Q3 2021 Yum China Holdings Inc Earnings Call

Good day and thank you for standing by welcome today, I'm, China third quarter 'twenty to 'twenty, One earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I would now like to hand, the conference over theory Speaker today, Michelle Sharon. Thank you. Please go ahead.

Thank you Hello, everyone and thank you for joining Yum, China's third quarter 2021 earnings conference call.

On today's call are L. C O Ms Joey Wat and our CFO, Mr. Andy Yeung 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.

Actual results may differ materially from these forward looking statements.

All forward looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC.

This call also include certain non-GAAP financial measures you should carefully consider the comparable GAAP measures reconciliation of non-GAAP and GAAP measures is included in our earnings release today's.

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

Andy will then cover the financial performance in greater detail. Finally, we will open the call to questions.

You can find the webcast of this call in a Powerpoint presentation, which contains operational and financial information or the <unk>.

On our IR website.

Now I would like to turn the call over to MS. Joey Wat CEO of Yum, China Joey Thank you Michelle Hello.

Everyone and thank you for joining us today.

As we shared in mid September we navigate a very challenging situation in the quarter.

Delta Varian operate that started in late July rented 16 provinces.

Came the most widely spread lesion oh, great since the first quarter of 2020.

Strict public health measures were implemented across the country trading was significantly impacted during.

The peak summer season.

Which is traditionally a very strong quarter in swap isn't it.

Same store sales declined five 7% in the quarter.

<unk> fell four E. Although this was partially offset by growth in delivery.

I wanted to take a minute to ban all 440000 employees, who are working diligently and rapidly finding solutions in this fluid situation.

In response to the sharp decline in dine in traffic, we've quickly adjusted marketing campaign.

Our Asia and supply chain to drive demand for off premise.

Liberty sales grew 23% year over year or 62% on a two year basis and contra built approximately 34% itself.

In the third quarter.

Newly tell business grew rapidly with cells and a third quarter almost equal to the first two quarters combined.

Our ability to engage customers digitally with essential during this difficult time.

The quarter over 60% of systems, though came from Monday, we ask about and not a 20 million members ending the period with a total member count all the $350 million.

We sold 19 million privilege subscriptions, including the popular KFC chicken Loveless car once up.

Which is exclusive.

Having taken important initiatives to drive sales, we saw a sequential recovery in September.

For the quarter system sales growth was positive compared to last year and two pre COVID-19 new unit growth more than offset the same store sales decline.

We broke records by opening 524 new stores.

Ending the quarter with 11400, if it means doing.

However, we do not compromise quality for quantity, we have prudent news still approval process and carefully trying to performance of each new store.

There's no payback remains healthy at around two years at KFC and three is at Pizza hut.

All the smaller store format and enable us to increase store density in higher tier cities and further penetrate into lower tier cities with lower Capex and rent.

Let me.

Provide some color on all key brand first KFC.

We stepped up value and promotional campaigns to drive traffic and we introduced bracelet items.

You see hot chicken was sold out within a week.

Let me walk through or Angus beef Burger.

So prove popular.

Our premium beef burgers have been very successful states, becoming permanent menu items.

We are building a beef burger platform covering different price points.

We're taking menu innovation and localization to the next level.

Following the success of her try noodles look I'm in.

We've rolled that out nationwide in September.

Week of launching with so over 1 million food, it's the best performing limited time offer breakfast item in the past three years.

We also introduced steamed dumplings showroom ball two more stores in eastern China.

More recently, we launched our purpose to the very famous whole lot of time going on.

All these are very well received by our customers.

He has nearly 1000 stores and entered 150, new cities over the past 12 months.

As we mentioned during the Investor Day, we are now tracking 1200 potential cities that we could enter in the future with multiple store formats.

Now, let's talk about Pizza hut.

Yes, the transformation has who has improved pizza hut's fundamentals and resilience.

In the third quarter Pizza Hut opened 103 stores.

