Q1 2023 Yum China Holdings Inc Earnings Call
Speaker 1: Thank you for standing by and welcome to the Yum! China first quarter 2023 earnings conference call.
Speaker 1: All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press the star key followed by the number 1 on your telephone keypad.
Speaker 1: I would now like to hand the conference over to Ms Michelle Shen, IR Director. Please go ahead.
Speaker 2: Thank you, Ashley. Hello, everyone. Thank you for joining Yum! China's first quarter 2023 earnings conference call. On today's call are our CEO , Ms. Zhou Yuot, and our CFO , Mr. Andy Yum. Before we get started, I'd like to remind you that our earnings call and investor materials contain forward-looking statements.
Speaker 2: which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our findings for the SEC.
Speaker 2: 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.
Speaker 2: You can find a webcast of this call and a PowerPoint presentation on our IR website. Now I would like to turn the call over to Joey Waugh, CEO of Yum China. Joey? Thank you for having me.
Speaker 3: Thank you Michelle. Hello everyone and thank you for joining us today.
Speaker 3: We are pleased to have set new records for first quarter revenue and operating profits.
Speaker 3: It's a wonderful start to 2023, like the Chinese saying, ?? Tucson.
Speaker 3: I want to thank all of our 400,000 plus employees. Without their hard work and dedication, our performance would not be possible.
Speaker 3: System sales grew 17% year over year.
Speaker 3: Back in early January , we had low visibility into how conditions would unfold after the realization of strict COVID measures.
Speaker 3: Chinese New Year is a political trading period for us. This year, an earlier Chinese New Year was particularly challenging due to short program of period.
Speaker 3: We planned for multiple scenarios incorporating regional differences.
Speaker 3: and focused on driving sales based on the more optimistic scenarios. Therefore, we were able to effectively deploy resources as opportunities emerged.
Speaker 3: Operating profit more than doubled to $416 million. Our efforts in enhancing operational efficiency and rephrasing our cost structure in the past few years contribute to strong profitability in the quarter.
Speaker 3: And our system sales growth compared to 2019 is plus 20% and operating profit also compared to 2019 is plus 37%.
Speaker 3: These results exemplify our ability to stay resilient in challenging times and seize opportunities when better times emerge.
Speaker 3: initiatives and investments along with our resiliency, growth, moat, strategy have made us more agile and responsive.
Speaker 3: During the quarter, we were encouraged by early signs of recovery. Look to believe, sign-in, take-away, delivery all grew year over year on the same store sales basis.
Speaker 3: Delivery accounts for around 36% of sales, same as a year ago.
Speaker 3: Customers continue to love the convenience and delivery provides. Off-premise with over 60% of sales.
Speaker 3: Same-source sales grew year-over-year across different regions and trade zones. We benefit from increasing mobility and saw a 40% plus growth at transportation and tourist locations. However, since ourselves at these locations in the first quarter were still
Speaker 3: 20 to 30% below 2019 level.
Speaker 3: Weekend sales growth slightly outpaced with day sales. Apart from increased social gatherings, value programs since 2022 also contribute to growth.
Speaker 3: Let me share about how we grow cells. We focus on our core pillars, good food at great value, and good customer experience to capture demand.
Speaker 3: Good food at great value is our hallmark.
Speaker 3: We refreshed several signature products and achieved great results.
Speaker 3: After doing it for more than a decade, people come to expect our Chinese New Year buckets at KFC.
Speaker 3: To capture a home consumption around family reunion, we add the option to trade off for juicy whole chicken, ch'n'ji. We sold 11 million whole chickens in the first quarter, more than doubled year over year.
Speaker 3: We gave our classic beef wrap a localized spicy twist. How to make a Levels Let us see how much we make.
Speaker 3: The innovation sparked social buzz, leading to a sellout in many markets in just six days.
Speaker 3: Pizza Hut, the supreme series is our most popular pizza lineup, accounting for nearly 30% of all the pizzas we sold in the first quarter.
Speaker 3: We introduced wagyu beef and seafood soup rings.
Speaker 3: plFor more information, please visit our website.
Speaker 3: in Chinese New Year.
Speaker 3: By including premium ingredients like abalone, sea cucumber, and wagyu beef, these pieces became the perfect festive choice.
Speaker 3: We also created double durian supreme.
