Q1 2022 Yum China Holdings Inc Earnings Call
[music].
Thank you all for standing by and welcome to the Yum, China first quarter 'twenty to 'twenty two earnings conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
To ask a question at that time, you'll need to press star one on your telephone.
And I'd like to hand, the conference over to your first Speaker Florence lip senior director Investor Relations of Yum, China. Thank you. Please go ahead.
Thank you Tara.
Hello, everyone. Thank you for joining Yum, China's first quarter 'twenty two earnings.
Paul.
Joining us on today's call are our CEO , Ms Joey Wat and our CFO , Mr. Andy Yeung.
Due to the current Covid restrictions in Shanghai, we are dialing in from different locations today.
If we experience technical difficulties during the call. Please remain on the line as we reconnect.
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 all.
All forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC.
This call also includes certain non-GAAP financial measures you should carefully consider the comparable GAAP measures reconciliation of non-GAAP and GAAP measures is included in our earnings release.
Today's call includes three sections Joey will provide an update regarding our performance in the first quarter.
Andy will then cover the financial performance and outlook in greater detail.
Finally, we will open the call to questions you can find the webcast of this call and a Powerpoint presentation, which contains operational and financial information for the quarter.
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Now I would like to turn the call over to Joey Wat CEO of Yum, China Joey.
Thank you flora and Hello, everyone and thank you for joining us today.
We are battling the most severe all bracing COVID-19 first emerged.
Physical.
The challenges we face the unprecedented.
The case can duration geographical coverage and restrictive measures are far more extensive than previous Oh, great.
Hi, Tien Tsin, Jeannie and Guangdong well among the places to experience extended periods of lockdown.
Shanghai one of the most in Perth cities has been locked down for more than a month now.
Our operational headquarters in Shanghai are all working remotely.
Hundreds of millions of people across China are currently under some level of restrictions.
You know regions with no cases have tightened containment measures in line with the dynamic zero carbon policy.
Compared to 2020 is far more complex to keep our stores open.
Against our employees to work and obtain necessary approvals.
Our store operations delivery and surprising had been heavily impact due to ever changing restrictions.
I want to thank all our frontline employees are restaurants, and logistics center, our delivery riders and I'll start at the back office.
We're working tirelessly during this difficult time.
I'm extremely proud to see how quickly we adapted to each new challenge and how team.
From across the company.
Support one another.
From procurement.
I T HR too fast we would as one team our mission is to serve the communities and customers in need to the best of our ability.
Hundreds of our back office rising to the occasion.
They volunteered to serve at the frontline.
Supporting our restaurants, they postponed health checks and restaurants deliver food using their own costs and such as customer service.
Service Representatives.
Soon after the last time in Shanghai thought to where most business activities have come to a halt we.
We became one of the field and first authorized suppliers to serve their communities.
While we can only offer limited services.
We are prioritizing fluid entering two frontline worker warranted.
And makeshift hospitals.
We also provide ready to eat products to the elderly living alone and can't see the children's books to kids in quarantine centers.
During the lockdown, but demand for KFC and Pizza hut Prada searched.
Many of our customer go on social media like Wechat and Boeing.
<unk> picked up in China expressing their longing for signature product.
Many of them also shed there have been moments on social media.
Media when they enjoy the KFC fried chicken or pizza hut pizza.
I'm glad we could bring some comfort and joy to our customers in trying times like that.
It also gives us energy and a renewed sense of purpose.
Health and wellness of our employees is always our top priority, we delivered over $10 a foot packages to closed off employees.
Also provide packages with essentially surprised and upgrading medical plan for those who are infected.
Our ability to adapt to the dynamic operating environment is at the core of our resiliency.
With valuable learnings from prior outbreaks, we have developed extensive scenario planning and toolkit to deal with different situations.
Nationwide, we quickly adjust that marketing campaign.
And simplified menu to streamline operations.
Oh, hi, brake delivery model with dedicated riders allowed us to maintain adequate rider capacity and continue operations in most places.
Delivery grew at double digits and reached 36% of company sales.
So you think the demand for at home consumption, we promoted new retail package product.
Such a state.
And Fry right, new retail sales in the first quarter more than doubled over the prior year period.
The surge of Omicron cases, and issuing a lot done have turned everything upside down for us in Shanghai.
Despite the citywide last time, we were able to keep about 10% to 15% of our stores open for delivery or take away in April .
To serve as many communities as possible where mobility is heavily restricted we introduced community purchasing across all brands as early as much.
This is a new way to group orders among residents to mess in mice efficient with focus on key menu categories offering only a few precept combos.
We also promoted new retail package food, which are perfect item ready to eat and easy to store under this circumstance.
The retail sales mixing April surged to over 15% in Shanghai.
By swiftly implementing these initiatives, we were able to generate 40% to 50% of pre lockdown level of cells in Shanghai, Despite having very limited stores offering off premises.
Services, only in 10% to 15% of our stores generate 40% to 50% of all.
Preloved themselves in Shanghai.
Yes.
Community purchased created new business opportunity for our brands kept the optimized is community purchasing menu to just one item the fried chicken combo.
As it is one of the most desired.
Items during lockdown, our customers share their appreciation on social media quoting that having has deep fried chicken is the happiest moment in the last month and our fried chicken is a comfort food and.
And nourishment of the soul.
People are craving for KFC and we are working our best to fulfill them. We also look forward to serving customers at a restaurant when they come to satisfy their craving after the lockdown.
Pizza Hut was one of the few places to all the hot Pizza during lockdown to meet the demand we simplified the menu to combos with two pizza.
Hi, rise and ready to Cook steak and pasta.
Our customer was so excited to receive high quality, well package and safe products during lockdown.
Community purchasing presents it fantastic cross selling opportunities and increase brand awareness for our emerging brands.
These brands captured a significant portion of cells.
<unk> to the level before lockdown with signature product and package offering.
