Q3 2022 Yum China Holdings Inc Earnings Call

November 2, 2022

Thank you for standing by and welcome to the Yum, China's third coals that we need 22 earnings conference call.

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 MS. Michelle Sheehan director of Investor Relations. Please go ahead.

Thank you Ashley and Hello, everyone and thank you for joining Yum, China's third quarter 2022 earnings conference call on today's call are all C O Ms Joey Wat and our CFO Mr. <unk> we.

We are dialing in from different locations today, if we experience any technical difficulties during the call. Please remain on the line as we reconnect.

Before we get started I'd like to remind you that our earnings call and investor materials contain forward looking statements, which are subject to future events and I'm sorry.

Actual results may differ materially from these forward looking statements.

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

This call also include certain non-GAAP financial measures you should carefully consider the comparable GAAP measures.

Reconciliation of non-GAAP and GAAP measures is included in our earnings release.

Today's call includes three sections. So he will provide an update regarding our performance in the third quarter. Andy will then cover the financial performance and outlook in greater detail. Finally, we'll open the call to questions. You can find the webcast of this call and a powerpoint presentation, which contains operational and financial.

Inflammation.

On our IR website.

Also on the site, we can't find the video we prepared that's why that showcases our latest stores offers and activities now I would like to turn the call over to MS. Joey Wat CEO of Yum, China Joey.

Thank you Michelle.

Hello, everyone and thank you for joining us today.

We achieved outstanding performance in the third quarter with fantastic growth.

Topline and Bottomline.

This demonstrate.

The ability to upgrade.

Certain environments by learning adapting and screen funding.

Fundamentals.

During tougher times.

Our resilient business model and agility.

Manage their negative impact.

It's called the condition well relatively comma the July and August .

Okay.

We kept our sales opportunity during the peak summer season.

Since themselves recovered with 5% year over year growth.

Operating profit.

77% year over year to $316 million.

You know higher than 2019 level.

Great Tim what make this possible.

He element in our winning formula include our in house on pay to make supply chain Indus.

Industry, leading digital and delivery capabilities cost restructuring and solid execution.

That's the most of the KFC and Pizza hut, we have been innovating new products to satisfy customers craving.

In the past two years, we have established a strong presence in new categories, such as beef yoga.

Oh chicken and Julian Pizza.

This was enabled by our powerful supply chain by securing supply scale streamlining production and optimizing cost let me share our success stories.

I can't see it.

Extra juicy beef burgers rapidly capture meaningful market share.

Since adding them to the permanent menu in May 2021, we have sold over 100 million. So good.

That's about five feet burgers every second.

For the full year, we expect to generate close to two 2 billion in south from beef burgers.

We cater to Chinese paid by making the petty Super Juicy using our specialty oven.

Customers Love, our burgers, while theyre, great pace and value for money.

We saw the wahoo beef loans young millennial locally from no eastern China and have signed a multiyear contract to secure prime and subprime.

Oh Juicy whole chicken.

That's awesome quickly gained popularity since its launch late last year.

Yesterday, we have so over 18 million whole chicken.

Oh chicken is another type product good for both timing and take home consumption will use a different breed smaller chicken would then of course that is the perfect size for an individual meal.

And particularly juicy.

Good for sharing on the dining table at home as well.

At Pizza hut.

You ran pizza has become a customer favorite in pet during Q3 as promotion every for pizza. We so once that you ran pizza.

Our limited time, Julian trio Pizza, when Michelle Corral, Julien something with three types of DRAM was especially popular with Korean Love Us.

Customers are increasingly valuable cautious, yes, we do not compromise on quality.

Last quarter, we ship about has been wildly popular Crazy Thursday campaign for one thing he said since.

Since 2018, we have been offering delicious food, including the latest innovation at amazing value. The campaign continues to be a phenomenal event generating a significant boost in south every Thursday.

Customer create witty and playful social media content using the crazy Thursday team many of them. He's postings has gone viral creating huge high right.

Now to drive weekend traffic for families and kids, we have introduced a Sunday buy more save more solar phone clumping campaign in July .

Customers can get a bigger discount when they buy more up to 50% off for iphones.

This new promotion so far has been wonderful momentum was good value perception, while protecting our ticker average apart from abundant value.

Also launch a golden Spa chicken breast program funding spot Hi, Bob This is.

So first the basketball chicken breast.

Okay.

We add that extra step in the preparation process to make the breast meat Super Juicy and tender.

This entry price Burger widens our choices for customer.

A great product for lower tier cities.

We've tried to keep our brand appealing to youthful customers.

In September we transformed Celeste pizza hut stores into a social hub for gamers.

Partnering with the popular RPG game Jensen impact Jensen with that great stores.

I'll speak at restaurant crews and offered exclusive kits.

The campaign generated extra ordinary social but in just three minutes, we still over 300000 themed combo meals.

And our Super App recorded its highest activity ever.

I'm looking forward to more successful event with the punish it.

Let's move to digital and delivery.

Have been enhancing our delivery and digital ecosystem to make our business fundamentally stronger.

Customers Love convenience.

<unk> sales are growing fast.

Empowered by our dedicated delivery rider and leading digital capabilities delivery grew 19% year over year and reached 38% south mixed in quarter three.

Together with takeaway off premise sales were over 60%.

Our ability to capture off premise demand not only enable us to profitably serve customer, but also cushion store closure impact due to COVID-19.

<unk>.

This 60% off Prem itself is so fundamental to our business model because it really puts our time in both sales and profit.

Right.

Fluid situation.

We have been messing rising delivery coverage and flexibility using AI technology.

Recently, we launched the smart delivery punching ghansham too.

To dynamically adjust delivery coverage for each store by Paypal, taking into account the operating hours of nearby stores.

Great system helped us serve more customers more efficiency.

Our digital capabilities serve as key touch points with customers.

In quarter three we reached.

Two milestones in our digital ecosystem, one our loyalty program reached 400 million members.

And two cumulatively since 2006, 2018 can see still over 100 million privilege subscriptions.

Privilege subscriptions of the great value for money and have been an effective tool in driving frequency and spending.

Our digital capabilities.

So crucial to streamlining restaurant efficiency.

Digital orders optimized in store labor efficiency and accounts for more than 90% of sales in the quarter.

Pizza hut table side mobile ordering sales have grown exponentially from just 2% of its launch in 2018, 45% in quarter three 2022.

<unk> mitigate rising wage inflation and freezer crew members to enhance customer service.

To improve digital experience, we introduced intelligent or the sequencing I can't see tremendous inbound Yahoo in a third quarter.

The system automatically arrangements ordered through short term customer wait times.

Now, let's move on to coffee.

Our third growth engine.

Baxter is making solid progress along is clear four pillar strategy.

Pillars include Ramsey with a menu upgrades expand digital and delivery capabilities and thought the vitamins.

Here's how we built these out Brendan.

Branding Lavazza has a century long reputation for coffee <unk> tea.

We will continue to essentially is brand positioning as the leading Italian coffee brand offering.

And Italian is doing.

Menu upgrades.

We are broadening food and drink offerings with more unique Italian product <unk>.

Including cover premium single origin beam and to jelly.

Which is the Italian flat threat with meat or something.

Something like a Chinese slowdown more.

We also launched localized product such as coconut latte, Buffalo Latte, and even augment vessel. Okay. Samantha what is a very lovely fragrant flowers using many Chinese dessert.

These new products capture the latest coffee plant and have been well received by our customers.

Digital and delivery, we are building, our membership program and digital fundamentals to improve customer experience online.

Online traffic.

Livery reached almost 40% of sales mix in quarter three.

So the vitamins.

Now with 78 stores, we have further refined our store models paving the way for growth.

We have made great progress so far but what remains good things do take time.

We want to grow this brand right with every step at the right time in close partnership with Nevada Group, we are confident to bill us as basketball Lovaza business in China.

With the started to wind down our coffee enjoying operation from branding to site selection to operation and more we learned a lot with coffee in doing.

This invaluable learning experience will help us capture growing opportunities in the coffee market.

Going forward, we will grow our coffee business with two distinct market positioning K coffee.

Focus on value and convenience.

And the viagra focus on authentic Italian coffee.

To summarize our innovations and hardware in the pandemic is happening.

We have made our business fundamentally stronger.

We are confident in our team's ability to find opportunities in adversity and unlock further potential in China.

We will continue to execute our Archie M, which stands for resiliency grow and moat framework to strengthen our competitive position and capture long term growth with that I will turn the call over to Andy Andy.

Thank you Joey and Hello, everyone. Let me now go through the third quarter performance in detail.

We saw sequential improvement in the third quarter system sales returned to growth year over year and restaurant margin was highest since 2018.

Well above our expectations.

We focus on driving sales through new product and compelling value.

<unk> recover to the same level a year ago.

From a timing perspective.

Trend remains volatile.

In fact that bi frequency call it upwards.

In July and August we saw a sequential recovery in same store sales.

And all of us exceeding the prior year.

This was mainly due to lapping the delta Berrien outbreak in August 2021, which heavily impacted eastern China.

However in September same store sales declined mid single digits.

As Covid related health measures tightened many areas.

Around 900 stores were temporarily closed.

Limited services in September compared to around 400 store on average in July and August .

On the margin side, we continue to identify cost saving opportunities.

Drive labor productivity, and we base our cost structure.

Let me go through the financials and our cost control initiatives.

Otherwise all presentation just four.

The effect of foreign exchange.

Foreign exchange had a negative impact of approximately 6% in the quarter.

Third quarter total revenues increased 5% year over year.

Got a currency to $2 $68 billion.

Due to the contribution of new units.

And the consolidation of Hangzhou KFC.

This was partially offset by temporary store closure and foreign exchange translation.

In constant currency total revenue grew 11%.

System sales grew 5%.

Same store sales were flat year over year.

Hi, Brian .

Same store sales were flat.

We're seeing solid traffic at 93% of prior year's level.

Ticket average grew 8%.

Due to the increase in delivery mix, which has a higher ticket average.

<unk>.

Abundant value campaigns like <unk>.

Family bucket and buy more save more also contributed to higher to a higher ticket.

Same store sales grew 2% year over year.

Same store profit grew 2%.

While ticket average was flat.

Hi delivery mix, which has a lower ticket average then that was offset by these care management.

Gross margin was 18, 8% 660 basis points higher than last year.

The year over year increase was mainly due to hybrid of 50 <unk>.

Temporary relief.

So that was leveraging.

These were partially offset by inflation and commodity wage and utility costs.

While the cost also increased due to high delivery volume.

Our team worked diligently to improve our cost structure. So let me next go through each expense line items and the actions we have taken.

Cost of sales was 37%.

150 basis points lower than last year.

We focus on the most effective campaigns to drive traffic.

That allow us to be more cost efficient, while ensuring quick value globally.