Speaker 3: For durian stands, two types of durian, sudanwang and jinzen were combined with grapefruit and pineapple to create an explosive tropical flavor.
Speaker 3: For durian fans, two types of durian, sudan wang and jingzen were combined with grapefruit and pineapple to create an explosive tropical flavor. Humanulphs love it!
Speaker 3: We continue to make our good food available at great value. We are also making our food available at KFC, Crazy Thursday and Sunday Buy More Save More promotion.
Speaker 3: to make our good food available at great value. At KFC, crazy Thursday and Sunday, buy more, save more promotions. Thank you for your time.
Speaker 3: To answer the fast.
Speaker 3: continued to drive self-momentum and excitement.
Speaker 3: This year we offer these great values even during Chinese New Year.
Speaker 3: We also revamped our weekday value combos. Okay, Sanjaya and Thao, with more choices.
Speaker 3: and lowered prices of celeb burger combos to just 19.9 RMB.
Speaker 3: These three items combo attract new customers and drill frequency.
Speaker 3: We also expand our popular Buy One, Get One Free campaign pizza hut to include pizza and stick options.
Speaker 3: Customers can redeem the free item immediately or in the next visit within 30 days. The campaign significantly increased sales by encouraging repeat purchases during the promotion period.
Speaker 3: Now let's talk about operating efficiency.
Speaker 3: Later last year, a significant portion of our employees and riders were infected with COVID.
Speaker 3: At peak, over 4,000 of our stores were temporarily closed or offered only limited services.
Speaker 3: By early January , as people gradually recovered from COVID, we made every effort to keep our doors open and resume normal operations.
Speaker 3: We got ready for the Chinese New Year period. We planned for cruise and inventory based on the more optimistic scenarios.
Speaker 3: We also account for regional differences and continuously fine-tune our plans based on regional learning.
Speaker 3: We further improved hiring and incentive programs to manage starving and minimize labor shortages.
Speaker 3: To enhance productivity, we expand our initiative to share store management teams across multiple stores.
Speaker 3: It also provides career development opportunities for our young talent.
Speaker 3: Now let me share with you about digitization.
Speaker 3: We have built a powerful digital ecosystem that's instrumental to our innovation while also enhancing operational efficiency.
Speaker 3: We leverage AI to optimize demand forecasting.
Speaker 3: Infantry management.
Speaker 3: crew scheduling and production.
Speaker 3: Smart Order System, Xin Dan Zunen Jiao Fu, streamlined the food preparation for Dining, off-premise orders.
Speaker 3: These capabilities are particularly important during the peak season like Chinese New Year.
Speaker 3: Also, migrating our key infrastructure to private EMC cloud enhance the reliability of our operations.
Speaker 3: It's especially important when we face significant traffic spikes during campaigns like Crazy Turkey. Smart Delivery, Sunun, Sanchian continue to improve delivery coverage and flexibility.
Speaker 3: Last year, we upgraded the system to dynamically adjust delivery coverage for each store by day part.
Speaker 3: These capabilities, along with our dedicated delivery riders, allow us to capture more sales and fulfill orders.
Speaker 3: even during the Chinese New Year peak season.
Speaker 3: We continued to improve digital touchpoints for better engagement with members.
Speaker 3: Digital orders account for around 89% of sales in the first quarter. Our loyalty programs exceed 430 million members. Members, steadily, contribute to about 60% sales.
Speaker 3: We actively engage members and drive frequency with privileged subscription plans.
Speaker 3: K-Friends! Suyoka is an invitation only program for top 1 million loyal customers.
Speaker 3: Pay Friends receives exclusive two points and puts.
Speaker 3: and a royal crown on the core screen when ordering in store.
Speaker 3: Please help us gain valuable insight.
Speaker 3: to improve service for our most loyal members and all customers.
Speaker 3: To sum up, we are extremely pleased to deliver strong first quarter performance.
Speaker 3: multiple scenario planning, innovative products, and value campaigns, along with our agile supply chain and digital capabilities enable us to capture multiple opportunities.
Speaker 3: As we progress through 2023, we plan to stay nimble to the evolving market conditions. Looking ahead, we will focus on building sales momentum, expanding our store network, and fortifying our competitive mode.