Even when only a few stores will open in Shanghai for example, Nevada.
Packaged cheese and Ham in addition to his famous coffee and pastries.
Go Bell, so hawkish idea fried chicken and breath of DIY package.
Little sheep offered takeaway hopeful with meats and fresh vegetables highly sought after item during lockdown.
Let's move on to surprising in digital.
Our industry, leading surprising and digital capability are critical business enabled us to fulfill ever changing demands.
Our in house supply chain can work wonders in difficult situations like this.
We quickly introduced strategic redundancy in a surprising with backups in different logistics center to lessen the impact of surprising disruptions and to allow us to continue operations.
We immediately designed a 200 kilometer detour route to ensure supply to logistics centers in eastern China.
Instead of just using trucks.
We move inventory by rail and sea freight as well.
In just a few days, we set up a temporary drop off and pickup site not far from Shanghai to support the region under a lockdown.
We also recovered ingredients from one product to another and we allocate inventory across restaurants, and even threatened to fully utilize all resources and minimize waste stage.
Digital enable us to put innovative ideas into action since March we cut back on advertising.
We'll leverage our membership program and our own channels to digitally engage our customers.
We rapidly launched a digital mini program to make community purchasing easier.
Our digital infrastructure provides real time visibility to store inventory.
Allowing us to precisely forecast the material demand manage surprising loose and minimized waste stage.
Ladies and gentlemen, it appears that Joey has dropped from Nicole please standby while she reconnects the line.
Please hold.
Hello.
The line just dropped.
I just call back.
Can you hear me.
Yesterday. Please go ahead.
Yes, I hope by now you have a better picture of the challenges that we face and even in situations like this how do we find ways to serve our customers and community.
This is the third year for the Covid pandemic. So it is understandable that pandemic fatigue may be settling in.
I'm very proud of our team members they have been courageous and continue to maintain a positive attitude in phase of adversity.
The pandemic will surely Pat and all business will recover as we look ahead I am confident that we focus on new opportunities remain.
People with our initiatives the agile in our action and control our cost structure, we can get through this challenging time and become even stronger.
We remain confident in the long term prospects in China, We will continue to invest and focus on all GM strategy. So we can fortify our market leadership and capture the significant growth opportunities across our brands.
Before I pass it to Andy Let me say a few words about changes in our leadership team.
I'm pleased that Johnson one previously the general manager of KFC is now our first chief customer officer. This strategic move will better integrate customer centricity into a brand driven culture.
Jonathan will focus on building capabilities to better understand and serve customers.
He will spearhead cross functional initiative, including cross brand customer loyalty program and delivery initiatives.
He will also oversee coffee enjoy lovaza and Taco Bell with Jones of strong technology background and deep understanding of the organization I'm confident that he is the best leader for this role.
Water wasn't one our chief development Officer, Jonathan <unk> CGM.
What enjoined at KFC excellent operations management trainees 24 years ago and worked his way up.
He left various initiatives to improve care for these business operation.
In a way so format and business model I believe that Watson strong leadership and deep operations at periods will bring <unk> to new height.
What are the achievement is a homegrown leader will also is via our entire frontline employees.
With that I will turn the call over to Andy Andy.
Thank you, Joe and Hello, everyone.
Now, let me share some color on our first quarter performance.
Compared to a relatively stable January and February Colby situations in March rapidly deteriorate.
March same store sales decline by more than 20%.
As Joe mentioned, our team putting tremendous effort to subsequent operations mobilized and fully utilize our available resources to drive sales.
We manage cost.
We achieved a profitable quarter.
Demonstrating the resiliency of the business.
We continue to grow.
Opening 329 net new stores.
Ending the quarter with over 12000 units.
First quarter total revenue grew 4%.
Recall that currency to $2 $7 billion.
The contribution of new units and the consolidation of Hangzhou KFC was partially offset by the same store sales decline and temporary store closures.
System sales were down 4% in constant currency.
Same store sales were 92%.
Use level.
Hi, Brian .
CFC things ourselves, where 91% of prior year's level, we're seeing solid traffic at 86%.
Average ticket grew 6%.
Mainly due to the increase in delivery mix, which have a higher average ticket.
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These are things box that was worth 95% of par use level same.
Same store traffic was at 97% while average ticket was down by 2%.
This was driven by the increased mix of delivery, which has a lower average ticket.
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Restaurant margin was 13, 8% down 490 basis points compared to last year.
It was mainly maintenance revenue leveraging.
Higher commodity prices.
And wage inflation as well as higher delivery costs due to increasing.
Delivery volume.
Now let me go through each expense line item.
Cost of sales was 31, 1%.
90 basis points higher than last year.
This was mainly due to commodity inflation.
We also incurred higher logistic costs and raise stage due to the regional outbreaks.
Cost of labor was $26, 2%.
90 basis points higher than last year.
This is due to sales deleveraging.
Racial inflation of 5%.
And higher delivery rider costs from higher delivery mix.
Occupancy and others was 28, 9%.
110 basis point higher than last year.
Mainly attributable to the leveraging impact and 10% increase in utility prices.
The impact was partially mitigated by proactive savings in advertising expenses.
G&A expenses increased 14% year over year.
Constant currency.
Mainly due to consolidation of Hangzhou KFC in Nebraska, as well as increased compensation and benefit expenses.
Operating profit was $191 billion solid performance in January and February enabled us to achieve a profitable quarter.
The net contribution from Hangzhou, Kfc's consolidations was 5% operating pockets in the quarter.
It also includes the amortization of intangible assets acquired roughly $60 million per quarter that one through the end of this year.
Below the operating profit line.
Incur a $30 million mark to market loss on our equity investment this quarter.
It was $14 million more than the same period last year.
Yeah.
Our tax rate was 33, 1%.
The high tax rate, mainly due to lower pretax income.
The Hangzhou kept the consolidations.