Higher number of store opening in a quarter since 2016.

Like all and others smaller format concept for over 70% of the new stores.

And enable us to capture the strong demand for delivery like higher store density.

Upgrade of a buy one get one pizza promotion.

For the three seconds pizza customers, well give them more flexibility to choose when and where and what pizza.

Like to have.

This mechanism was a breakthrough for us.

Enabled by our upgrade digital platform.

Promotion, what's exciting for customer and create south uplift for us.

During the 10 day campaign, we sold approximately 1 million buy one get one pizza.

For a limited time, we also offered new piece of fragrances model unpopular Chinese dishes, such as T bar pizza with pickled vegetables.

Hi, Hello here.

Spicy stir Fry pumped pizza.

While I can't go there.

These innovative products with pizza hut take on localization and position as a threat young consumers, who love to try new things.

Moving onto coffee off the road and we are very excited about deepened partnership with Lavazza.

126 years old Italian brands, all but a truly authentic Italian experience.

The Italian coffee exclusively use as high quality Lovaza Bean Roast, Inc. Marino, Italy.

In addition to coffee customers love the delicious food.

Item like Emiliano, which is toast sandwich, and many croissant with ham and cheese and meat fresh in a fully equipped kitchen.

The high proportion of food, which is 25% contribution to a higher ticket average.

<unk> September we had 26 lovaza stores in all top tier cities.

We expand beyond Shanghai, Hangzhou, Beijing, and Guangzhou, where all stores receive great customer feedback.

Speaking school is already ranked the most popular cafe entirely on district.

Encouraged by the positive results, we expect to enter into more top tier cities and more than double our current installed base in the fourth quarter.

Despite recent challenges.

Mentally China's long term growth remains unshaken.

We're always planning for the future and have been executing on the strategies outlined during our September Investor day.

Despite the difficulties posed by the outbreak.

Diligently to build our pipeline, we now expect to open over 1700 gross new stores in 2021.

From 13 hungry.

I'm also excited about our investment in Hangzhou catering service group.

This will allow us to accelerate growth across our brands in the province.

Lastly, we continue to enhance capabilities is surprising and digital.

These are stores.

Our core enable us all sustainable growth in the long term.

Last week, we opened our digital R&D center with three sites.

Hi, Nanjing and yeah.

The center is a key part of our strategy to build a dynamic digital ecosystem.

The R&D center will consolidate and expand dedicated resources to develop solutions and services to optimize customer experience and operating efficiency.

We plan to invest 100 to 200 million and to employ up to 500 staff over the next five years.

This particular initiative.

As for supply chain. In addition to the logistics center in Chengdu, we have another one under construction in quiet.

Which is in Gansu province.

There are also several sites in our pipeline as.

As we mentioned during the Investor Day, we plan to upgrade about 45 to 50 logistics center and consolidation incentives over the next several years to support our expansion and to further increase efficiency.

With that I will turn the call over to Andy.

Thank you Joey and Hello, everyone.

First to review, our third quarter financial performance and then discuss this year's outlook.

Unless noted otherwise.

All percentage changes before the effect of foreign exchange.

Let me first cover the third quarter performance.

Actual results are in line with the business update we released in mid <unk>.

September.

Third quarter performance was disrupted by the Delta virus outbreaks.

Resulting in same store sales decline of 7% year over year.

However, we still delivered positive revenue growth.

System sales growth, which is led by new unit contribution.

Total revenues grew 2% year over year and reached two <unk>.

Billing.

System sales increased 1%.

Similar to prior quarters, we are providing pro forma measures here for convenience comparison with 2019.

Same store sales were approximately 87% of the third quarter of 2019 level.

KFC same store sales were approximately 92% last year level and 87% for 2019.

With same store traffic at approximately 82% of 2019 level.

Average ticket price grew roughly 6% versus 2019.

Mainly due to the increase in delivery mix.

