Q2 2022 Yum China Holdings Inc Earnings Call
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Thank you for standing by and welcome to the Yum, China second quarter 2022 earnings conference call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press. The stocky followed by the number one on your telephone keypad I would now like to hand.
The conference over to Michele Shen. Please go ahead.
Thank you Melanie Hello, everyone and thank you for joining Yum, China's second quarter 2022 earnings conference call joining us on today's call are our CEO Ms. Joey Wat and our CFO Mr. Andy Yeung, we are dialing in from different locations today, if we experience technical difficulties during the call. Please with me on the line.
We collect before we get started I'd like to remind you that all earnings call and Investor presentation.
Forward looking statements, which are subject to future events.
Our 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.
See the Asian 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 second quarter and you will then cover the financial performance and outlook in greater detail.
Finally, we will open the call to questions.
You can find the webcast all these call and a 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, Julian. Thank you Michelle Hello, everyone and thank you for joining us today.
Second quarter was the most difficult quarter entercom to NR.
Got it.
Without me, Okay always on keeping our employees and customers. We also want to bring joy to our customer.
With 10 memorial high and put them together to deliver better than expected results.
And both Brad.
One or two.
Like a battle alongside a wonderfully I'm kind of thing.
We upgraded with our Shanghai headquarters under Lockdown for over two months.
You managed to interfere with extraordinary agility.
But curious bombing cross functional and cross brand crisis management team well.
We develop flexible to appears to tackle each problem.
Oh really.
Through it all we have good we have.
And so the business stronger in so many ways.
We have innovated new menu offerings.
Delivery and digital solutions as well as cost optimization initiatives.
So it's not just the imminent problem that can serve as a lender.
Any way to make us more agile and resilient for the longer term.
During this trying time, we continued to execute Oh, Gee and strategic framework that is resiliency.
And look.
That's that would resiliency with failure the shine right tests in tough situations.
Let me share with you some of the measures we implemented to overcome considerable operational difficulties.
During the city a lot of time in Shanghai with very limited restaurant staff and riders our goal was to sustain minimum level of restaurant operation and serve desire food to customers.
With simplified menus, where you reduce complexity of operations and inventory management.
The extreme we just have one bucket of fried chicken on the menu.
One item on the menu and that's it.
Fried chicken was perhaps one of the most desired food items in Shanghai during lockdown and brought our customers great happiness.
We launched community purchasing Congo as early as it meet March including packaged food products.
Well just for KFC and Pizza hut.
But also for our emerging brands Lavazza, Taco Bell and literally sheep.
In the Q1 earnings call I shared that with 10% to 15% of the store opened in April Shanghai achieved 40% to 50% of pre locked ourselves.
In me with less than half of our stores open we reached pre locked ourselves level.
This was a remarkable achievement.
We were able to continue serving our customers. Thanks to our in house and agile supply chain management system as well as dedicated last mile delivery riders.
Obtained the necessary permits and manage to.
The majority of Shanghai under severe mobility restrictions.
Digitization also played a very critical role in just a day's time, a stellar I T team launched and AI enabled delivery route planning to full community purchasing in Shanghai.
To optimize what they delivery route covering a wide geography, well beyond our usual store base vicinity radius.
Across the country, well with phase of challenging operating environment with all of the advertising and promotion to save costs.
Some of you may remember the side that could I yeah.
Other pokemon meal Companion's toys, we launched Orion children's day on June 1st.
Besides that towards instant city, well lateral becoming a smash hit with children and adults alike.
A sensational buzz from this campaign drove almost 20% of sales in the first two days of the promotion.
Who would have thought that we chose sized up.
To accommodate our refuse advertising budget.
The results were phenomenal.
We were thrilled to bring joy to our customers' lives doing it exceptionally hot time and to see that social media posts. It.
We also focus on driving off premise sales.
Delivery grew 7% year over year and reached a record sales mix of 38% in the second quarter.
Combined with pick away off premise dining concept build two almost two third of selling.
Also exciting me a new retail package goods sales reached 200 million yen in the second quarter.
That's more than double the sales compared to last year. These initiatives, partially offset the reduced buying services.
Let's move on to growth.
He lives in conditions like this we don't stop delighting, our customers with innovative food and value campaigns.
Ability to innovate is that important pillar to capture growth opportunities.
Can see diversified into adjacent categories to drive additional growth.
With what GUL and Angus beef burgers as premium options will launch entry price choices.
Only around half of the price, which is 18 years versus 33, yeah.
On the weekend, we are now offering choose the whole chicken at $29 nine yen to thrive cells.
This is J D whole chicken is one of my personal favorite now and it's absolutely delicious.
These two new categories have proven popular.
Accounting for mid single digit of menu mix combined in June .
Our innovation team left their creativity Fry when designing new products.
At KFC, we launched a super abundant chicken bucket for total.
In select cities.
This bucket because chicken eat chicken wing tips mats and other part traditionally favored by Chinese people.
Well some of the analysts who asked me before when would we start to sell chicken feet, yeah officially starting chicken feet right now after 35 years.
This follows on the heels of KFC has launched last year its super popular late night snack chicken from the blood yeah.
In addition, the usage of all parts of chicken provides an intriguing variety to our customer.
Good color.
Yeah.
Pizza Hut, New man, who received amazing customer feedback and generate a boozy cells.
We launched the campaign on social media and sponsored T V shows instead of using celebrities.
With just one third of the advertising cost.
<unk> achieved the same customer awareness as flashy as menu.
The new menu included 35 brand, new or upgraded items, such as stuffed crust pizza with sausage and meet thriller really shown whirlpool Supreme Pizza and deep Fry zero, a zero problem, yes, we'd put the cereal around the problem and it tastes wonderful.
Taco Bell launched a risk Rachel so once you end with a lighter saar and more vegetables tailored for Chinese customers.
It gained great popularity and appeal to our more health conscious customers.
Value for money resonate well with customers under the current circumstances.
As part of the 35th anniversary celebration in China can't see all but its signature Prada at amazing prices.
Original recipe chicken.
1987 Prize.
And the family bucket at almost 60% of our cap right.
This campaign brought that form memories and became a hit with customers.
We rotate the oversea weekly.
The ability to adjust according to the market conditions in different regions and customer response.
Our iconic crazy Thursday value campaigns have won the heart of our customer.
Since we first launched it back to 2018, we have been constantly boiling our customers with very attractive offers.
The campaign now inspired schools, all creative social media posted.
First days also generate significant sales uplift compared to regular weekdays and sometimes even weekend.
At Pizza Hut, we brought back our signature buffet and so all 400 thousands of face that in the pre order promotion in just 15 days.
We also launched our buy more save more combo offering more abundant option the new combo successfully left that ticket average.
And lowered our courses.
Let's move onto moat.
All initiatives and supply chain infrastructure are the key enablers in asks about P. J smoked.
Leveraging our dynamic digital ecosystem, we generate around 4 billion in digital sales in the first half of 2022.
<unk> represented 88% of ourselves.
Our loyalty program exceed 385 million members.
As of the end of the second quarter, we shared our latest launches and engage with members through all Super apps Mini program and social media groups.
We also constantly upgrade the tooth.
Cool all customers of it.
Jesse Super App now features a senior friendly interface option with simpler grab it.
Less promotion formation pick a phone well which lies.
And remind all doing functions.
We tailor it to the needs of our older customers.
So how's the upgrade their mobile ordering menu for more flexible buy more save more combos and customized rather displays.
Digital capabilities were crucial.
To streamline restaurant efficiency.
So like all restaurant sales forecasting system and Pumpkin manager gave us full visibility of the situation in each stope.
With <unk>, we can rapidly adapt to a changing scenario.
Our real time inventory visibility from logistics center to store health and able us to dispatch raw materials with greater precision.
Restaurants to adjust or the daily based on their operating environments and ship inventory across the stores when fulfilling community purchasing or other large orders.
Is it continuing.
As the ongoing F. All all the deliveries refund zero.
Which allows riders sharing across trade zones, we know all the same flexibility.
To our restaurant staff.
<unk> now can schedule shifts across store.
Across cities.
We continue to invest.
In building, a world class intelligent and digitize supply chain to improve operating resilience and support business School.
Our first two Greenfield logistics center in Chengdu, and one in Jiangsu and now complete and operational.
And a week ago, we have nice construction starting on new.
Supply chain management center in Shanghai.
This project is our largest greenfield project, yet and will serve as the headquarter for all said tier three logistics center across China. It.
It will integrate the latest state of the art digital technologies and support restaurants in eastern China.
2022 has indeed been extremely challenging.
We learned many lessons and now emerge as a stronger and more resilient.
The station.
And I'm not saying this just for KFC and Pizza hut.
Some of our emerging brands have also demonstrated great agility and potential during lockdown.
I'm convinced that but it's the tooling Oh G. M framework, we are well positioned for sustainable long term growth.
She'll do a hallmark DNA of resiliency, we are taking every action to quickly drive returning traffic to our stores by providing cookbook.
Great value and build customized doing going forward, we will continue to delight, our customer and see new opportunities to grow our business in China with that I'll turn the call over to Andy Andy.
Thank you, Jamie and Hello, everyone.
Let me share some color on our second quarter performance.
The cold situations have significantly impacted.
Okay.
In April and May same store sales declined by more than 20% year over year.
On average more than 2500 fall were temporarily closed all Hawaii only minimal disruption.
Cause situations gradually improve E G.
We were able to capitalize on that.
With same store sales declines narrowed to high single digits year over year.
And a number of temporaries Paul Hoelscher.
Yes, you're upping profit of $81 million.
And less of a margin of 12%.
Sure.
We were able to generate meaningful profit in the quarter, which exceeded our expectations.
Well only by capturing so when the Covid situation improved in June .
By taking swift and decisive action.
Yes, Jessica offers and promotions.
Tremendous effort and driving productivity gains.
Cure onetime movies, and we base our cost structure.
Let me go through the financials and our cost control initiatives.
Unless noted otherwise all percentage changes.
For the effects of <unk>.
In exchange.
Foreign exchange had a negative impact of approximately 3% in the quarter.
Second quarter total revenues decreased 13% year over year.
And we quite frankly to $2 $1 billion.
Due to the same store sales decline and temporary store closures.
This was partially offset by the contribution.
And the consolidation of Hangzhou KFC.
<unk> sales were down 16%.
Same store sales were 84% of high use level.
Hi, Brian chassis things Paul.
Or 84% of high use level.
And the same salt traffic at 75%.
Ticket average grew 12% mainly due to the increase in delivery mix and higher ticket average of community placing orders.
Pizza hut same store sales.
85% of prior year's level.
Same store traffic was up.
80%.
While ticket average increased by 6%.
This was driven by the higher.
Ticket average of community Hudson.
Restaurant margin was 12, 1%.
370 basis points compared to last year.
It was mainly due to significant thank you might have an impact.
Significant.
Cost inflation and how people will recall.
To take actions, we have taken actions to mitigate the impact.
Let me next go to each expense line and the actions we have taken.
That was 139% almost flat year over year.
We took actions to reduce promotional activities discounts.
To keep commodity price increased low single digits.
And to optimize the distribution frequency the warehouse to store.
To reduce cost.
Cost of labor was $27 one.
290 basis points higher than last year.
Mainly due to sales deleveraging.
Wage inflation of 5% and more than this is why did costs, resulting from higher delivery mix.
This was partially offset by improved labor productivity as we seem to find promotions and menu items.
Reduced operating hours as necessary.
Reduced hiring and qualified Saskatchewan, all full time employees.
Occupancy and other was 29, 9%.