Prior to consolidation.
<unk> income from JV was not subject to tax resulting in a lower tax rate.
These factors will likely continue to impact the effective tax rate for the rest of the year.
Therefore, we expect full year effective tax rate to be low to mid 30.
Net income was $100 million.
However, the EPS was <unk> 23.
The mark to market loss in baseline negatively impacted probably the EPS by <unk> <unk>.
Let's now turn our attention to the outlook for the second quarter 2022.
As the Covid situation deteriorate reefer.
We faced even stronger happenings in the second quarter.
Eastern China.
Most economic overview by brain regions in China.
Severely impacted this time.
Eastern China, you've also.
Most important market accounting for around <unk>.
30% to 40% of our store mix and sales mix.
Okay.
I'll call from Shanghai.
Many large cities such as Guangzhou Suzhou Tianjin sanctioned since Jan were also partially lockdown in April .
Strict congrats measures.
Place nationwide.
Significantly limiting social activities and mobility.
<unk>.
For example, during the Labor day holiday in Beijing restaurant provider only off premise services.
Residents are required to provide prove operating negative Pcr tests.
Venues.
Consumer spending has also been weak.
Non manufacturing PMI dropped from 48 in March to 42 in April According to government statistics.
This was the lowest depots.
<unk>.
Reduction since February 2020.
In April .
Our same store sales declined more than 20%.
In addition around 3000 stores were temporarily closed.
Only delivery all takeaways so.
Significantly more than March.
Around half of temporary hopwood temporary closures.
As a reminder, stopped providing only delivery and takeaway services are included in our same store sales calculation.
Temporary closure are excluded from the same store sales calculation during the closure period.
But negatively impacts systems out and revenue.
Margins are expected to be pressured in the second quarter.
Significant sales declines as expected due to the worsening COVID-19 outbreak.
Sales deleveraging impact will be more pronounced.
Our sales and margins are seasonally lower in the second quarter.
Furthermore, we continue to face several cost headwinds, including the surge in commodity prices.
Wages and <unk> prices.
The increase in delivery sales mix.
Also increased <unk> costs.
The current situation is challenging.
We incurred loss even in March.
Barring a significant improvement in <unk>.
Slow conditions in May and June we expect to operate at a loss in the second quarter.
We're taking actions to lessen.
Some impact.
In addition to what Joe you mentioned, we are adjusting our marketing you been chemical.
And promotional activities.
Temporarily postponing shall we model.
Negotiating rent rent relief.
Optimizing raw material cost structure and implementing G&A austerity.
We quickly do quite various initiatives across the country.
While staying flexible depending on local conditions.
Now looking past the very tough business environment in the near term.
I'll ask one.
We will have a long term positive impact.
We have strengthened our brand equities and Brian and bonded with our customer.
We have also gained valuable experience and develop <unk> to help us navigate different situations.
Our business model, even more agile and we still end up before.
We have made important breakthroughs in community approaches and new retail.
We will continue to be constructive and strategic changes to seize market opportunities as they arise.
We're here in China for the long run.
Followed by healthy strong economics, we are confident to pro to expand our store network.
KFC and Pizza hut, new store thinking how we saw payback.
Two years and two year respectively.
The majority of store opened in 2021 also achieved monthly breakeven within the first three months.
While we expect a slower pace of store openings in the second quarter due to COVID-19.
We still intend to achieve our full year target.
1002 trial 100, net new units.
We will continue with our systematic.
Disciplined approach.
Accordingly evaluate the situation.
Also.
I'm pleased to share that we have entered into an agreement with Yum, Brian two joining step up investment in accelerating Taco Bell's store growth in China.
We are committed to expanding the Taco bells going network.
100 store by the end of this year and at least 225 stores by the end of 2025.
And Todd young.
Yum, China will have the exclusive right to operate a brand in China for 50 years.
I'm confident in <unk> long term potential in China.
Now turning to capital allocation.
The board of director expanded authorization of share repurchases by $1 billion in March.
In aggregate of $2 $4 billion.
At the end of the first quarter.
Our remaining authorization was approximately $1 $4 billion.
We returned over $280 million to shareholders in cash dividends and share buybacks in the first quarter.
We continue to employ a disciplined.
Lynn.
Capital allocation strategy.
As I mentioned before our priority is to have sufficient cash for daily operations.
To deal with contingencies.
We will continue to make significant capex investments in digital.
<unk> infrastructure in house.
Store network expansion.
We are confident.
These investments will widen our strategic mode.
Drive sustainable growth and capture attractive long term opportunities in China.
With that I will pass you back to <unk> to start the Q&A.
Thanks, Andy we will now open the call for questions.
Operator could you please start the Q&A.
Thank you Florent sled, ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question. Please press star one on your telephone and wait for your name to be announced if you need to cancel your request. Please press the pound key.
Our first question comes from slightly limb at CIC. Please go ahead.
Thank you Julian and thank you for your great advertising now sort of environment.
I have two questions. The first is the.
So the multiple waves of Kobe, ugly, especially Bob Krohn this year it's.
It's a very difficult situation for market players in the whole restaurant industry. So regarding the impact on industry supply.
<unk> you.
A few of many closures of mom and pop during last two years are we seeing more small and medium sized chain facing difficulties this year.
My second question is could you please give us more color on the promotional strategy at the current stage.
What's the difference compared to last two years, considering the Bobby situations. Thank you.
Thank you.
Yes.
Let me share some thoughts here first of all we are very grateful with our own.
Our business model.
This is young China particular, KFC and Pizza hut.
A fantastic business model that we can.
Well when the time is good but it's also proven again and again during challenging time.
Is a very resilient business model.
So so we are very grateful and we still can.
Can capture.
40% to 50 per thousand thousand Shanghai win with 10% to 15% of store.
In terms of competitive landscape.
It's still a bit difficult hotel.
<unk> in Shanghai or lost on.