We also manage commodity price inflation to low single digits.

Cost of labor.

23, 5%.

210 basis points lower than last year.

This was mainly due to improvement in labor productivity.

<unk> release recognized in the third quarter of $17 million.

These were partially offset by increasing why did costs from higher delivery sales mix and wage inflation of 2%.

We improve labor productivity by one optimizing staffs gasoline and hiring.

Are you sharing restaurant management teams across stores and three leveraging <unk> to automate processes, such as digital ordering and inventory management.

There was also a lapping impact due to higher staffing levels in 2021 caused by the southern Delta wherein the outbreak.

Occupancy and others was 27% 300 basis point lower than last year.

This was mainly due to our cost savings initiative.

And lower rental expense as a percentage of sales.

In addition, we pulled back on marketing and advertising.

<unk> expenses were lower in the quarter due to one, whereas we believe a $13 million.

Smaller store format with.

Lower upfront investment embedded store economics and three.

Negotiating more way to relieve with variable components.

G&A expenses increased 16% year over year, mainly due to increased compensation and benefit expenses.

Foundation of wholesale KFC and incremental expenses from emerging brands.

There were also one time expenses associated with primary listing conversion and Holdco.

Operating profit was $360 million.

87% increase year over year.

Net contribution proposal KFC consolidation was 6% of total operating profit in the quarter.

They include amortization of intangible assets acquired which was roughly $16 million per quarter.

This will run through the end of this year.

Below the operating line.

Kurt.

$10 million Mark to market loss.

Our equity investment in late in the quarter.

It was lower than $32 million net loss in the same period last year.

The effective tax rate was 29, 9%.

60 basis points higher than last year due.

Due to Hangzhou KFC consolidation.

Prior to consolidation.

Equity income from JV as well.

It was not subject to tax.

Resulting in a lower tax rate.

We expect our full year effective tax rate to come in around.

Low thirties.

Net income was $206 million.

A 72% increase year over year.

Diluted EPS was <unk> 49.

More than double the prior year period.

The mark to market loss in may cause negatively impacted diluted EPS by <unk> <unk>.

We have returned.

$160 million to shareholder in cash dividends and share repurchases year to date.

We carefully slope and touches in the quarter prior to the deal primary conversion.

Followed by our strong balance sheet, we will continue to execute our disciplined and balanced capital allocation strategy.

Our operating cash flow remained strong.

The third quarter, we generated free cash flow of $558 million.

Let's take a look at our fourth quarter outlook.

The external environment remains challenging.

Covid related preventive health measure Escuela in October .

The October around 1400 of our store on average were temporarily closed.

All of our limited services.

Downward pressures on the economy.

Consumer spending.

An inflationary environment.

So that means that we continue to face.

Our same store sales in third quarter were below the pre pandemic levels.

We expect a full recovery of south.

Same store sales will take time and the path to remain uneven and anemia.

I would also like to remind everyone that one fourth quarter is seasonally a lower quarter in term of sales and profit.

So sales volatility could have a more wholesale impact on profitability.

Two it was around $30 million temporary relief in the third quarter, most of which is unlikely to repeat in the fourth quarter.

The appreciation of U S dollar against the Euro.

Negatively affect our reported numbers.

We continue to dial back some austerity measures to balance cost reduction and service levels.

Now despite the headwinds in the third quarter, when we assume the pace of store openings and opened 621 net new stores year to date.

By relentlessly optimizing store economics with lower upfront investments.

Our new store performance continues to be strong.

Stall payback remain healthy at.

At two years for KFC and three year for Pizza hut.

This gives us strong confidence for further expansion.

We will continue to implement our disciplined and systematic store opening approach.

Opening new and profitable store at a robust pace.

As the fourth quarter is usually the peak season for store openings.

We are confident in reaching the full year target of 1200 net new stores.

Lastly, let me touch on.

Primary listing conversions in Hong Kong.

It became effective on October 24, along with our inclusion in the sell downs Stockholm there.

We expect the new status will provide additional access to investors.

Our shareholder base and increase liquidity.

We have learned to navigate through uncertainties and volatilities in the past two years.

Coca conditions will continue to remain challenging, but we are adapting to the new normal.

Our resilient business model and agility allow us to pivot quickly and effectively develop new street.

When a market is wontedly calmer, we're able to capture the upside and delivered strong results.

In the third quarter, we have once again demonstrated our transponder fundamentals.

Cost control and solid execution.

We're confident in our ability to achieve long term growth in China in January .

Sustainable returns to shareholders.

With that I will pass you back to Michelle to start the Q&A Michelle. 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 actually please start the Q&A.

Thank you.

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If youre on a speaker phone please pick up the handset to ask your question.

Your first question comes from Gene Lowe with Bank of America. Please go ahead.

Hi, Julia Andy Congratulations on the very strong Q3 result.

Given the very fluid situation, Amit the Colgate <unk>.

Break and restrictions in China. My question, we are focused on margins and we have seen very impressive margin expansion.

Q3 results and over the past three years, we also observe a pattern that usually doing the first few quarters of a big coli outbreaks such as one or the <unk> outbreak in Q3 last year.

And the army chrome upgrades.

Early this year, we might see a few quarters of margin erosion, but then after our very.

And quick adaptation.

The following quarter, so we actually we managed to.

<unk> margin stock would be even higher than the pre pandemic level unless assume that next year.

We are not going to see another big wave of outbreak that would lead to massive lockdowns in our core markets such as eastern China.

Fair to say that we can achieve our restaurant margin that is largely comparable to the pre pandemic level, which is around boutiques.

Thank you.

Ken Thank you for your questions.

Obviously, all chemotherapies fantastic job to deliver solid margins amidst very difficult and challenging situations now our margin improvement obviously some of these.

A fundamental transformation that would loss going forward.

Some of this is more temporary in some of these.

Measure maybe dial back.

Returning to work as normal now if you look at our.

Margin improvement was largely constituted by high productivity right.

And also.

For the quarter, some temporary relief and south leveraging now so when we look at.

The initiative that we have undertaken over the past couple years, we have mentioned over the past quarter. We have initiative to re base our cost structure and also to drive.

Okay. So so you see a lot of new product innovation.

In terms of also asked is how we manage.

The pricing and also the.

Cost inflation and commodity prices, we also <unk> our supply chain team for TB.

Our core strength in term of managing supply.

And robustness of our supply chain and also setup mitigate partially some of those impacts sometimes commodity prices.

And now allow us to continue to innovate and quickly to roll out new products that meet the consumer demand.

The other one is obviously you look at the labor pool that <unk> for example.

We have deployed technologies, we have continued to invest in technology to automate systems processes to help improve labor productivity.

As we have mentioned probably last quarter, we're beginning to roll out.

Management tool for our store so we know our management team for this fall.

Can be use our call multiples fall.

And you look at our rental for example, obviously, we see some <unk>, but we also have over the past few years and especially over the past couple years too.

To restructure the rental cost structure.

Landlocked.

No.

Seeing lower rental costs, but also the more wearable and flexible rent structure and so those are both fundamental transformation.

Going forward same thing for our digital investments.

Last two years, we have continued to invest heavily in digital that allow us to for example June pandemic have direct I wish to our consumer roll out new products, new marketing campaigns efficiently.

And also allow us to.

You looked at our membership program and continue to be a very strong foundations flopped out then we should pull them now it's helpful.

60% of ourselves. So those will continue to help us going forward to maintain the efficiencies of operating.

Efficiency. However, as we mentioned before this is a temporary for example.

<unk>, who will lead you Philip.

We believe in.

Our labor costs, especially.

Some of the government incentives.

And as well as.

The delay in delay in.

Wage increase in the market in the third quarter, usually we adjust wages.

In the third quarter.

For our market May report that because the pin down the impact this year many market have delayed.

Wage increase so some of this may come back and also some of the austerity program. So all in all I think.

Looking forward I think you can expect some of these.

From a macro change would stay and then.

Some of these temporary measures made may subside over time.

I would like to just add some color in terms of.

Our management is thinking through the business model wide that help protect the margin now in the future.

Well, we do.

I believe that this company and this team this management team is that.

Is the anti fragile company.

Whenever a stone's throw as we possibly could come the Keystone <unk>.

Sure.

<unk> took all sorts of Empire.

That's what we believe and our team.

To do the right thing.

In terms of business model as I mentioned in our monthly plantation in earlier.

It's very important to recognize that our off premise business ran out of 60% what does that mean.

If we look at that.

By brand KFC is actually 65%.

Off premise.

And that is up from last year, which was 60% of pizza hut palate, even more amazing story pizza huts the off premise sales is 50%.

50.

Before pandemic it was only 30% from 30% to 50.

Our business our off premise business in Pizza hut is much much stronger and higher.

Given the fluid situation pandemic.

Credibly important number because when we are in sort of more tougher situation in terms of not that that 60% will become higher because that will be naturally some sales transfer from <unk> to additional off premise business.

So with the 60% as sort of the off premise influenced situations that percent will go higher than nationally protests.

So because it's very difficult to have.

Strong margin when the sales leverage is not there. So it's not only all the margin line that we will.

Andy.

Has comprehensively.

But on the other side.

The sales side that we have also protect that.

That's a lot of hardware in the last three years and the team has done a great job. Thank you Alton.

Thank you Julia Andy your margin management capabilities rating pressure congratulations again.

Thank you.

Your next question comes from Lillian Lou with Morgan Stanley . Please go ahead.

Thanks, a lot Joey and Andy for your very detailed explanation. My question is also a follow up question on margin management, but maybe from different angle because.

Joey and Andy you mentioned about the sales leverage and also the line items management on the cost side. So maybe look at it.

All the initiatives in the third quarter and also.

During the pandemic in this three years and you've been focusing on and we need to find a way to realize the menu and the new product launch a smaller stores very effective promotional campaign. So when you all define this.

Whats your thinking behind especially trying to understand that with our new stores now incrementally higher portion of small stores would that actually fundamentally change our margin profile going forward and also especially so quarter youll have more promotional campaign, but.

In return I actually didn't.

Suffer.

Our margin instead is on the other side as to the margin.

When they are trying to understand a little bit further.

How you achieve that from this.

Assets. Thank you.

Thank you Vivian.

I think I think.

Margins I think I want to emphasize at least in the short term.

Because of the Covid situations, we see fluctuations in our sales <unk>.

Impacted and high correlation with the clinical situations. So the biggest lever delever.

Deleveraging impact when things come down is actually quite high to stall sales channel we will drive.

Higher.

Restaurant margin and we can see that even without the pandemic in a normal time, you will see that margin fluctuate through the year.

During the first quarter in the third quarter with generally higher sales period for us and we all can see higher margins and then second quarter and especially the fourth quarter generally a lower season for US and you also see lower margin. So I want to emphasize echo what Joe you had mentioned earlier is very good.