Speaker 4: With that, I will turn the call over to Andy. Andy? Thank you, Zoe, and hello everyone. Let me now share with you our first quarter performance.
Speaker 4: First quarter sales we bonded significantly from the fourth quarter. We made tremendous efforts to drive sales since the reopening by offering innovative food and compelling bar do campaign.
Speaker 4: Restaurant margins reached 20.3%, the highest since 2017. Our margin expansion was driven by sales leveraging, efforts to rebase our cost structure in recent years, investment in improving operating efficiency, and temporary COVID-related relief from government and landlords. Let's go to the financials.
Speaker 4: Foreign exchange had a negative impact of approximately 8% in the quarter.
Speaker 4: First quarter total revenues were $2.9 billion in reported currency.
Speaker 4: A 9% year-over-year increase.
Speaker 4: In constant currency, total revenue grew 18%. System sales increased 17% year-over-year in constant currency.
Speaker 4: The robot's growth was fueled by same-sore cells growth of 8%.
Speaker 4: The contribution from new units and significantly fewer coag-related temporary small culture.
Speaker 4: Both KFC and Pizza Hut achieved 17% system sales growth.
Speaker 4: KFC same saw cells grew 8% in the year.
Speaker 4: Same store traffic grew 6%.
Speaker 4: and ticket average grew 2%. He's a hut, sings our south, who's 7% year over year.
Speaker 4: same soil traffic grew 13% and ticket average decreased 5%.
Speaker 4: These results were largely due to the successful promotional activities which drove strong traffic and low ticket average.
Speaker 4: The natural margin was 20.3%.
Speaker 4: 650 basis points higher than the prior year.
Speaker 4: There's a leveraging contributed to approximately half of the margin expansion.
Speaker 4: labor productivity gains, and lower occupancy costs were key factors.
Speaker 4: We also enjoy $18 million benefit from additional VAT deductions.
Speaker 4: as thanks to the government policy to help businesses dealing with the challenges posed by COVID-19.
Speaker 4: These are partially offset by cost inflation and increased promotion expense.
Speaker 4: Let me go through the key items. Cost of sales was 30.1%.
Speaker 4: through the key items. Cost of sales was 30.1%, 100 basis points lower than prior year.
Speaker 4: We kept commodity prices low, through tremendous effort, locking in prices and innovating the menu.
Speaker 4: We also reduced waste age and benefited from higher VAT deductions.
Speaker 4: Games were offset by increased promotional activity to drive traffic.
Speaker 4: Cost of labour was 24.6%, 160 basis points lower than the prior year.
Speaker 4: Self-leveraging and better labor productivity more than offset headwinds from low single-digit weight increase.
Speaker 4: We further improve labor productivity through star management team and crew sharing initiatives.
Speaker 4: Occupancy in others was 25.0%, 390 basis points lower than the prior year.
Speaker 4: This was mainly driven by sales and leveraging, lower rental expense, as well as other cost savings initiatives.
Speaker 4: Rental expense improves due to what is the more favorable rental term for new store and stock portfolio optimization.
Speaker 4: We also recorded $8 million in rental relief related to COVID surge last year.
Speaker 4: GMA expense increased 16% year over year in current currency.
Speaker 4: mainly from performance-based bonus and merit increase, as well as additional travel expenses from the resumption of business activities.
Speaker 4: Offering profit was $416 million, increasing 118% in constant currency, in report currency.
Speaker 4: Our effective tax rate was 28.5%. We expect full year effective tax rate to be around 30%. That income was $289 million, increasing 189% year-over-year in report currency.
Speaker 4: Start of EPS was 68 cents and an increase of 196% over year.
Speaker 4: In the first quarter, we genuinely spent $507 million in operating cash flow and $328 million in free cash flow.
Speaker 4: We returned $160 million to shareholders in cash dividends and share repurchases. At the end of the first quarter, we had around $3 billion in cash and short-term investment.
Speaker 4: and another $1 billion in long-term deposit, which would benefit from data interest rates.
Speaker 4: We expanded our star network and remain committed to capturing future growth opportunities.
Speaker 4: In the first quarter, we opened 233 net new stock.
Speaker 4: In the first quarter, we face an earlier Chinese New Year and labor shortage, as well as delays in contract signing and building permit pauses due to the widespread infections in the fourth quarter.
