unk> from Citi. Please ask your question.

Good morning, Julien and Andy can you hear me.

Yes, Yes sure go ahead. Thank you my question is on Pizza hut.

We are glad to see the strong recovery boosting sales and margin and pizza hut as we know that casual dining has been very difficult segment for years.

And as for everybody.

And according to the public information 1 of the few of your competitors actually due to very weak performance of kind of a dining sector, but you guys really surprised of market upside.

I know that Julien team of down Lord for Peter.

For the past 4 years product delivery.

Vision of etcetera, what are things and most important factors that contributing to the surprise on the upside and.

Why is it suddenly take off and.

And how long this kind of a recovery of strong recovery can be sustainable. Thank you.

Thank you Jeff for well.

Well I would say there's no southern recovery.

It's really.

The heart of last for year, but it's hard to translate but I think of Chinese Wakeful Ho Chi for refi is a good way to describe at you work on it for over 4 years day by day on all of the key areas and then finally, we get to the end.

Inflection point at the results start to speak for itself.

Let me comment on the.

<unk>.

The path so far we have taken but also what is next.

Well.

No I think it's fair to say debt.

Our full year of revitalization program have you great result.

Almost in all of the.

All of the key dimension from same store sales traffic and same store sales system sales margin operating profit at.

And right now new.

New store openings, they are all strength training to the right direction.

And I'll repeat the number.

Which you all have at.

<unk>.

If you remember.

When we started journey, we we had a very bold goal to turn.

And the same store sales positive.

At in 24 months.

And with debt with deliver debt return return at the same store traffic positive first and same store sales and in terms of which particular.

Analytically, we like to say they are still focused in reality of when we come to the turnaround business.

With that I.

To be honest that we have to work on all areas.

No such of luxury of just focused on 1 of 2 feta and roughly categorize them into for pillar the fundamentals delivery of digital and store format, which you guys should be.

More than <unk>.

Malaria is not borne out with the with the repeat focus.

So all of them all of them have have deliver but really with it and.

Pressed to single out 1 or 2 I would have to say is.

Greg Fluet with great value as simple as that.

Right now it's fantastic.

Cash day with great value for money.

And my reason favorite.

And in favor of chicken carry.

And while carrying vegetables is hard to imagine debt, but that's national dish for British people.

And then the pizza has have improved a lot not only debt.

Topping.

But the total right now as of now.

Having pizza topping that with cloud and colonial those stats of abalone sauce with a group of beef and Michelin starred recipe.

But the price is very very good so that has to be a key key.

At <unk> and turnaround.

On top of that we have really worked hard to improve the technology the digital of.

The digital ordering and then delivering et cetera.

So I'm not going to go through other detail about our 4 pillar.

I would like to comment is what's next.

Well you know.

We now have confidence in in the Pizza hut business and we are very clear that we want to make it and not a solid growth and in what is next.

You guys are familiar with debt to the next is resilient and high growth.

1.

And the Pizza hut business as resilient as KFC business. So that it makes money during good times, but also make money during bad time, that's the best way to protect the jobs of our staff.

In this market and also now we have a good foot.

Good good good value for money, but we also have final way with the new store opening has industry, leading cash payback and in store profitability, that's even comparable to that of KFC, what a fantastic.

The thing to have particularly for the.

The satellite store and new store and small store. Therefore, you can expect we are going to pursue high growth for this.

You know of.

Very profitable store to pursue profitable growth now and in the future. So.

<unk> focus on for plus in the last for years going forward, we're going to focus on resilience and growth and particularly profitable growth. Thank you share pool.

Thank you Julien.

Our next question comes from the line of churn low from Bank of America. Please ask your question.

Hi, Joey and Andy again, congratulations on another strong set of results I also have some follow up questions a pizza hut us I know this day and the announcement and Joey described pizza hut at another growth engine, we have not seen this level of confidence and pizza hut.

Hot in the past few years and just now Joe you also elaborate on a lot of initiatives regarding pizza hut.

And in particular I notice of Joey mentioned that for those satellites stores are the pay back could.

Could be similar to that of our KFC. So can you actually elaborate.

Readout and the unit economics of those satellite stores and and also among the 1300 and Ah Ah.

Store addition, target this year can we offer us a rough breakdown between our brands such as KFC Pizza hut and other brands and.

And also lastly.

In terms of margins.

Is it fair to say that we can our mediant of normalized.

Restaurant margin for Pizza hut could possibly return to the level of that we saw during the years of 217 or 2018 before we started to turn.

Non of wronged.

At the Pizza hut business. Thank you.

Okay. Thank you I'll comment on the on the Pizza hut confidence and then pay back their store.

And then and be able to address the other 2 a question for you at.

And you can.

See our increasing confidence on our business on all of the Pizza hut business in the last for years.

But we did take the food and approach.

And it's very clear what other stats that we have taken traffic first and then you know sales.

And then process and when we get to a you know the point that we can get all 3.

And you know, we we were well well well go.

More of it just like you know as I mentioned in previous earning calls.

<unk> is vanity profit of sanity, and we like both cells.

And profit.

What is even better at even more profit right.

So thats the growth that come in.

The.

And the confidence of the Pizza hut business model at <unk>.

Does not come from 1 or 2 quarter positive results at.

Come from the fed.

We have been working very hard on improving fundamentals of the business.

The paying of working on the fundamental at.

Good thing thus take time.

And the joy of the fundamental improvement is the benefit is long lasting.

It will it will help our business model for the many years to come.

It's not because of 1 of promotion of et cetera is because the improvement.

Good value for money.

Store.

And.

I mean, the majority of our stores.

It's very very nice looking right now I mean, Unfortunately, you guys panel seed because of <unk>.

It's very difficult for you guys to come from.

For travel from Hong Kong, China, I really look forward for your visit to our new stores might be a bit too feminine for gentlemen, but it's okay.

We care about the ladies.

Because they make the critical purchasing decision most of the time.

So so so the improvement.

At all fronts, and and the technology and other customer like <unk> and <unk>.

Last year at the challenge of COVID-19 for.

For the.

Challenge of our business model and we.

And we took the challenge at positively and with Great results give you an example.

And last year with the.

The impact on our <unk> business.

Our pizza hut business took the opportunity to to make the verge.

Of necessity to use our existing ingredients to make very.

Hi.

Value foods, such as 1 person meal and.

And that right now is bringing inc. Incremental sales because our party side traditionally has been fixed but the 1 person.

All of the incremental business to Pizza hut and also because of the pandemic, we push ourselves to growth of new retail business not only with deliver.

States, but we also sell.

Well.

Raw steak marinated of raw state that yourself.

Of all your ie cannot destroy.

So so so all of these.

The result of heartworm, and the last for year and particularly low.

Last year.

And therefore, we are at at the point debt.

We can be very responsible.

<unk> is our view.

<unk> that we believe pizza hut is another growth engine given the size of the store right. We have over 2004 hundred stores of.

Pizza hut and in over 500 cities with fantastic brands, particularly in casual dining business.

So that.

And that's the fundamental end for the payback for the smallest of particular hub and spoke store which is the.

Business model I introduced.

<unk>, our shareholder Investor 2 of 2019 March.

So much lower investments at.

Really supplement our.

With her and.

Pizza Hut store density and also.

Help to make our current pizza hut.

Store, which are not too small.

Mick Mick Mick Mick and re.

Asset because the original stores.

Or could be what we call mother stores. These are the big store and they will be helping to open the pit store, which asked a satellite store to provide better convenience for our customer focusing on off premise consumption.

So now the satellite store.

And <unk> together with our original.

Casual dining store is fantastic network is a great way to grow our business.

It's not like we have to go to.

We could go very far away and we're just putting 1 satellite store and logistically is very difficult no. We have stores there already.

We will have potential dining stores theyre already which is going to increase the density of our store at that to help the delivery of off premise business and when I say the case cash payback is good at comparable to KFC and our number show that the success rate is very high because of the investment is very low.

And <unk>.

And the payback is about 2 years.

And so thats fantastic.

Okay.

Looking at.

Let me address the question of bowel.

30 <unk> hundred.

New build.

We are looking at for.

For this year.

And again.

And then if you look at the break.

I think at work.

Obviously somewhat similar to before.

Mainly kfc's of very strong Pos.

Powerful machines.

Continue to generate very strong cash payback. So we should continue expect variable force growth for.

For GAAP and is going to continue to be the launcher.

The new store view.

As Joey mentioned.

We continue to gain confidence in the economics for Pizza hut.

And then especially for the satellite store and the smallest of all format. So you should see.

For the acceleration on Pizza hut.

New store openings and the second half as well.

We also.

And you have perhaps.

And do we have mentioned.

On her prepared remarks.

And we are seeing all of it.

At the very strong.

Consumer reception for Lovaza, we tripled and our short term almost tripled from about 5 store 2 reporting.

Sure.

And the.

And second quarter. So so.

And we're also have a number of store and the pipeline of.