60 basis points higher than last year.
The modest increase was mainly attributable to sankey languishing and wife, you need to be prices.
Partially offset by our cost initiatives.
Over the past few years, we spent considerable efforts to reduce the fixed component of our rental expenses.
Shifting more to wearable components.
Hey, Stefan continue to improve the first.
Movie of our operations.
In addition, we.
The associate at meaningful rent relief from landmark.
Welcome back.
Pull back on marketing and advertising and took on more energy saving initiatives.
G&A expenses increased 6% year over year.
Mainly due to increased compensation and benefit expenses as well as the consolidation of Hangzhou KFC.
This was partially offset by lower share based compensation expenses.
Operating profit was $81 million.
The net contribution from Hangzhou KFC consolidation was roughly 3% of operating profit in the quarter.
It includes the amortization of <unk>.
Tangible assets acquired.
Which is roughly $60 million per quarter and.
And that would want to end up this year.
Yeah.
Below the operating profit line, we incurred a 60 million dollar mark to market net gain on our equity.
This investment this quarter.
It was $9 million more than the same period last year.
The effective tax rate was 26, 5%.
170 basis points higher than last year.
Mainly due to Hangzhou, KFC consolidations and lower pretax income.
Piracy consolidations.
The equity income from JV was not subject.
Sure.
Resulting in lower tax rate.
Effective tax rate in the first half of this year.
Hum.
We expect full year your tax your tax rate to be in a row lowest study.
Net income was $83 million.
Diluted EPS was twice.
The Mark to market gain you made quite possibly impacted diluted EPS by four cents.
Despite the challenges in the second quarter, we returned $218 million to shareholders in cash dividends and share repurchases.
In total we returned half a billion in U S dollars to shareholder in the first half of this year.
We will continue to execute on our disciplined and balanced capital allocation strategy.
As always.
All parties are.
To have sufficient cash for daily operations.
To deal with contingencies.
And to invest in capital expenditures to drive organic growth.
Now, let us take a look at the third quarter outlook.
We saw some gradual improvement in restaurant traffic in June .
Still we remain cautious on same store sales.
The external environment remains very challenging given that we are incurring.
Outbreaks.
Weakening consumer sentiment.
Pressures and commodity price inflation.
In July .
The more infectious Omnicom Varian appeared in Shanghai, Beijing, and obviously.
Nationwide. The number of cases has increased again after two months.
Question would decline.
Many cities, including Tianjin, Qingdao and Lanzhou FX spin sometime of lockdown conditions.
Owing the dynamics hero public policy.
Therefore, we expect sales were tough for me to take time.
To be non linear and uneven and potentially volatile.
Our focus is to drive sales recovery.
We are planning a variety of new product launches and.
Market.
Marketing promotion.
We are also working to ensure a quick volume for money.
Consumer spending.
In addition.
Our teams employ extensive scenario planning with regional focus.
State at trial.
Between keeping bomber.
We're delighted with the better than planned cost savings in the second quarter.
As we look into the fourth quarter.
We are dialing back some of these austerity measures.
To sustain long term growth and operational excellence.
For example, reduce.
<unk> promotions.
Simplify the menu.
Shopping the store operating hours and when these are temporary.
In addition, south deleveraging impact is wheel.
And we will continue to impact our margins.
Also we continue to face headwinds from the inflationary environment.
Prices of commodities, such as cooking oil and beef as well as utilities have risen significantly this year.
On the labor side, we expect labor inflation to soften.
Even given the downward economic pressure.
However, the increase mix of delivery sales likely increase right of course.
Hum.
Despite challenges, we face our expansion strategy position us well for long term growth.
In the second quarter.
Well so opening.
Bond to the Covid outbreaks, yes, we remain committed to open.
Most all that with growth for years to come.
Over the past two years, we have been innovating stall models to cater to different business needs.
Livery and takeaway services.
Then start entities and high tier cities and to expand into lower tier cities.
This year, we expect more than half of our new store to be in smaller formats.
We more often investment and streamline restaurant operations to be more efficient.
The smaller format together with our reputation as a reliable tenants opened up more potential sites for new store openings.
Our new style, we being healthy.
The latest batch of new staff, you saw payback of two years at KFC and three at Pizza hut.
The majority of store opening in the first quarter of this year were able to achieve breakeven in three months.
The healthy payback periods reflect our disciplined approach to store openings.
Nishu up by a strong pipeline and healthy new Salt performance, we maintained a target of 1002 Charles.
Net new stores for this year.
In the near term, we continue to expect volatility in our business due to the resurgence of Covid outbreaks.
Softening economic conditions and the impact on consumer sentiment.
Nevertheless, we continue to focus on the elements of business that we can't control.
As demonstrated in the past two and half years, we are confident that our people our execution and our strategy positions us well to deal with this very challenging environment.
Got it and others.
Also our investment in new store supply chain and do so <unk>.
<unk> opportunity and make us even more with you soon.
With that I will pass you back to Michelle to start the Q&A Michel.
Thank you Andy we'll now open the call for questions in order to give more people the chance to ask questions. Please limit your questions to one at a time Melanie please start the Q&A.
Thank you if you wish to ask a question. Please press star one on your telephone and wait for your name to be announced if you wish to cancel your request. Please press star two if.
If you're on a speakerphone. Please pick up your handset to ask your question. Your first question comes from Lillian Lou with Morgan Stanley . Please go ahead.
Thank you. Thanks allowed till you and Andy and also congratulation to very solid results.
My question is on the margin side, because obviously I think all every cost line, what's controlled much better than our expectation just won the well not understand with business gradually re open, especially more stores that we opened and they're running at a normal hours.
How do we see these cost lines on the trend what are some of the it because I think a N D until you might shed some of our Red Lake rather can be a pretty major cost savings so well not understand with same store sales growth continued to be negative how weak on the project. This.
I would say cause changes, especially on the margin side on the year on year basis. Thank you.
Second we are in.
So let me know.
I'll answer your question.
First of all I think you know as mentioned.
Second quarter margins and profit.
I see.
Our expectations.
And I think if at all possible I think it's first of all you said.
Thanks to the very incredible asphalt.
And we feel live and dedication of our team, especially at all.
Restaurant employees, who did everything humanly possible and doing.
A lot of hardships tuned.
And what's out in the pandemic.
To continue to serve customers need and keeping our store openings.
Running as normal as possible.
So you know I think both of those efforts.
Sure absolutely.
Is it possible to get to.
Stable basis.
In terms of obviously, they're all performing well.
It's all dependent on the phone.
The improvement.
In June and come off the Covid situation and our ability to actually capitalize on that improvement and so you know as we mentioned things ourselves.
Decline narrowed to a.
To a high single digit.
Yeah.
But in term of snow in term of cost funds you mentioned already some of these initiatives.
Initiative.
Temporary.
So for example, you know we have cut back quite significantly.
Marketing and promotional activities.
I think I've seen what we tried to drive scale.
Okay.
We also mentioned that you know.
Hmm.
Managing the inflation cost inflation.
So as in the first quarter was phenomenal.
But I think if you look at the commodity price issue.
No.
The elevated level and we expect that to continue to creep up.
Labor I think you know obviously, we have simplified menu items.
Shopping with some pumping hours.
The second quarter.
We also would use hiring.
And so some abuses go ahead and pay it back.
Yes.
Especially last week, so I'll try to return to a more normal operations. So we will have more nominal.
Emmanuel and normal opening hours.
In terms of you know again like going back to your own.
But we do that but I think spending would have.
It would be payback I think we tend to be more.
Our proactive advertising to drive.
Got it.
And then we have some we mentioned also choose all again with some one off.
When you come off lease and and goffman disease, and so some of that.
That wasn't due to Covid somebody's Noah and so we have about roughly close to $20 million of that quarter and the window uncertainty and quite excited about.
And we see no.
In the third quarter.
So I think when you look into the third quarter as I mentioned, the key things, obviously yourselves right southeast revenues wheel.
And as we see the Covid remains one of the biggest uncertainty.
Forward.
And we see some resurgence.
Resurgence in cases.
In July nationwide and then we see some cities for example, Chengdu Guangzhou and also a CR.
Lockdown measures and so some.
<unk>.
So you know.
That's why we say every customer opt outs with Maine.
Time will be no anemia, and catastrophe bond top.
Now obviously, we will continue to set up like focus on cost control.
You have seen your planning.
Staying nimble, but I think we need to be we would think about it.
Some.
The uncertainty that we face and then.
And then leveraging an awesome globally that inflationary pressure there.
Thank you William.
I just want to.
Just some color about these numbers behind this number let's say pick C O L.
Some of the savings will not continue with some of it will continue.
So those will continue as such as <unk>.
The sharing of staff across the store.
Some of that will not continue such as the extreme situation.
During April .
And and.
And what about me.
These stores are run by very feel number.
And probably eat.
Typically they they stay in itself a one week, they literally live and if so for one week and what month, though.
And now we have the second shift.
Moving however, while monitoring the most extreme case is.
One of my stuff. They therefore seriously they otherwise they did for 44 days.
You know I have the fortune to invite some of them to have lunch with me reason to defend them.
You know, it's truly heartwarming behind is number.
Two.
Really grateful that we have such amazing operation team. They worked this hard so that they can protect their jobs and they can serve the customer and that they can protect the company.
But this kind of extreme arrangement of course cannot be sustainable, but if we have gone this far.
The innovation and creative arrangement.
Our teams become even more open minded to embrace any sort of innovation in terms of the re phasing of cost structure. Thank you Lydia.
Okay.
Okay.
Thank you.
Your next question comes from Mike Michelle Chen with Goldman Sachs. Please go ahead.
Oh, Hi, Joey Andy Thanks for taking my question.
I think about the incremental also turned out to be absorbed without doing a top high so arguably some bad though the Osama of new business. We are driving in the company that people approach us on top of that the retail part of our selling pretty well do you mean, the top pie. So are we going to be more aggressive before.
Before in these new business lines and that's on the the way we do the business I told you earlier, you mentioned that we have the AI enabled with vault to improve therapy anybody efficiency et cetera. So I'm just wondering back on those opportunity will play off doing a top up on how we should think about all the other stuff in there.
Okay.
And how we are going to qualities opportunity even further.
Thank you.
Thank you Michelle.
Let me take a step back and then I'll comment on your question about the incremental opportunity.
Overall quota two we delivered substantial operating profit versus expected loss.
Total number is not the highest quarter video it is a million, but my boy Oh My God.
Got the quality the amount of asphalt go into it and and and the resiliency. Our team has demonstrated is phenomenal and we can see the result, you know it was tough may improve a little bit Q&A came came back quite a bit.
The.
Core of the core of the question that you just what do we do.
How do we manage to do it well I mean.
It would have go back to al.
So T J framework, which.
Hopefully make it much easier for four key stakeholders, who understand the momentum in the U S. So it's going back to Jim.
The resiliency to growth and the moat in terms of resiliency are two.
Two examples that you mentioned Michel the new retail community purchasing and the a.
He is a great example, about resiliency.
We will get very very quickly.
We are talking about.
Putting together the commodity purchase program, starting with a hotline and they all with the mini program to sell cars.
Within a week across the brand.
And we got the entire process team program done.
<unk> of March.
And then we roll it out.
And wait for two or three days and then the demand came in.
And that's the that's the kind of speed agility and determination of the ability to execute innovative solution that.
The resiliency and thus the result.
The tango the community approaches to help it.
And now when they happen.
Of course, we are setting what we can sell at that time, we can buy chicken, but that's not enough.
Because of all kinds of limitation.