Cities.
We are still going through it.
But I think this is this is definitely the time.
That differentiation.
Does the company with with solid operating capability.
And also.
Prudent financial.
Arrangement versus the other.
So Fortunately I think for Yum, China, both our operation and digital capabilities and also our prudent financial.
Philosophy help us through difficult times.
In terms of promotion strategies.
We have multiple scenarios so wow.
Nationwide the sales is under pressure.
But for the.
Country for the city and the Providence.
They're still going on.
With our normal business operation.
The business still as usual we still.
Pursue good product with fantastic values with promotion and reason today, we just launched the entry level beef Burger priced in 19 yen.
And for Pizza Hut, we just launched a new manual.
For the year, which is again, 40%.
Improved one.
Of the menu item on the menu.
So business still going on and we still have our very famous.
Our crazy Thursday for KFC, and screaming Wednesdays for Pizza hut as value.
Program for.
For four cities in a lot of time such as Shanghai.
Guangzhou often done.
We will pullback.
Promotion.
Because the.
The focus is about.
Maximizing our limited resources.
To meet the customers' unmet need here, we really have the unmet needs.
Because the rather small percentage of our stores.
Can open.
And we also pulled back our menu as I mentioned earlier in KFC UK, we only offer one combo, which is for our chicken. We don't have Burger. We don't have rise just fried chicken with some Pepsi Cola and then for Pizza hut there are two pieces.
Famous.
Sir ladies and gentlemen, it looks like Joe his line has jumped once again please standby.
Okay.
Thank you Joey you are now free back on the call. Please continue.
Okay. We can take the next question.
Okay.
Certainly our next question will come.
From early Loo at Morgan Stanley . Please go ahead Lillian.
Hi, Joey Hope all is well.
Given all the challenges the operation <unk> could you give us a bit to update about the trends eastern on <unk> thousand area.
To the end of April or May I E. The latest trend.
Actually I think in southern China seems like the situation.
It's better than eastern region, if we talk about the economic importance, both res and library.
Important so tough to give a little bit color.
If the lockdown.
You are kind of relief whats the impact could be and following on that also.
Okay. So you mentioned that there is simplify the menu.
And also in the normal areas. We also offered a normal menus. So wanted to understand a bit further.
Under such a complicated situation, how do we manage the logistics.
And also procurement.
Especially.
Understand that.
Transportation disruption bottleneck it stood there thank you.
Thank you.
Andy has.
You mentioned earlier about his thoughts.
And also about the Q2 and.
Early may trading so I am going to comment on the trading pattern, Let me take KFC as example.
To help.
And sort of understand the overall big picture.
<unk> sales Stefanie, Rob very significant today, the delivery has come up and we can understand that nationwide.
We drove growth through a hybrid delivery model with our own rider.
As I mentioned earlier.
Hi, Kate.
We don't have enough rider or radar beam quality, our own bet office staffed volunteer to deliver whenever we could if we can't get their license or.
Approval to go out and deliver.
So.
So so.
Versus delivery and then the transportation hub.
Imagine what it is.
The transportation hub like a train station et cetera, the trade right now.
About 50% below the pre COVID-19 level would you say.
Compared to 2020.
Non transportation location also decline because the.
The decline is nationwide and then in terms of weekend versus weekday weekend is doing slightly better.
Because there is a bit more functional.
Sorry, we face is a bit more better because there's a bunch of the weekend.
So it'd be a bit weaker relatively speaking and in lower tier cities are doing slightly better.
And because that they are less impacted by the transportation hub.
And then the highest is today's more impact by the region.
Regional outbreak.
And then system sales a lower tier city also is better because because of the new store opening there and by region Interestingly.
Despite the outbreak in the sell them, China and eastern China Eastern part of China is still doing better in terms of same store growth is a very resilient part of the.
Our country.
And we are very focused on you somehow China. So this is not that bad news.
Yes.
So beyond that pattern of trading I mean, the similar pattern kind of.
Sort of.
<unk>.
Hi for Pizza hut as well.
In terms of the logistics and procurement.
As I mentioned earlier I think our team is just absolutely amazing.
And we also mentioned business all in house logistics surprise and they what stays at night.
Our team have come up with alternative arrangement very quickly.
We traditionally used truck to a mortgage Orion and you probably know that it has become a bit challenging to move goods around across provinces.
So we use rail mainly to take our goods to the west.
And then Youll see freight.
We can put out.
<unk> into sea freight and send it to attending to cover the northern part of China in Santaquin, Joe to cover southern part of China.
Then our logistics center in Shanghai, and now we have both.
King our team is working inside a close loop arrangement to keep our.
Logistics.
Running without major disruptions and also because of this this is all in house team. So we can move.
The surprise between.
The stores in between the brand and to also.
Minimize the wastage again, it has proven our investment in supply chain and also in digital capability are very important strategic mode. Because now we have visibility digital visibility of a real time installed so that we know exactly where it was.
Yeah as far as day with the visibility we can we can be more efficient too.
To kick off the surprise as much as we could and also minimize the foot wastage.
Currently when foot.
Is the challenge for Shanghai. So this is incredibly important so that's what we are is not easy there are a lot of drama.
A lot of challenges.
But we seem to we seem to be able to adapt quickly and be as agile.
Ever.
I'm sure some of these innovations.
What will help us.
Will help us in the long term as well.
And then not to mention other than logistics and procurement and all these thing what would a help is externally our our innovations and new retail.
We have been we have been incubating, new retail business I'll caveat the brand coastal funds.
We've been doing that for few years now and bye.
By second week of March.
We can see.
The potential opportunity in new retail was Yahoo was the sort of software attacks and literally within a few days few days we.
We come up with the initiative.
Commodity purchasing across all the brands not only KFC pizza hut, Lovaza and Taco Bell and ship all of the brands and we do it together and original community purchasing is only a hotline at all we have the.