Lavazza coffee business to be at charter.

And then <unk> China.

Chinese Goosing business <unk> business and also we see a uptake install openings in the second half so and that's generally the composition of.

Of those 1500 store.

<unk>.

I will mention that usually.

The store opening will be probably faster.

And the second.

And in the latter part of the year. So thats generally the trend before the Chinese new year, and so it's not completely linear but that generally you should see some acceleration.

So expanding the skull growth new store openings now.

And top piece of margin.

<unk>.

We're very pleased with pizza hut.

Improvements as we mentioned is not only the growth of strongly for SSG.

SSG to some growth and <unk>.

On the traffic.

And then so.

<unk>.

The biggest driver obviously for margin improvement, you're south leveraged and so at the other part is.

For and also labor pool with a few of improvement and this fall of economic model and so if you look at the first half though.

And we did benefit from as I mentioned.

So factors, 1 low commodity prices right and 2 we have salt lake more moderate and labor cost increase.

Debt defray debt.

To help improve the.

The margins and the first time now in second.

I think.

Similar to KFC and Pizza hut, we have low hour wage increase of course, China in June and July and for a restaurant staff and so.

And also would likely to increase for hiring as well.

And so you should expect.

Increased.

Labor costs, there and.

The.

And 2 of that we're also seeing.

Commodity price it will be a less favorable and.

And with very favorable and the first half.

For more advisors is down 7% year over year, so and.

And I think we have seen.

For example for.

And your prices.

Sort of like which is.

Low and first quarter, and then have been rising and so we do expect that.

Commodity prices afterwards.

And do some pressure there and then perhaps come into.

Inflation and pressure year over year.

But those are the long term debt with April, but I think for.

This hub.

You have.

Compared to.

No.

Drive I think the priority for them, obviously to drive traffic drive sales back to store.

And we.

With you at of recovery phase for the pandemic opened and the more of the thing for them, obviously continue to focus on.

Making sure of that.

Because some of it would come back for the stores come back too.

And then increased spending and then.

And then we will continue to drive that profitability improvement.

And as business returns.

And then and then.

And we will also look at them too.

Jonathan.

For all term.

Profit improvement for Pizza hut, but that should be of long longer term kind of point of view of shouldnt be getting at.

At least through <unk> profit.

And some of the new Sol Economics I think.

I think there's a couple of things 1 is that of small.

And that large and smaller that's how I saw as most of the name would imply.

So the throughput.

Pissed off of our new store, probably lower than does the cycle.

System portfolio.

However at deposit margin as goods and then we have lowered our of of investments. So the overall return is there.

And as strong as.

As Julian mentioned for Sally store is on.

Most comparable to what we can do so thats crestor and kind of what you've done.

So hopefully that with that we address your questions.

Yes, and thank you Julia and ended this 3 and a handful.

And.

Operator.

Our next question comes from the line of and Lee from Jefferies. Please ask your question.

Okay. Thank you very much.

Most of my questions and answer, but just 1 follow up questions on the cost side.

Andy you mentioned about the cost increase.

And for commodity.

And if you share with us of that in terms of quantified it at that kind of exam.

So at the beginning of the year 2021, you mentioned about labor costs increased by mid single digits and now we're into the second half maybe I've missed it but.

But would you share with us and that can all day.

And the.

Possibly.

<unk> increased for.

Commodity.

Labor cost and for SG&A and.

And also at maybe a breakdown in terms of the Capex and therefore, the 700 to 800 million.

And the Capex, which is the revised number alright.

Okay.

Hi.

So let me address the.

First question's about commodity price and.

<unk> increase.

Commodity prices I think if you look at the first half we benefited from.

The lower commodity prices by almost 7% year over year.

As I mentioned.

We have seen come out of parts of specialty epoxy prices.

Which is I guess, the recent low in the first quarter and have been rising and.

And then.

So.

So we're going to see less benefit much less benefit.

Of the lower commodity prices and.

The third quarter.

Compared to the first half now.

Obviously, the commodity prices, it's very hard to predict.

But current trends suggest that based on our contract prices and whatnot suggest that.

Maybe perhaps in later part of this year the commodity.

Prices could.

Product.

A favorable 7% year over year deflation and pressure to a.

And the inflationary pressure right. So so.

That's all of our near term outlook for commodity prices now and kind of labor cost.

And the first half hour wage increase.

<unk>.

We.

Cost compared to last year was about 3% increase.

As I mentioned, we have decided to.

To adjust our restaurant staff.

Right and so we have well out of that wage increases in June and July and debt.

That is about possibly 7% year over year.

<unk>.

Increase there so.

And part of that and then a subpart of thing for all of the cost of labor.

And is twofold, 1 is that obviously delivery continue to be a higher mix of that and then well.

If you look at the hiring I think we also have mentioned over the past few quarter debt there is some.

The labor shortage and hopefully with the.

Salary and wage increase over there with ease that situation as well so we're going to increase hiring now.

Obviously as <unk> mentioned as we continue to.

Local way.

Savings to pay for that and then we will continue to.

Do so and second half could look at productivity improvements, how we can better utilize.

Our.

At <unk> technologies to help that and then as Julie also mentioned, we continue to try and improve our delivery operation as well and drive efficiency. So so but.

At the short term outlook for.

For us and come up of.

Sales and sales out.

Now.

Second question is about the.

700.

$800 million Capex for this year I think at.

Obviously, the lions share of that.

Is it going.

And to be.

In new store.

And then the second part is going to be for.

For remodeling of mall and continues to be.

And part of our Capex program, we wanted to keep our restaurants fresh and so so we generally have a pretty robust.

Boeing program.

And then.

Obviously investment in.

Our it.

And at infrastructure.

And then and then sort of like.

The main categories.

Of.

Our.

And our spending roughly of that order.

And in terms of.

Okay.

Our G&A G&A.

Yes, so obviously on a year over year basis.

<unk>.

1 is we will have <unk>.

Less government subsidy of last year as you remember there was we found and.

And in those credit insurance payment for.

For Walker heat and China, and so that that has expired.

And a part is that obviously, we also have model.

Salary and wage increase.

And can increase for us.

And our staff.

Yes that 1 and so important and hopefully folks.

Don't forget is that last year, we have to.

At precision ones of consolidations of obviously.

Obviously, the operations yet and 1 is the acquisition of loans you at both of them.

We would solve that G&A expenses.

And then finally and then.

Last year.

Year because of the and then make we basically would have stopped almost all of the.

Business travel and.

And with the improvement and of course situations.

B from return too.

Some of it like some of them return to some business travel I think thats.

Normal.

Path and.

Hopefully that gives you some ideas about the expense and cost involved.

The environment that we're facing right now.

Thank you Ed.

Thank you.

Our next question comes from the line of Liam.

From Morgan Stanley. Please ask your question.

Thanks, Julia and N D for the very detailed explanation I have a question on the new store expansion, because I think of so far you've been doing a very good job at it.

In terms of managing both our very fast store expansion and margin improvement. So I just want to understand.

And more in detail about the increase of store density impact to the existing stores.

Does that have any impact on the same store sales growth of the existing stores, that's 1 side and at the other side is yes, the payback and return.

And store are quite good.

<unk> kind of luck in the future of Lynch.

Our continued store Inc.

And Keith.

And even after net debt target again.

Kind of at that nanometers, we shouldnt look at any time at <unk> and new store.

Margin and also.

Turn off mute the impact of the existing stores.

Yeah.

And well thank you for your questions.

You know.

Obviously, we are very pleased with the pace of store openings.

<unk>.

We consider your posture.

And the market opportunity.

So if that is percentage of us.

Especially in a low tier cities, but also the.

And also allow us to better serve our existing market and we have the design as we mentioned.

So all of that work and existing markets. So that we can increase at density and better serve customers need for.

Community of delivery and and.

And you can think of weighted.

And so.

Obviously, when you opened a new store.

Especially if you think of density is naturally see some sales transfer.

New store opening.

And that also the impact is not at the same.

For.

And where.

And 2 day, if you look at SSG impact I think.

The pandemic, obviously is far most the most important 1 right now.

Overall SSG sales of overall.

Is quite price sensitive too for example at some of the original outbreak as we have seen.

And the <unk>.

First quarter and at what we haven't been in June.

And so we have always as.

Analysts and investors.

To sort of pay attention to.

But yes, we are we don't need to be you know.

Overly alarmed by that but we need to stay at about because you know Alex.

At that purely we can outbreak.

And is to be expected.

We have seen debt in <unk>.

And with January we have seen debt in June in Guangdong and now we're seeing a potential outbreak here.

And in Nanjing and.

So is that fuel.

<unk> kind of situation.

What is driving SSG, there's amount of impact many many of them factors there.

But again going back to the main point here, which is you know Tom So youll for low tier city. There was some impact but if you look at for lower tier city of of all you know the efficacy for that sort of faster right. So.

And for some of our urban.

So I think at.

And we signed our network.