And also at home consumption and you can imagine.
<unk>.
Increased dramatically so we're putting a new retail the package food.
And at the at the height of the new retail Pizza hut.
I believe its maybe 50% of the pizza herself in Shanghai is from them in retail.
Well now time has malone.
<unk> laid off by June it became 20% and then now that the vantage smaller took.
To go back to your question Michelle.
We doubled our new retail business two during the fourth quarter, two compared to two last year.
Yeah last year.
And for first half of the year with a lesser on the this is Bobby number $450 million.
So.
For new retail and now you can do the math is that to start to see some decent number and for the entire year. This year 2022, we're looking at reaching RMB 1 billion cells for new retail alone in China, If you will.
Combat ourselves to many other than the retail business. This is not small.
A very small percentage compared to your own kind of business, but as our new retail business alone is not and it's a wonderful complement to our business. Because you can imagine that we have our scale in terms of supply chain, we have a network of distribution, which.
Al.
12000 store and online.
The channel a little brands. So far has started 2018 and we have all rider to deliver these new retail customer diversity without incremental delivery cost charged to the customer. So this will continue a very good complement to our business and EMA emerging.
<unk>.
Achieved breakthrough.
With the new Li told about the Taco Bell leadership, I mean doing me again.
Again sales exceed pre lockdown level because of the package product they have been trying to put.
Put together within a very short time.
And then the next thing you talk about mentioned the AI the digital a little bit surprising et cetera, absolutely. That's the absolute right thing for us to do and we have been doing that for 35 years. We are one of the one one of the few if not the only one at our scale, we have dedicated supply chain.
Paid in May.
So that we can continue and keep the parking lot that's the goal.
Even during quarter two of such difficult time, and now we are building our Greenfield logistics center.
Yes.
Digitized and.
Enable supply chain to provide us.
Michelle.
Mitchell.
Image and visibility of the supply chain process.
The traceability of upstream so that we can move things around and we can be very efficient in terms of course.
Of doing business.
So these incremental opportunity, we'll certainly continue therefore, despite such difficult quarter. The morale is good.
Ever.
Because as the 450000 people company, we work well together.
Execution ability agility is second to none the team is very proud of that we protect the business per pet that jobs. We look at every single cost opportunity possible. It's Beth.
Except.
The promise and the sense of security that we are not doing any layoff for staff for 'twenty 'twenty. Two so I'll stop now that their jobs are protected and Oh, and it's doing everything we could possibly to protect the customer and to protect the shareholder a policy of Michelle.
I can tell you that's very clear thank you.
Thank you.
Your next question comes from Brian Wang with CMS. Please go ahead.
Hi, So basically Oh, one question, so I would like to listen to people on their songs you remember I am with you.
Would you mind speaking up a little bit we have very difficult time hearing you Brian .
Hello Rocher. Thank you.
Yeah, how you will kind of give me though.
Yes sure. Thank you so yeah.
Thank you so basically I want to understand you know your macro thoughts on.
The increase you know how do you plan to increase your number of stores do you fucking off savings on the Holdco break them down by five different brands safety sample you know like so like you upon of English in your store colleagues in Chelsea and always will be.
Pizza hut on the will there be a breakdown by tier of cities.
That's my question. Thank you.
So much.
Hi, Brian .
So Paul as you know.
New store opening.
<unk>.
As we mentioned we have always deploy a disciplined.
Parsons.
Different methodologies to evaluate saw opening unusually.
It's a bottom up on the markets, where they proposed site.
One 2% of actual models went through the committees to think about that how should return to specific indications.
Overall market conditions.
To approve those.
The site.
So I think.
I don't think there is any change to that process.
And so.
So in terms of like by brand.
Because <unk> continues to be obviously, the largest brand within our portfolio.
We will continue likely to be to account for the majority of.
The new salt opening.
Pizza hut.
As you can see the installed new store performance.
So we think good, especially with new satellites at all and you have seen this fall opening accelerated.
Last year.
D C as well so I think you can also expect that.
In terms of.
Sure.
Other brands I think we can expect coffee for example, lovaza.
We continue to and also talk about you.
Expense.
<unk>.
Second half, although they are skewed.
Smaller portfolio halls stall.
Percentage wise it will be based on an absolute number that would be smaller.
And then in her Chinese cruising business, there's some cyclicality to start opening there they opened by franchisees.
Genuinely data would be most all opening before the Chinese new year for example, and so that's potentially more but again like this year.
Because the COVID-19 situation.
Yes, a little bit more challenging for restaurant operator.
And so our franchisee so we will continue to monitor the situations in the market.
Especially given Chinese synthesis.
Apart and install purposes.
Concentrated.
Northern part of Norway and tunnels.
Anna.
We'll have to see how it goes between these losses.
But thats update by brand.
If I can here.
Yes.
<unk>.
I've seen over the past couple years.
We have beginning to see more opportunities in royalty Cds and concentrations.
Concentrations are a number of new store openings in royalties Cds have now account for the majority of this fall open now obviously, we continue to see opportunity to increase the density of our store network in tier one tier two cities.
And I think that's the general trend I think that trend will continue so.
That's how we generally look at the store opening again like this year, we have some target up about 1212 under that new store.
And as we mentioned given the strong timelines that we have and also given the strong economics and we have seen in our new store to have opened over the past couple of years in Boston recently.
We're pretty close on that.
We will have good opportunity to open more good hospitals fall that can help us quantify for us over the long term.
Thank you Brian I'm sure. Thank you so much.
Sure. Thank you Andy So I think this is very clear so actually I have one more question. So on the commentary on the competitive landscape. So because I've heard that you know your tier two and tier three cities southern zero, So I'm kind of low priced peers similar to KFC. So they all kind of like the Chinese version.
A cheaper version.
Sure. So how do you think you know your your strengths compared to them because I have seen demand new you know.
Matthew it's actually quite cheap so how do you plan to compete in these lower tier cities.
Right.
I think you know we have seen.
Whiskey competition.
Both in <unk> and the high tier cities and so.
We think the best thing that we can do a used not to be just being cheap, but we won't focus on having a quick module for consumer ASIC value, that's something we can chew.
Although oil price.
Well music.
Quick.
Quick volume with price to consumer and so that they can enjoy it we have a fantastic Brian how customer third line trial, Brian we have great quality of products delicious food, a very comfortable funding environment.
You personalize our brand identity.
So as we mentioned if you look at it during the pandemic and the Lockdown in Shanghai for example.
By some indications.
<unk> chicken was multifaceted.
During that period of time.
I think I'll, Brian lessen even while consumer foods.
Food and culture in the way you can see as Tony mentioned, each brand continue to innovate with new products.
Great fun suite for consumer.
And we continue to do a quick modules.
Mentioned one of the reason why we focus so much on cost and college home policy.
In order to compete volume propositions. Most important thing is to have a.
Cost structure advantage and that's what we're trying to give a quick one on the consumer.
To be sure.
Yeah.
To be more specific leasing three way.
We will do it slightly differently in lower tier cities compared to tier one cities, while we have slightly different menu.
The project and we felt that we could have again to eat or something like that which is targeting for lower tier cities and starwood when Mike sorry in other pop yesterday laid off but we do have different slightly different menu and the pricing differential. So we incorporate it and remember also promotion.
They've.
We gave up our store manager a flexibility to run certain promotion that's for sending me the different model. So Andy mentioned last night, yes, the cost of setting up these stores in lower tier cities could be slightly lower and we have a slightly different way of doing it. So.
The operating model the kitchen, blah blah blah, we'll be sorry to defend.
We are very very focusing on children in August which is something very very good and it was in the last the last 35 years to give you. An example in northern part of China, which is the most.
Difficult.
Part of our business even.
Even in their lives.
You know the last two.
Three years.
But the impact of the pandemic.
In eastern part of China, Northern part of China, the business still but more challenging one for.
This summer alone we have run more than 10000 children summer event. So there's still a manageable organized events more kit during the summer.
So.
You can you can you can see we do have a different type of a model of course, when all right Ken.
Accumulative remind all of L. A and then there's the other that lower tier city, we have so many different business models of catering.
And customized for slightly different customer groups in different regions and different consumption occasions like those transportation hub the highway stations.
And University.
Dave you name it.
Okay I'll pause here, let's move on to next question.
Thank you.
A reminder to please limit your questions to one per person.
Next question comes from via poll way with Citi. Please go ahead.
Yeah.
Good morning, Julian Andy I congratulate <unk> for another resilient quarterly result.
I think in the past few years Yum, China have shown great agility.
Being defensive about it being defensive but b a G. I Joe Operation also means that you can switch back to offensive mode when opportunity arises.
China reopening continues which I presume you share the same view how could you be offensive again.
<unk>.
Do we have touch base on the new brands, new reach opportunity etcetera, but if we'd only pick up all of the cooperation of KFC Pizza hut in the reopening scenario, how would you do differently versus the pre COVID-19 kind of accretion with what you learned in the last one I'll call as in the past two years. Thank you.
Thank you so for.
Sure Mike.
Uh huh.
Indeed.
The business has become more agile, we just looked at the number for quarter two things ourselves well, it's 80, 84% and same is about systems out so 16% on a however, we still deliver 4% profit so <unk>.
Holly.
We reduced our breakeven point through to about 80% and roughly our business is it.
I guess pretty normal to have the breakeven point is about.
The eighties.
So our ability to reduce some of the <unk>.
It is a it is.
It is phenomenal it gave us the agility.
Two things.
Going forward.
I think you know full quota to you can you can see a win.
When.
Our fundamentals are intact and when things are a bit more stable, even though COVID-19 situation is that it's relatively a more stable we are able to bounce back rather quickly.
That's where we can be even from quarter two.
So we hope adult for quarter three.
As Andy mentioned is still a lot of uncertainty.
Now the Orlando.
In challenging situations.
But in the long term we are optimistic.
Very committed to this market and that we're still growing the store, but when things become better how can we grow faster.
If that's your question.
He is if there is not going to be any different from what we have share I think 2019 is the algae M is the resiliency of growth and that's about ticket mode.
When we started it faster, but the strategy is the same.
You know it might be a bit difficult to say that in the last few years right now I think.
We can we can see that sometimes that sometimes resiliency is even more important than growth.
We have the resiliency and we will continue with that with our with our digital capability with our product innovator product with our great value for money with our ability to control costs.
And then we'll grow more stores and the growth here come from KFC Pizza hut and other emerging brands will.
We will continue to do well we are very good at opening its doors and also increasing the south from off premise.
Hey.
You can see our number right now all off premise sales is about 65 of them for getting a 65% for pizza hut.
And all these numbers move quite a bit in the last few years.
And that gave us both the program agility because without this high percentage of our premise.
Cells.
We won't be able to deliver the number that we deliver.
And the last.
And the last two and a half year.
So the growth will continue and that will continue to build strategic moat.
You know.
On daily basis.
And steady so the supply chain will continue with 33 Logistics Center right now will continue to build more greenfield.
The center will continue to invest in our automation from.
From the front all the way through that that will continue to work on our sustainability commitment to science space.
Forget that we have connector.
So so I hope that gives you a sense that the direction of Korea, we might pick up a bit faster whenever we could.
But nathan steady.
Thank you.
Yeah.
Thank you.
Your next question comes from C. G Lane with the C. I C. C. Please go ahead.
Thank you Joanne Andy Ah Congrats again for such a strong and resilient performance I have one follow up question on the margin side. So I'll wear shoes are very resilient the restaurant margin in Q2 for the child and reactors dance with adjustments and some onetime relief and Meanwhile, Andy mentioned that in the future we are.