A nicely laid all I need a few days later, we have the mini app.
And then we have the ready to eat ready to eat ready to Cook products.
And and the package food also.
Allow us to be more efficient with the logistics.
Process because.
The.
New retail package.
These are much better fluid to store and to move around in bulk.
Of course, where we are.
And.
With with this challenge comes opportunity because.
China is very well positioned to capitalize.
Extensive store network, our membership online channel and already established.
Channel <unk>.
Third parties as Youre seeing the or <unk>.
<unk> for the new retail as well so all possible.
I'll pause here and save some time for the next question. Okay. Thank you Lillian.
Thanks, a lot Joey.
Thank you and just before we continue we will ask that participants limit to one question. Thank you. Our next question will come from Anne Ling at Jefferies. Please go ahead.
Hi, thank.
Thank you very much for taking my call.
Just to follow up on the regarding the same store sales.
Comment that Joe just mentioned.
Background and confirms our thoughts.
In the eastern.
Some kind of China. Despite all these dotcoms stringent lockdown.
So meaning that in the other market for.
For the rest of the nation are we assuming like not much rebuilt themselves on track.
Just wanted to check of maritime and what is the take on this.
So it doesn't mean that there's more fundamental issues.
Regarding consumer sentiment or underlying structural issue, which we.
Should continue to worry about.
Even when the Covid.
Situations Dr Subsides on this.
And we're also seeing I'd like to note the membership sales.
The percentage of sales.
With lower on a quarter on quarter basis.
Doesn't mean that during this period, though we have more new customers.
If that's the case and how are we able to capture these.
To our members.
But there is not the case now how are we going to remedy that.
Alright.
I think I would take you.
I think the first question is about the regional differences.
Between.
You can China.
West of there.
The country I think there's a couple of things one is obviously, we're referring to.
Overall, you can part of China.
Not impacted by.
No not significantly impacted by the.
Public situations to accomplish on high obviously because of the lockdown.
Difficultly.
Hello.
The national average and so.
I think what we do.
<unk> overall in yoga.
The.
Situations.
In China.
Outside of Shanghai is probably still performing quite robustly.
So I think.
It probably had to do with the overall economic.
Vibrancy you hear in eastern China as you know.
As in prior years, the most vibrant economic Hulu speaking regions in the country.
A big part of the GDP has strong growth rate.
We see that the wealth distributions also.
Quite quite evenly distributed so so that's why we continue to see China as a very important.
And a very good growth market for us.
Now obviously there are some regional differences.
For example in northeast part of China This year.
Over the last couple of years.
You hit by wave after wave of Covid, and so I think.
Google economically speaking.
Eastern part of China is off.
So that's why even compared to for example, eastern China.
So I think that's generally there's some regional differences.
Obviously, our strategy our Golden network expansion will also affect that that means as we opened a new store.
Now.
The other question is about.
The sales decline I think it's very important to keep in mind.
Same store sales decline it seems like that would decline.
In recent months.
Driven.
Hi, Colby.
Serge.
Omnicom search, which we selling game.
Our district.
Perhaps you can measure and health measures.
I have to say no as I mentioned on my pre prepared remarks, how about you.
The impact on the restaurant industry, but also on obviously you have done.
Manufacturing package service sectors in China as well.
And also the manufacturing sectors.
So I think.
Is worth keeping in mind the <unk>.
Temporary short term nature of this.
You look at we have confidence we are doing a lot of things obviously to trying to address the short term challenges.
Okay.
How do you use our existing resources. One obviously is to continue to provide service to our customer and to manage costs, while your partitions and.
And also meet the demand in the impacted region.
And then we also have cost control as we mentioned its not only the short term, but also looking to cost structure and long term, how we can emerge better.
We're confident if you look at.
One one.
In China would have been a strong opportunity there is a lot of white space view.
So we can expand and grow.
You look at between the.
<unk> 2020.
In the first half of 2021 when.
Things become markedly more stable.
We were able to capitalize.
On.
The rebound and recovery.
And also.
Opportunity that presents in terms of both sales and also margins. So I think it's fairly.
Fair to say that the short term piece and then intermediate longer term.
Longer term limits.
More confident about the market opportunity.
Hopefully that addresses your question.
Right.
I'm also referring to is on the membership sales as a percentage of system sales.
Got it wrong from like 64% previously to 16, 2%.
I think the.
Memberships out.
It is not always higher the better.
Understand.
We.
Our membership continued growth obviously.
In this period of time like maybe it may not be impacted but we continue to have.
New customer.
It uses.
100% member sales than that.
Would be Paul medical out in the long term because that means we're not tracking new customer.
Purchase at all Scott, So so I think helping mix 60.
60, some percent membership.
All of the very high number we don't pursue a.
Yes.
Number four membership sales and we don't particularly think that having higher membership sales.
<unk> be better I think this is a healthy level.
Where we have a good mix.
Our member sales and then also a good mix of new customers coming to our store.
Okay. Thank you and thank you.
Yes.
Our next question comes from forerunner Caso at Credit Suisse. Please go ahead.
Thanks for taking my question and thanks enjoying Andy for sharing this is Veronica from credit Suisse.
A quick question on the store expansion, so, especially today is.
Very well on track and understand that management maintains the annual expansion target for now.
We at.
Market condition or at what they.
Will the management consider to lift or cut the analysts mentioned targets. Thanks.
Okay, Julian let me just this question.
But we are on the curve.
Our stock that were expansions I think.
Well thank you.
We employ a very disciplined.
Strategy for store network expansion.
We continue to see good opportunity that's why we continue to.
Expand our network and our store economics, our payback period reflect that discipline.
Our approach and also.
The strong economics.
So if you look at KFC for example.
That period for those new store.
Sure.
Q2 years Aimco piece of high is about three years. So he is very strong economics.