These same store sales were approximately 95% of last year.

89% of 2019 levels.

Same store traffic is on par with 2019 level, while average ticket decreased by about 10%.

Driven by the increased mix in off premise occasions.

Rich.

Lower ticket.

Hi.

KFC was slightly more effective than pizza hut again this quarter.

KFC has a higher skill mix in transportation and tourist locations.

These locations experienced a sharp decline in sales.

Approximately 40% on a two year basis in the quarter.

Restaurant margin was 12, 2%.

640 basis points compared to last year.

This was mainly caused by sales deleveraging.

More value promotions.

High ratios and increased delivery costs associate with more delivery quarter.

As well as lower Covid related relief this year.

Cost of sales was 32, 2%.

100 basis are higher than last year.

Modest decline in commodity prices year over year.

Partially offset the step up value promotions to drive customer traffic.

<unk> facing.

Cost of packaging and other affecting upgrade.

Cost of Labor was 25, 6%.

400 basis points higher than last year.

This is due to a few factors.

<unk>.

Inflation was six.

6% in the quarter.

Notably higher than previous quarters.

Second increased delivery volume contributed to higher labor cost percentage.

Sure.

Additional labor hours with schedule going into the third quarter, which is typically a step.

Strong trading period.

We are also scheduled more labor hours for increased safety political during the outbreak.

We were quick to adjust labor scheduling.

Great.

Sales leveraging data.

Occupancy and other.

30%.

140 basis points higher than last year.

Amy attributable to the sales deleveraging impact.

In addition, we received 10 million cubic related onetime relief in the third quarter last year.

While the amount was only $2 million this year.

G&A expenses increased 6% year over year, mainly due to higher compensation costs and increased head count.

Great.

In the quarter with operating profit of $178 million, excluding a noncash remeasurement gain of <unk>.

Our existing equity interest in Lavazza joint venture of $10 million adjusted operating profit was $168 million.

A 52% decrease year over year, or a 48% decrease compared to 2019.

Our effective tax rate is 28, 3%.

We maintained a full year effective tax rate outlook at 27% to 29%.

Net income was $104 million.

And adjusted net income was $96 million.

Excluding $32 million net investment loss.

I'll make one.

It was $128 million.

8% year over year.

Diluted EPS was <unk> 24.

Mark to market loss in baseline negatively impacted our diluted EPS by <unk> <unk>.

In the quarter, we returned $85 million to shareholders.

<unk> cash dividend.

Share repurchases.

As we look ahead to the fourth quarter, we remain cautious.

Strict public health measures are still in effect.

Consumer are cautious about spending.

Our chocolate.

According to government statistics.

For the seven day National day holiday shopping aquifer.

Number of traveler was down 2% compared to the same period last year and down 30% versus 2019.

Related travel spending was down 40% compared to 2019.

While we are seeing a slight sequential recovery.

And you saw same store sales.

As steel.

We remain below prior year and pre Covid 2019 levels.

That's overall.

In volume and traffic at transportation.

Our suits and listen were impacted.

We expect a recovery of same store sales with a time with a non linear and uneven.

Recently, we have seen a resurgence of cases across 12 provinces and municipalities.

<unk> inner Mongolia, Jiangsu in Beijing.

We will continue to monitor the developments and stay agile.

Edition.

The fourth quarter is seasonally.

The smallest quarter for sales and profit margins.

Based on what we've seen so far we expect our margin and operating profit in the fourth quarter to be significantly impacted by.

One note deleveraging.

Same store sales remained below prior year pre COVID-19 levels.

Rising commodity prices.

Since the fourth quarter of 2020, we have benefited from a deflationary environment, which will very likely and in the fourth quarter.

Cost of sales will also pressure by aggressive campaign as we continue to drive traffic through attractive promotion.

Wage inflation, which is expected to be in the mid <unk>.

Single digit rate.

While the costs are likely to continue to increase.

Deliveries.