1 thing that impact us too.

To reduce debt.

<unk> delivery of <unk>. So for example, you know you have the <unk>.

So that was a 5 kilometer at before now you're going to shrink at 2.

<unk> 3 kilometer because.

Area of and have better delivery services and whatnot and so that would naturally with that increased density we are able to cover that debt.

And that we're able to do that.

Of better but that would naturally means that we will have to shrink some of the Hulu, which faithful for sort of what makes people store.

So, but I think you know.

With.

And you won't have like in Taiwan and SBA.

And with a little bit but is that the right and we do absolutely.

And especially when we look at some of these changes.

And that have been accelerated by COVID-19, and 1 of them spent out obviously delivery sales right.

Off premise.

With average and what at home consumption.

And so so.

So this is something that I think when we mentioned.

Store opening and SSG I think there's something debt to be to be aware of.

The other 1 is.

What's the other 1 here payback and the future.

And for some increased target.

And just going back and store target. So if you look at.

Our store opening we always have a very disciplined process.

And there have been so for.

As many years and then these continue to be so and we will continue being.

And with the future Thats why.

When Joe you mentioned weakening of trying to accelerate growth.

And so you put a special emphasis on profitable growth and so.

And then if you look at our payback period for both KFC.

And Peter Hutton.

There have been variable bus and very stable for cash.

Ft.

And at roughly 2 years and for Pizza hut roughly.

Roughly 3 to 4 years and yes.

Julian mentioned for some of the smaller store and.

And Thats, how I saw nowadays.

It could be even China that and so we will continue to do that making a balance between faster growth.

And if the market opportunity and capacity of our customer.

But also maintain.

Our financial discipline.

And for profitable growth.

Thank you Andy at AIG.

Just wanted to ask at seal.

Great color.

And so we highlight 2 to your question.

First of all we.

And the kind of like to at.

Our focus on system sales growth.

And of short term and long term because this is not a mature market yet.

And <unk> market with huge opportunity to opened new stores.

You know we are only in 16 and 100 cities in China.

And I still feel hundreds of cities for KFC, and <unk> thousand and city for Pizza Hut. So let's look at the system sales in the short term and long term and margin. We always have the balance on the profitable margin growth and I would like to at 3 things 1 is.

And the past few.

And with this forecast and pizza hut, particularly their cash.

We have made ourselves very platform and that flexibility and part of me selling.

For us 2 openings store opened more store within the GAAP.

And so and to open more stores and our new executive I'll give you.

<unk>.

Really at drivers here, Andy and mentioned it and I would just like to touch upon it well at the time traffic is up there right now and probably what day, we see debt. Therefore of what are we doing.

Tried to grow incremental growth.

And from the day part.

For example, late.

Late at night sang and Cts.

Yeah at the chicken bone from Shanghai.

At Fantastic New product innovation that really drive the sales of the late at night.

Is that enough to fill that gap of the dial.

No.

And for now.

The dining business it is challenged and probably with day.

But we see at opportunity for incremental business.

We also see the opportunity and regional menu, which we did not.

We have not.

Further as part of the opportunity for <unk>.

Sample.

And look on yet.

It is not only selling.

And should he is selling even better in junkie and sends them because for.

For people and just and then just is the only place that they can buy the look at me and I'll try I know, though.

So and we also start of new retail doors across the all of the brands.

That is fantastic.

Well and rental business 2 of deliberate business Sos and off premise business.

So that internal internally and we've become and they come right internally, we've become more flexible and stronger that allow us to to take advantage of more store location to open more store well secondly, we.

And couldnt come of better tenants.

If you think about last year. What happened is we are 1 of the very few.

Retail food retailer that can continue to pay rent and we did not lay off any people.

10 and.

Tenant.

And whether you're a.

We have been on now is decided by the Leno and then low now really.

Like us and if.

Not love Us, particularly in the lower tier city, we are at.

And it's clear.

Traffic driver and anchor tenants and the Rand and we are getting a lower tier city is fantastic.

Good day net help the economics of the new store openings.

And then we also have become more clear with our new franchise strategy. The channel franchise strategy the remote area franchise strategy.

So that we of.

We are helping our.

Franchisee to open more stores in the area that we can still do it but it is not as efficient as for.

For the franchisee to run the operation and locally in the remote area. So with the 3 combined factor. We believe that we can continue to pursue.

Our system sales, which is a combination of profitable new store openings and the recovery of SSG.

And Theyre also protect the margin because it will not be right for our shareholders in a short term and and the long term if we buy market share we don't is that discipline.

We only pursue profitable.

New store growth with industry, leading cash payback and in store profitability. Thank you Lillian.

Thank you and centrella Joey and Andy.

Thank you thank.

Thank you for.

Go ahead of Ruger.

Yes, thank you at arena.

Okay.

Go ahead.

Please go ahead.

And our last question comes from the line of Christine Peng from UBS. Please ask your question.

Yes.

Thank you Joey and Andy just.

Any colors on your company's latest operation as well.

Management towards towards and many questions and actions have been asking for analysts about so I have a question regarding the coffee.

Business I think Joey mentioned briefly.

Briefly about the latest operations about.

Sure some of the buzzer coffee and enjoy a I remember when I was being China and of lot share I visited the store of Lovaza and your office and when I look at some of the commentary on the on the and social media platform and I realize there has been a lot of changes to lovaza and newly operating 8 stores.

<unk>.

And China compared with 1 eye I visited end of last year. So Joey maybe can you share with us more colors about the Lady and store.

For US you are making consumer visor, especially how you think about the long term.

<unk> of the brand compared with existing.

Competitors, such as Starbucks and if you can share with us some.

Some of the financial details such as store economics, there'll be even more I appreciate it. Thank you.

Thank you Christine and I Hope 1 day you got it you can try our handler.

And look at them in and see whether you like it.

At the local person.

Betted of coffee EBITDA, let's take a step back we have free coffee brands in young China, kickoff, ECA, and <unk> and Nevada outcome to Lovaza of it.

And I'm very happy to report K coffee for 2021 first half.

Net increase.

The.

And the sales of coffee per cup by as much of 30% compared to the pre pandemic 2019 number and that shows debt.

Our our focus of good coffee affordable price is a viable strategy is twofold.

So for the coffee business Glu for KFC.

Okay.

Yeah and day, we have been working on it and now we have 38 stores and I will be very transparent and we are learning the operations side of our business of of new business. We have huge respect to us new business and I'm happy to report that we at there because.

Sales of.

A meaningful number of store would be breaking even by end of this quarter and more will be by end of year end and that allow us to bill.

The people.

<unk> is about people without good people, there's no business. So we built our operations people and we become sharper.

With our marketing positioning and pricing et cetera, and these <unk> are all helpful. Very helpful. When it come to the experience of building Lovaza brands in China.

And take much less time compared to <unk> for us to get the operation right too.

<unk>.

Get the marketing right and also with our fantastic partner Novartis help to get a foot right to get the Italian.

And flavor of the whole environment of fluids of training et cetera.

So lovaza.

And you said it earlier.

And I'm going to emphasize we are going to have.

A solid rate of pace of development for the second half of the year compared to first half so.

So first half we moved from $5.2 today 15 store.

And in Shanghai, and now 1 store in Hangzhou, So for the second half we have.

The store opening pace and will enter into a more cities in China.

So thats in terms of footprint and in terms of business model right now.

And we so far at.

In Shanghai for the 14th store, we have half of the store what I call, what we call large store to build.

Salary and then the other half of it a smaller side of smaller store, meaning store.

These other.

Stores with much better economics.

<unk> to make them money faster.

So a combination of flagship stores and build our brand and and smallest store to build of cells that seems the.

At the brand to do and we are very happy with the initial results.

So that's the second and third is we already.

Encouraged by the initial retail and working on day part menu combo delivery and.

And other.

Off premise sales.

Sales.

Pricing and now is over 50% for Lovaza at store and Thats. Good range, because we know that right now.

The off premise is the is the trend and for Lovaza obvious. The finally, the my comment is the the position and is premium is organic.

And <unk> Italian style coffee with a nice environment, we believe the Chinese consumer can have a choice can have alternative other than 1 single choice in this beautiful.

Premium.

Coffee segment, so thats, where we are right now and we cannot.

Wait to see more beautiful store.

And with fantastic.

<unk> is at.

Suppose is hot to get tired and partner to produce per Italian food.

And we are not complaining about it so we really look forward to 2 of opportunity for for.

And for analysts to try and.

Our Nevada coffee and food in China. Thank you very much.

<unk>.

And hopefully and Hong Kong, 1 day by the way.

Thank you.

Thank you Christine before we end today's call. Please low there we will host of virtual Investor day on the morning.

And our September 2000, and Shanghai time, we will announce more details as we get closer to today.

With that we will conclude today's call. Thank you for joining and have a great day.

Thank you everyone and thank you operator.

This concludes today's conference call. Thank you for participating.

You may now disconnect.

Okay.