Speaker 4: However, we have a strong pipeline and are confident in reaching our goal of opening 1100 to 1300 Mac News store this year.
Speaker 4: Our new store continues to perform well.
Speaker 4: We've paid a period of two years at KFC and two years at Pizza Hut.
Speaker 4: We'll continue to focus on expanding our cell network in a systematic and difficult manner.
Speaker 4: We will continue to focus on expanding our cell network in a systematic and disciplined manner. Let's turn to our outlook.
Speaker 4: We are encouraged by first quarter performance. During the Chinese New Year trading period, we were born by pent up demand to travel.
Speaker 4: But things ourselves post Chinese New Year have remained at teams level below 2019.
Speaker 4: Now we are still in the early stages of the recovery. The pace and the trajectory of the recovery are likely to be gradual and uncertain.
Speaker 4: Overall, global macroeconomic conditions remain challenging and the pandemic is still lingering.
Speaker 4: So the car priority for us this year is still driving self.
Speaker 4: Consumers are volume conscious, so our investment in promotion to attract more traffic and sales are crucial.
Speaker 4: In the coming quarters, we expect gradual inflationary pressure.
Speaker 4: and we anticipate the benefits of additional VAT deductions and when to leave to face off.
Speaker 4: We have demonstrated our ability to capture opportunities in good times and manage the downsides in bad times.
Speaker 4: We will continue to utilize extensive scenario planning, flexible cost structures, and more. We will continue to utilize extensive scenario planning, flexible cost structures, and more.
Speaker 4: and operational activities to navigate a certain environment.
Speaker 4: We remain committed to seeking long-term growth opportunities in China, investing in strengthening our strategic most and creating value for our shareholders. With that, I will pass you back to Michelle. Thanks, Andy. Before starting the Q&A, we would like to share a heads-up that we have scheduled our 2023 Investor's Day.
Speaker 2: September 14th to 15th. The event will take place in Xi'an, China, and it will also be webcast for those who can join us in person. We will provide more details soon. Now, we will open the call for questions in order to give more people the chance to ask questions.
Speaker 1: Please limit your questions to one at a time. Ashley, 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.
Speaker 1: If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question.
Speaker 1: Your first question comes from Michelle Cheng with Goldman Sachs. Please go ahead.
Speaker 3: Hi Joey, Andy, congrats for the very strong results. My question is about the value content you mentioned on the project now. So since we have been going through this reopening of volatility for the past few months and to give we see the trend is still quite challenging. So can you share with us...
Speaker 3: like TFC benefit quite a lot on this for cost savings while Pizza Hut didn't see that much benefit. So can you also share with us how this value campaign and the product mix adjustment impact the tool brands for cost? Thank you very much.
Speaker 3: Thank you, thank you Michelle. Let me comment on the value campaigns and then Andy can follow up with the cost comment. There are economic challenges right now and therefore consumers are quite value cautious.
Speaker 3: The key question here is what are our strategies? The three prongs.
Speaker 3: three pillars of our strategy. One is menu. We really focus on the food, good tasting and innovative food on top of value campaigns because...
Speaker 3: The pure value campaign is not enough. The value campaign must come with good food in order to get the benefit.
Speaker 3: So you will see the annual fund, but Mo Hie Wan.
Speaker 3: right after Chinese New Year value-contained products.
Speaker 3: And that was doing very well.
Speaker 3: And then the group value of course is important. So you can see we have Kelsey, we have the...
Speaker 3: the first day and weekday value combos right now. And then on top of that we introduce the DOLER from Quansing, the Sunday value campaigns in the middle of last year. And all of these work quite well.
Speaker 3: So we will continue to work on that because let's not forget, Hong Kong Sing Jie's Crazy Thursday has been working since 2018. So it takes many years hard work to build that as a platform. And then
Speaker 3: with Pizza Hut with the Green Wednesday which has been working quite well. On top of Good Food, Good Value we have Good Fun. We even right now delight customers with some fun toys or even a trip to a trip to Maldives etc.
Speaker 3: So that is the first pillar of the strategy. Second is pricing. When we raise price we always do it very, very carefully and prudently. And we also carefully design trade-up options to protect the ticket average and margin. So while we are going heavy with the value campaign, you can see Management Team has been able to protect the margin for the shareholder.