In terms of driving.

Margins of the leverage.

Now in terms of our store format.

Our supplement remains very very healthy so economics.

Probably about where.

The recent years.

This is not just come naturally.

But why have worked have put into the store format design operations.

And then also the menu mix and et cetera.

Make it work now I'll stop on that obviously right now a tier two or so.

<unk>.

Area last week, one is on the Greenfield right. So we still have a lot of Citi.

Cds in partnership that we can sir.

And then we have performance of that we also have fundamental catering to work.

Sure.

Urban area, where we increase in density and cater to the high mix of delivery and takeaway.

Yeah.

And so but they all have one thing E. Commerce is that our small format in terms of upfront investment.

Lower two compared to a few years ago were spending on average $2 5 billion.

$2 5 million to RMB per store.

Now, we paused spending not less than.

Two men Kociolek, maybe drilling down to one point.

Six $1 $7 million of Crystal so that help us.

So it'd be more agile more nimble and reduced after the investments that allow us to continue to see very strong.

The economics for the new store that we opened no as I mentioned on our prepared remarks.

You look at our payback period for KFC.

At two years, obviously, there may be some fluctuations.

On the dynamics in any.

And then for Kate.

Pizza hut three year, if you look at our satellites. The motto as we measure before is performing very close to what we can achieve with KFC already and so.

Yes.

What gives us confidence in terms of <unk>.

Robust expansion.

And I don't thing.

We too concerned about at least from the so economics that that would have.

Immaterial impact.

The market mix going forward.

So so that those thoughts on that and then also our.

Our next academic for us, though Joey do you have anything to add yeah, Let me.

Again.

I'm kind of in terms of the.

The relation between promotional minding management.

We as we mentioned earlier, we consolidate our promotion that mechanism and we focus on fewer and.

And more impactful such as.

Turner from hunting buy more save more.

That helped drive our sales.

Hearing.

And.

Which is quite impressive but at the same time, we are very very careful.

To manage.

Hum.

Products for example.

Uh huh.

The whole chicken right the Huntington.

I'll give you one example.

You guys will get it somehow must more detail we'll get it.

So 80 million homes, you can so far this year.

Rose chicken one off projects.

Well here's the reason why this year is very expensive.

Uh huh.

We do road chicken has to benefit one is healthier to root cause of that customer love. It. So we go to every little detail make sure that it has both great product, but at the cost.

And that work for not only signing for at home consumption.

Just a small example, it could give us.

And in terms of margin professional I would like to share another.

Believe which we can now in very good result that through Q2.

It was very difficult quarter.

Reiterate our commitment to protect.

Our staff job no layoffs.

We look at every single.

Way to manage our cost structure our margin.

Is that a layoff.

We want to propel our employees' jobs.

During the tough time.

Everyone needs some senses securities during very fluid situation.

After our 400000 strong team. They appreciate it and everyone everyone go for every single innovation that we can achieve to protect.

Many.

Okay.

Our posture, let's move on to next question.

Your next question comes from Jeff Hawaii with Sachet. Please go ahead.

Hi, good morning Julien.

I'll also ask question about the margin, but I will take another approach.

The bigger picture what happened in the past two years, if we look at what happened in the past.

<unk>, we are seeing you open more stores, but in the third quarter.

First time that we are seeing amazing restaurant margin, we saw some very short window of the rebound about all of the consumption side of it but I can see that greatly I capture that upside of the consumption rebound shall we say that actually the new store opening which worst investments for the future.

Starting working well in the situation Q4, when the <unk> facing out actually our new store contribution toward profitability actual that it would be more pronounced than before.

Other question related with this is if we look at a deliberate sales contribution to cash to hit.

37%, which is amazing very close to pizza hut.

As you remember years ago, My first match jewelry I had the impression that you can't see but never been that high in terms of delivery sales contribution before piece off and now we are seeing pizza.

At KFC.

A very closed conduct delivery sales contribution shall we say that Q4, KFC fundamentally has transformed and we are expecting actually higher than expected delivery sales contribution Q4 approaching 40%. Thank you.

Yes.

Thanks, Joe Bob.

So I think there's a lot of question about margin today, obviously, we're very pleased with our margin performance in the third quarter.

As we mentioned leveraging.

When come a time, where not only able to capture both the.

Only the sales outside but also able to regain that leveraging.

Globally.

We also obviously as I mentioned before.

There's a number of fundamental transformation that we have undergone we basically our cost structure.

For the initiative.

I think what you.

Asking about is about two things right one is the new store.

<unk> and <unk>.

Probably the other one.

Is that do it yourself.

Mix was the potential going forward now I think when we look at the new store economics, I think one thing to remember is that for any new store generally take a couple of year for it to ramp up sales and margins to mature truly level. So the other part is that obviously with.

I am pleased that we mentioned when we look at our new store performance. They continue to be very robust very strong.

If we look at.

Sure.

The modern fund that I mentioned, the ramp up period, but even Florida store that we opened this year.

A large majority of them turn to western.

But even better in three months.

Which is tracking.

Slightly better than historical levels and so.

And there's a.

A couple of things happening there right one as we mentioned we have warfare.

Finally away from that now.

And reducing the size of the size of its obviously important.

But but also the operation.

Total operating for Linda.

Offerings and menu mix.

So all of these.

In conjunction with that.

We also as we mentioned we have worked hard on.

No change in the I felt like I meant like Western management structure has developed a.

<unk> management labor pool, they can share with.

The store.

Productivity improvement so I think and then also if you look at the rental.

For a new U S dollar obviously.

At work there.

Two.

Two lower the wet Macarthur facility itself, but more importantly to keep.

With <unk>, we continue to.

Well look to develop a high proportion of.

Wearable cost component and so that allow us to be.

While we feel it okay. So I think.

Our approach to new store opening is discipline and it's just.

<unk> as I mentioned before and we will.

We continue to.

To drive that.

That discipline, so that we will open a new store.

Could you do with the very robust basis might be accelerating during the fourth quarter. We will continue to open new store proposal and so so I think the portfolio contribution for new solar Asa overtime.

But I think.

The economic South I think as we mentioned paid appears to year four cap the two year for pizza.

Consistent.

So thats, a new store margins in.

<unk> portfolio and how can we do with sales mix, obviously in the short term youre going to be depending on.

Perfect.

<unk>.

The measures you're going to see heightened degree mix shift.

And then you all some time, you'll see that things calmer and denying traffic will come back, but all in all I think you can see.

There's a.

Big change in our business a delivery mix right now and all permits right now.

At Copel.

Majority of our sales now and so.

So that's why I like one with developing small format as we mentioned before for the smaller urban format with your those low catering to work theoretical way business.

So those.

Both I think.

Really by the consumer.

Moreover, we will deliver more.

And we have to format and system to achieve.

Chief that especially with digital Sky Lake.

We have a whole app to drive traffic.

So the consumer can audit.

Alright.

And we have a slot assessment.

Thank you Bill.

Yes.

Your next question comes from Michelle Cheng with Goldman Sachs. Please go ahead.

Hi, Julianna <unk>. My question is about our store expansion and so given this very strong profit margins. So do you have any initial thoughts on the expansion plan into 2020 as Tony any chance, we could further accelerate it.

Spansion Keith.

All of the smaller players are suffering and also more specifically by brands.

PFC pizza huts.

Maintaining of that obviously, a stronger momentum expansion, how do we think about auto brands seems where we actually reshuffling of auto breast how aggressively in the past few quarters. Thank you.

Hi, Michelle Thank you for your questions so about new store.

As I mentioned, our new store performance continues to be strong.

So.

And also as.

As I mentioned before we generally.

Each year, we set a target thing what is reasonable, but ultimately is what the market and the fundamentals that would try to hammer this call that will be open.

And then also sometimes that's impacted by Covid.

So we will continue to maintain that discipline and systematic approach so.

The economics are good.

The system will do in the uses of acceleration because mall. So we propose that multiple will be approved.

Obviously, when the market all at.

The economics are more moderate the impact that we see.

Some deceleration of medical it because he is doing to the model and assumption southward refresh that very regularly.

So we will maintain that disciplined approach obviously, we continue to see very strong.

On the metal disposal opening we.

We see as I mentioned before there are greenfield.

We have <unk>, we are only in the more than 17 cities, we see probably another mill.

The housing recovery that potentially we can enter.

Pizza hut.

But like all but one that we saw that KFC, Oregon.

We don't have rfps out so.

So this is a greenfield opportunity.

If you've had good about install expansion installed Alex mentioned an opportunity there.

Now.

In term of.

Obviously, we will continue to work hard to score format right there with the consumer.

Equity to change.

And we see obviously opportunities way now our pipeline is the best job because.

We are aware of it feel very attracted talents way now in the restaurant industry.

Two three years of pandemic, we continue to be very.

Very well paying rent on time and everything so we move them attract even more attractive and until we have more opportunity, but our emphasis again is discipline.

Approach to make sure that we not only opened a new store, but open new impossible. So until that's important now as you mentioned, we did some portfolio management on our brands as Joey.

Joey mentioned.

Earlier, we are winding down <unk> to focus our resources on the coffee side on Lovaza, which we see.

Very good opportunities.

There and so that's a different approach.

So earlier this year, we also wanted to.

Are you starting business.

And you're starting happening.

A homegrown brands more foreclose a decade now.

Unfortunately, it is market positioning is in the transportation and tourist locations now that business has been very very challenging over the past two years you can imagine.

Currently we don't see.

With the new del Amo.

Proven in very short time, so who we decided to wind up.

This is Don so again back to that discipline and systemic approach via installed over expression in portfolio management, we're very disciplined about that until we will continue that going forward.

About the brand.

Development. Thank.

Thank you Olivier.

Michelle Michelle.

Yeah, I'll just add to.

A few comments about our joint venture first we certainly are opening.

Even more tomorrow stone so long.

Some 5% then you opened this year, either monitor or set of lifestyle and Kathy.

And these molecules work, particularly well in lower tier city.

That's where we will continue.

And we.

It's pretty pretty yet exciting promising.

So the comment number one come in to mature it.

Opening new at the smaller stores also require.

Our focus on the products and operations and we are giving that support through the near term on a store.

For example, chip.

<unk> chicken breast broker.

Sponsors.

<unk>.

The price of <unk> $9 nine yam.

It really is amazing for the lower tier city.

So as an introduction to our business.

The other product, let jensen with you with that.

All of these.

Product with lower price points specifically.

For lower tier cities facility in Florida introduction on your store.

And at the same time, we also.

Continue to innovate in terms of upgrading process.

Within the Marcellus well one example.

Monostome weak oni can accommodate fewer number of staff, which is a great year for shareholder.

But that also requires changes in terms of operating profit.

How to still make it work to protect our product quality.

For safety in a minute.

So.

Yes.

Cause.

Opening new store, but also with the product.