Okay.

Okay.

And.

And.

Awesome.

And.

Okay.

[music] space.

Okay.

[music].

[music].

Yeah.

[music].

Good day, and thank you for standing by and welcome to Yum, China second.

And QUADRA of 2021 earnings conference call. At this time all participants are in a listen only mode are free to speak of presentation. There will be a question and answer session to ask a question of them. During the session you will need to press star 1 and your telephone please be advised at the base contract is being recorded if you require any sort of fees.

Fish dance, Please press star Zero, and I would now like to hand, the conference over to our per speaker of today Ms. Michelle Chang. Thank you. Please go ahead.

Thank you for Davina Hello, everyone and thank you for joining Yum, China second quarter, 2020.1 earnings conference call joining us on today's call R. O C O at Ms.

Joey Wat and our CFO Mr. Andy you before we get started I'd like to remind you that our earnings call and investor presentation contain forward looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward looking statements of.

All forward.

Forward looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included you know of filings with SEC.

This call also includes certain non-GAAP financial measures you should carefully considered of comparable.

GAAP measures reconciliation of non-GAAP and look.

GAAP measures is included in our earnings release.

Today's call includes 3 sections Joey will provide an update regarding recent developments and our second quarter 2021 results Andy.

Andy will then cover the financial performance in greater detail.

Finally, we will open the call to questions.

You.

<unk> of the webcast of this call in the Powerpoint presentation, which contains operational and the financial information for the quarter on our IR website.

Now I would like to turn the call over to MS. Joey Wat CEO of Yum, China and.

Thank you Michelle Hello, everyone and thank you for joining us today.

Ah.

Our business has recovered remarkably well, although the pandemic of steel impacting our business and we'll continue to do so.

We have learned to live with it and.

And we are focusing on the future with.

We are focused on our core.

Fluids, great value and customers.

<unk> experience.

We penetrate further into lower tier cities, we increased our store network density to suit the shift to off premise dining post pandemic.

<unk> remains resilient and continue to grow at a very fast pace.

Pizza hut achieved stellar performance.

<unk> and expect it to become and lot of growth engine of Yum China.

Colby and Joanne Lovaza and making good progress.

We delivered a solid second quarter system sales grew 14% operating profit grew 83%.

And the store footprint at.

Debt accelerated pace.

Opening 400 for new stores in the quarter.

In less than 1 year, we at more than 1 net new stores and increased total store count to over 11000.

Our team is laser focused on driving sales.

<unk> for digital platform and enable us to swiftly adjust our marketing campaigns.

We can reach members directly with targeted offers.

In the quarter, we recruit over 10 million new members ending the quarter with over 330 million members.

Notably off premise and home consumption of becoming more popular in a post pandemic era.

At delivery sales grew over 60% compared to 2019, we also launched retail products across our brands leveraging our online and offline assets.

We intend to low and innovate to address evolving consumer needs.

Let me update you on our core brands first let's start with KFC.

KFC, let our new store openings, we increased store density in existing cities and.

And Ted over 1.

And new cities in the last 12 months.

With 280, new stores opened in the quarter, we now have over 7600 stores across China.

More impressively new store cash payback and profitability remains very healthy across city tiers.

<unk> hundred and at themselves grew 14% led by same store sales growth and accelerated new store openings.

Kathy successfully navigated this tough operating environment with reduced volume at transportation and tourist locations.

Our operating profit grew by 50.

3% to $240 million.

It goes without saying the crucial role <unk> plays in our business in our second quarter, Kathy at <unk>, and Angus beef burgers to the permanent menu cash.

<unk> also launched the proton and mid tier.

50, <unk> chicken Sandwich and limited time offer.

These innovations generated strong social buzz at.

And a well received by consumers.

We know our consumers well and cater to local taste buds.

<unk> has introduced regional menu item.

Such as hot dry noodles.

Look at EMEA and.

And steamed dumplings, Joe and ball and Hangzhou.

We also launched at <unk> spicy Tom based fees Rep at.

And and Milt latte to provide more choices to consumers.

Good food, we also offer great value throughout the quarter, we launched attractive promotions to drive traffic.

Our main labor day holiday bucket.

And as ever mix and match buckets for dining locations.

On the digital front, and we focus on growing our member base and driving their.

<unk>.

We launched a new privilege subscription plan, giving our members of choice of perks from a range of offerings.

These provide visibility for our members and drive incremental sales.

And so 8 million privilege membership fees.

In the quarter.

For every spending of a privilege members doubled that of regular members.

Now, let's move on to Pizza hut.

Our transformation initiatives in the last for years.

Yield great results.

Compared to pre COVID-19 levels in the 2000.

And same store sales continue to recover.

System sales growth turn positive at.

Operating profit more than doubled from the same period last year.

We accelerate our new openings and at 17 net new built.

In the first half of this year. This is.

And 90 highest total net new units we at in the first half since 2016 at shows our confidence in the business model now.

Hub and spoke and other small store format and have proven to be successful.

And now account for most of our new stores.

Store economics continue to improve.

At the new store payback remains healthy and particularly for the hub and spoke.

Multiple and.

We will continue to increase density and penetrate into more new cities.

And of March new menu, we've changed 40% of the menu items compares to the previous year.

In the second quarter we.

And <unk> to improve our product offerings for a better customer experience.

In June we upgrade our hand tossed store with more premium flower and low temperature long segmentation net.

Makes the pizza dough Christie outside and solved inside.

We can take taste, particularly good and.

And very very suitable for delivery.

We also launched sirloin steak with parmesan cheese, and nice slides noodle not of great proper translation, but the Chinese name, it's called <unk>. It.

Is that traditional and specialty.

Noodle of strength since the province there.

This is of great fusion product combining elements of east and west.

2 and enable value proposition and.

And hence our value proposition Pizza hut has expand the price range of at T cell offerings in June.

We launched 13, new piece of flavors at more affordable price points.

Mainly for the.

New.

Upgrade at hand to hospitals.

We also launched and non is successful all you can eat campaign offering of fund them value.

At the Pizza and membership reached.

A significant milestone of 100 million members.

<unk> sales now account for over half of system sales.

Digital and technology continue to play an important role in driving sales.

Digital ordering increased to 84% of cells from <unk> 29.

9% 2 years ago.

Delivery and tableside mobile ordering became more popular.

Coffee, our coffee business, making good progress, Nevada Triple as store can although the base is at this mall in this in the second quarter and.

Initial results of our new store.

For opening are encouraging.

We now have 14 of anchor store in Shanghai, and we are opening of first beautiful store in Hangzhou, which is the first of all outside China and above 1.

1 hour today.

We are confident in of potential of debt.

102006 years of Italian coffee brands.

Carver enjoyed double is per unit sales compared to 2019 and had a meaningful number of stores breaking even at the end of the quarter.

We are reinforcing of specialty coffee brand positioning expense.

Spending day parts with more food choices.

Broadening the customer base and have better value for money.

To conclude my section.

We are well positioned to capture the market opportunities in China.

Our store network is growing at.

And.

Precedented pace.

We are investing ahead of 245 and future proof our infrastructure and Digitization.

China, we are committed and confident to achieving sustainable growth in of many years to come with that I will turn the call over to Andy Andy. Thank you Joe.

And Hello, everyone. Let me know Hawaiian additional details on our second quarter financials, and then share our perspective on this year's outlook.

Unless noted otherwise all percentage changes before the effects of foreign exchange.

Let me first cover of our second quarter financial results.

Total revenue grew 17% year over year and reached $2 for $5 billion for.

And some sales increased 14% led by same store sales growth of 5% and accelerated new unit development.

Similar to last quarter, we are providing pro forma measures here for convenience.

And being in comparison with 2019 sales.

Same store sales recovered to approximately 94% of the second quarter 2019.

System sales grew rough.

Roughly 9% benefiting from new units and the consolidation of <unk>.

Sales for recovery.

In April and May.

For the trajectory was disrupted.

But at Delta wherein outbreak and Guangdong province at the end of May.

While non province is the largest economy in China and <unk>.

And 1 of the largest markets.

Housings 2 of the for tier 1 cities.

The outbreak led to temporary closures and the regions and effect at the consumer behavior of course, China.

Same store die and volume is still well below 2019 levels.

While all premise occasions continue to grow rapidly.

KFC remains.

And with England and deliver at robust growth on a year over year basis system sales of KFC grew 14% led by strong unit growth and same store sales growth.

On a 2 year basis for.

And some sales grew an impressive 7%.

Use at 2% faster.

And of Chinese restaurant industry growth of 5%.

Despite subdued traffic of transportation and <unk>.

And with locations.

Same store sales recovered to approximately 93%.

And at the same store traffic at.

Approximately 86%.

Average ticket.

Grew roughly 8% versus 2019, mainly due to the increase and delivery mix.

Pizza hut delivered exceptional performance on a year over year basis system sales grew 16%.

Same store sales grew 11%.