Speaker 3: And on top of that, we introduce good selection for each price range including entry.
Speaker 3: price point product and let the customer choose. The third pillar of this strategy is to keep the cost competitive in inflationary environments. Our supply chain has been doing amazing work to secure supply and product innovation at scale.
Speaker 3: So while these value campaigns seem amazing, marketing campaigns, well they are amazing, but these are not possible without the very strong surprising behind that.
Speaker 3: And then we also drive operational efficiency including staff sharing, lowering the food waste, and then also save a lot of money from rent in order to pass these savings back to the customer.
Speaker 4: and I pass to Andy for comments related to calls. Yes, so I think when you look at the Pizza Hut, we're very encouraged and very happy with the results. If you look at the things that are broke or Pizza Hut, we saw...
Speaker 4: 7%, you know, same stock growth. And then if you look at over system growth, you know, and it grew at 70%. PZ also have seen, you know, acceleration in stock opening. At the same time, you know, we obviously have very strong margin expansion. We saw almost 350 basis on restaurant margin expansion. It looks like the offering profit itself.
Speaker 4: is almost double or 85% increase on a yearly basis, which is slightly less than KFC, which is 90%, but still very respectable. And I think when we look at the cost structure on line item basis, obviously your two business are slightly different in the way they operate and also the material that they use.
Speaker 4: So when you look at the food cost, KFC obviously have more important components, beef, cheese, dairy products, etc. And then also for the two brands, they also have different pace of promotional activities.
Speaker 4: And if you look at Pizza Hut, you have a very strong value campaign and a very strong slow traffic growth. And so I think the strategy, although slightly different for the two brands, are working quite well both at Pizza Hut and KFC.
Speaker 1: Thank you. Your next question comes from Lillian Lou with Morgan Stanley . Please go ahead.
Speaker 3: Thank you. Congratulations again, Joey and Andy for the strong results. My question is actually on the cost side, because I think Joey and Andy did mention that there are some benefits from cost rebates in the first quarter significant margin improvement, aside from the self-delayed
Speaker 3: the margin outlook on the year basis, are we, can we expect a similar pattern of cost saving from our patient put outside the phasing out of relief, and also with their guidance on the depreciation cost for the full year, given the significant decrease in aels PP...
Speaker 4: Thank you. It seems like another question for me, so I will take this question. So in terms of margins, I think when we look at first quarter margin improvement, we're very encouraged obviously as we have expected with increasing sales, we're going to see you.
Speaker 4: So approximately almost half the improvement are coming from the sales leveraging. Now in terms of the overall cost structure, we can see that labor productivity, some of the effort that we put into basing our cost structure there benefiting the fuel as well.
Speaker 4: because we have better sales forecast and real-time inventory visibility. So that's the benefit of investing in technology and digitalization. We also have installed some smart utility devices in the restaurant, so we also see better utility usage.
Speaker 4: In terms of what you mentioned, in terms of our O&O expenses and depreciation, I think one is that the rental expense, as I mentioned before, we have a lot of the more favorable rental terms for our new store. And also, we have a store.
Speaker 4: also the optimization that should also help us in terms of our depreciation. And then if you look at our overall investment for Newerstar, we also have bring up some investment and that also benefits in the long term our depreciation expense as well.
Speaker 4: Now, in the first quarter, we also benefited from temporary relief, as we mentioned $8 million from rental relief that we made from last year's COVID surge, and then also about $8 million from additional VAT deduction, which is a government policy that helps businesses deal with COVID.
Speaker 4: challenges and we will see how long that often will continue.
Speaker 4: In terms of outlook, I think one thing I want to emphasize on is that, as I mentioned, sales is a very important factor in determining our overall margins. And so, with sales improving, we should see sales leveraging.
Speaker 4: However, I want to point out that we do have a system now, we've got those same quality channels with a full recorder for sales and therefore margin.
Speaker 4: The other one is that when we look at the pace of recovery, I think post-CMI we see more about your pace of recovery.
Speaker 4: And still, if you look at the cost of goods sold, we have a rapidly stable cost of sales with commodity prices, but we already see from the spot market that some of the inclusion pressure of building, although much more gradual compared to overseas.
Speaker 4: We're also likely to see wage inflation through the year. Normally we see a high single digit, currently we add both single digits. So I think we're going to trend back to normal as we come to the computer. So that's sort of the way we look at it. I think for a lot of improvements, I think...