Because we apply a consistent disciplined approach how we sell it markedly consistent and that can happen. So I think a lot of people will ask question is why.
It seems like we have some corporate challenge how come you're still economic.
And people that can skew Fitzgerald.
We caution over the past few years, we continue to innovate in our store model, we lowered our capex.
I think that's more flexible and so we just see more opportunities more site available.
Our internal decline.
<unk> ahead.
I think obviously COVID-19.
And the new site is not immune to COVID-19.
But.
I think.
We look at the situation if it is.
The prolonged situations, obviously longer term you will see that.
The impact reflected.
Our payback periods, our payback periods is based on.
But he buckle.
So 12 to 24 months.
Our performance. So so when did you have a sharp impact in the short term.
Throw it up in the near term now what will change our outlook our hour.
Especially as we have management, obviously during the first quarter, we are going to slow.
The solid, especially because the COVID-19 situation right now is somebody that's practical reasons.
We also.
Spending sort of forward modeling at this time are temporarily.
We are solving model in very good shape.
On average if you look at our store portfolio to store at a new or have been remodeled.
Our five year, so 80% of that you've already got so so so so we the thing we could also slow down a little bit.
Unless obviously you also mentioned <unk>.
Situations.
Yes.
Being very prolonged and then impact our store unit economics that will may go back and evaluate so they've been pointing perhaps matrix that we look out there is obviously the return on investment.
Great successfully are useful.
And then obviously.
Going forward, how close we are.
Mark just trending to our expectation and so all of these would help us to revise our volume throughput.
So hopefully.
No.
When we look at the longer term strategy. There is no change to it I think and I'll make it two very healthy.
As I mentioned before 'twenty, one 2021, new store openings.
They were able to reach breakeven within three months, so that the healthy and the payback periods are very healthy so not much in the long term change our view on store network expansion.
And we see a lot of space.
<unk> as well as potentially improving household density in the urban area for off premise consumption.
Thank you Monica.
Thank you.
Our next question comes from Lisa Yang.
<unk>. Please go ahead.
Hi management, Thanks, very much for taking my question.
I think there are a lot of uncertainty in the short term. So I actually wanted to ask a question about the longer term.
So if I look at like a KFC per store per year.
Like in 2019 was close to RMB 8 million per store.
That lower number in 2020 and even.
You have a lower number in 'twenty, one probably because we open more stores in lower tier cities. So I think like if we consider like a longer term considering the mix of new store opening.
Do management have any estimate of where is the ideal like that.
The per store sales for KFC canseco add like in the absence of Covid situation.
Also considering the opportunity from retail.
Joey just hear the retailer has like grew very fast.
Capacity wise like theoretically what kind of retail revenue, we could expect in 2022 and is more like a medium term targets.
So that's my question. Thank you.
Thank you let me, let me share some thoughts with you in this particular area.
One is about the store.
Average.
And the other ones the new retail.
So for every stone I would like to.
I guess that bad.
And sure that KFC and Pizza hut, both has a range of store models.
There are some big store.
<unk>.
More seating and there's some modest or that is more off premise driven and this is incredibly important because if we keep changing the average store size then we miss the big opportunity in terms of the convenience.
The reason why this is so important because you can see our mix of off premises business is growing and growing.
Off premises is is woody.
Driven by the store network and as Andy just mentioned earlier in our new store opening strategy. The store density within our current top tier cities.
Is incredibly important.
And then of course, we are opening a store in the lower tier city as well as you mentioned and.
If you just think theoretically within the same five kilometer if I have more toward the upper end of convenience.
And the speed of delivery is much higher.
And more efficient.
So we will continue to pursue a range of business model our store models within the business and let's say pizza hut for the new store that we opened this year 70 to 80 of these stores are.
As a molecule.
We're talking about 100 square meter.
Or 150 square meter or below.
That is the smallest of we are pursuing.
When it comes to retail new retail is still early days.
Our here for 2021 our sales was.
I'll give them to you about $80 million and that that double the sales.
Before because we're be incubated this.
<unk> is now and as of quarter. One this year, we further double compared to the previous year. So for the quarter, one we're talking about close to $40 million.
Newly hotels I mean, when we put it in the entire business, we have a pretty big base. So we are talking about 1% to 2%.
If we only look at a lot done.
Cities, such as Shanghai, we can be talking about 10% or even in smaller business, 50% for the emerging brand.
So so.
How big it is in the future is a bit too early to tell but as I mentioned this earlier.
In a very good position to do that because we have the we have the product.
We have the store network and we have our online channel and we have around logistics and delivery capability.
And so for a new retail business.
Even though is still relatively small.
Yes.
It is profitable.
Which is very very difficult to achieve.
So thats, where we are.
And it's proven to be particularly.
Important.
In difficult times like this and we are so glad for the flexibility and agility of the new retail that brought us.
In the middle of the pandemic. Thank you.
Thank you so much for sharing.
Store, Dallas and different formats Joey.
If I sort of like correctly I actually also observed your per store number of employees declined by around 30% between 2021 to 2019 so.
Like I assume.
Things are back to normal one day is actually there is a hope for.
Like our labor cost productivity gain.
Two to show.
In your financial results I'm not sure if that.
That's one.
Our expectation yeah.
Labour profitability is ongoing challenge.
Yeah.
Prior to 2015 2016, we have.
2015, we have 7000 per store we.
Have about 400.
400.
<unk> of 1% to 45 right now we have 12000 store, we still only have 420000 staff. So that gives you a sense.
About it and then during the pandemic during the lockdown of Shanghai.
Operating a five to 10 people, but this is not sustainable.
That means our staff will be putting every ounce of their energy.
But there won't be.
Some innovation coming out of this because.
We are pushing our thinking into sharing management head count across the store, which is something that we learned from ourselves in our delivery rider sharing among peer stores. So so some innovations will stay but.
What extent with during the process. Thank you.
The next question.