And I'm back from Australia called commercial measures to sustain our long term growth. So.
So how shall we expect our restaurant margin in the long term under the new normal with this there'd be like around 17% target. Thank you.
Thank you <unk>.
So obviously as we talk a little bit of a short term volatility as we mentioned in the second quarter you know some some some of these cost savings initiatives.
All efforts.
What is your more temporary in nature.
And then in the short term the biggest driver for industrial module right now.
Sales leverage and deleveraging.
To what extent.
Dan on public situations.
But in terms of longer term I think.
Yes.
Obviously chocolate loans continue to be tried.
Our growth on the top line and also return.
And Joel.
Normal level.
As we have mentioned in last years.
Good day.
Longer term goals, we need to drive.
Sales growth by.
High single digits and should drive.
Let me close by high single digits and so.
So I think those and Paolo that's one of them is trying to achieve.
Long term.
One thing I think.
It's.
Question was saying new normal all and things return to normal.
Huntington's in capturing that opportunity both in cells and also potentially in margin.
I always feel like although histories.
Always.
Because the future is probably the best particularly all future and show us some lessons.
<unk> typically.
Yes.
Period full year period between.
Third quarter.
2020 in the second quarter 2021.
When you look whole situation was obviously more stable.
You will see that we were able to drive sales growth.
We were able to see significant margin improvement.
And Thats, you know thats going back to what Joe you have a lot of kind of emphasize resiliency and also.
In terms of our excellent executions and so so awesome well planning help us to design our operations.
You know things get worse, but also in chasing Scott how we can capitalize on the opportunity.
<unk> sales growth in China sales and margin recovery. So hopefully that gives you some perspective in terms of how we look at the shorter term and also the longer term.
And perspective.
Thank you.
Your next question comes from and Lynn with Jefferies. Please go ahead.
Okay. Thank you.
Instrument team. Thank you for taking my call. My question is on the coffee business I know, it's so far it's a very small at this stage.
But at the same time I understand that I know this will be one of our potential growth driver.
Moving forward.
More of like a long time, and if I look at like you know on the Youre still opening plan versus the peer and now it seems that.
Still a little bit slower.
So maybe just share.
Yeah, well it sounds like your pace of Hum yawn coffee like that would roll out.
Like are we are you know are.
Are we still in the process of testing our model or we already find the right models ROE it rolled it out and once we rosebel normally this is a type of business.
We need scale and with back end support.
Meaning that if we have to understand the store, we possibly might have to bear.
Men are unusually.
So, but I don't think any of us know as analysts.
And the investment in our in our model. So just wanted to check right.
The company if management can share with us what you know.
Some of your initial plan or what will be the investment in a protocol for a business that would be great. Thanks.
Okay.
And thank you for your questions.
So I think we'll certify thing.
No.
We were very pleased to see the progress.
And your progress may not be seen the how they measured by in our company remains in Russia by.
Hundreds of salt.
Quarter on whatnot.
<unk> Suisse.
All investments, including our store network.
<unk>.
Any other investments it's affected impulses.
Although for the newer brands like coffee and you're getting a pad and we expect them to be profitable immediately on short term.
Thank you you guys generally expect that they will figure out the right business model before we scale up because otherwise you're going to scale, a big pop right. So the way so far we're very pleased with that.
All the wholesale is installed network right now.
We have expanded quite significantly.
Last year.
We have seven T forestall.
No.
And for tier one cities and plus a number of Cds as well.
And you have wholesalers, we have more than doubled.
Year over year, and then even in very challenging time as Joey mentioned the team happened very tremendous shopping satellite.
Together package.
Our products to sell into retail channels in English.
Okay.
Almost better than.
Last year things have held up lots of new library small nimble start with each other.
In terms of your customer base right now and we continue to see customer loyalty.
If you look at remember now.
Members of the buffet have Quinn.
Year over year.
And then.
Men contributions continue to grow.
A significant number though.
So.
Obviously.
The coffee business this new Brian .
It has also been impacted by Covid.
Now I'll watch number off this fall on the chocolate that chassis.
Hi.
Laughter and so soon as impacted by Union as I mentioned, they were able to quickly pivot and juice commodity type of thing.
Packaged coffee.
A product like history and whatnot.
And this product really how we help I think so.
US reach to a bigger audience all in separate maybe historically have not case I apologize.
In Q2 with two community purchasing and then some of them we have initiative.
Now obviously.
We cannot say, we have everything figured out.
Patrick model I think if you would take some work to saw streamline the restaurant operation there to strengthen some of the supplemental.
And wildfire.
Wildfowl Jeff.
<unk> EBITDA to figure out the right small format and in some of these product menus.
And they are also improving efficiency I think we still need to be a little bit more patient with that.
So yes.
Yes, so I think.
We are happy with the progress.
With wholesale.
Still a lot more work to do but nevertheless, with our covenants and we think it's very important.
The slides and we have a big punch.
Punishable with the possibility that in the coming years. Thank you.
Okay.
Thank you <unk>.
Question comes from Christine Peng with UBS. Please go ahead.
Hum.
Yeah.
Hi management. Thank you for taking my call taking my question. So I I actually have a similar question I wish I I'm sure some damage to like a shovel and and have asked previously, but I just want to ask management, providing some updates.
About the new initiatives that you've previously mentioned.
As we are looking for a post COVID-19 recovery in China, possibly in 2023, So I think the two key initiatives management pretty decent my final one is on the integration of launching a wall and a leadership can you provide us more updates as regards to this initially.
And in relation to that maybe can you provide us more updates in terms of your.
You know maybe 2023 plan in terms of the extent of the Chinese cuisine.
Business I know that business has been struggling with COVID-19 in the past few years, but when we think about 2023 what are your initial.
All you know thinking behind the store expansion plan.
Plan a is that true. So I think that's our first initiative I want to check out in the second initiative is regarding you know introducing more franchise to our stores.
Stores is this something you know management is thinking right now given that you know management you know I I remember previously you mentioned about your initiative to emphasize the supply chain resiliency to provide a more possibility of our franchisees. So I just want to.
Check out.
What are the I think.
Ladies for thinking behind those long term initiatives, one we're going into 2023. Thank you.
Hi, Christine.
So let me try to answer go ahead JJ.
JJ you want to go ahead.
No. No go ahead go ahead go ahead.
Okay.
Yes, so Paul Lajoie and will ship as you mentioned obviously.
There have been impacted by the outbreak.
Despite in nature, and then a lot of locations, our emails and not in the.
Western part of China now.
I think obviously the main priorities for them as we need to chart two.
So our sales recovery.
And then also have the franchisees to strengthen the operations.
Particularly in the Pas business.
If anything probably nothing.
A big part of the business and delivery. So I think this is something that we can help.
<unk> given you.
Our overall coffee.
Brody will ship muscle.
During the pandemic also being quite creative and innovative.
Pretty good progress improving goods and services and then also.
The overall cost management.
Especially in Shanghai in June the Lockdown, they were able to.
Salt Lake.
Capturing water opportunities in both the three and also a completely purchasing <unk>.
So I think that's a powerful Chinese PC business next year.
Im just trying to drive sales recovery.
These 221 surfaces and then also something to work on the fundamentals and the integrations.
So Joe you do once you come in on the franchise questions.
Christine.
Now we'll continue to be the.
Driving force for our business going forward. However, we do have the kind of thought.
<unk> franchise strategy, so right now.
In Montana.
Hello, London in Montana.
Like like.
But too bad or too high.
And these are very good franchisee market and then also for some emerging.
This new business models, such as the stores along the highway stations, we have established strategic partnership already to Super store. So.
So the franchising strategy.
Not only be to general it will have his own strategic purpose and you know given.
Given the time today I think I'll just pause here.
We could have more detail exchange a thought.
Uh huh.
Okay. Thank you.
Thank you.
Question comes from Lucy Yu with Bank of America. Please go ahead.
Okay.
Hi, Jerry Hi, Andy. Thank you for taking my question. My question is more on the GP margin side. So how should we think about the promotion and discounting plan in the second half.
Especially we are fighting against commodity headwinds and uncertainty.
While at the same time, we were trying to similar itself. So how should we think about the promotion and discounting in second half. Thank you.
Thank you Lindsay yeah, as we mentioned.
Second quarter, obviously, we saw a cut back on marketing and also in promotional activities.
And then as we move into the second half and third quarter.
With the concession improve.
A bit.
Even though with some volatility in.
The key focus for us is really driving sales recovery and.
So we likely can see put their marketing and promotional activities there.
And then also you will have more bundled campaigns around how many campaigns because as you mentioned consumer sentiment as well.
Every week because of the prolonged click situations and then some of these <unk>.
Economic pressure and so some value for money is very important.
So that's how we see in the second half this year, but as always you know like.
We are always trying to be very cautious about using price.
Increased U setup like two to offset inflationary pressures.
We've always tried to first.
For us to run our business better and lower the costs before we say right when we have increased prices.
Increased prices.
Annually by a small amount that <unk> below inflation rate.
Thank you Lindsay.
Thank you Andy.
Okay.
Thank you. Our final question today is from Walter <unk> with C. M. B International. Please go ahead.
Hi, Hello, Andy and Joey Congratulation for your Hollywood Resilient result.
My question was asked by.
And then there's apparently so perhaps I can ask about the you remember cells.
So while the number of members.
<unk> continued to grow very healthily.
It seems the member sounds as percentage of total system sales.
Planes a year on year. So do you mind, explaining the reason behind and it's not a concern for you guys and how do you see the brokerage and your strategy over the members and members house going forward. Thank you.
Yeah.
Really quick what are the.
Remember so it's around 60% is it's not a concern for us because the total numbers.
You're growing which is very.
Very nicely actually I mean, our I remember, so 3% to 55 million roughly for KFC, and then and then 115 million for Pizza hut.
And when it comes to members and nonmembers. So remember sell 60. Some percent is already high enough and then the next the next target for US is to.
Other than quantity is to work on the quality the stickiness of the member the overall experience of them remember et cetera et cetera. So you know.
I guess.
Cannot just increase the members are forever it does not.
It does not make much strategic sense for us is quantity and quality.
But it is a very very important part of our business and our best guess.
So much that we can do to improve until you get something all of it.
Just to give it out but what about across brands have okay and did that.
How can we how can we.
Do better and how can we so to.
That same customer better with Chesapeake a little sheep etcetera.
So a lot to do here, but our focus is.
It's more on the quality of experience for now thank you Melissa.
Thank you Tony.
Just a little bit follow up so if the members and growth is still very healthy and the members that was mix has declined. So is that means we have more new customers are being affected in the second quarter or in the field.
Amongst them, so do you see that trend.
A trend we have more new customers.
Hum.
Yeah.
I mean.
The China.
Oh go on.
Yep.
Yes, so I think as Jerry mentioned like we haven't realized measured pace, we're already halfway to 280 million remember and as I say last completion of an area already.
Get a part of this is that this is always it's not always hired a member sales percentage of amendment. There was a better but you will have 100% member sales companies. How you have no new customers. So there's always a balance between yield.
Mix of member sales and.
And the new members and so so that will be some fluctuations from time to time, depending on the marketing campaigns and depend on.
My condition, but I think at 64% is a pretty healthy level and so.
And then in terms of you know for US. We are still you mentioned, which is how do you drive that quality of member self driving cost out.
All of our customers.
And then continue to increase their stickiness and frequency.
Although the long term so that's the.
The payback for our marketing and.
Persimmon cumin economy to improve so those are the number of matrix I think metal sales is one of them.
The higher the better.
Thank you.