Operating profit that we are focusing on.

Thank you Michelle next question.

Your next question comes from Anne Ling with Jefferies. Please go ahead.

Okay. Thank you. Thank you for me the opportunity for <unk>.

Asking a question.

Hi regarding the cost side.

Look at that.

Tracks the chicken price.

We saw a 20% increase.

And also at the same time.

<unk> also increased.

You said that management has really greatly in terms of like a better use of the <unk>.

The chicken parts.

But moving into 2020 free when you will see that this increase in terms of the cost the chicken cost all of the other commodity costs kicking into Europe .

Your P&L or maybe you can share with us what is your current.

Agreement with your supplier. Thank you.

And thank you for your question.

Yes.

No no no go ahead.

Okay. So when we look at.

Our Suez.

Obviously.

I think we do have to comment on how fantastic job.

Our product innovation team have done to help us manage that cost inflation.

Price inflation as you mentioned is very real.

In Israel globally and is true also in China as well.

Albeit in China, we see a more moderate inflationary pressure we.

We see.

We had a commodity price increase.

Escalating over the past.

Probably like a year.

We see a very favorable.

<unk> last year 2021, we're beginning to see that commodity price pricing pressure building up.

And the way that in China as Paul at mid two.

High single digit.

Commodity pricing increase and as you mentioned, we all see poultry price increase so as I mentioned before this will contribute happening.

And we will continue to work hard to mitigate the other one that wasn't mentioned is that as we have mentioned before our supplies in January we locked down most of the supply quarter to half time, so there will be some impact on the inflationary side.

And obviously, because what you do a completion, who founded our supply chain also deploy long term culture chart to you whether it was possible to lock in pricing a little bit longer for example, coffee locking in love.

Along with her pricing contract.

But some of the commodity you cannot walk the walk in closet to longer time, So we will see some commodity pricing pressure building up.

In the coming quarter as well.

Now as you mentioned two fewer premier pricing pressure, besides the supply chain and efficiency there.

He is also on product innovation and so we have mentioned the team has done a fantastic job developing new products that utilize.

<unk> been part of what we thought that that we already have chicken and beef.

For our folks in the U S.

When people talk about.

Chicken sandwich.

Berger.

<unk> that we referred to compress, but we have mentioned before unfortunately consumer generally.

They like that more than likely.

White meat because.

More tender as more favorable.

For example, this quarter until you mentioned, we have developed a fantastic chicken sandwich.

Cheeseburger.

That is very successful well received by consumers.

That kind of product innovation, both satisfy consumer demands and also help us manage commodity prices will be very key for our long term managing backfill <expletive>.

So.

Yes, so some of that commodity price inflation.

And then also obviously, how do we manage our marketing campaign.

How do we manage cost.

Paul.

<unk> stations all of that will be awfully point for us in the long term to medicine.

Now for labor inflation.

Those should be fall generally at time to time, we will likely see labor cost increase.

Some time, you will delays in terms of more moderate but in China. The long term trend is mid to high single digits.

And so long term, we will continue to have to.

To improve their productivity.

Invest in technology.

Invest in infrastructure.

As Julian mentioned continue to innovate and need to improve our store operations. So that so that we can maintain.

Labor efficiency, it will begin to offset that labor inflation.

So that said I would like you to commodity prices and labor inflation.

Thank you Ed.

And I'll just add one comment on that one, but we do use every pound chicken, except that you can think of it.

But I would also like to point out that we have our team both the pricing team and then product innovation team.

We have been able to.

Interview and use different proteins beef pork.

And stuck with.

We are starting that program right now as we speak right now to kind of depth of them. So we have a law.

A variety of protein in our pipeline that we can use and we can promote depending also on the pipe.

Banking is rather simple guest chef.

They look at what is the best in terms of quality not only pipe quantity and price of late are in market and then you.

These are fantastic and great anchors breakthrough.

Thanks, a lot just a much much bigger scale I guess so.

So we have both the flexibility and scale to deliver amazing foot to a customer at very good price and balance the value. Thank you Ann.

All right.

Your next question comes from Christine Peng with UBS. Please go ahead.

Thank you management for taking my question.

So my question is on the product side, so I supported a very interesting.

Yes.

I know new product, which Joey mentioned, which is this beef burger.

No.

I noticed that this quarter has been on the menu since may of 2021, which means that this is likely to be longstanding product instead of a L. T. O. So if that is the case.

Joey can you share with us.

The decision behind this product.

In terms of the.

In terms of the rationale the.

The supply chain management and also future plan.

For this product going forward because you know.

What I'm interested to understand is the.

Will this be a burger.

Potentially become a very important category.

<unk> going forward and what's going to be the structural impact.

On KFC in terms of competition in terms of.

Margin trends et cetera, So anything you can share with us there will be very much I appreciate it. Thank you.

Thank you Christine.

It's already a very important product in P&C portfolio.

The speed and.

The pull from the customer exceed our expectation.

Okay.

To quantify the.

The south of <unk>.

We talk about it already.

They already contemplate meaningful.

So mixed throughout the group is about 3% to 4% of.

<unk> sales mix.

I don't know.

Already.

Because.

For original recipe after all these years.

It's about 67% so it's top of average original recipe.

Chicken sales already.

So that's that's the number.

And in terms of product Si.

For those who are in China, if you have a chance to try at least funny.

I encourage you to try it.

Daniel can form their opinions about the future of this product.

I know its rather unusual four alright, well company selling chicken itself broker the broker but.

Sure.

Wanted to try it you'll understand why.

We have Chris <unk>.

Angel product choices.

From entry price.

Broker, which pays amazing deal.

The president all the way to work with the broker Angus beef Burger.

As Andy mentioned, it's hard to imagine, but it tastes amazing.

Okay relatively will be broken.

So enterprise is still very.

Very good value I wont say its low price.

The Rockwell data broker base fantastic value.

So thats the choice of product sometimes it is.

The Fraser to take.

Yeah plenty of.

Customer.

Alright.

The man made.

Video comparing our burger versus other competitors.

One thing very sustained.

About our FIFA is.

Thank you.

And this is our focus.

Wow some.

Traditional beef Burger lumber my laughter barbecue Fraser.

For Chinese pay pay.

They prefer to Tennessee bunker.

That has been our focus and we are uniquely positioned to do that because we have very high quality oven in our.

Kitchen each of our.

Kenzie kitchen to produce at least bucket. So the beef Burger Patty is coke oven.

Not really.

So I hope that gives you.

Some flavor of this amazing product.

I know for myself.

Jamie let me add a little bit here, because you know as I promised household claim number one fan of KFC.

Yeah.

I say.

Often.

Let's give it some time I'd need do need variety besides chicken right and so I think the beef burgers fantastic.

It would be very sorry, we have one locum group Burger, but now we have a range of.

Burger that the free Burger that can appeal to different pricing points and myself.

Increased my frequency going to install.

Because I have not had the yellow like when I wanted to EDF.

I have been to have the choice.

For the FCB progress. So my customer standpoint, I think is fantastic because E coli quicker variety of items, you mentioned different coatings different choices.

So I love it anyway. Thank.

Thank you Jerry I think you could see for your patients.

Your next question comes from Veronica Zhang with Credit Suisse. Please go ahead.

Thank you management for taking my question and congratulations on the very strong set of results I have a <unk>.

Question regarding the coffee business. So as Joey mentioned, we're going to wind down the coffee enjoy business is focused on more on the K coffee and Lovaza. So could you share more color on the current situation or achievement of Lovaza, especially in terms of.

Our store expansion and.

Any color on store economics.

How can we adopt the valuable.

We learn from all of those are currently enjoying KFC team to drive Lovaza success. Thank you.

Yes.

Okay.

Thank you Monica, yes so.

Sorry, Joe you are typically.

No.

Okay. Okay. So.

I think.

First of all I think.

Why don't repeat it quickly which is which.

Wind down dose Sanjay business.

So that we can focus more.

Losses on the.

Copper resources.

<unk>.

Obviously the team.

Well focus more laser focused.

On the market.

And as you mentioned as you know currently out obviously as you have to.

Brian when you take off which.

So if the value and convenience pigments and defer lavazza beautiful listing on offer authentic Italian.

Currently in coffee and experience so.

Obviously, Sanjay we the whole brands over the past couple years, we will learn a lot and it is one thing that we have kept saying.

We have health we expect.

We entered into a new.

Business segment.

This is very different obviously from fried chicken.

Okay.

So theres all learning there.

How to Bill <unk>.

If our product coffee water mill.

Whole classes.

Good coffee.

In selection obviously he is also very critical.

And then obviously for coffee too.

File format to come through.

<unk>.

Figure out why the rifleman.

Tracy.

And the economics and whatnot.

And then also.

In terms of the.

Chinese customers.

Coffee is still a relatively new market segment.

The Chinese consumer.

The good news is the coffee the.

Take a coffee and what their preference also return to spot for us to develop and learn and apply to how product development. So a lot of these learning I think one of the learning that we did with Sanjay.

<unk>, obviously apply to <unk>.

<unk> expanded business in for Rob.

Lavazza.

How do you do.

We cover from obviously from a refresher anytime you know because of the lost volume as Jonathan early part of this year and we see recently business have rebounded.

I think until the <unk>.

The team.

They continue to be on the right track I think we don't I don't think we can say, we're there yet but given the new brand new business will take time, but they have done a great job in terms of putting the right.

And the right team.

Putting the continue to innovate in the product.

A lot of new product innovations right, where the Buffalo milk.

In drilling we obviously political in that.

And all of that has been.

Wonderful.

With the consumer.

That sounds like.

Offer that you currently experienced but also favorite gear to Chinese consumers.

And they do more I think.

In terms of training and innovation as both of them at the same thing you see that they continue to experiment in the rollout.

Overall you see.

The unit economics improve.

But I think for the empty, which obviously.

The consumer awareness.

South level and also the.

<unk>.

Profitability significantly.

I think you will be will have to be able to be more patient with that.

They have.

Therefore, this year almost double right now we have the.

On the eighth store.

For Q2 open more store.

And then you also continue to develop.

His capability.

We continue to develop and delivery capability. So if you look at South mix now you can see that.

The membership program.

And also the Grupo <unk>.

Accretive dilutive.

Delivery now almost 40% of its sales makes them so.

A quick improvement, especially given the challenging environment with Colby.

Society Abutment mentioned like threefold improvement increase from a year ago to 78 store.

There will be more like but you should.

Hey, Colby obviously.

You will have some impact.

Last year, we mentioned 1000, and we're very much committed to that but obviously the timing of that and could it be depending on sort of market share because of COVID-19.

We mentioned, we have a very systematic and disciplined approach even with the new coffee brands. They lovaza, but I think we're pretty confident.

Talking to improve do you see most often.

So.

That's.

Lovaza.

Thank you.