On a 2 year basis system sales.

Sales growth in the quarter returned to positive.

Same store sales and cover to approximately 97%.

A 2 point sequential improvement from the first quarter 2021.

It was led by a 9% increase and traffic driven mainly by more.

For delivery and breakfast sales.

Gross margin was 15, 8% up 210 basis points compared to last year.

This was mainly driven by sales leverage favorable commodity prices and operational excellence.

Cost of sales force.

37% to.

220 basis points lower than last year.

<unk> prices declined by 7% year over year.

Mainly helped by lower for sugar prices.

Cost of Labor was 24, 2%.

150 basis, 0.5 and last year.

This was mostly.

Mostly due to lapping of Covid related government subsidies received in 2020.

And call and cost and.

Wage inflation of 3%.

Labor for Otp, and labor shortage, partially offset the increase.

Occupancy and other.

Was 29, 3%.

140 basis points.

Lower than last year, mainly attributable to sales leverage and savings in operating costs.

G&A expenditures increased 10% year over year.

Mainly due to higher compensation costs.

Consolidation of Soochow kept.

FC and the resumption of some.

Some business travel.

Operating profits grew to $233 million.

A 65% increase year over year, or a 6% increase compared to 2019.

The increase was mainly driven by system sales.

And restaurant margin improvement.

Our effective tax rate of 24, 8%.

Similar to last year we.

We expect full year effective tax rate to be 27% to 29%.

Net income was $181 million.

Adjusted net income was $185 million, excluding $5 million net investment gain it was 180 <unk>.

<unk>.

Up 55% year over year.

Diluted EPS increased to 42.

And from 34 tenths of a year ago.

Despite and margin our share.

Base by roughly 11% at par.

Out of our secondary listing in Hong Kong last year.

Now, let's turn our attention to the outlook.

And so we continue to drive sales growth and accelerate store network expansion, we need to mindful of.

And the near term challenges.

It may sound like a cliche, but we continue to expect.

The impact of COVID-19 to linger.

And that there would be periodic lesion of outbreak.

So for recovery of same store sales to pre COVID-19 level boutiques.

Those of recovery will continue to be uneven and non linear impacted by a few factors.

And so.

Traffic at Transportations and tourist locations.

2.

Some health measures and restrictions on mobility to remain in place.

And that will continue to impact diet and traffic.

3.

Chuck and school harvest.

Operating profit and margins have improved year on year.

And the first half.

Benefiting from sales leverage.

Favorable commodity prices.

At moderate wage increase and labor productivity improvement.

We expect southern tailwind to turn into perhaps headwind in the second half.

First <unk>.

Cost of sales, which will be pressured by our focus on Bayou campaigns and.

And increasing commodity prices.

We have already seen an uptick and poultry prices.

And we will lap to low prices in the prior year.

Therefore, the commodity prices will potentially kind of into inflationary pressure later this year.

Second cost of labor.

Cost of Labor, we will.

Increase in the second half of 2021 for 2 reasons first most of our store have increased.

Restaurant staff wages in June and July.

And therefore wage increase will be higher.

And the second half compared to 3% in the first half.

Second we are also increasing staffing levels to ensure customer services.

As a reminder.

The speedy recovery last year creates a tougher comparison in the second half of this year.

Now despite these challenges.

We remain.

Remain confident and our long term potential of China.

We're accelerating store network expansion with increased store density to capture market opportunity and to better serve the shifting demands to off premise.

We now expect to open at around 1300, new stores in.

In 2021.

We also.

We will incubate our emerging brand for future growth.

To support this growth.

We will continue to invest ahead and technology and infrastructure.

To further solidify our competitive position.

We now expect.

Full year capital expenditure of approximately $700 million to $800 million.

As we step up investments western margins as whilst G&A will reflect higher depletion costs.

Finally.

Following and assessment of the Covid situation.

Our financial position.

And what has approved the resumption of share repurchases.

Yes over $690 million remaining under the current authorization.

We're committed to drive low.

Long term returns for our shareholders with that I will pass you back to Michelle to start the Q&A.

Thank you Andy we'll now open the call for questions and orders give as many people as possible the chance to ask questions. Please limit your questions to 1 at a time Davina please start of Q&A.

As a reminder to ask a question you will need the quest for 1 of your telephone and we do.

Your.

Shang Please question.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of.

Michelle Cheng from Goldman Sachs. Please ask your question.

Hi, Joe and congrats also on at very good results again during this environment.

Your question. My question is about the labor cost and also of the new guidelines and government to protect delivery riders of interest.

So we all understand that <unk> has been taken care of the employees.

So you'll want to key of management's thoughts on the future of labor cost management and more specifically given we have high revenue contribution funding of our business. So.

And how should we think about of the delivery cost increased due to government requirement and also.

I think we are also talking about the delivery of 3 point to the relative enhance the efficiency so like.

Can we expect some efficiency upsides to offset and these potential cost increases.

<unk>.

Okay maybe.

This is Andy.

And let me first.

Some color on the cost of labor.

And so we have mentioned in prior quarters, we were facing.

Labor shortage.

Some of our.

Restaurant.

And then we.

Hum.

Sort of moderate.

And a wage increase over the past year, because none of the pandemic situations now we have decided.

Early on.

And the second quarter to increase wages at.

And our markets and the west for the restaurants.

Non staff and.

As I mentioned on my prepared remark.

We have increased wages.

In June and July and.

China So.

Honestly, we rolled it out at the measured over the 2 months period across China and so.

And as a result.

We also we do expect that.

Duration, Inc increase will be higher and so we've got partners and 7% debt.

<unk> is going to be roughly normal to returning to the pre COVID-19 level of waste.

Our ratio increased.

And so as a result as I mentioned.

And we should expect.

Our highest <unk>.

And the second half because of observation Kris.

Now of course, we have at the company we always.

1 of the payout of staff more high salary and higher wages.

We filed and stat.

And focus on and also maintaining.

Reasonably and delivering value for our shareholders. Therefore, we have invest over the years.

And then we will continue to invest.

And in technologies.

2 of our efficiency and operations.

Investment in automation and so.

And can continue to drive that labor productivity improvement.

So hopefully.

And in <unk>, we can continue to you.

Payout of that more at the same time.

King.

A reasonable margin for all of our business. Thank you Andy Michel I would just add.

At 1 comment about the labor cost and now I will address your question all right variety of label.

Zero.

We increased our delivery sales mix from 11% of right now of 30%.

Phase 2016, and I think you can see from our P&L statement that we manage to.

To manage the overall of delivery.

And then right at Cod and also true find net savings to fund debt and also to.

To continue to deliver at the profit margin for shareholders. So.

We have done at in the last 5 years as per lane of numbers and I believe that Andy also gave you some of our continues to do.

And your future as well.

So let me address the variety of labor labor low question and Antelope 3.

For the writer of Labor Law question I would like to make 3 comments 1 is.

We are compliant to applicable laws and regulations and we also require of service provider to sign of Yum.

And at the prior code of conduct to ensure they are legally compliant with all applicable laws and regulation.

Second is.

Regarding the right of safety, we have a very comprehensive delivery management system cleared guideline and we conduct regular audits to ensure for.

Safety and ride of safety.

China is of course, we also provide a rider training and equipment with safety measures.

Third quarter.

Quarter end.

We actually work with our service provider to manage Brian is we're intensity of <unk>.

Riders.

Other writers and a market debt.

The allocated to serve only.

China brands.

Cassie Pizza hut, and we focus on service quality.

And 1 thing Rod of difference, which we have been criticized and a pause but now I think we can see the beauty of at.

Our order density for Ryder is roughly 30% lower.

And the platforms.

So you asked a question so how do we make sure we paid of Ryder well, so that we can and.

Ill keep them well with pay of writers more per transaction, they got paid a bit more money.

So net net the pay the take home pay for the rider.

And the <unk>.

Competitive.

On top of that all riders and joy stable income with less stressful and stressful what the intensity in a short term and my sounds like a disadvantage for Alcoa, but remember as I mentioned earlier, we manage the cost okay.

But that's absolute.

And right thing to do for the long term with <unk> rider better service quality and protect our brand and the long term.

So let me move on to your question about deliveries deliveries of 3 zero.

We upgrade of rider program in 2020 to optimize our delivery.

Free trade zone and ride of routine.

As of right now this platform cover 75% of KFC store and by the end of 2021, we will complete the low.

All for all of the KFC store at the same time at the same time.

<unk>.

On.

We share the ride at within.

Few stores of field KFC store within a distinct trade zone. We are also.

Trying and and.

And going through the testing phase to share the rider with pizza.

And as well.

So all of these will continue at.

In 2021.

We do expect the.

The improvement in the.

The trade zone optimization the routine.

Will.

Now in improvement improving and right of course.

Of course, there are more to be done at delivery business continues to grow but the progress is good. Thank you Michelle.

Thank you Joey and Steven.

Clear.

Yes.

Our next question comes from the line of share.