Speaker 3: your comment on the question. The current call space is certainly more resilient than three years ago.
Speaker 3: the last three years have been difficult, challenging, particularly 2022. Therefore, we really have been pushing a lot to replace the cost and the result is showing right now. Let me give you some specific examples. The rent is better. It's actually the best rent.
Speaker 3: For depreciation, roughly even for just 2022, our cap-test for New Store is down by 25 to 35%.
Speaker 3: just for 2022. If we add up the improvement in the last three years, the improvement is more.
Speaker 3: Well, the WPSA, the sales per week is also coming down. However, the profit margin maintain or even improve.
Speaker 3: And the benefit of lower CAPES is not only benefiting depreciation.
Speaker 3: Think about the sale side, Lillian. It also benefits the new store opening. With the lower capacity for new store, we are able to open.
Speaker 3: stores in trade zones that we were not able to open in the past.
Speaker 3: but lower CAPTES allows us to have more flexibility to open stores and still maintain the capacity to open stores.
Speaker 3: but lower CAPTES allows us to have more flexibility to open stores and still maintain the probability.
Speaker 3: And third one is the labor cost. I think this is an ongoing challenge. But as Andy mentioned, we have initiative working on crew sharing starting with the delivery riders and now moving to
Speaker 3: store staff as well. And that is something that we will continue to work on. And it feels quite early in the process, but we will continue with that. Thank you.
Speaker 1: Your next question comes from Lena Yan with HSBC. Please go ahead.
Speaker 3: Hi, thanks for taking my question. So I want to compare the recovery pattern on same-source databases first quarter 2023 versus first quarter 2021. So as you mentioned in your presentation with offline traffic recovered you still see positive growth in delivery. This was actually different.
Speaker 3: with delivery still growing in the post-pandemic age, we actually have more room to grow our offline traffic and dining service. Actually, we have like a bigger potential versus 2019 to grow our single store sales. So that's my question.
Speaker 4: So I think, obviously, in 2021 and today, it's quite different macro environment and also in terms of overall course recovery. So, given time, given place, I'm not quite sure it's comparable, it's just looking at the year 2023 versus 2021.
Speaker 4: What I can say is that if you look at delivery, delivery and off-premises in general have been growing before the pandemic and continue to grow through the pandemic. As we have mentioned in the last quarter, we do expect sign-in traffic to Wepam and
Speaker 4: but we also see that delivery remains very low cost. I think we're looking at delivery sales overall. At the end of last year, because of the pandemic, it spiked to about 39% of over sales. Now it's roughly about 36% of our sales.
Speaker 4: enjoying that benefit of off-premise dining, convenience and whatnot. But also we also benefit from our small network restructuring. You can think about that. We have mentioned over the past couple years, we continue to build more densities within the city that we have already.
Speaker 4: have stalled and with stalled that format that are more catering to delivery and take away business. So we are seeing some network effect there. So we're going to see some of that. And then also if you look at our delivery business model, it's very unique in a way that you know we lure depth, generally to produce new Rumors.
Speaker 4: we have dedicated a writer to commemorate our trip to consumer for the last month.
Speaker 4: that allow us to ensure good service quality, good food, timely manner, and then more importantly, when the
Speaker 4: you know, the labor shortage in rider where people are killed like Chinese New Year or what we have in, you know, crazy Thursday or rainy day or whatever, we do have, you know, ability to, you know, provide that to resubstance then out of perhaps, you know, may not.
Speaker 4: So overall, we also have continued to improve our trade zone. As I mentioned, we have invest in technology to help us to more effectively manage our trade zone for delivery and also the efficiency in terms of our delivery services, in terms of food production process.
Speaker 4: queuing and also a lot of success on the routing for our rider. So I think digital delivery will continue to be a very important growth drive for us going forward. Obviously, with the rebound in small traffic, we'll make the presentation.
Speaker 4: change and fluctuate but I think you know a long term we're pretty confident in off-premise planning. Thanks, do you have anything to add?
Speaker 4: But I think in the long term we're pretty confident in the off-premise planning. Thanks. Adwoa, do you have anything to add?
Speaker 1: That's it. Thank you, Wendy. Thank you. Your next question comes from Shen Lu with Bank of America. Please go ahead.