Thank you Laura.

There are no further questions at this time I will now hand back to Ms. Chen for closing remarks.

Thank you Ashley. Thank you all for joining the call today, we look forward to speaking with you on our next earnings call.

Have further questions. Please reach out through the contact information in our earnings release.

Our website have a great day.

Thank you <unk> 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's third quarter 2020 earnings Conference call.

<unk> 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 MS. Michelle Qi <unk> director of Investor Relations. Please go ahead.

Thank you Ashley Hello, everyone. Thank you for joining Yum, China's third quarter 2022 earnings conference call on today's call are our CEO , Ms Joey Wat and our CFO Mr. <unk>.

We are dialing in from different locations today, if we experience any technical difficulties during the call. Please remain on the line as we reconnect before we get started I would like to remind you that our earnings call and investor materials contain forward looking statements, which are subject to future events and uncertainties.

Results may differ materially from these forward looking statements.

All forward looking statements should be considered in conjunction with the cautionary statements in our earned.

Earnings release, and the risk factors included in our filings with SEC.

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

Today's call includes three sections, Tony will provide an update regarding <unk> performance in the third quarter. Andy will then cover the financial performance and outlook in greater detail. Finally, we'll open the call to questions. You can find the webcast of this call and a powerpoint presentation, which contains operational and finance.

<unk> information for the quarter on our IR website.

Also on the site, we can't find a video we prepared that showcases our latest stores offers and activities 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.

We achieved outstanding performance in the third quarter with fantastic growth, both topline and Bottomline.

This demonstrate.

Our ability to upgrade.

Certain environments by learning adapting and screening funding.

Fundamentalists.

During that time, our resilient business model and agility.

Managed a negative impact.

Sure.

As COVID-19 conditions were relatively comma in July and August.

We kept our sales opportunity during the peak summer season.

System sales recovered with 5% year over year growth.

Operating profit.

77% year over year to $360 million.

Even higher than 2019 level.

Great Tim what make this possible.

Key elements in our winning Formula includes our in house on <unk> to make supply chain industry.

Industry, leading digital and delivery capabilities.

Restructuring and solid execution.

Let's move to KFC and Pizza hut, we have been innovating new products to satisfy customer cravings.

In the past two years, we have established a strong presence in new categories, such as beef Burger.

Oh chicken and durian pizza.

Enabled by our powerful supply chain.

Securing supply scale streamlining production and optimizing cost.

Can you share a success story.

Can't see our extra juicy beef burger rapidly capture meaningful market share. Thanks.

Adding them to the permanent menu in May 2021, we have so over $100 million brokered.

That's about five feet burgers every second.

For the full year, we expect to generate close to 2 billion in sales some piece of it.

We cater to Chinese paid by making the padding Super Juicy using our specialty of them.

Customers Love, our burgers will be a great pace and value for money.

We thought our group B loans young millennial locally.

No he's in China and have signed a multiyear contract to secure price ends up.

Correct.

Our QC whole chicken.

Has also quickly gained popularity since its launch late last year, yes.

Year to date, we have so over 18 million whole chicken.

Chicken is another type product.

<unk> timing and take home consumption will use a different riva smaller chicken with better cost that is the perfect size for an individual meal.

Particularly juicy.

For sharing on the dining table at home as well.

At Pizza hut.

Julian Pizza has become a customer favorite in fact during Q3 as promotion every for Pizza, we felt was that Julian pizza.

Our limited time, Julian trio Pizza women's yoga and the audience something with three types of DRAM with especially popular with Julian longer.

Customers increasingly value conscious, yes, we do not compromise on quality.

Last quarter, we shared about has been wildly popular crazy Thursday campaign full planting season since.

Since 2018, we have been offering delicious full including the latest innovation amazing value. The campaign continues to be a phenomenal event generating a significant boost in sales every Thursday.

Our customer create witty and playful social media content using the Crazy Thursday team. Many of these postings has gone viral creating huge hike right.

Now to drive weekend traffic for families and kids, we have introduced a Sunday buying more safe mode. So we're pumping campaign in July .

Customers can get a bigger discount when they buy more up to a 50% off for iphones.

This new promotion so far has been wonderful.

Our momentum with good value perception, while protecting our ticker average.

Apart from abundant value. We also launch <unk> chicken breast program funding spot <unk> Hi, Bob.

This is our first successful chicken breast.

Yes.

We add that extra step in the preparation process to make the breast meat Super Juicy and tender.

This entry price further widened our choices for customers.

Great product for lower tier cities.

We've tried to keep our brands appearing to youthful customers.

September we transform select pizza hut stores into social hub for gamers.

Partnering with the popular RPG game Jensen impact Jensen with that great stores, our favorite restaurant crews and offered exclusive.

The campaign generated extra ordinary social but in just three minutes, we still over 300000 themed combo meal.

And our Super App <unk>.

God It is highest activity ever.

Looking forward to more of a festival event with this partnership.

Let's move to digital and delivery.

We have been enhancing our delivery and digital ecosystem to make our business fundamentally stronger.

Customers Love convenience.

Delivery sales are growing fast.

Empowered by our dedicated delivery riders and leading digital capabilities.

Rate grew 19% year over year.

38% of sales mix in quarter three.

Together with takeaway off premise sales were over 60%.

Our ability to capture off premise demand not only enable us to SaaS sublease of customer, but also cushion store closure impact due to COVID-19 conditions.

This 60% off premise sales is so fundamental to our business model because it really protect our downside in both sales and profit.

Right.

Lewis situations.

We have been messing rising delivery coverage and flexibility using AI technology.

Recently, we launched smart delivery punching ghansham too.

To dynamically adjust delivery coverage for each store by Paypal, taking into account the operating hours of nearby stores.

Great systems help us serve more customers.

<unk>.

Our digital capabilities serve as key touch points with customers.

In quarter three.

Rich.

Two milestones in our digital ecosystem, one our loyalty program reached 400 million member.

And two cumulatively since 2006, 2018 can see still over 100 million privilege subscriptions.

Our privilege subscription offer great value for money and have been an effective tool.

In driving frequency and spending.

Our digital capabilities are also crucial to streamlining restaurant efficiency.

Digital orders optimized in store labor efficiency.

For more than 90% of sales in the quarter.

Pizza hut table side mobile ordering sales have grown exponentially from just 2% at its launch in 2018, 45% in quarter three 2022.

Mitigate rising wage inflation and frees up crew member to enhance customer service.

To improve this.

Little experiment, we introduced intelligent or the sequencing I can't see tremendous inbound deal flow in the third quarter.

Our system automatically arrangements ordered through short term customer wait time.

Now, let's move on to coffee.

Our third growth engine.

Baxter is making solid progress along its clear four pillar strategy.

The loss includes Ramsey with ink menu upgrades expand digital and delivery capability and sort of environment.

That's how we built this out.

Branding, Nevada has the century long reputation for coffee expertise.

We will continue to essentially is brand positioning as the leading Italian coffee brand offering.

And the Italian.

Menu upgrades we.

We are broadening food and drink offerings with more unique Italian product <unk>.

Including cover premium single origin beam and to gallium.

The Italian flat, Bret with meat or something.

Something like Chinese slowed gambler.

We also launched localized product such as Cocomat, Latte, Buffalo, Latte, and even augment vessel of.

As Matt that's great what is a very luxury fragrance salary using many Chinese.

These new products capture the latest coffee plant and have been well received by our customers.

Digital and delivery, we are building, our membership program and digital fundamental for <unk>.

<unk> customer experience.

Online traffic.

Levering reached almost 40% of sales mix in quarter three.

Well have the vitamins.

Now with 78 stores, we have further refined our store model is paid.

The way for growth.

We have made great progress so far but what remains good things do take time.

We want to grow this brand right with every step at the right time in close partnership with Nevada Group, we are confident to Bill us SaaS Lovaza business in China.

With decided to wind down our coffee and joint operation from branding to site selection to operation and more we learned a lot with coffee in doing this.

This invaluable learning experience will help us capture a growing opportunity in the coffee market.

Going forward, we will grow our coffee business with two distinct market positioning take coffee.

Focus on value and convenience.

In Nevada focus on authentic Italian company.

To summarize our innovations and hardware in the pandemic.

<unk> our business fundamentally stronger.

We are confident in our team's ability to find opportunities in adversity and unlock further potential in China.

We will continue to execute our RPM, which stands for resiliency growth and moat framework to strengthen our competitive position and capture long term growth with that I will turn the call over to Andy Andy.

Thank you Joey and Hello, everyone. Let me now go through the third quarter performance in detail.

We saw sequential improvement in the third quarter system sales returned to growth year over year and restaurant margin was highest since 2018, well above our expectations.

We focus on driving sales through new products and compelling value.

Same store sales recover to the same level a year ago.

From a timing perspective.

The trend remains Moscow impacted by frequent COVID-19 outbreak.

In July and August we saw a sequential recovery in same store sales.

And all of us exceeding the prior year.

This was mainly due to lapping the Dallas ovarian outbreak in August 2021, which heavily impacted eastern China.

However in September same store sales declined mid single digits.

<unk> related health measures tightened many areas.

Around 900 stores were temporarily closed.

Limited services in September compared to around 400 store on average since July and August .

On the margin side, we continue to identify cost saving opportunities.

Labor productivity and we based our cost structure.

Let me go through the financials and our cost control initiatives.

Unless noted otherwise all sorts of exchanges.

For the effect of foreign exchange.

Foreign exchange had a negative impact of approximately 6% in the quarter.

Third quarter total revenues increased 5% year over year.

The currency to $2 $6 8 billion.

Due to the contribution of new units.

The consolidation of Hangzhou KFC.

This was partially offset by temporary store closure and foreign exchange translation.

In constant currency total revenue grew 11%.

System sales grew 5% same store sales were flat year over year.

By brand KFC same store sales were flat.

We're seeing solid traffic at 93% of prior year's level.

Ticket average grew 8% due.

Due to the increase in delivery mix, which have a higher ticket average and dining.

Abundant value campaigns like.

So family bucket and buy more save more also contributed to higher to higher ticket.

These are not same store sales grew 2% year over year same.

Same store traffic grew by 2%.

While ticket average was flat.

Hi delivery mix, which has a lower ticket average that he was offset by these care management.

Restaurant margin was 18, 8% 660 basis points higher than last year.

The year over year increase was mainly due to hybrid of 50 <unk>.

Temporary relief and leveraging.

These were partially offset by inflation and commodity wage and utility costs.

While the cost also increased due to high delivery volume.

Our team worked diligently to improve our cost structure. So let me next go through each expense line items and the actions we have taken.

Cost of sales was 37%.

150 basis points lower than last year.

We felt that the most effective campaigns to drive traffic.

That allow us to be more cost efficient, while ensuring quick value for money.

We also manage commodity price inflation to low single digits.