<unk> from Citi. Please ask your question.

Good morning, Julien and Andy can you hear me.

Yes, Yes sure go ahead. Thank you my question is on Pizza hut.

We're glad to see the strong recovery both in sales and the margin and Pizza hut as we know that casual dining has been very difficult segment for years.

And as for everybody.

And according to the probably information 1 of a few of your competitors actually due to very weak performance of kind of a dining sector, but you guys at really surprised the market of oxide.

I know that Julian and team have done lot of.

Pizza hut and deposit for years of product delivery.

The provision of etcetera, what are the things and most important factors that contributing to the surprise on the upside and.

And why suddenly take off and.

How long this kind of recovery of strong recovery kind of be sustainable. Thank you.

Thank you Jeff for.

Well I would say no southern recovery.

It's really.

At the heart of last for year, but it's hard to translate but I think of Chinese way call Ho Chi for <unk> is a good way to describe it and you work on it for over 4 years day by day on all the key areas and then finally, we get to the end.

And pointed at the results start to speak for itself.

Let me comment on the.

For the.

The path so far we have taken but also what is next.

Well.

I think it's fair to say debt.

And fresh and our full year of revitalization program have you great result.

Almost in all of the.

All of the key dimension from same store sales traffic and same store sales system sales margin operating profit at.

And right now new.

And at opening they're all strength trending to the right direction.

And we'll repeat the number.

Which you all have at.

<unk>.

And if you remember.

When we started journey, we we had a very bold goal to turn.

So at the same store sales part.

New store in 2000 for months.

And with debt with deliver debt return, we turned the same store traffic positive first and same store sales and in terms of which particular.

<unk>.

Analytically, we like to say they are few focused in reality of when we come to turnaround business.

And I.

To be honest and we have to work on 4 areas.

And that's not such a luxury of just focused on 1 of 2 feta and roughly categorize them into for pillar the fundamentals delivery digital and store format, which you guys should be more than <unk>.

Malaria is not bored with the with the repeat focus.

So all of them all of them have have deliver but really with at Empress to single out 1 or 2 I would have to say is.

Fruit with great value as simple as that flow.

Right now it's fantastic.

And with great value for money.

And my reason favorite.

And in fact fried chicken Curry.

And while current vegetables is hard to imagine debt, but destinational dish for precision before.

And then the pizza has have improved a lot not only debt.

Testing.

But at the low right now as of now we are.

Having pizza topping that with pulse and colonial those stats of abalone sauce with a group of beef and that should Michelin star of recipe.

But the price is very very good so that has to be a key key.

Top Russian and turnaround.

On top of debt, we have really worked hard to improve the technology that digital of.

The digital ordering and then the delivery et cetera.

So I'm not going to go through all the detail about our 4 pillar.

I would like to comment is what's next.

And at trail.

We now have confidence in in the Pizza hut business and we are very clear that we want to make it and not a solid growth engine and what is next.

You guys are familiar with debt to the next is resilience and high growth.

We want.

1 of the hub business as resilient as KFC business. So that it makes money during good times, but also make money during bad time, that's the best way to protect the jobs of our staff.

In this market and also now we have a good foot.

And that piece of good good value for money, but we also have final way.

With the new store opening has industry, leading cash payback and in store profitability, that's even comparable to debt of KFC, what a fantastic.

Thing to have particularly for the.

Good day, Payless store and new store and small store. Therefore, you can expect we are going to pursue high growth for this.

You know of.

Very profitable store to pursue profitable growth now and in the future. So.

<unk> focus on our 4 pillars in the last for years going forward, we're going to focus on resilience and growth and particularly profitable growth. Thank you Michelle Poole.

Thank you Julien.

Our next question comes from the line of Chengdu from Bank of America. Please ask your question.

<unk>.

Hi, Julien and again congratulations on another strong set of results I also have some follow up questions on pizza.

Pizza hut.

I know the site and the announcement and Joey described Pizza hut at another growth engine, we have not seen this level of confidence of pizza hut.

And the past few years and just now Joe you also elaborate on a lot of initiatives regarding pizza hut.

And in particular, our notice of Joey mentioned for those satellite stores.

The payback.

And would be similar to that of KFC, So kind of you actually elaborate.

And the unit economics of those satellite stores and also among the 1300 <unk>.

Store addition, target this year can we offer us a bit rough breakdown between our brands such as KFC Pizza hut and other brands.

And also lastly.

In terms of margins.

Is it fair to say that we can hour.

Our media and to normalized.

Restaurant margin for Pizza hut could possibly return to the level of dog. We saw during the years of tool of 17 to 18 before we started to turn.

And the Pizza hut business. Thank you.

Hello, and thank you I'll comment on the.

On the Pizza hut confidence and then the payback for the stores and then and they will address the other 2 questions for you us.

I hope you can.

See our increasing confidence on our business on our pizza hut business in the last for years.

But we did take the prudent approach.

And it's very clear what other steps that we have taken traffic first and then.

Sales and.

And then profit and when we get to.

The point that we can get all 3.

And we will go more at your site as I mentioned in previous earning calls sales.

<unk> is vanity profit of sanity and reliable sales.

And profit.

And what is even better at even more profit right.

So thats the growth that come in.

For the.

And the confidence of the piece of our business model. It does not come from 1 of 2 quarter positive results at.

Come from the fed debt.

We have been working very hard on improving fundamentals of the business.

The paying of working on a fundamental at.

Good thing thus take time.

And the joy of the fundamental improvement is the benefit is long lasting.

It will it will help our business model for the many years to come.

It's not because of 1 of promotion of et cetera is because the improvement in food value for money store.

Look at I mean, the majority of our stores.

It's very very nice looking right now Unfortunately, you guys cannot see because you.

It's very difficult for you guys to come from to the travel from Hong Kong and China.

Really look forward for your visit to our new stores might be a bit too feminine for gentlemen, but it's okay.

We care about the ladies.

And they make the critical purchasing decision most of the time.

So so so the improvement.

At all fronts, and and that technology and other customer like end of <unk>.

Last year at the challenge of COVID-19 for.

For the.

Because of challenge of business model and we.

<unk>.

The challenge at positively and with Great results give you an example.

And last year with the.

The impact on our <unk> business.

And our piece of our business took the opportunity to to make the verge.

Of necessity to use our existing ingredients to make very high.

Hi.

Value of fluke, such as 1 person and.

And that right now is bringing inc. Incremental sales because our party side traditionally has been fees, but the 1 person.

All of the incremental business to Pizza hut and also because of the pandemic, we push ourselves to growth of new retail business not only with deliver.

State, but we also.

Sell raw steak marinated of raw state that yourself.

<unk> he cannot destroy.

So so so all of these.

The result of heartworm, and the last for year and particularly low.

Last year.

And therefore, we are at at the point debt.

We can be very responsible.

<unk> of our view.

View debt, we believe pizza hut is another growth engine given the size of the store right. We have over 2004 hundred stores of.

Pizza hut and in over 500 city with fantastic brands, particularly in casual dining business.

So that.

And we are fundamental and for the payback for the small store particular hub and spoke store which is the.

And business model are introduced.

To our shareholder Investor that 2 of 2019 much.

So much lower investments and really supplement our.

At the current piece.

Pizza Hut store density.

And also.

Help to make our current pizza hut.

Store, which are not too small Mick Mick Mick Mick Mick of re.

You asked that because the original stores.

Our copy what we call mother stores is a big store and they will be helping to open the pit store, which asks the satellite store to provide better convenience for our customer focusing on off premise consumption.

So now the.

Satellite store.

And we'll gather with our original.

Casual dining store, it's fantastic network is a great way to grow our business.

It's not like we have to go to.

We could go very far away and we're just putting 1 satellite store and logistically is very difficult no. We have stores there already.

So we have the potential of that installed there already and we're just going to increase the density of our stores debt to help the delivery of price, perhaps off premise business and when I say the case cash payback is good at comparable to KFC and our number show that the success rate is very high because the investment is very low.

And <unk>.

And the payback is about 2 years.

And so thats fantastic.

Okay.

Looking at.

Let me address the question about.

30 <unk> hundred.

New build.

We are looking at.

And for this year.

And I think.

And if you look at the break.

I think at <unk>.

Obviously somewhat similar to before.

And mainly kfc's of very strong.

Powerful machines.

We continue to generate very strong cash payback. So we should continue to expect variable force growth for.

For.

And for GAAP and is going to continue to be the lion's share of those.

The new store view.

As Joey mentioned.

We continue to gain confidence in the economics for Pizza hut.

And then especially for the Sally store and the smallest of all format. So you should see.

And for some acceleration on Pizza hut.

New store openings and the second half as well.

We also.

Yes.

And.

And so we have mentioned.

On her prepared remarks.

We are seeing.

For the very strong.

No.

Consumer reception for Lovaza, we triple and all short term almost tripled from about 5 stores to.

2 of faulting.

For.

And those in the second quarter. So so.