Thank you just once again if you can ask one question at a time. Thank you. Our next question will come from <unk> at Citi. Please go ahead.
Good morning.
My question is about the new business.
I mean.
We appreciate the great effort.
Timing of molecule and we know that sophisticated.
Supply chain very agile digital competitively request asking the tough time. So you did mention a prepared remarks about a good purchase which is a very new model new Shanghai do think this going to be.
And the model three spending into other part of the triangle.
The liquidity situation improves with the first question the second question.
For the market consolidations yearly we are seeing the top time like Kirby's distribution always a good opportunity to consolidate market, we still remember that in the second quarter of 2020.
<unk> 2020 will pose a.
Fourth we've accrued you guys consolidate market immediately so presumably the casual dining segment kind of be more consolidated posted Kobe.
Q S. R. So this really referring to the pizza hut.
Investors have been focused law.
Shall we see that your pillar business could be even more enjoying more advantage of market consolidation post this week on week on week.
Previous wrong.
So the two questions. Thank you.
Thank you Paul.
The first question commented the purchasing.
Yes.
<unk>.
Okay.
Unfortunately, it looks like <unk> line has stripped once again please stand by.
Yes.
While we conduct Joe let me address the second question, which is about.
The consolidation opportunities in the marketplace.
I think as you.
You had mentioned on our capital allocation strategies.
We have put a lot of emphasis on investing in capex to drive organic growth and then also.
To view, our six Sigma so our preference for consolidations in marketplaces really crude expansions of outbound network across all that Brian .
We have.
The.
KFC.
Quick service restaurant business, we also have pizza hut casual.
Casual dining business.
We also have coffee enjoyed lavazza in the coffee business and then we also have the Chinese goods business. So I think we already have a number of opportunities as we mentioned.
Today, we also have.
Joy.
And you announced a.
Our arrangement with John Brennan to Johnny step up investment to X <unk>.
Accelerated store expansion.
China for Taco Bell. So I think we already have a wonderful opportunity coffees, and taco and as well as the growing opportunities here with KFC and Pizza hut. So I think the main focus being dry for us for.
<unk> the market is really through the expansion of global organic brand.
C G.
Joey is already back online so we.
Just the first questions here.
So the commodity purchasing more.
We are cautious.
That said best practices within the company.
So we.
We get the scenario plans for whatever cities and provinces.
It's going to lockdown and and also slowdown.
<unk> kept the options open right now commodity purchase in Shanghai as the shopping becomes slightly easier we can see the demand come down a little bit which is a pretty good thing actually.
But but.
At the worst time, we have 10 to 15 stores opening in Shanghai, but as of right now we have about 40% of our store open.
So so.
We can see loss of customer.
Better with more stores to open bank than just relying on committed to purchasing but.
It is a it is set up.
Example of our agility and adaptability.
<unk> of our business model and team. Thank you.
Our next question comes from Jeff Chen at CLSA. Please go ahead.
Okay.
Yes.
Sir it looks like Jack stepped from Nicole Our next question will come from Christine Peng.
Please go ahead.
Thank you management for answering the questions.
A quick question regarding the cost cutting measures and so given the prolonged and fluid situation about colby restrictions and lockdown in China. So I'm, just wondering what kind of cost cutting measures.
Management has put in place or consider putting into place to deal with this.
Situations and also I remember back in 2020 there are.
Quite a few government grants.
Given to Yum China.
During the Covid period, so are there any government Grand Cayman.
Similar to 2020, there'll be given to Yum, China for the remaining of the year. Thank you.
Hi, Christine So let me address your questions regarding office.
Cost control and cost sharing I think.
Obviously, we're looking at.
Hmm ACO as Si pretty strong inflationary pressure globally, and so you will continue to work with our supply chain to our long term supply chain partner.
To manage that Scott will be including.
Potentially with longer term contracts.
We as you mentioned before our contract usually bumping.
A quarter or two.
We made practically do you do with that.
Given the inflationary pressures for example for coffee beans, we have lockup compliant.
Tracked that would like us to 2023 and that would help us to mitigate obviously.
Anything can be done.
But I think we.
And we have a very smart.
And supply chain.
The books here Doug.
A lot of experience.
<unk> if you will.
Given the environment.
Pushing environment.
The other one is obviously the energy cost energy cost in China and globally. We also gone up because we mentioned.
Two the prices up 10%.
Then.
We are also implementing.
Why we invest in technology.
We have and will continue to invest in technologies that would help us to reduce energy consumption.
So so hopefully that will pay off in the long term.
And the other one is.
We will continue to deploy technology.
Our supply chain to make sure that we.
Both have a flexible and flexibility to deal with given.
Potential scenarios, but also make them more efficient I think is paying off as we see in the current situations, we were able to very flexibly to redefine their.
Our supply chain network.
The routing.
And using both railroads can see freight to flexibly manage our.
<unk> operations.
You also see technology being.
Store operation back office.
So the labor productivity in the long run it should be held by your investment in technology.
Obviously.
In terms of margins of course.
The biggest driver is actually.
So.
We will continue to focus on obviously.
Our CRM program Digital program, and then Bob precise marketing drive sales.
And then if I.
We will continue to look at our innovations.
That is fine.
No.
In housing.
How to best utilize the resources that we have for example, a whole chicken versus.
Some of the pond.
So this other sounds like another way, we look at the cost base and then also longer term obviously, we're looking at.
Potentially.
Restructure some of our cost base, including rent rental relief.
<unk>.
For 2022 in the first quarter.
Thats correct.
Got it.
Launch.
<unk> lead program Colby, mostly mostly is addressed to small medium enterprises and so.
We will continue to work.
If we can.
Clarifying somewhat goes program, but I think for most part those program.
Small and medium enterprises.
<unk> will continue to work with.
Landlord lease rental relief, but also in the longer term as you mentioned.