Cost of labor.

23, 5%.

210 basis points lower than last year.

This was mainly due to improvement in labor productivity and release recognized in the third quarter of $17 million.

These were partially offset by increasing costs from higher delivery sales mix and wage inflation of 2%.

We improve labor productivity by one optimizing staff scheduling and hiring.

Two sharing western management teams across stores and three leveraging <unk> to automate processes, such as digital ordering and inventory management.

There was also a lapping impact due to higher staffing levels in 2021 caused by the southern Delta wherein the outbreak.

Occupancy and others was 27%.

100 basis point lower than last year.

This was mainly due to our cost savings initiative.

And lower rental expense as a percentage of sales.

In addition, we pulled back on marketing and advertising.

<unk> expenses were lower in the quarter due to one, whereas when we leave up $13 million.

Smaller store format with lower upfront investment embedded economics and three.

Hitting more rental relief with wearable components.

G&A expenses increased 16% year over year, mainly due to increased compensation and benefit expenses.

So elevation of wholesale KFC and incremental expenses from emerging brands.

There were also one time expenses associated with primary loosening conversion in Hong Kong.

Operating profit was $316 million.

77% increase a year.

The net contribution proposal KFC consolidation was 6% of total operating profit in the quarter.

These include amortization of intangible assets acquired which was roughly $60 million per quarter.

This will be one through the end of this year.

Below the operating line.

Kurt.

$13 million Mark to market loss.

Our equity investment in late in the quarter.

It was lower than $32 million net loss in the same period last year.

The effective tax rate was 29, 9%.

160 basis points higher than last year due.

Due to Hangzhou KFC consolidation.

Prior to consolidation.

Equity income from JV as well.

It was not subject to tax.

Resulting in a lower tax rate.

We expect our full year effective tax rate to come in around low thirties.

Net income was $206 million.

A 72% increase year over year.

Diluted EPS was <unk> 49.

More than double the prior year period.

The mark to market loss in baseline negatively impacted diluted EPS by <unk> <unk>.

We have returned over $560 million to shareholder in cash dividends and share repurchases year to date.

We temporarily slowed purchases in the quarter prior to the deal primarily a compression.

Powered by our strong balance sheet, we will continue to execute our disciplined and balanced capital allocation strategy.

Our operating cash flow remained strong in the third quarter, we generated free cash flow of $558 million.

Let's take a look at our fourth quarter outlook.

The external environment remains challenging.

Collect related preventive health measure Escuela in October .

In October around 1400 of our store on average were temporarily closed.

All of our limited services.

Downward pressures on the economy.

Cautious consumer spending.

An inflationary environment.

So that means that we continue to face.

Our same store sales in third quarter were below the pre pandemic level.

We expect a full recovery of south of <unk>.

Same store sales will take time.

And the path to remain uneven and Dominion.

I would also likely we might everyone that one fourth quarter is seasonally a lower quarter in term of sales and profit.

So sales volatility could have a more potent impact on profitability.

Two it was around $30 million temporary relief in the third quarter, most of which is unlikely to repeat in the fourth quarter.

The appreciation of U S dollar against the Euro.

Negatively affect our reported numbers.

We continue to dial back some austerity measures to balance cost reduction and service level.

Now despite the headwinds in the third quarter, we assume the pace of store openings and opened 621 net new stores year to date.

By relentlessly optimizing store economics with lower upfront investments.

Our new store performance continues to be strong.

Stall payback remained healthy at.

At two years for KFC and three year for Pizza hut.

This gives us strong confidence for further expansion.

We will continue to implement our disciplined and systematic store opening approach.

Opening new and profitable store at a robust pace.

As the fourth quarter is usually the peak season for store openings.

We are confident in reaching the full year target of 1200 net new stores.

Lastly, let me touch on our primary listing conversions in Hong Kong.

It became effective on October 24, along with our inclusion in the cell bank stock connect.

We expect the new status with Hawaii additional access to investors.

Our shareholder base and increase liquidity.

Okay, well, we have learned to navigate through uncertainties about two of these in the past two years.

Coca conditions will continue to remain challenging, but we are adapting to the new normal.

Are we still in business model and agility allow us to pivot quickly and effectively develop new street.

When a market is widely calmer, we're able to capture the upside and delivery stroke result.

In the third quarter, we have once again demonstrated our transponder fundamentals.

Cost control and solid execution.

We're confident in our ability to achieve long term growth in China in January something sustainable returns to shareholders.

With that I will pass you back to Michelle to start the Q&A. Thank you Andy we'll now open the call for questions in order to give more people the chance to ask questions. Please limit your questions to one at a time actually 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.

You're on a speaker phone please pick up the handset to ask your question.

Your first question comes from Gene Lowe with Bank of America. Please go ahead.

Hi, Julia Andy Congratulations on the very strong Q3 result.

Given the very fluid situation Amit Colgate.

Outbreak and restrictions in China. My question, we are focused on margins.

We've seen very impressive margin expansion in Q3 readout and over the past three years. We've also observed a pattern that usually doing the first few quarters after that.

Coli outbreak such that it will have one or the delta outbreak in Q3 last year.

And omnicom upgrades.

Early this year, we might see a few quarters of margin erosion, but then after our very agile and quick adaptation in the following quarter. So we actually we managed to.

Achieve margin stock would be even higher than the pre pandemic level.

Assume that next year, we are not going to see another big wave of outbreak that would lead to massive lockdowns in our core markets such as eastern China is it fair to say that we actually achieve a restaurant margin that is largely comparable to the pre pandemic level.

Which is around boutiques.

Thank you.

Ken Thank you for your questions.

Obviously, our team has done a fantastic job to deliver solid margins amidst very difficult and challenging situations.

Our margin improvement obviously some of these.

Fundamentally transformation that would loss going forward.

This is more temporary in some of these austerity measure maybe dial back.

Returning to normal.

Now if you look at our.

Margin improvement was largely constituted by high productivity right.

And also.

For the quarter, some temporary relief and south leveraging now so when we look at.

The initiative that we have undertaken over the past couple of years, we have mentioned over the past two quarter. We have initiative to re base our cost structure and also to drive efficiency gains.

So we do see a lot of new product innovations.

In terms of obviously you asked is how we manage.

The pricing and also.

Cost inflation and commodity prices.

We also offer to our supply chain team Hot TB, our core strength in term of managing supply.

And robustness of our supply chain and also sort of mitigate partially some of those impacts some time commodity prices.

And now allow us to continue to innovate and quickly to roll out new products that meet the consumer demand.

The other one is obviously you look at the labor pool that <unk> for example.

We have deployed technologies, we have continued to invest in technology to automate systems processes to help improve labor productivity.

As we have mentioned probably last quarter, we're beginning to roll out a management pool for our stock. So we can know our management team for this fall.

Well, Ken can be use our call multiples fall.

And you look at our rental for example, obviously, we see some winter would be but we also have over the past few years and especially over the past couple of years to work very hard to restructure the cost structure.

Landlocked.

No.

Seeing lower rental costs, but also lost rebel and flexible rent structure and so those are both fundamental transformation.

Going forward same thing for our digital investments over the past two years, we have continued to invest heavily in digital that allow us to for example June pandemic have direct I wish to our consumer roll out new products, new marketing campaign efficiently.

And also allow us to.

You look at our membership program continue to be a very strong foundation, you'll flopped out then we should pull them. Now example, north of 60% of our sales. So those will continue to help us going forward to maintain the efficiencies of operating.

Efficiency. However, as we mentioned before this is a temporary for example.

The rental lease.

Philip at lease in.

Our labor costs, especially.

Some of the capital incentive of relief and as well as.

The delay in delay in reaching.

Wage increase in the market in the third quarter, usually we adjust wages.

In the third quarter.

While market later part, but because the pay down of impact this year many market have delayed.

Wage increase so some of this may come back and is also somewhat of battery program. So all in all I think.

Looking forward I think you can expect some of these.

From a macro change would stay.

<unk>.

Some of these temporary measures.

The subside over time.

I would now like if you just add some color in terms of.

Our management is thinking and also the business model why that helps.

The margin now in the future.

Well, we do.

Leave that this company and this team this management team is that.

Anti fragile company.

Whatever stones throw as we possibly could come out.

A two.

Our stepping stone triple set of Empire.

What we believe and that's our team.

Trying to do the right thing.

In terms of business model as I mentioned in our monthly contagion in earlier.

It's very important to recognize that our off premise business right now at 60%.

I mean.

Now if we look at the bi brands KFC is actually 65%.

Off premise.

That is up from last year, which was 60%.

Lisa Hot palate, even more amazing story.

The off premise SaaS is 50%.

50.

Before pandemic it was only 30% from 30% to 50.

So our business our off premise business in pizza hut is much much stronger and higher.

Given the fluid situation pandemic.

With the 50% as sort of the off premise.

With situations that percent will go higher than nationally protect.

Sure.

Because it's very difficult to have.

Strong margin when the sales leverage is not there. So it's not only all of the margin line that we protect.

Andy.

As comprehensively pointed out but on the other side.

Sales side that we have also protect.

A lot of hardware in the last three years and the team has done a great job. Thank you Wilton.

Thank you Julia Andy your margin management capabilities rating pressure congratulations again.

Thank you.

Your next question comes from Lillian Lou with Morgan Stanley . Please go ahead.

Thanks, a lot Joey and Andy for your very detailed explanation. My question is also a follow up question on margin management that may be from different angles.

Joey and Andy you mentioned about the sales leverage and I'll say the line items management on cost side.

Maybe look at.

All the initiatives in the third quarter and also.

During the pandemic in the three years and you've been focusing on mainly continental rejuvenize, the menu and the new product launch smaller stores very effective promotional campaign.

All design does.

Whats your thinking behind especially trying to understand that with our new stores now incrementally higher portion of small stores.

That actually fundamentally change our margin profile going forward and also especially so quarter youll have more promotional campaign, but.

In return I actually didn't.

Suffer.

Our margin instead is on the other side as to the margin. So when they are trying to understand a little bit further.

How you achieve that from this.

Assets. Thank you.

Thank you Vivian.

I think.

Margins I think I want to emphasize at least in the short term.

Look up their kovac situations, we see fluctuations in our sales.

Impacted and high correlation with the Cook situation.

<unk>.

The biggest lever.

Deleveraging impact when things come down is actually so high that stall cells generally will drive higher.

Restaurant margin and we can see that even without a pandemic in a normal time, you will see that margin fluctuate through the year.

During the first quarter in the third quarter, which annually so pivotal for us and we all can see higher margin and then second quarter and especially the fourth quarter generally a lower season for US and you also see lower margin. So I want to emphasize echo what Joe you have mentioned earlier.

In terms of driving.

Margins of the leverage.

Now in terms of our store format.

I'll start on that remain very very healthy so economics.