We are also have a number of store and the pipeline.

Okay.

Joe boxer coffee business to be at other.

And then <unk>.

Chinese goosing business half of our business, although we see uptake in store openings and the second half so and Thats January the composition of.

Of those 13 under store.

Again.

And so it's mentioned that usually.

And the store opening will be probably faster.

And secondly in units beginning.

And in latter part of per year, So thats only the strength for the Chinese new year and so so at.

Not completely linear, but that's generally because of seasonal acceleration.

And the store growth store.

New store openings.

Now and talk piece.

Fees up margin.

<unk>.

We were pleased with pizza hut.

Improvements at <unk>.

Mentioned, the only the growth is strongly of SSG.

SSG to some growth and <unk>.

On the traffic.

And then so.

So.

The biggest driver obviously for margin improvement yourself leveraged and so the other part is no.

For and also labor pool at a few of improvement and.

The store economic model and.

So if you look at the first half, though we did benefited from as I mentioned.

Factors, 1 low commodity prices right and 2 we have felt like more moderate and labor cost increase.

And that defray that no.

They are helping pools and order.

For the.

Sure.

The margin in the first half.

And second half.

And 2 I think.

Similar to KFC and Pizza hut, we have low ratio increase of course, China in June and July for Western and staff and so you should end.

And also would likely to increase for hiring as well.

And so you should expect.

Increased.

Labor costs, there and.

India.

Half of that we're also seeing.

And when oil prices will be a less favorable.

And it was very favorable and the first half and commodity prices fell 7% year over year, so and.

And I think we have seen.

For example for.

And your prices.

Sort of like which is.

And first quarter, and then have been rising fees and so we do expect that.

Commodity prices also woods.

Do some pressure there and then perhaps and you come into <unk>.

Inflation pressure year over year.

But those are the long term headwinds at <unk>, but I think for.

This hub.

You have.

Thank you.

No.

Drive I think the priority for them, obviously to drive traffic drive sales of extra store.

And we.

With you at of recovery phase for the pandemic sold and the more of the thing for them, obviously continue to focus on.

For 2 of that customer.

Some of it will come back for the stores come back too.

And then increased spending and then and.

And then we will continue to drive that improvement.

At the business returns.

And then and then.

We will also look at them too.

Driving.

And with <unk>.

Profit improvement for Pizza hut, but that should be a low longer term point of view of shouldnt be getting us.

At at least to try to squeeze profit too.

And some of the new saw economic setting.

No.

I think couple of things at once at a small.

And at large and smaller that's how I saw as most of all at the name would imply.

So the of throughput.

Christophe of our new store, probably lower than does the cycle is.

And portfolio.

However, the profit margin as goods and then we have lowered our of of investments. So the overall return is there.

So as.

Installations for Sal I saw all.

Most comparable to what they are for compute so thats gross store closers.

So hopefully that will that we address your questions and thank you.

Yes, and thank you Julia and and this is 3 and a handful.

Julian and operator.

Our next question comes from the line of annually from Jefferies. Please ask your question.

Okay. Thank you very much of.

Most of my questions been answered, but just 1 follow up questions on the call Scott.

Andy you mentioned about the cost increase.

For commodity and while.

And the past you share with us and in turn.

As of quantified it at for example at the beginning of the year 2021, you mentioned about labor costs increased by mid single digits now.

We are into second half maybe I've missed it.

But would you share with us and I can all of these.

The cost.

Cost increases for commodities.

Labor cost as well of SG&A and.

Also at maybe a breakdown in terms of the capex for the $700.

Hundreds of million.

And the Capex, which is a robust number right.

Okay.

Hi.

And so let me address any of the.

First question's about commodity price and.

<unk> increase.

Commodity prices I think if you look at the first half we benefited from.

The lower commodity prices by almost 7% year over year.

As I mentioned.

We have seen come out of parts of specialty epoxy prices.

Which is I guess the recent low.

The first quarter and have been rising and.

And then.

So.

So we're going to see less benefit much less benefit.

Of the lower commodity prices and the third quarter.

Compared to the first half now.

Obviously, the commodity prices, it's very hard to predict.

But the current trends suggest that based on our contract prices and whatnot such as debt.

And maybe perhaps in later part of this year the commodity.

<unk>.

Prices could.

Got it.

A favorable 7% year over year, reflecting pressure to a.

At inflationary pressure, but so so.

That's all of our near term outlook for commodity prices now in terms of labor costs.

And the first half hour wage increase.

<unk>.

We.

Cost compared to last year was about 3% increase.

As I mentioned, we have decided to.

To adjust our restaurant staff.

Right and so we have well out of that wage increases in June and July and debt.

That is about possibly 7% year over year.

And with Bob.

Increase there so so that's.

And part of that and then the third part of thing for the cost of labor.

And is twofold, 1 is that obviously delivery continue to be a higher mix of that and then.

Well if you look at at hiring I think we also have medicines over the past few quarter debt there is some.

The labor shortage and.

And hopefully with the.

Salary and wage increase over there at ease that situation as well so we're going to increase hiring now.

And obviously as Jimmy mentioned, we continue to.

Look for ways.

And the savings to pay for that and then we'll continue to.

And if I can.

And have to look at productivity improvement and how we can better utilize.

Our.

At <unk> technologies to help that and then as Julie also mentioned, we continue to try and improve our delivery operation as well and drive efficiency. So so but that's of short term outlook for.

And do so in terms of both.

Phil <unk> and CFO.

No.

Second question is about the.

700.

$800 million Capex for this year.

Think of.

Obviously, the lions share of that.

Yes.

Is going.

For us.

In new store.

And then the second part is going to be.

For remodeling of more and continue to be.

And part of our tax program, we wanted to keep our store refresh and so so we generally have a pretty robust remodeling program.

And it.

And obviously investment in.

And our ITE and.

Infrastructure.

And then.

And there's also some sort of like the main categories.

Our.

And our spending roughly of that order.

And then in terms of.

With the vs.

Oh G&A G&A, yes.

So at.

Obviously on a year over year basis.

<unk>.

1 is we will have low.

Les Galvin latest subsidy at last year as you remember there was we spending reductions.

And in those credit insurance payment for.

For Walker here in China, and so that has expired.

Other partners that obviously, we also have modeled.

Salary and wage increase compensation increase for of our staff.

Yes that 1 and so.

And hopefully folks.

<unk> and forget is that last year, we have to.

At precision ones of consolidations of.

Obviously your operations, yet and 1 is the acquisition of loans you are both of them.

We would absorb that G&A expenses.

And then finally and then.

Last year.

Total and then we basically would have stopped almost all of the.

Business travel and.

And with the improvement and of course situations there will be some return to.

Some of it like some of them return to some of business travel I think thats.

Normal.

And.

And hopefully that gives you some ideas about the expense and cost.

Environment that we're facing right now.

Thank you Ed.

Thank you.

Our next question comes from the line of Lillian Lou from Morgan Stanley. Please ask your question.

Thanks, Joey and Andy first of all of a detailed explanation I have a question on the net new store expansion because I think of so far you've been doing a very good job and in terms of managing both very fast store expansion and margin improvement.

So I just wanted to understand.

More and detail about the increase of store density impact to the existing stores.

Does that have any impact on the same store sales growth of.

At the existing stores.

And that's 1 side and at the other side is.

Yes, the payback and return.

And in store are quite good. So how are we kind of look in the future with.

Our continued store Inc.

Increase, especially.

Especially with uplift of the target again.

What kind of at that nanometers, we should look at it in terms of the new store model.

<unk> and also.

Also at the impact of the existing stores.

And you.

Has it and well thank you for your questions.

Obviously, we are very pleased with the pace of store openings.

With that we continue texture.

The market opportunity.

And I'll keep at this presents to us.

And we loyalty of Cds.

But also the and.

And also allow us to better serve our existing market and we have the design as we mentioned.

So all of that work and existing markets. So that we can increase at density and better serve customers needs for.

Unity delivery and.

And in particular weighted.

So.

Obviously, when you opened a new store.

Especially interesting and density is natural to see some sales transfer.

New store opening.

But that also the impact is not the same.

For everywhere.

And today, if you look at SSG impact I think.

Pandemic, obviously for most the most important 1 right now at the sales overall SSG sales of overall is.

And quite a few if I can't give too for.

Examples of the original outbreak as we have seen.

And the for.

First quarter and as we haven't been in June.

And so we have always us analysts and investors.

And to sort of like.

Net pension to the lesion outbreaks and we are we don't need to be.

All of the alone by that but we need to say about because.

And our experience.

And how is that purely we can operate.

And as to be expected.

We have seen debt in <unk>.

And with January.

Debt in June and Guangdong, no, we're seeing a potential outbreak here.

In Nanjing and no.

With that and fuel.

Solvency ratio.

At what is driving SSG net impact many of management practice there.

Again going back to the main point here, which is some so youll for loyalty 3 debt will be some impact, but if you look at for lower tier city of all of the efficacy focused actually faster right. So.