We don't target a particular growth number for our store, but we like to have the quality score open and so we would continue to look to make sure that our rental cost structure is.
Comparatively lower investments.
Thank you thank you Christine.
Christine.
Thank you Andy So I just want to make sure the the previous.
Guidance about the commodity cost and labor cost increase for 2022.
Were not changed despite all the volatility we have seen in the past two to three months this globally.
Well I think that would be some changes, but I think.
The biggest driver for the margin as I mentioned user south leveraging deleveraging.
The other part is obviously the inflationary pressures some of these commodity prices.
Have been more stable.
In line with our expectation, but somewhat pieces that youre Barry jump in crude high right now. So if you look at for example, poultry.
And pocket there David market grew in line with our expectation, but if you look at B. If you look at.
On the commodities.
Yes, so it's quite a bit.
And then also if you look at energy cost also go up so for chemicals and oil and all that.
Although I think mesh.
You mentioned.
Those are the smaller factor, but the sales leveraging.
Yeah.
Thank you Andy.
Sure.
Our next question comes from Brian Wang at China Merchant Securities. Please go ahead.
Hi, Joe.
Okay.
Okay.
Yes.
Hi, Joey fiduciary.
Tim have you seen your peer.
Hello, Thank you.
Causal burden.
Okay.
<unk> restaurant.
And costs are fixed so the whole mostly on for Jonathan.
Hum.
Still variable because.
Colby.
Your P&L I don't see that as one of the components were around 30%.
Along with that.
And of course, the whole, Michigan largely based on the way.
Sure.
On the store shelf.
There was a launch.
Brian .
Your line was coming in in Alberta.
I guess your question is about <unk>.
Costs and particularly.
Variable costs versus fixed costs.
Yes.
Okay. So I think as I mentioned before.
Obviously, the key cost structure for us.
So it's largely variable cost.
While in food and paper and packaging for our.
And then so al Dor.
We have a.
The hybrid model, obviously, we had a full time workers and then we also have a large part time.
Workforce.
On a more flexible schedule basis.
In term of.
Oh.
Mentioned.
When big part of.
Last presentation of the.
The rent.
Would that have a variable component to it and internal Palatine.
He is probably depend.
Depending on the sales obviously.
Wearable.
Normal times, maybe 40 50 plan no doubt.
About 50% or so at this time about wearable program and then we also have obviously marketing expenditure and all that we can flex around that so youll elbow cost structure I think was that to say that majority of our call.
Yes.
Our flexible.
Available, but we also have a very large portions.
Sometimes effects, including our G&A expenses for a couple of salary for our headquarter staff most of the operations.
And then the fixed cost and the rental so south leveraging revenue some real for our business and as we have.
You mentioned over and over again.
So.
But we as mentioned before we're doing a lot of things to control costs in the near term, but also looking at your longer term structure for example, like G&A.
In the short term may be impacted by it.
So leveraging deleveraging.
And then and then but the long term that goes with it <unk>.
Growth to be below sales growth for example, so that's the overall.
Are things simple deal out.
We will use technology.
And then prove out.
Our.
Our process and store format et cetera to make sure that long haul.
Our labor productivity.
And a good trend.
Thank you thank.
Thank you Brian .
Thank you.
Our final question comes from Jeff Chen at CLSA. Please go ahead.
Thanks, Julian and Andy for taking my questions I'm, sorry that in my life just.
It didn't work and my question is regarding on Taco Bell brand strategy.
Plus the spread has entered China market for years, but still.
A small size.
We are planning to have over 100, Taco Bell installed by this year. So could you. Please show us more about how are we going into that.
Develop this branch benchmark with KFC.
TFC and if there's a hard and.
Since the call we had several big cities in China. So if this trend continues we want to know how it away.
Impact our install opening such as maybe a weekend only find the store locations in low tier cities and less impacted wages.
Okay.
Okay.
Thank you. Thank you.
Sure.
We we looked at this talk about.
Opportunity over a very long time.
If we look at we look at let's.
Let's say pizza hut, we are already in 700 cities and only 700 city all of 2700 city and squeezing 1700 cities. So if we can win in.
Coming to Julie I want to open at least 125 stores and honestly if not better.
Okay.
Okay.
First of all the way.
So you have a job walking right. So I would just complement what youll Utica mentioning. So obviously, we have looking to talk about business for number of years, but.
So you mentioned you will see a lot of opportunities not only for.
Our our existing brands KFC Pizza hut, Andrew, but obviously for Taco Bell to 225, new stores by 2025.
Is ambitious talking about <unk>.
On a stretching targets.
If we look at.
The reason why we have confidence about yields are stepping it up obviously.
We have expanded with the Brian quite a bit with the format the fulfillment and whatnot and then I think some of the testing that we have earlier.
To make us more efficient and flexible.
I'm showing some very encouraging.
Alright, especially for the newer smaller format.
Which is about what's your square meters and lower capital expenditure and with a simplified menu I think.
If you look at the stock performance that give us no.
Quite a bit of encouragement in terms of expanding the network. There again like we obviously really important for us.
Any thought opening is the disciplined process. So we do.
Supply disc.
Glenn no process with the small.
Small store format in a new format for Taco Bell as well and so.
Hum.
Taco Bell.
I think we've seen that in the urban and top tier cities could you popular with younger generation.
They are more open to trying out.
Good good.
So and then if you look at during the Lockdown period.
Bryan also deep.
Quite well.
The.
Offering as well as the <unk>.
Delivery coverage so.
We're excited we're excited with the type of initiative.
Over the next few years, you should see more growth in that.
Brian and then we would.
Obviously separate investment with we've talked about national could drive that started workload.
Thank you.
Thank you Annie.
Thank you for joining the call today, we look forward to speaking with you on the next earnings call and sorry about the.
Connection.
Have a great day.
Thank you so much this does conclude the call today. Thank you all for joining you may now disconnect.
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