Speaker 5: Hi, Joey and Andy. Congratulations again on the following results. So my question is also related to same-store sales growth as I like to get more detail color on the Q1 same-store sales. So first of all, our result announcement mentioned that at CMY, our same-store sales actually increased by about $1.5 million. So we're going to be talking about the same-store sales growth as I like to get more detail color on the Q1 same-store sales. So my question is, how do we make the same-store sales growth as I like to get more detail color on the Q1 same-store sales?
Speaker 5: was below the 2019 level by PIMS level. So it seems that there could be some sequential weakness. About on the other hand, is it fair to say that on the year-on-year basis, or if we compare it with 2022 level, actually in March we are seeing...
Speaker 5: even better year-on-year same-sex process growth as the Shanghai lockdown actually started from the middle of March in Pudong. And secondly, by city tier and regions, which parts have we have actually registered even better growth. Have we seen better growth in tier 1, tier 2 cities or lower tier cities?
Speaker 5: or in which regions such as in Eastern China or Southern China, which part of the regions actually have seen even better growth. Also lastly when it comes to dining, which was also the focus of the previous question by Lena, apart from the fact that we mentioned that our stores in transportation hubs are
Speaker 5: and tourist locations still soar 20 to 30 percent same store sales decline versus 2019. Are there any other tracks that we have observed in terms of the same store sales at the dining level? Is it because of too many new stores?
Speaker 5: in our mature markets, which may cause cannibalization or are there any other drugs? And how are we going to do to address these issues so that we can see further improvement of the dining traffic? Thank you. Okay, thank you very much.
Speaker 3: I'm going to address on the same process, but let me also emphasize.
Speaker 3: for our first quarter number is also equally to look at the system cells compared to 2019.
Speaker 3: So our first quarter number is also equally to look at the system cells compared to 2019.
Speaker 3: there's a gap of things ourselves versus 2019, but the systems house growth, as I mentioned from my opening remark, is plus 20% versus 2019, and the OP is plus 37% versus 2019. So I think,
Speaker 3: we like to focus on think-throws sales, but it's equally important to note the impact of better store portfolio and also the new store opened in the last three years. I'm gonna go through a bit more color of the think-throws sales breakdown and then come back to the dining comment. We see strong rebound from quarter four 2022.
Speaker 3: and we grow year over year. First two months in Q1, we benefit from the pent up demand for Chinese New Year's travel, but more than that, we have multiple scenario planning and we invest heavily in both ingredients and staff, staffing. Therefore, I believe we have a...
Speaker 3: better than industry average result. After the Chinese New Year, the same themselves continue to grow year over year. But yes, it remains below 2019, but the good momentum continues into quarter two.
Speaker 3: So I think you can see from all the pictures, May 1, holiday, the trading was vibrant. Still low single digit below 2019, but it's catching up quite nicely.
Speaker 3: The encouraging sign is that the sales growth year on year is led by transaction growth in both KFC and PISA Hub. And you know in our business this is absolutely important.
Speaker 3: As I mentioned already, system sales improved significantly with much larger store networks. But also, despite the same sort of sales gap, the older stores are much healthier because we have been pruning store portfolio and the new stores are more resilient.
Speaker 3: because by redesigning the store network as Andy mentioned before and adjusting the store format to capture off-premise demand with more convenience, less investment and flexible core structure.
Speaker 3: So net net is more resilient than store portfolio. So let's move on to the more specific.
Speaker 3: by brand, by region, by city tier, etc. So by brand, KFC and Pizza Hut, things like those is similar, but versus 2019 is interesting. The
Speaker 3: The pizza high-sink cells versus 2019 is slightly higher than KFC. It's minus 4 versus 2019 and KFC is minus 8.
Speaker 3: So it's partly because PFC has a higher ratio of stores in transportation and tourist location.
Speaker 3: But also it shows that PISA has good improvement since its revitalization program.
Speaker 3: Can't see system growth higher than Pizza Hut because we open more new stores, OKC in the past few years. Therefore, it's, you know, plus 19%.
Speaker 3: By region, year over year, all markets grew for quarter one.
Speaker 3: By region, year over year, all markets grew for quarter one, except Beijing.
Speaker 3: because remember last year we had Winter Olympics. But by March...