And for civil urban.

I think at.

And you find out of network.

1 thing that impact us she is to reduce debt.

Delivery of trade zone.

For example.

Of the store that was 5 kilometer at before now you're going to shrink debt.

Between 3 kilometer because.

And you wanted to have better delivery services and whatnot and so that would naturally with that increased density we're able to cover that debt.

That's able to do that because of a.

Better, but that would naturally means that we will have to strength some of the 2 of which faces for sort of opex at Lasalle. So so but I think you know.

With.

Would that have like in Taiwan and SG.

And there's a little bit, but it's at the right and we do absolutely.

And especially when we look at some of these changes.

And that has been accelerated by COVID-19, 1 of them spent out is obviously delivery sales right.

Off premise.

Consumption at home consumption.

So so.

So this is something that I think.

And we mentioned.

For opening and SSG I think there's something debt at the b to be aware of.

1 is.

What's the other 1 here payback and the future.

And with increased target.

Please spell attack and store target. So if you look at.

And our store opening we always have a very disciplined.

<unk>.

And that has been so for.

As many years and then these continue to be so and we will continue being.

Future and Thats why.

And when Joe you mentioned weakening of trying to accelerate growth.

And so you put a special emphasis on profitable growth and so and.

And then if you look at our payback period for both KFC.

And pizza hut.

There have been variable based and very stable for KFC.

And roughly 2 years and for Pizza hut roughly.

Roughly 3.2 for years and yes.

So you mentioned for some of the small store and.

And satellites low nowadays the payback for it could be even shorter than that and so we will continue to do that and making a balance between faster growth.

<unk> for market opportunity and capacity of our customer.

But also maintain.

Our financial discipline.

For profitable growth.

Thank you Andy.

Just wanted to at steel.

Great.

Color.

And so we highlight 2 to your question.

First of all.

And really liked you.

Our focus on system sales.

And of short term and long term.

This is not a mature market yet.

European market with huge opportunity to opened new stores.

And.

We are only in 1600 cities in China.

And as you know few hundred cities for forecast and then thousand city for Pizza Hut. So that's looked at our system sales in the short term and long term and margin. We always have the balance on the profitable margin growth and I would like to at 3 things 1 is.

And the past few.

2 years, both cash and pizza hut, particularly out of cash we have made ourselves very fast simple and that flexibility is part of resiliency for us to opened store to open more store within the GAAP of existing store and to open more stores and the new cities I'll give you.

<unk>.

For a few drivers here, Andy and mentioned and I would just like to touch upon it well at the time travel is appeal right now and probably would say we see debt. Therefore, what are we doing we try to grow incremental growth.

From the day part.

For example, late.

At night and Yancey.

Yeah at the chicken bone from Shanghai.

At Fantastic New product innovation.

And that really drive the sales of the late at night.

Is that enough to fill the gap of the diet and no but.

And for now.

The dining business is challenged and probably with day.

But we see opportunity flow incremental business.

We also see the opportunity and regional menu, which we did not.

We have not.

Further explore the opportunity of <unk>.

Sample.

And look at it.

It is not only selling.

And Ron will have at sugar is selling even better in Jan CN because.

And people in China, and then Kathy is the only place that they can buy the low Gambia and I'll try and nodal.

So and we also start of new retail that's across all of the brands.

That is a fantastic.

Incremental business to deliver at business Sos and off premise business.

So thats best Internal Inc.

Donnelley, we become make them right internally, we've become more flexible and stronger to allow us to to take advantage of more store location to open more store well secondly, we.

Kind of a better tenant if you think about last year of what happened is we have 1 of the very feel free.

Retail foot retail at that can continue.

To pay rent and with a non layoff any people.

And tenant.

What are you.

Good day, and Arnaud is decided by the landlord and then Leno now really.

Like us.

Not love us, particularly in the lower tier city, we have a clear.

Traffic driver and anchor tenant and the Rand and we are getting a lower tier city is fantastic.

And that helped the economics of the new store openings.

And then we also have become more clear with our new franchise strategy. The channel franchise strategy. The remote area franchise strategy. So that we are.

We are helping our.

Franchisee to open more stores in the area that we can still do it but it is not as efficient as for.

For the franchisee to run the operation and locally in the remote area. So with the 3 combined factor. We believe that we can continue to pursue.

<unk> themselves, which is a combination of profitable new store openings and the recovery of SSG and Theyre also protect the margin because it would not be right for our shareholders in the short term and and the long term if we buy market share we don't is that discipline.

And we only pursue profitable.

New store growth with industry, leading cash payback and in store profitability. Thank you Lillian.

Okay. Thanks, a lot of Joey and Andy.

Thank you thank.

Thank you for.

Go ahead of all Burger.

Yes, Thank you of the arena.

Okay.

Go ahead.

Please go ahead.

Yeah.

And our last question comes from the line of Christine Peng from UBS. Please ask your question.

Yeah.

Thank you Joey and Andy to share.

Any colors on your company, ladies operation as well as and management sorts of toys and many questions investors have been asking for analysts about so I have a question regarding the coffee business.

And business I think Joey mentioned.

Briefly about the latest of operations about.

And Lavazza coffee and enjoy a I remember when I was in China, and a lot share I visited the store of Lovaza and your office and when I look at some of the commentary on the the of social media platform and I realize there has been a lot of changes to lovaza and newly operated stores.

And China compared with 1 eye I visited end of last year. So Joey maybe can you share with us and more colors about the Lady and the progress Youre, making to Lovaza and especially how you think about the long term positioning.

Positioning of the brand compared with existing.

Competitors, such as Dropbox, and if you can share with us.

Some of the financial details such as store economics, that'd be even more I appreciate it. Thank you.

Thank you Christie and I Hope 1 day you got it you can try at Ala Moana.

And I look at them in and see whether you like it is.

At the local person.

Back to the coffee and let's take a step back we have free coffee brands in young China, K coffee, ECA, and Jay and Nevada outcome to Lovaza of it.

I'm very happy to report K coffee for 2021 first half.

Net increase.

The.

And the sales of coffee per cup by as much of 30% compared to the pre pandemic plenty and 19 number and that shows debt.

Our our focus of good coffee affordable price is a viable strategy is.

For the coffee business good for KFC same store sales.

Sales right.

Yeah, and Jay we have been working on and now we have 38 store and.

We've been very transparent and we are learning the operations side of our business of of new business. We have huge respect to us new business and I'm happy to report that we had debt because.

At a meaningful number of store would be breaking even by end of this quarter and more will be by end of year end and that allow us to fill.

For people.

Business is about people without good people, there's no business. So we built our operations people and we become a shot.

<unk> with our marketing positioning and pricing et cetera, and these learning are all helpful. Very helpful. When it comes to the experience of building Lovaza brand in China.

And take much less time compared to CN day for us to get the operation right too.

To get the marketing right and also with our Fantastic partner, Nevada has helped to get of fluid right together of Italian.

Flavor of the whole environment of fluids of training et cetera.

So lovaza.

And you said it earlier.

I'm going to emphasize we are going to have.

The accelerated pace of development for the second half of the year compared to first half. So first half we moved from $5.2 today 15 store.

<unk> and Shanghai and now 1 store in Hangzhou, So for the second half we have we of.

Salary, they're still opening pace and will enter into a more cities in China.

So thats in terms of footprint and in terms of business model right now.

And so far at.

In Shanghai for the 14th store, we have a hub of the store at what we call large store to build.

For the brand and then the other half of either smaller side, a smaller store meaning store.

These other.

And with much better economics.

And to make them money faster.

So a combination of flagship stores at build a brand and and smaller store to build of cells that seems the.

Right thing to do and we are very happy with the initial results.

So that's the second and third is we already.

Encouraged by the initial retail and working on day part menu Campbell delivery and.

And other.

Off premise sales.

Sales.

<unk> right now is over 50% for all of assets store and that's good right because we know that right now.

The off premise is the is the trend and for Lovaza Rvs. The finally, the my comment is the the position and is premium is at.

And at Italian style coffee with a nice environment. We believe the Chinese consumer can have a choice can have alternative other than 1 single choice in this beautiful.

Premium.

Coffee segment, so that's where we are right now and we cannot wait.

Wait to see more beautiful store.

And with fantastic.

And is.

Oppose is hard to get our Italian partner to produce per Italian food.

And we are not complaining about it so we really look forward to 2 of opportunity.

For for.

Our investors and for analysts to try and.

Our Nevada, and a coffee and food in China. Thank you very much.

<unk>.

And hopefully and Hong Kong and day by the way.

Thank you.

Thank you Christine before we end today's call. Please low that we will host of virtual Investor day on the morning.

As of September 23rd Shanghai time, we will announce more details as we get closer to today.

With that rule conclude today's call. Thank you for joining and have a great day.

Thank you everyone and thank you operator.

This concludes today's conference call. Thank you for participating.

Please disconnect.

Okay.