Thank you.
Thank you. Thank you. Thank you.
Thank you that concludes the call today, and we look forward to speaking with you on the next earnings call have a great day.
Thank you.
Yes.
That does conclude our conference for today. Thank you for participating you may now disconnect.
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Thank you for standing by and welcome to the Yum, China Second quarter 2022 earnings Conference call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press. The stocky followed by the number one on your telephone keypad.
I would now like to hand, the conference over to Michele Shen. Please go ahead.
Thank you Melanie Hello, everyone and thank you for joining Yum, China's second quarter 2022 earnings conference call joining us on today's call are our CEO , Ms Joey Wat and our CFO Mr. Andy Yeung.
We're dialing in from different locations today, if we experience technical difficulties during the call pleased with me on the line as we connect 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 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.
A 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 second 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 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, Julian. Thank you Michelle Hello, everyone and thank you for joining us today.
Second quarter was the most difficult quarter in the past two and a half of it.
With a main focus always on keeping our employees and customers safe.
Also wanted to bring joy to our customers.
With Cats Memorial high and came together to deliver better than expected results.
Both glad and owner to reflect a battle alongside a wonderful Yum China team.
We upgraded with our Shanghai headquarters under Lockdown for over two months and still managed to interfere with extraordinary agility.
Actually firming cross functional and cross brand crisis management team well.
With the van up fit I suppose to cure to tackle each program.
Good.
Through it all we have good.
And built the business stronger in so many ways.
With innovative new menu offerings.
Ray and digital solutions.
As well as cost optimization initiatives.
So it's not just the eminent problems, but can serve.
The only way to make us more agile and resilient for the longer term.
During this trying time, we continued to execute our G M strategic framework.
This resiliency growth and moat.
Let's start with resiliency.
Sydney is it shines brightest in tough situations.
Let me share with you some of the measures we implemented to.
Overcome considerable operational difficulties.
During the city a lot of time in Shanghai, with very limited restaurants Spa and riders.
Our goal was to sustain minimum level of restaurant operations and serves desire through to customers.
With simplified menu as we reduce complexity of operations and inventory management.
At the extreme we just have one bucket of fried chicken on the menu.
One item on the menu and that's it.
Fried chicken was perhaps one of the most desired food items in Shanghai during lockdown and brought our customers great happiness.
We launched community purchasing Congo.
Early in March.
Creating packaged food products.
Not just for KFC and Pizza hut.
But also for our emerging brands, it's about the Taco Bell and literally sheep.
In the Q1 earnings call.
Sure that was 10% to 15% of the store opened in April Shanghai achieved 40% to 50% of pre lots and sell it.
In may with less than half of our stores open we reached pre locked ourselves level.
This was a remarkable achievement.
We were able to continue serving our customers. Thanks to our in house and agile supply chain management system as well as dedicated last mile delivery riders.
Obtained the necessary permits and managed to sell.
But unlike the majority of Shanghai under severe mobility restrictions.
Digitization also played a very critical role in just a day's time.
Hello.
Team launched an AI enabled delivery route planning to full community purchasing in Shanghai.
To optimize.
Delivery route covering a wide geography, well beyond our usual store base vicinity radius.
Across the country, well with face a challenging operating environment.
Without the advertising and promotion to save costs.
Some of you may remember the size tuck <unk>, yeah, and other pokemon meal companion toys, we launched Orion shooters day on June 1st.
Besides that toy instantly brown viral becoming a smash hit with children and adults alike.
A sensational but from this campaign drove almost 20% of sales in the first two days of the promotion.
Who would have thought that we chose sites up just to accommodate our refuse advertising budget.
The results were phenomenal.
We're thrilled to bring joy to our customers' lives.
Exceptionally hot time and to see that social media posts it.
We also focus on driving off premise sales.
Delivery grew 7% year over year and reached a record sales mix of 38% in the second quarter.
Combined with pick away off premise dining controvert two almost two third of selling.
Also exciting new retail package goods sales reached 200 million yen in the second quarter.
This is more than double the sales compared to last year. These initiatives, partially offset the reduced dining surfaces.
Let's move on to growth.
Eva in conditions like this we don't stop delighting, our customers with innovative food and value campaigns.
Ability to innovate is an important pillar to capture growth opportunities.
Cassie diversified into adjacent categories.
Drive additional growth.
With what Google and Angus beef burgers as premium options will launch entry price choices at only around half of the price, which is 18, yeah versus 33, yeah.
On the weekend, we are now offering juicy whole chicken at $29 nine yen to drive sales.
<unk> is one of my personal favorite now.
It's absolutely delicious.
These two new categories have proven popular.
Counting for mid single digit of menu mix combined in June .
Well innovation team left their creativity Fry when designing new products.
At KFC, we launched a super abundant chicken bucket sore throat instead.
In select cities.
This book is featured chicken eat chicken wing tips mats and other part traditionally favored by Chinese people.
Some of the analysts who asked me before when we stop yourself that you can see we are officially selling chicken feet right now after 35 years.
This follows on the heels of KFC has launched last year its super popular late night snack chicken from the blood <unk>.
In addition, the usage of all parts of chicken provides an intriguing there already to a customer and very good color.
Yeah.
Pizza Hut, new manual received amazing customer feedback and generate a boost in sales.
We launched the campaign on social media and sponsored television shows instead of using celebrities.
With just one third of the advertising costs. The menu achieved the same customer awareness as last year's menu.
The new menu included 35 brand, new or upgraded items, such as stuffed crust pizza with sausage.
Thriller really shown well gossiping pizza and deep Fry zero zero front, yes, we'd put the cereal around upfront and it tastes wonderful.
Taco Bell launched a risk burrito, so once you're in.
With a lighter Saar and.
And more vegetables tailored for Chinese customers.
Great popularity and appeal to our more health conscious customers.
Value for money resonate well with customers under the current circumstances.
Part of that 30, 35th anniversary celebration in China can see all the expenditure Prada at amazing prices.
Original recipe chicken.
1987 right.
And the family bucket and almost 60% of our cap right.
This campaign brought that form memories and became a hit with customers.
We rotate the offers weekly.
Flexibility.
Yes, according to the market conditions in different regions and customer response.
Iconic crazy Thursday value campaigns have won the heart of our customer.
With first launched it back to 2018, we have been constantly spoiling our customer with very attractive offers.
Pain now inspired scores of creative social media posted.
First Dave also generate significant sales uplift.
Pad two regular weekdays and sometimes even weekend.
At Pizza Hut, we brought back our syndicate buffet and so all 400000 per base. That's in the pre order promotion in just 15 days.
We also launched our buy more save more combo offering more abundant options.
<unk> successfully left that ticket average and lowered our courses.
Let's move onto moat.
All initiatives and supply chain infrastructure are the key enablers in our strategic moat.
Leveraging our dynamic digital ecosystem, we generate around 4 billion in digital sales in the first half of 2022.
This represents 88% of ourselves.
Our loyalty program exceed 385 million members.
As of the end of the second quarter, we shared our latest launches and engage with members through a super apps mini program and social media groups.
We are also constantly upgrade these tools to improve our customer service Jesse.
Jesse Super App now features that female friendly interface option with similar graphic.
Less promotion inflammation, because bonds will mature.
And streamlined ordering functions with tailored to the needs of our older customers.
Pizza Hut also upgrade our mobile ordering menu for more flexible buy more save more combos and customized product displays.
Our digital capabilities were crucial.
To streamline restaurant efficiency too.
So like all restaurant sales forecasting system and program manager gave us full visibility of the situation in each stope.
With <unk>, we can rapidly adapt to a changing scenarios.
Our real time inventory visibility from logistics center to store health and able us to dispatch raw materials with greater precision.
Restaurants to adjust or the daily based on the operating environment and ship inventory across the stores when fulfilling community purchasing or other large orders.
Is it continuing.
As the ongoing F all but the luxury refund zero.
Which allows riders sharing across trade zones, we now offer the same flexibility.
Two our restaurants that.
Stops now can schedule shifts across store.
Across cities.
We continue to invest.
Amy building, well cost intelligence, and digitize supply chain to improve operating resiliency and support business growth.
Our first two Greenfield logistics center intangible and why I'm in castle, and now complete and operational.
A week ago, we announced construction starting on new.
Supply chain management center in Shanghai.
This project is our largest greenfield project yet.
That's the headquarter for all 33 logistics center across China It.
It will integrate the latest state of the art digital technologies and support restaurants in eastern China.
2022 has indeed been extremely challenging.
We learned many lessons and now emerge as a stronger and more resilient.
The station.
And I'm not saying this just forecast in pizza hut.
Some of our emerging brands have also demonstrated great agility and potential during lockdown.
I am convinced that but it's securing Archie M framework, we are well positioned for sustainable long term growth.
She'll do a hallmark DNA of resiliency, we are taking every action to quickly drive returning traffic to our stores.
Providing cooper.
Great value and good customized doing going forward.
We'll continue to delight, our customer and seek new opportunities to grow our business in China with that I'll turn the call over to Andy Andy.
Yes.
Thank you, Joe and Hello, everyone, Let me share some color on our second quarter performance.
The current situation has significantly impacted our second quarter results.
In April and May same store sales declined by more than 20% year over year.
On average more than 2500 store were temporarily closed all providing only limited services.
The situation gradually improved in June .
We were able to capitalize on that improvement with same store sales declines narrowed to high single digit year over year.
And a number of temporary store closure also with us.
We achieved operating profit of $81 million.
And western margin of 12% from second quarter.
We were able to generate meaningful profit in the quarter, which exceeded our expectations.
Not only by capturing sales when the Covid situation improved in June , but also by taking swift and decisive actions.
We adjusted offers and promotions.
Spent tremendous efforts and driving productivity gains.
Secure onetime movies, and we base our cost structure.
Let me go through the financials and our cost control initiatives.
Unless noted otherwise all percentage changes before the effects of foreign exchange.
Foreign exchange had a negative impact of approximately 3% in the quarter.
Second quarter total revenue decreased 13% year over year.
In reported currency to $2 1 billion.
Due to the same store sales decline and temporary store closures.
This was partially offset by the contribution of new units.
And the consolidation of Hangzhou KFC.
System sales were down 16%.
Same store sales were 84% of high use level.
Hi, Brian KFC same store sales were 84% of high use level.
And the same source topic at 75%.
Ticket average grew 12% mainly due to the increase in delivery mix and higher ticket average of community purchasing orders.
Pizza Hut same store sales were 85% of prior year's level.
Same store traffic was at 80%.
While ticket average increased by 6%.
This was driven by the higher ticket.
Ticket average of community purchasing.
Restaurant margin was 12, 1%.
370 basis points compared to last year.
It was mainly due to significant deleveraging impact.
Significant sales.
Cost inflation and how you will recall.
To take actions, we have taken actions to mitigate the impact.
Let me go through each expense line and the actions we have taken.
Cost of sales was 39% almost flat year over year.
We took actions to reduce promotional activities and discounts.
To keep commodity price increased to low single digits.
And to optimize the distribution frequency the warehouse to store to in order to reduce cost.
Cost of labor.
Was 27, 1%.
290 basis points higher than last year.
Mainly due to sales deleveraging.
Wage inflation of 5% and more than likely wider cost, resulting from higher delivery mix.
This was partially offset by improved labor productivity as we simplify promotions and menu items.
Reduced operating hours if necessary.
Reduced hiring and scheduling our full time employee.
Occupancy and other was 29, 9%.
60 basis points higher than last year.
The modest increase was mainly attributable to sell deleveraging and wise can you to the prices.