Probably best in recent years. This is not just come naturally.

But a lot of hard work to have put into the store format design operations and.

And then also the menu mix and et cetera to make it work.

Obviously right now are geared toward to.

Area last week, one is on the Greenfield right. So we still have a lot of.

Cds and partnership that we can sir.

And then we have a format for that we also have Tom ethanol catering to work.

Two.

Urban area, where we increase in density and cater to the high mix of delivery.

Away.

Business.

And so but they all have one thing in comments is that our small format in terms of upfront investment.

On your lower two compared to a few years ago were spending on average $2 5 billion.

$2 5 million to RMB per store.

Now we are offsetting net less debt.

Two men closely like maybe jumping down to like 1.6.

$1 $7 million of Crystal so that help us.

So it'd be more agile more nimble and reduced after the investments that allow us to continue to see very strong.

The economics for the new store that we opened.

As I mentioned on our prepared remarks.

You look at our payback period for KFC to Super healthy at two years, obviously, there may be some fluctuations depending.

Depending on the dynamics.

For Pizza hut three year, if you look at our satellites they'll motto as we mentioned before is performing very close to what we can achieve with KFC already and so that's.

Thats, what gives us confidence in terms of.

Robust door expansion.

And I don't thing.

We too concerned about at least from the second I will make that that would have a material impact on our margin mix going forward.

So thats the stop on that and then also our.

Our next academic thoughtful new store Joey do you have anything to add yeah, Let me.

Again.

I'm kind of in terms of <unk>.

The relation between promotional minding management.

We as we mentioned earlier, we consolidate our promotion mechanism and we focus on fewer and.

And more impactful such as.

Turner from hunting buy more save more.

That helped drive our sales.

Doing well.

Which is quite attractive.

The same time, we are very very careful.

To manage.

Hum.

Products for example.

Sure.

The whole chicken right the Huntington.

I'll give you. One example, you guys will get it sometimes a small detail.

We fell $80 million so far this year.

Roast chicken one off projects.

Well here's the reason why this year is very expensive.

Uh huh.

Relative to benefit one is healthier to root cause of that customer love. It. So we go through every little detail and make sure that it has both great product, but at the cost.

And that work for not only buying for at home consumption.

Just a small example, it could give us in terms of margin protection I would like to share another.

I believe which we.

We'll now in very good result that through Q2.

It was very difficult quarter.

We reiterate our commitment to protect our staff job normally off.

We look at every single.

Way to manage our costs much of our margin.

Is that the layoffs.

We want to propel and <unk>.

During the tough time.

Everyone needs some senses securities during very fluid situation.

And after our 400000 strong team. They appreciate it and everyone. Everyone go for every single innovation that we can achieve to protect.

Okay.

I'll talk to you, let's move on to next question.

Your next question comes from Jeff Hawaii with Sachet. Please go ahead.

Hi, good morning Julien.

I'll also ask question about the margin, but I will take another approach.

The bigger picture what happened in the past two years, if we look at what happened in the past two years shoes Covid. We are seeing you open more stores.

Third quarter.

The first time that we are seeing amazing restaurant margin.

Some very short window of a rebound about all of the consumption side of it but I can see that greatly I capture that upside of the consumption rebound shall we say that actually the new store opening which worst investment for the future starting working well situations before where the <unk>.

Facing out actually our new store contribution toward profitability actual they'd be more pronounced than before.

The other question related with this is if we look at a deliberate sales contribution to cash <unk> heat.

7%, which is amazing very close to pizza hut.

As you remember years ago, when I first met jewelry I had the impression that we can't see but never been that high in terms of delivery sales contribution before pizza and now we are seeing pizza hut.

At KFC.

Having a very close conduct delivery sounds contribution shall we say that Q4 cash see fundamental that has transformed and we are expecting actually higher than expected delivery sales contribution Q4 approaching 40%. Thank you.

Thanks, Joe Bob. Thank you. So I think there's a lot of question about margin today, obviously, we're very pleased with our margin performance in the third quarter.

As we mentioned leveraging.

When come a time, where not only able to capture both the only to sales outside but also able to gain that leveraging.

So with Google.

Obviously, as we mentioned before.

So there's a number of fundamental transformation that we have undergone rebased our cost structure.

The initiative.

I think what you.

Asking about is about two things right. One is the new store margins in.

Probably the other one.

Is that the weaker sales.

What's the potential going forward now I think when we looked at the new store economics, I think one thing to remember is that for any new store generally take a couple of year for it to.

Ramp up sales and margins to mature truly level. So the other part is that obviously, we're very pleased that we mentioned when we look at our new store performance. They continue to be very robust very strong.

If we look at.

The modern fund.

I mentioned, the ramp up period, but even for the store that we opened this year.

A large majority of them turn to Washington.

But even better in three months.

Which is tracking.

Slightly better than historical levels.

So.

So in that.

Couple of things happening there one as we mentioned we have warfare.

Find new way format.

And reducing the size the size is obviously important.

But also the operation.

Total operating cylinder offerings and menu mix.

So all of these.

In conjunction with that.

We also as we mentioned we have worked on.

You're changing I felt like I meant like restaurant management structure developed a management labor pool, they can share with the.

Call committed productivity improvements. So I think and then also if you look at into rental.

Q U S store obviously.

We have worked very hard to.

<unk> went through call it that facility itself, but more importantly to keep.

We continue to.

But well look to do but a higher proportion of.

Wearable cost component and so that allow us to be.

While we feel it okay. So I think.

Our approach to new store opening is that discipline.

<unk> as I mentioned before and we will.

Talk to you too.

To drive that.

That discipline so that.

Doing what we opened a new store that we have.

Could you do it at a very robust basis might be accelerating during the fourth quarter. We will continue to open new sofa proposal and so so I think the portfolio contribution for new solar and also over time.

But I think.

The economic South I think as we mentioned paid appears to year four cap the two year for Pizza hut, which is critical systems.

So thats, a new store margins and hopefully and hopefully will be with sales mix, obviously in the short term youre going to be depending on.

Situations tighter.

The measures you're going to see.

The high degree mix shift.

And then you oftentimes you see that thinks calmer and denying traffic will come back, but all in all I think you can see.

It does.

Big change in our business delivery mix right now and all permits right now.

At the careful.

Majority of our sales now and so.

So that's why I like one would be what things Biopharma as we mentioned before for the smaller urban format. We feel are those low catering to take away business.

So hi.

I think we.

Really by the consumer.

Moreover, we will do more.

We have the format and system to achieve.

Chief that especially on the digital side.

We have a whole app to drive traffic.

So the consumer can audit.

Got it.

And we have a small sofa.

Thanks Heather.

Yes.

Your next question comes from Michelle Cheng with Goldman Sachs. Please go ahead.

Hi, Julian My question is about our store expansion and so on.

Given this very strong profit margin. So do you have any initial thoughts.

Expansion plan into 2023 any chance, we could further accelerate it.

Expansion keep we now.

All of the smaller players are suffering and also more specifically by brands.

All KFC Pizza hut.

Maintaining of obviously, a stronger momentum expansion, how do we think about auto Brian Scholl seems will be after the reshuffling of auto glass <unk> in the past few quarters. Thank you.

Hi, Michelle Thank you for the questions so about new store.

As I mentioned, our new store performance continues to be strong.

So and also.

As I mentioned before January .

Daniel I mean, each year, we set a target thing what is reasonable, but ultimately is what the market and the fundamentals that would try and explore that wouldn't be open.

And then also sometimes that's impacted by Covid.

So we will continue to maintain that disciplined and systematic approach. So when you see the economics are good.

The system will do in the uses of acceleration because mall. So we propose that multiple will be approved.

Obviously, when the market all the economics are more moderate the impact that we see some deceleration of medical because it's built into the model and assumption southworth impressed that very regularly.

So we will maintain a disciplined approach obviously, we continue to see very strong.

Fundamentals are also opening we.

We see as I mentioned before there are greenfield.

We have <unk> in more than 17 cities.

Cities, we see probably another node.

The housing recovery that potentially we can enter.

Pizza hut.

Like almost 1000 saw that KFC, Oregon.

We don't have rfps out so.

So it is a greenfield opportunity.

<unk> had good about.

<unk> installed our expansion and opportunity there.

No.

In term of.

Obviously, we will continue to work for the store format.

Consumer the medical needs to change.

And we see obviously opportunities way now our pipeline is very strong because.

They feel very attracted talents way now in the restaurant industry.

Two three years of pandemic will continue to be very.

Well payout.

I mean, everything so we move them attract even more attractive and until we have more opportunity, but our emphasis again is a disciplined approach to make sure that we not only opening new store that opened new and profitable store until that's important now as you mentioned, we did some portfolio management on our brand.

Joey mentioned.

Earlier, we are learning CMG to focus our resources on the coffee side on the <unk>, which we see.

There are good opportunities lots of potential there and so that's the disciplined approach. We also earlier this year we also.

They are you starting business.

And you're starting happening.

A homegrown brands more will pose a decade now.

Unfortunately market positioning is in the transportation and tourist locations.

That business has been very very challenging over the past three years you can imagine.

Currently we don't see.

With the new normal.

<unk> in the restructuring so we decided to wind that business data. So again back to that disciplined and systematic approach via in store expansion and portfolio management with at this point about that until we will continue that.

Sure.

About the brand.

Thank you Alicia.

Michelle.

Here are just a.

A few comments about our joint venture first we certainly are opening.

Even more Simona stone so PCI.

PCI loans, some five without the nearest to open this year, either smaller or satellite and Kathy.

And these molecules work, particularly well in lower tier city.

Where we will continue our affiliate.

And.

Please tell me, it's pretty pretty exciting promising.

So the comment number one come under Matilda.

Opening new at the smaller stores also require.

Our focus on the products and operations and we aren't giving support.

Support through the near term on a store.

For example.

<unk> chicken breast broker.

<unk> decreased.

No Paul.

<unk>.

The price of <unk> $9 nine a M.

Really it's amazing for the lower tier city.

For an introduction to our business.

The other product, let Yan to develop these.

Got it.

With lower price points specifically.

Lower tier cities facility further introduction on this call.

And at the same time, we also.

We continue to innovate in terms of operating profit.

Within the homeowner stone.

One example.

A smaller store.

We only can accommodate fewer number of staff, which is a great year for shareholder.

But that also requires changes in terms of operating profit.

How to make it work to protect our product quality.

For safety and maintenance.

No.

The only yes.

Core.

Opening new stores, but also the product.

Operating profit that we are focusing on.

Thank you Michelle next question.

Your next question comes from Anne Lange with Jefferies. Please go ahead.

Okay. Thank you.

Thank you for the opportunity for <unk>.

Asking a question.

Hi regarding the cost side.

Look at that we.

Tracks the chicken price.

We saw a 20% increase.