Which was partially offset by our cost significant initiatives.
Over the past few years, we've spent considerable efforts to reduce the fixed components of our rental expenses.
Shifting more to wearable components.
These efforts continue to improve the flexibility of our operations.
In addition, we negotiate at meaningful rent relief from landlords.
Apart from that.
We pulled back on marketing and advertising and took on more energy saving initiatives.
G&A expenses increased 6% year over year, mainly due to increased compensation and benefit expenses as well as the consolidation of Hangzhou KFC.
This was partially offset by lower share based compensation expenses.
Operating profit was $81 million.
Net contribution from Hangzhou KFC consolidation was roughly 3% of operating profit in the quarter.
It includes the amortization of intangible assets acquired.
Which is roughly $60 million per quarter.
And that would want to end up this year.
Below the operating profit line, we incur a 60 million dollar mark to market net gains on our equity investment this quarter.
It was $9 million more than the same period last year.
The effective tax rate was 26, 5%.
170 basis points higher than last year, mainly.
Mainly due to Hangzhou, KFC consolidations and lower pretax income.
Prior to consolidations.
The equity income from JV was not subject to.
<unk>.
We saw them in lower tax rate.
The effective tax rate in the first half of this year was 34%.
We expect full year effective tax rate to be around low 30.
Net income was $83 million.
Diluted EPS was <unk> 20.
The Mark to market gain you may possibly impacted diluted EPS by forehead.
Despite the challenges in the second quarter, we returned $218 million to shareholders in cash dividends and share repurchases.
In total we returned passed a bill in U S dollars to shareholder.
Half of this year.
We will continue to execute on our disciplined and balanced capital allocation strategy.
As always.
Parties.
To have sufficient cash for daily operations.
To deal with contingencies.
And to invest in capital expenditures to drive organic growth.
Now, let us take a look at the third quarter outlook.
We saw some gradual improvement in restaurant traffic in June .
Still we remain cautious on same store sales.
The external environment remains very challenging given that we are incurring of COVID-19 outbreaks.
Weakening consumer sentiment.
Pressures and commodity price inflation.
In July .
The more infectious omnicom variance appear in Shanghai, Beijing and other cities.
Nationwide. The number of cases has increased again after two months of sequential decline.
Many cities, including Xi'an, Chengdu and Lanzhou F explained some kind of lockdown conditions following the dynamics here public policy.
Therefore, we expect sales to be tougher to take time.
To be non linear and uneven and potentially volatile.
Our focus is to drive sales recovery.
We are planning a variety of new product launches.
Market modeling.
Marketing promotion.
We are also working to ensure a quick volume for money to attract consumer spending.
In addition, our.
Our teams employ extensive scenario planning with regional focus to stay agile and just averaging to inbound.
We're delighted with the better than planned cost savings in the second quarter.
As we look into the third quarter, we are dialing back some of these austerity measures to sustain long term growth and operational excellence.
So example, reduce reduce promotions.
<unk> menu.
Shopping the store operating hours and when these are temporary.
In addition.
Deleveraging impact is real.
We'll continue to impact our margins.
Also we continue to face headwinds from the inflationary environment.
Prices of commodity such as cooking oil and beef as well as Q2 lease has weakened significantly this year.
On the labor side, we expect labor inflation to soften.
Given given the economic pressure however.
However, the increase mix of delivery sales likely increase why would it cost.
Oh sure.
Yeah.
Despite challenges, we face our expansion strategy position us well for long term growth.
In the second quarter.
Well store openings in response to the Covid outbreaks, yes, we remain committed to open good afternoon stall that with growth for years to come.
Over the past few years, we have been innovating stall models to cater to different business needs like delivery and takeaway services to enhance start Fcs and high tier cities and to expand into lower tier cities.
This year, we expect more than half of our new store to be in smaller formats.
We lower upfront investment and streamline restaurant operations to be more efficient.
The smaller format together with our reputations.
A LIBOR tenants opened up more potential sites for new store openings.
Our new style remain healthy.
The latest batch of new staff, you saw payback of two years at KFC and three at Pizza hut.
The majority of store opened in the first quarter of this year were able to achieve breakeven in three months.
The healthy payback periods reflect our disciplined approach to store openings.
We issued by a strong pipeline and healthy new Salt performance, we maintained a target of one thousands to Charles.
Net new stores for this year.
In the near term, we continue to expect volatility in our business due to the resurgence of Covid outbreaks solved.
Softening economic conditions and the impact on consumer sentiment.
Nevertheless, we continue to focus on the elements of business that we can't control.
As demonstrated in the past two and half years, we are confident that our people our execution and our strategy positions us well to deal with this very challenging environment.
Got it and others.
Also our investment in new store supply chain, and digital will bring global growth opportunity and make us even more soon.
With that I will pass you back to Michelle to start the Q&A Michel.
Thank you Andy we'll now open the call for questions in order to give more people the chance to ask questions. Please limit your questions to one at a time Melanie please start the Q&A.
Thank you if you wish to ask a question. Please press star one on your telephone and wait for your name to be announced if you wish to cancel your request. Please press star two if.
You're on a speakerphone please pick up the handset to ask your question. Your first question comes from Lillian Lou with Morgan Stanley . Please go ahead.
Thank you thanks, a lot Joey and Andy and also congratulation to very solid results. My question is on the margin side, because obviously I think all every cost line, what's controlled much better than our expectation just won the when I understand with business.
Gradually re open, especially more stores or El pen and they're running at a normal ours how.
How do we see these cost lines on the trend what are some of the it because I think a N D until you might shed some of our really relatively temporary measures for cost savings. So wanted to understand with same store sales growth continued to be negative how weak on the project. This I would say.
Cause changes, especially on the margin side on the year on year basis. Thank you.
Thank you.
So let me.
Answer your question.
I think it's justified as mentioned.
The second quarter margins and profit.
It exceeded our expectations.
And I think they all possible I think it's first of all is that.
All thanks to the very incredible effort.
And we feel and dedication of our team, especially.
Restaurant employees, who did everything humanly possible and doing.
A lot of hardships.
Sure.
The pandemic.
To continue to serve customers' needs and keeping our store openings.
Running as normal as possible.
So I think both of those efforts.
The <unk> FY <unk>.
Is it possible to MSR.
Stable basis.
In terms of.
Obviously the outperformance.
<unk>.
The improvement.
In June and come off the Covid situation.
Our ability to actually capitalize on the improvement and so as we mentioned same store sales.
Decline narrowed to two.
To high single digits in June .
But in term of snow in term of cost fund you mentioned already some of these more initially.
Initiative.
Temporary.
So for example, you know like we have cut back quite significantly.
Marketing promotional at two P M.
I think what we tried to drive sales I can stop there.
We also mentioned that you know.
Some of them.
Managing the inflation cost inflation.
And so as the first quarter was phenomenal.
But I think if you look at the commodity price.
You know.
The elevated level and we expect that to continue to creep up.
Labor I think obviously, we have simplified menus items, that's shopping with some pumping hours during the second quarter and then we also reduced hiring.
And so some of this is going to have to pay it back.
Especially when you.
So I'll try to return to a more normal operations. So we will have more normal.
A menu and normal operating hours.
In term of you know again like going back to your own.
We do that but I think spending would have.
We'll be payback.
Retrenching more.
Our proactive advertising to drive.
Got it.
And then we have some we mentioned also to dealt with.
One off.
When you come off lease.
And goffman disease, and so some of these government year to cover some of these numbers and so we have about roughly close to $20 million of that quarter and when.
I'm quite excited about.
If we can receive.
In the third quarter, so so I think.
When looking to the third quarter as I mentioned, the key things, obviously yourselves right south in revenues wheel.
As we see the Covid remains one of the biggest uncertainty going forward.
And we see some.
Resurgence in cases.
July nationwide and then we see some cities for example, shingo.
And also.
John .
Some.
Lockdown measures and so solutions.
So.
That's why we say we can.
As we have that with me.
They take time will be no anemia, and catastrophe bond title.
Now obviously, we will continue to.
Set up like focus on cost control.
Do you have planning.
This statement, but I think we need to be we would think about.
Okay.
Uncertainty that we face.
And then.
The sales deleveraging and also globally that inflationary pressure there.
Thank you Brian .
I just want to.
Some color about the numbers behind this number let's say pick C O L.
Some of the savings will not continue with some of it will continue.
So those will continue as such as <unk>.
The sharing of staff across the store.
Some of it will not continue.
Such as the extreme situation.
During April .
<unk> and <unk>.
<unk>.
And that's all for me.
B.
These stores are run by very feel number at all.
Employees.
Typically they they stay in itself a one week, they literally less than a sofa and what myself.
And then are we at the second shift.
Stuff moving however.
Monitoring the most extreme case is.
One of my stuff. They therefore 33 day, otherwise stay there for 44 days.
You know I had the fortune to invite some of them to have lunch with me reason to defend them.
You know, it's truly heartwarming behind at number.
Who are really grateful that we have such amazing operation team. They worked this hard so that they can protect their jobs and they can serve the customer and that they can protect the company.
But that's kind of extreme arrangement of course cannot be sustainable, but if we have gone this far.
The innovation and creative arrangement.
Our teams become even more open minded to embrace any sort of innovation.
In terms of a rebase the cost structure. Thank you Lydia.
Okay.
Okay.
Thank you.
Your next question comes from Mike Michelle Chen with Goldman Sachs. Please go ahead.
Oh, Hi, Joey Andy Thanks for taking my question.
Think about the incremental Opex, we're lucky we absorbed about doing a top high.
So you mentioned that some of new business, we are driving in the company that you could purchase on top of that our retail part of our selling pretty well do we have a tough time. So are we going to be more aggressive.
These are new business lines and you know if you answered that from the the way we do that business. I told you earlier, you mentioned that we have dis ops AI in April with the route to improve therapy anybody efficiency et cetera. So.
Just wondering back on those opportunity we are plugged into the top half how we should think about all the other stuff.
And ability on how we are going to qualities opportunities going forward.
Thank you.
Thank you Michelle.
Let me take a step back and then I'll comment on your question about the incremental opportunity.
Overall quota to deliver substantial operating profit versus expected loss.
Total number is not the highest quarter video it is a million, but my boy, but my God the quality the amount of asphalt go into it and and and the resiliency. Our team has demonstrated is phenomenal and we can see the result, you know it was tough may improve a little bit Q&A.
Kim came back quite a bit.
The core of the core of the question that you just asked what do we do.
How do we manage to do it well I mean.
It would go back to al.
So T J framework, which.
Hopefully make it much easier for four key stakeholders, who understand the management team is still it's going back up again.
The resiliency to growth and the moat in terms of resiliency.
The two examples that you mentioned Michele.
New retail community purchasing and.
He is a great example, about resiliency.
We will get very very quickly.
We are talking about.
Putting together the commodity purchase program, starting with a hotline and later on with the mini programs have helped to shape.
Within a week across the brand.
And we got the entire call.
The team program.
Middle of March.
And then we roll it out.
And wait for two or three days and then the demand came in.
And that's the that's the kind of speed agility and determination of its ability to execute innovative solution that.
And as the resiliency and thus the result.
The tango the commodity purchase habits.
And then when they happen.
Of course, we are selling what we can sell at that time, we can split chicken, but that's not enough.
Because of all kinds of limitation.
And also at home consumption and London.
<unk>.
Increased dramatically so we're putting a new retail the package food.
And at the at the height of the new retail Pizza hut.
I believe its maybe 50% of the pizza herself in Shanghai is from them in retail.
Well now time has mobile.
Laid off by June it became 20% and then now the percentage smaller.
But to go back to your question Michelle.
Double the new retail business to during the fourth quarter, two compared to two loss a year on year last year.
And for first half of the year.
Uh huh.
Andy This is amin number $450 million.
So.
For new retail and now you can do the math is that to start to see some decent number and for the entire year. This year 2022, we're looking at reaching the 1 billion sales for new retail alone.
China, if you will.
Bad debts as too many other in the retail segment. This is not small.
There's a small percentage compared to your own kind of business, but as our new retail business alone, it's not and it's a wonderful complement to our business because you can't we can't imagine that we have our scale in terms of supply chain, we have our.
Network of distribution, which is out.
Those 12000 store and online.
Channel that are a little brands. So far has started 2018 and we have all riders to deliver these new retail customer directly without incremental delivery cost charged to the customer. So this will continue a very good complement to our business and EMA emerging.
Brands achieve.
Achieve breakthrough.
With the new lethal about the Taco Bell leadership, I mean doing me again.
Again sales exceed pre lockdown level because of the package product they have been trying to put.
Put together, we think there is real time.
And then the next thing to talk about mentioned the AI digital a lot of surprising et cetera.
That's the absolute right thing for us to do and we have been doing that for 35 years. We are one of the one one of the few if not the only one at our scale, we have dedicated supply chain paid in may.
So that we can continue and keep the processing logistics going even during quarter two of such difficult time and now we are building our Greenfield logistic center.
Yes.
Digitize and AI enabled supply chain to provide us Michelle.
Mitchell.
The image and the visibility of the supply chain process.
That traceability of upstream so that we can move things around and we can be.
Is very efficient in terms of code.
Of doing business.
So these incremental opportunity. We're certainly continue therefore, despite such difficult quarter. The morale is that.
Ever.
Because as a 450000 people company we work so well together is occasionally ability agility is talking to him on the team is very proud of that we protect the business per pet that jobs. We look at every single cost opportunity possible. It's Beth.
Except.
The promise and the San for security that we are not doing any layoff for stuff for 2022. So I'll stop now that the jobs are protected and Oh and doing everything we could possibly to protect the customer and to protect the shareholders.
Our policy of Michelle.
I can tell you that's very clear thank you.
Thank you.
Your next question comes from Brian Wang with CMS. Please go ahead.
Hi, Hum so basically asking one question, so I would like to listen to people and Theres times remember Ryan would you.
Would you mind speaking up a little bit we have very difficult time hearing you Brian .
Hello Rocher. Thank you.
Can you give me though.
Yes sure. Thank you so yeah sure. Thank you so basically Iraq towards as probably you know your macro thoughts on.
The increase you know how do you plan to increase your number of stores do you fucking off savings on the Holdco break them down by then by default Brunch. Safety example, you know like so like you upon if you're increasing your store colleagues in KFC and also.
Pizza hut on the will there be a breakdown by tier of cities.
That's my question. Thank you so much.
Yeah.
Hi, Brian .
So Paul.
New store opening.
<unk>.
As he mentions we that's always deploy a disciplined.
Parsons.
Different methodologies to evaluate all opening unusually.
It's a bottom up from the markets, where they proposed focused site.
You want to know how to model. It went through the committees to think about that how should we turn to specific indications.
Overall market conditions.
To approve those.
The site.
So I think.
I don't think there is any change to that causes.
And so.
So in terms of like by brand.
Because cassis.
These continue to be obviously, the largest brand within our portfolio.
We will continue likely to be to account for the majority of.
The new store openings.
Yes.
As you can see the installed new store performance also we'll think good, especially with new satellites at all and you have seen some other store opening accelerated now.
Last year in D C as well so I think you can also expect that.
In terms of you know our.
Other brands I think we can expect coffee for example, a passer.
We continue to also talk about you.
Spend.
<unk>.
In second half.
Although there.
A smaller portfolio of store.
Percentage wise, it will be big but the absolute numbers are small.
And then in her Chinese cruising business, there's some cyclicality to it.
The opening there they opened by franchisees so.
China leader will be most all opening before the Chinese new year for example, so there's potentially more but again like this year.
Because the COVID-19 situation.
It's a little bit more challenging for restaurant operator.
And so our franchisee so we will continue to monitor the situations in the market.
Especially given Chinese synthesis, apart and still purposes.
Concentrated in.
Northern pothole lowest in panels.
China.
We'll have to see how to close between walnuts.
But that's like by brand and geography.
<unk> here.
Yes.
<unk>.
<unk> seen over the past couple years.
We have beginning to see more opportunities in both <unk> and your other concentrations.
Concentrations are a number of new store opening in loyalty Cds have now account for the majority of this fall open now obviously, we continue to see opportunity to increase the densities of our store network in tier one tier two cities.
And I think Thats the general trend I think that trend will continue so.
That's how we generally look at install opening again like this year, we have a target of about 1002 trials under that new store.
And as we mentioned given the strong pipelines that we have and also given the strong economics and we have seen in our new store to have opened over the past couple of years in Boston recently.
We're pretty close in that.
We will have good opportunity to open more good hospitals that can you help us quantify for us over the long term.
Thank you Brian most of it. Thank you so much.
Sure. Thank you Andy So I think there's a very clear so actually I have one more question. So on the commentary on the competitive landscape. So because I heard that you know your tier two or tier three cities, London zero, So I'm kind of low priced peers similar to KFC. So they all kind of like the Chinese version, you know I'm, a cheap version save someone lifestyle I sure.
So how do you think you know your your shrubs compared to them because I have seen demand new you know.
It's actually quite cheap so how do you plan to compete in these alerts tier cities.
Right.
I think we are.
No.
Well, it's because the competition.
Both in <unk> and the high tier cities and so.
We think the best thing that we can do I used not to be just being shipped but we won't focus on having a quick module for consumer.
While it does not mean cheap.
Although oil price.
What it means.
Good.
Quick volumes could price to consumer and so.
That they can enjoy it we have a fantastic Brian how customer very loyal to our brands, we have great quality of products delicious food.
Are we comfortable funding environment.
The personal lines.
Brand identity.
As we mentioned if you look at doing the downtick in the lockdown.
For example.
I think by some indications KFC.
<unk> fried chicken was multifaceted.
During that period of time.
I think our brand resonates very well in consumer.
Food and culture in the way you can see as Joey mentioned each brand continue to innovate with new products.
Great fun to shoot for consumer.
And we continue to do a quick modules.
You mentioned one of the reason why we focus so much on cost control policy in.
In order to compete.
New propositions most important thing is to have a.
Cost structure advantage and that's what we're trying to do with a quick one on the consumer.
To be sure.
To be more specific at least in three ways.
We will do it slightly differently in lower tier cities compared to tier one cities, while we have slightly different menu.
The project and we felt that we could have again to eat something like that which is targeting for lower tier cities and starwood when Mike sorry in other top tier city laid off but we do have some slightly different menu and the pricing is differential.
So we incorporate that and then also promotion we gave we gave up our store manager a flexibility to run certain promotion that's the suddenly the different model. So Andy mentioned last night, yes.
The cost of setting up these stores in lower tier cities could be slightly lower and we have done so.
A different way of doing it so the operating model the kitchen blah blah blah will be slightly different.
We are very very focused on children in lower tier city, which is something very very unique to us in the last the last 35 years.
Given example in northern part of China, which is the most difficult.
Part of our business even.
Even in the light.
You know the last.
Two or three years, despite the impact of the pandemic.
In eastern part of China, Northern part of China that this is still the more challenging one.
This summer alone we have run more than 10000 children summer event.
So a manageable organized events market during the summer.
So.
You can you can.
You can see we do have a different type of a model of course.
And this opportunity to remind our analysts the other lower tier city, we have so many different business model catering and <unk>.
Customized for slightly different customer groups in different regions and different consumption occasions, like a transportation hub highway stations.
And University.
These days.
Yes.
Okay I'll pause here, let's move on to next question.
Thank you.
A reminder to please limit your questions to one per person.
Question comes from via poll away with Citi. Please go ahead.
Good morning, Julian Andy I, Couldnt Gratulation spud another resilient quarterly result.
I think in the past few years Yum, China have sure great.
T off of being defensive about it being defensive.
<unk>.
Hi, Julien Operation also means that you can switch back to offensive mode when opportunity arises.
China reopening continues which I presume you share the same view how could you be a CMC begins operation.
Do we have touch base on the new brands, new reach opportunity etcetera, but if we'd let me pick up all of the cooperation of our KFC Pizza hut in the.
Reopening scenario, how would you do differently versus the pre COVID-19 kind of accretion with what you learned either bad last one I'll call as in the past two years. Thank you.
Thank you Paul.
Let me share.
Sure Mike.
Uh huh.
<unk>.
Indeed.
The business has become more agile, we just looked at the number for quarter two.
So it's.
It's 80 84.
And they must about systems out so 16% on a however, we still deliver 4% profit. So technically you know.
We reduced our breakeven point through to about 80% and roughly our business is it.
I guess pretty normal to have the breakeven point is about.
<unk> eight is.
So our ability clearly due to some of the <unk>.
<unk>.
It is phenomenal it gave us the <unk>.
<unk> two.
Two things.
Going forward.
I think you know full quota tool you can you can see them well.
<unk>.
Our fundamentals are intact and when things are a bit more stable, even though COVID-19 situation is that it's relatively a stable way.
We're able to bounce back rather quickly.
That's what we can see even for quarter two.
So we hope adult for quarter three.
As Andy mentioned, there's still a lot of uncertainty right.
Right now the Orlando.
In challenging situations.
But in the long term, we are optimistic and we are still very committed to this market and that we're still growing the store, but when things become better how can we grow faster.
If that's your question.
Strategy is if there is not going to be any different from what we have share I think 2019 is oh Gee am is the resiliency of growth and that's why I think it more when we started it faster, but the strategy of this thing.
You know it might be a bit difficult to say that in the last few years, but right now I think we.
We can we can see that sometimes that sometimes resiliency is even more important than growth.
We have the resiliency and we'll continue that.
With our with our digital capability with our product innovator product with our great value for money with our ability to control costs.
And then we'll grow more stores and the growth here come from KFC Pizza hut and other emerging brands.
We will continue to do well we are very good at opening its doors and also increasing the south from off premise.
Okay.
You can see a number right now all off premise sales is about 65 example, Kathy and 55% for Pizza hut.
All these numbers move quite a bit in the last few years.
And that gave us both a profound ability because without this high percentage of off premise sales.
We won't be able to deliver the number that we deliver.
And the last.
And the last two and a half years.
So the growth will continue and that will continue to build starts you can look at.
You know.
On daily basis firm and steady.
So the supply chain will continue with 33 Logistics Center right now will continue to build more Greenfield logistics center will continue to invest in our automation.
From the front all the way through that that will continue to work on our sustainability commitment to science based.
Forget that we have connector.
So so I.
I hope that gives you a sense that the direction of Korea, we might pick up a bit faster whenever we could.
But nathan steady.
Thank you.
Yeah.
Thank you.
Your next question comes from C. G line with the C. I C. C. Please go ahead.
Thank you Joanne Andy Ah Congrats again for such a strong and resilient performance I have one follow up question on the margin side. So I'll wear shoes of every resilient restaurant margin in Q2 for the extraordinary effort of Dropdowns as some onetime relief and Meanwhile, and dementia badly in the future we are.
Then I'm back from Australia called commercial measures to sustain long term growth. So how shall we expect our restaurant margin the long term under the new normal where this there'd be like around 17% target. Thank you.
Thank you.
So.