And also at the same time final costs also increased.

Management has really greatly in terms of like making use of that.

The chicken pox.

But moving into 2023.

You will see that analysis.

In terms of the cost.

Chicken cost of all of the other commodity costs kicking into Europe .

P&L or maybe you can share with us what is your current.

Agreement with your supplier. Thank you.

And thank you for your question.

Yes.

Joe you want to.

No no no.

Okay. Thanks.

So when we look at.

Our Suez.

Obviously.

I think we do have to comment on how fantastic job.

Our product innovation team have done to help us manage that cost inflation commodity price inflation that you mentioned is where we are.

And as we have globally.

<unk> also in China as well.

Albeit in China, we see more moderate.

<unk> pressure of steel.

We see.

The commodity price increase.

Escalating over the past.

Probably like a year.

We see a very favorable.

Pricing last year 2021, we are beginning to see that commodity prices pricing pressure building up.

And laid out in Chinese Paul at mid two.

High single digit.

Commodity pricing increase and as you mentioned, we also see poultry price increase so as I mentioned before like discipline contribute happening.

And we will continue to work hard to mitigate the other one I want to mention is that as we have mentioned before our supplies in January we locked down most of the supply a quarter to half time, so there will be some impact on the inflationary side.

And obviously, because what you do a completion.

We founded our supply chain also deploy long term culture chart to you whether it was possible to lock in pricing a bit longer for example, coffee shops.

<unk>.

Along with her pricing contract.

But some of the commodity you cannot walk the walk in closet, you longer time, so we will see some commodity pricing pressure building up.

In the coming quarter as well.

Now as you mentioned two fewer premier pricing pressure it besides of the supply chain and efficiency there.

He is also on product innovation and so we have mentioned the team of benefit tactic job developing new products that utilize.

Given part of that is what we thought that that we already have chicken beef.

For our folks in the U S.

When people talk about.

Chicken sandwich chicken.

Berger.

Generally that we referred to compress, but we have mentioned before unfortunately consumer generally.

They like that more than likely.

Neat because.

Is it more tender is more favorable.

So for example, this quarter until you mentioned we have developed.

Tastic chicken sandwich.

Berger.

Thats very successful well received by consumers that kind of product innovation, both satisfy consumer demands and also help us manage commodity prices will be very key for our long term managing backfill <expletive>.

So yes.

Yes, so some of that commodity price inflation.

And then also obviously, how do we manage our marketing campaign.

How do we manage.

Cost.

Playstation or that will be awfully point for us in the long term to medicine.

Now for labor inflation as mentioned before generally that's a good time, we will likely see labor cost increase.

Some time, you will delays in terms of more moderate but in China, the long term trend.

Your high single digit.

And so long term, we will continue to have to work hard to improve their productivity.

And technology.

Invest in infrastructure.

As Julian mentioned continue to innovate our need to improve our store operations. So that so that we can maintain.

Our labor efficiency, it will begin to offset that labor inflation, and so with that said I would like you to commodity prices labor inflation.

Thank you Ed.

And I'll just add one comment on that one, but we do use every Paul chicken, except that you can further.

But I would also like to point out that we have our team both the pricing team and then product innovation team.

We have been able to.

Interview and use different proteins beef pork.

And we.

We are setting that further right now as we speak right now to kind of depth of them. So we have.

A variety of protein.

In our pipeline that we can use and we can promote depending also on pipe.

Thinking is rather simple guest chef.

They looked at what is the best in terms of quality.

Pat quantity and price of late are in market and then you.

These are fantastic and great anchors breakthrough.

Thanks, a lot just a much much bigger scale I guess so.

So we have both the flexibility and scale to deliver amazing foot to our customer at very good price and balance the value. Thank you Ann.

Alright.

Your next question comes from Christine Peng with UBS. Please go ahead.

Thank you management for taking my question.

So my question is on the product side, so I spotted a very interesting.

I know Neill product, which Joey mentioned, which is this.

Peter Parker.

No.

I noticed that this quarter has been on the menu since may of 2021, which means that this is likely to be longstanding product instead of a L. T. O. So if that is the case.

Joey can you share with us.

The decision behind this product.

In terms of the.

In terms of the rationale the.

The supply chain management and also future plan for.

For this product going forward because.

What I'm interested to understand is the.

Will this be a burger.

Potentially become a very important category.

<unk> going forward and what's going to be the structural impact.

KFC in terms of competition in terms of.

Margin trends, so anything you can share with us there will be very much I appreciate it. Thank you.

Thank you Christine.

It's already a very important product you can't see portfolio.

The speed and.

The poll from the customer exceed our expectation.

Okay.

To quantify.

So south of Dayton.

We talk about it already.

They already contemplate meaningful.

So <unk> is about 3% to 4% of KFC.

<unk> sales mix.

I don't know.

Alrighty.

Because for four original recipe after all these years.

It's about 67% so it's top of average original recipe.

Chicken sales already.

So thats the number.

And in terms of product Si.

For those who are in China, if you have a chance to try at it was funny.

Daniel can form their opinions about the future of this product.

I know its rather unusual four alright, well company selling chicken itself broker beef broker but.

Why don't you try it you'll understand why.

We have good range of product choices.

From entry price.

Broker, which pays amazing deal.

Does it all the way to work with the broker Angus beef Burger.

Yeah.

As Andy mentioned, it's hard to imagine, but it tastes amazing locomotive.

Relatively deep okay.

So enterprise is still very.

<unk>.

Very good that it I won't say it'll drive.

Good luck with Peter spoke about fantastic value.

So thats the choice of product is fantastic.

The things that could take.

Yes plenty of.

Customer.

Alright.

Customer in May.

Video comparing our burger versus other competitor.

One thing very thing about our FIFA is.

The Coker is thank you.

And this is off okay.

Wow some.

Traditional be further level of my laughter barbecue Fraser.

For Chinese pay pay.

Pay per third party broker and.

That has been our focus and we are uniquely positioned to do that because we have very high quality oven in our.

Kitchen each of our <unk>.

Kenzie kitchen to produce at least broker so the beef Burger Patty is coke oven.

Not really.

So I hope that gives you.

Some flavor of this amazing product.

I know for myself.

Jimmy let me add a little bit here because.

But with household claim number one fan of KFC.

Often.

Let's give it some time I'd need do need variety, besides chicken right and so I think that beef burgers fantastic.

Where we thought we'd have one locum group Burger, but now we have a range of <unk>.

Gary that the free Burger that can appeal to different pricing points.

And myself.

<unk> increased by frequency going through the store.

Because I have not had the yellow like when I wanted to <unk>.

I have been to have the choice.

All of the FCB progress. So my customer standpoint, I think is fantastic because Hawaii quit their variety, but you mentioned different posting different choices.

So I love it.

Thank you. Thank you Juliet and thank you could see for your patients.

Your next question comes from Veronica Zhang with Credit Suisse. Please go ahead.

Thank you management for taking my question and congratulations on the very strong set of results I have.

Question regarding the coffee business. So as Joey mentioned, we're going to wind down the coffee enjoy business and focus on more on the K coffee and Lovaza. So could you share more color on the current situation or achievement of Lavazza, especially in terms of.

Our store expansion and.

Any color on store economics.

How can we adopt the valuable.

We learn from those cubby and join KFC too to drive Lovaza success. Thank you.

Okay.

Thank you Monica, yes so.

Sorry, So you are basically.

No.

Okay. So.

I think.

First of all I think.

Why don't repeat it quickly which is what we have.

Wind down there Sanjay business.

So that we can focus more.

Losses on the covenant.

<unk> office.

<unk> and <unk>.

Obviously the team.

I'll focus more laser focused.

On the market.

And as you mentioned as you know currently out obviously as you have two key brand when you take coffee, which.

The value and convenience pigments and default lavazza refocusing on offer authentic.

Therefore, we currently in coffee and experience.

No.

Obviously sanjay.

The whole brand over the past couple years, we will learn a lot and it is one thing that we have kept saying.

We have healthy respect.

And two are new.

Business segment.

Colby this is very different obviously from fried chicken.

Okay.

So theres all learning there.

How to build it.

Our product coffee water meals.

Whole classes.

Good coffee.

This election, obviously is also very critical.

And then obviously for coffee too.

Amit I think come to.

Figure out why the rifleman Epipen traces.

And the economics and whatnot.

And then also.

Tim.

The Chinese customer.

Coffee is still a relatively new market segment.

The Chinese consumer.

The good news is the coffee take.

Take a coffee and what their preference also turn.

Turn to spot for us to develop and learn and apply to our product development. So a lot of these loading I think.

Larry that we did with Sanjay.

How 'bout too obviously apply to <unk>.

Our expanded business and for.

Lavazza.

How do you do.

We cover from obviously from a franchisee in time because of the lost volume Jonathan early this year and we see recently a business have rebounded.

I think until the <unk>.

<unk> team.

They continue to be on the right track I think we don't I don't think we can say like we're there yet, but given the new brand new business will take time, but they have done a great job in terms of putting the white optimizing the right team.

Putting the company to innovate in the product.

A lot of new product innovations right, where the Buffalo milk.

Hey, and training.

See political in that.

And all of that have been wonderful to SaaS.

With the consumer.

That sounds like.

Offer that internally experienced but also favorite gear to Chinese consumers.

And they do more I think.

In terms of.

Training and innovation I thought the same thing you see that they continue to experiment in the rollout.

And overall you see.

The unit economics improve.

But I think both empty, which obviously.

Consumer awareness.

The sales level and also the.

<unk>.

Profitability.

I think you will be will have to be able to more patient with that.

They have.

Therefore, this year almost double what we have.

78 store.

For Q2 open more store and.

And then you also continue to develop.

His capability.

Continue to develop.

And I do very Capably. So if you look at South mix now you can see that.

The membership program and also the Grupo <unk>.

<unk>.

Delivery now almost 40% of its sales makes sense so.

A quick improvement, especially given the challenging environment with Colby.

Society Bartlett mentioned.

Threefold improvement increase from a year ago to 78 store.

There will be more.

You showed that sounded like Colgate obviously.

You will have some impact I think last year, we mentioned 1000, and we're very much committed to that but obviously the timing of that and could it be depending on sort of market share because of COVID-19.

Measures, we have a very systematic and disciplined approach even with the new coffee brands. They lavazza, but I think we're pretty confident.

Talking about improved USB mothball open.

So.

That's.

Our update on Lovaza.

Thank you.

Okay.

There are no further questions at this time I will now hand back to Ms. Chen for closing remarks.

Thank you Ashley. Thank you all for joining the call today, we look forward to speaking with you on our next earnings call. If you have further questions. Please reach out through the contact information in our earnings release.

Our website have a great day.

Thank you <unk> conference for today. Thank you for participating you may now disconnect.

Q3 2022 Yum China Holdings Inc Earnings Call

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