As we talk a little bit of a short term volatility as we mentioned.
Second quarter, some from some of these cost savings initiatives.
All efforts.
Some of these more temporary in nature.
And then in the short term the biggest driver for restaurant module right now.
Sales leverage and deleveraging.
Two quick extend it.
Dependent on public situations.
But in terms of longer term I think.
I think.
Those obviously chocolate loans continue to be tried.
Our growth on the top line and also we turned to profit until more normal level.
As we have mentioned in last years.
Good day.
Longer term goals, we need to drive.
So it's close by.
High single digits and should drive.
Let me close by high single digit too and so.
So I think those in parallel this one was trying to achieve.
Long term.
One thing I think.
It appears the crushing was saying.
In the new normal and things return to normal.
Huntington's in saw.
Capturing that opportunity both in cells and also potentially in margin.
I always feel like although histories.
Always.
We can tell the future, but he's probably the best particularly around future and show us some lessons if you take a look at.
Yes.
Period full year period between.
The third quarter.
2020 in the second quarter 2021.
Glenn will situation was relatively more stable.
You will see that we were able to drive sales growth.
We were able to see significant margin improvement.
And Thats Thats going back to what Joe you have.
Emphasize loans, we see Lindsay and also.
In terms of our excellent execution.
So alpha Gal Plannings help us to design our operations.
In case things get worse, but also in case things get better how we can capitalize on the opportunity and drive sales growth and then drive sales and margin recovery. So hopefully that gives you some perspective in terms of how we look at the shorter term and also the longer term.
And perspective.
Thank you.
Your next question comes from and Lynn with Jefferies. Please go ahead.
Great. Thank you.
Instrument team. Thank you for taking my call.
Question first on the coffee business I know it so far.
Very small at this stage.
But at the same time I understand that I know this will be one of our potential growth driver.
Moving forward.
More like a long time and if I look at like you know on the your store opening plan versus the peers it seems that.
It's still a little bit slower.
So maybe it would.
Well it sounds like your pace of.
The coffee.
<unk> rollout.
We.
Or are we still in the process of testing our model or we already like you will find the right models ROE it rolled it out and once we rolled it out normally this is the type of business.
We need to go with back end support.
Meaning that if we have to understand as.
Possibly you might have to invest.
Investment.
Unusually.
So, but I don't think any of us to go after another.
And the investment in our in our model. So just wanted to check right.
The company if management can share with us that you know some of your initial plan or what will be the investments in our protocols business that would be great. Thanks.
And thank you for your questions.
So I think first of all I think.
We were very pleased to see the progress.
And your progress may not be seeing how they measured by in our company remains in Russia by.
Hundreds of small things in the quarter and whatnot.
We have mentioned.
All investments, including our store network expansion.
Any other investments is affected to impulses, Hello, although no LIFO, the newer brands like coffee and Youre getting a pad and we expect them to the hospital.
<unk> short term thinking.
As we continue to expect that they will figure out the right business model before we scale up because otherwise youre going to scale, a big pop right. So the way so far we're very pleased with that.
All vessels all installed network right now we don't have expanded quite significantly.
Last year.
We have seven people store.
No.
And for tier one cities and plus.
Since you see these as well.
In Europe wholesale we have more than doubled.
Year over year, and then even in very challenging time as Jimmy mentioned the team has been very tremendous chopping satellite.
Putting together a package.
Our products to sell in the retail channel.
China.
Okay.
Almost better than.
Last year. It seems like there is lots of room in a very small nimble staff mainly in Shanghai.
In terms of your customer base right now and we'll continue to see called customer loyalty.
You look at remember right now.
Members of the buffet have Quinn.
Year over year.
And then.
<unk> contributions continue to grow.
And number now.
So.
Obviously, the coffee business this new Brian .
<unk> has also been impacted significantly by Covid.
Bill I'll, Washington August all on top of that.
Hi.
Laughter and so soon as impacted by unit as I mentioned, they were able to quickly pivot into commodity type of thing.
Packaged coffee.
Products like pastry and whatnot.
And this product really how do we help us in Salt Lake.
US reach to a bigger audience all.
Separately, we historically have not case, our partner AT&T two with two community purchasing.
We have initiatives.
Now obviously.
We cannot say, we havent seen all figure out.
Patrick model I think if you would take somewhat to saw streamline the restaurant operation there to strengthen some of the supplemental.
And no.
While for Jeff.
<unk> EBITDA to figure out the right both on that and until this product menus.
And they're also improving efficiency I think we issued students to be a little bit more patient with that.
So yes.
Yes, so I think.
We are happy with the progress so far but still a lot more work to do but nevertheless, the covenants and it's very important.
Political slides and we have a big call.
Our partnership with the possibility that may.
In the coming years. Thank you.
Okay.
Thank you. Your next question comes from Christine Peng with UBS.
Go ahead.
Hum.
Hi management. Thank you for taking my call taking my question.
I actually have a similar question, which I'm sure some of the analysts like a shovel and and have asked previously, but I just want to.
Ask management, providing some updates about the new initiatives that you've previously mentioned.
As we are looking for a post COVID-19 full recovery in China, possibly in 2023, So I think the two key initiatives management pretty decent my shot one.
The integration of <unk> and leadership can you provide us more updates as regards to this initiative.
And in relation to that maybe can you provide us more updates in terms of your.
Maybe 2023 plan in terms of the extent of the Chinese cuisine.
Business I know that business has been struggling with COVID-19 in the past few years back when we think about 2023 what are your initial thinking.
Thinking behind the store expansion.
Pam.
Is that true. So I think that's our first initiative I want to check out in the second initiative is regarding.
You know introducing more franchise stores.
Stores is this something you know management is thinking right now given that management.
I remember previously you mentioned about your initiative to emphasize the supply chain resiliency to provide a more possibility of franchisees. So I just want to check out.
What are the Ah think ladies for thinking behind those long term initiatives, we have going into 2023. Thank you.
Hi, Christine.
So let me try to answer go ahead JJ you want to go ahead.
No. No go ahead go ahead go ahead.
Okay.
So yes, so far once you all and we'll shift that you mentioned, obviously you have been impacted by the outbreak.
Because it is tight in nature, and then a lot of locations in north North Western.
Western part of China.
I think obviously the main priorities for them is really to chart two.
So our sales recovery.
And then also have the franchisees to strengthen the operations.
Particularly in the <unk> business. So in the sense that historically have not been having.
A big part of the business and delivery. So I think this is something that we can help.
<unk> because of our powerful.
They will ship also.
During the pandemic also being quite creative and innovative.
Pretty good progress improving goods and services and then also.
The overall cost management.
Especially in Shanghai in June the Lockdown, they were able to.
Salt Lake.
Capturing lots of opportunities in both Q3 and also a completely because of things we would hope so I think the polypore Chinese cruising business initiatives.
Tried to drive sales recovery.
<unk>.
Two one surfaces.
And then also something to work on the fundamentals and the integrations.
So Joe you do once you comment on the franchise questions.
Christine could you still will continue to be the.
Driving force for our business going forward. However, we do have the clarify.
<unk> franchise strategy. So right now you know in in Montana.
Hello, London in Montana.
Like like.
Uh huh.
Tibet or too high.
These are very good franchisee, Montana and then also for some emerging.
Business, New business models, such as the stores along the highway stations.
<unk> established strategic partnership already.
To show.
So the franchising strategy.
Not only big general it will have his own strategic purpose and.
Given the time today I think I'll just pause here.
We'll have more detail exchange.
Oh, okay.
Okay. Thank you.
Thank you.
Our next question comes from Lucy Yu with Bank of America. Please go ahead.
Okay.
Oh, Hi, Joey Hi, Andy. Thank you for taking my question. My question is more on the GP margin side. So how should we think about the promotion and discounting plan in the second half.
Especially we are fighting against commodity highways and the Covid uncertainty.
While at the same time, we were trying to stimulate.
Similar to self so how should we think about the promotion and discounting in second half. Thank you.
Thank you Lindsay.
You mentioned as you know in the set.
Quarter, obviously, we saw a cut back on marketing and also in promotional activities.
And then as we move into the <unk>.
Can have in the third quarter.
With the concession improve.
A bit.
Even though we have some volatility.
The key focus for us is going to be driving sales recovery and.
So we like you can see their marketing and promotional activities there.
And then also you'll have more budget campaign launch how many campaign because as you mentioned consumer sentiment is relatively weak because of the prolonged click situations and then some of these.
Macroeconomic pressure and so some value for money is very important.
That's how we see second half this year, but as always we are always trying to be very cautious about using price increase.
Increase to sort of like two to offset inflationary pressures.
You always try to first ask it's a way for us to run our business better and lower the cost before we say right when we had to increase prices.
Increased price annually.
More months Officialese below the inflation rate.
Thank you Lindsay.
Thank you Andy.
Okay.
Thank you. Our final question today is from Walter <unk> with C. M. B International. Please go ahead.
Hi, Hello, Andy and Joey Congratulations for your highly resilient without.
My question was on spine.
Apparently so perhaps I can answer about the member's house.
So while the number of members.
Continued to grow very healthily, but it seems the member sounds as percentage of total system sales has declined year on year. So do.
Do you mind, explaining the reason behind and it's not a concern for you guys and how do you see the brokerage.
And your strategy over the members and members house going forward. Thank you.
Yeah.
Really quick works.
Sure.
The name itself is around 60% is it's not a concern for us because their total members that they are still growing which is.
Very nicely actually I mean, our I'll remember cells are used to in the 55 million roughly for KFC and then and then 115 million for Pizza hut.
And when it comes to members and nonmembers, So remember sell 60 some percent.
At a high enough.
Next the next target for us is to other.
Other than quantity is to work on the quality the stickiness of the member the overall experience of them remember et cetera et cetera. So.
I guess.
Cannot just increased tremendous out forever.
It does not.
It does not make much strategic sense for us is quantity and quality.
But it is a very very important pas business and that is.
So much that we can do to improve until you get something all of it but just to give it out but what about the cross brand house.
Okay. So in Pizza hut, how can we how can we do.
Do better and how can we sort of the.
The same customer better with testing people got a little sheep and et cetera.
So a lot to do here, but our focus is.
It's more on the quality of life for now thank you Melissa.
Thank you Jody.
Just a little bit follow up so if the members and growth is still very healthy and the members that was mix has declined. So is that means we have more new customers are being affected in the second quarter or in the past about a few.
A few months.
Do you see that a trend we have more new customers.
Hum.
Yeah.
I mean.
The China.
Malaysia, Oh, yeah, yeah.
Yes, So I think as Jerry mentioned, we haven't really lost measured pace, we're already halfway to $280 million remember <unk> completion of an area or <unk>.
The other part of this is that this is always it's not always hired a member sales percentage of Memphis that was better but you will have 100% member sales that means how you have no new customers. So there's always a balance between.
Member sales and and and the new members and so so that will be some fluctuations from time to time, depending on the marketing campaigns and depend on.
My condition, but I think at 67% with a healthy level and so.
And then in terms of you know for US. We are still you mentioned, which is how do you drive that quality of member self driving car cells.
All of our customers.
And then continue to increase their stickiness and frequency.
Although the long term so that's the.
The payback for our marketing and new customer recruitment Committee.
So those are the number of matrix I think memory sales.
One of them is not.
The higher the better.
Thank you.
Okay understood. Thank you.
Thank you. Thank you. Thank you.
Thank you that concludes the call today, and we look forward to speaking with you on the next earnings call have a great day.
Thank you.
Yes.
That does conclude our conference for today. Thank you for participating you may now disconnect.