Speaker 3: Subsequently, the number improves and turns harder.
Speaker 3: Subsequently, the number improved and turned positive.
Speaker 3: versus 2019 KFC, Eastern China outperformed other regions because of its very vibrant economy. Pisa has Northern China outperformed because it has less competition. Our business of Pisa and Northern China actually is quite strong.
Speaker 3: In 2019, PFC, Eastern China outperformed other regions because of its very vibrant economy. Pisa had Northern China outperform because it has less competition. Our business of Pisa and Northern China actually is quite strong. Now, if you want to do anything about my background,
Speaker 3: Year over year, lower tier cities perform well as people return home for Chinese New Year. Tier 2 cities also perform well because last year, the control, the street control on COVID impacted tourism and this year, the city of Hanoi is now in the middle of a pandemic. The city of Hanoi is now in the middle of a pandemic.
Speaker 3: we are getting the benefit out of it because domestic tourism in cities like Chanzhah, Xi'an, Hanoi, helps a lot. Transportation helped.
Speaker 3: Year over year, we see substantial improvement with increased mobility.
Speaker 3: The momentum obviously further improved during the May holiday. So I hope that gives you some color of the different angle of the things ourselves.
Speaker 3: Instead of signing, it improves, the computer improves.
Speaker 3: in, it improves, the computer improves.
Speaker 3: Because, you know, we have increased mobility.
Speaker 3: after the COVID policy change. And it's important to see whether sign-in, delivery, or take-away.
Speaker 3: All the things are self-improved. It's not only just focused on one. And of course, it improves more for Pizza Hut than for KFC because we rely more on buying business for Pizza Hut.
Speaker 3: But I would like to ask you to look at the other side of our business, which is the resiliency. KFC, it took us a lot of hard work and determination to get the off-premise sales to as high as 60-70%.
Speaker 3: And that means it's a very resilient business model.
Speaker 3: because even with dying with significant impact, we are able to still...
Speaker 3: through the business and running themselves. What PISA has also improved a lot because the percentage of all premise business for PISA back to 2019 was only 30%.
Speaker 3: and bringing them. Whereas PISA has also improved a lot because the percentage of all premise business for PISA back to 2019 was only 30%. That's between
Speaker 3: take away and deliver it. By 2022, that ratio is 50%. That's through 2023, now the ratio is down to 46%. But it would be very good for Pizza Hut if we continue to improve the ratio of take away and delivery because that improves the resiliency of the business. It's a good thing.
Speaker 3: So I hope that gives you some color of our thinking of the dying indigenous versus the others. Is there any other stress?
Speaker 3: Well, there's always much uncertainty, particularly the macro environment. We can't focus, we can't predict too well, but...
Speaker 3: What I would like to remind our analyst is...
Speaker 3: We have always had multiple scenario planning in the last three years. I hope we have also demonstrated our ability to deliver and to have the resilience in our business during bad times and during the past quarter we also have demonstrated our ability to seize opportunities.
Speaker 3: Again and again, we have very disciplined and symptomatic way of opening new stores.
Speaker 3: And one thing I would also like to mention is, and to emphasize is the agility and the flexibility of the new store portfolio is very important going forward because instead of investing too much money on fixed store, we U Amazing.
Speaker 3: in smaller, lower investment stores, but
Speaker 3: smaller, lower investment store, but with
Speaker 3: shorter distance between the stores and to make it a more convenient network for the customer but also a lower cost of delivery network for the operation because it's more efficient and it's lower cost to deliver our product to a customer when the store distance is shorter and closer to the customer.
Speaker 3: and to make it a more convenient network for the customer, but also a lower cost of delivery network for the operation because it's more efficient and it's lower cost to deliver our product to a customer when the store distance is shorter and closer to the customer. Thank you, Arplerich.
Speaker 4: I just want to add a couple of quick points there. One is that when we look at, when we mentioned, you know, like we see low teams level compared to 2019 post-CNY, but you know, like if you look at CNY, we also add the team level below 2019. And I think the main thing is that...
Speaker 4: What we're trying to say is that we saw a very sharp recovery after the reopening and during the Chinese New Year period. Then we see more gradual recovery. It's not to say like a recovery stall. The other one you said that I want to mention is an SSG comparison. Our SSG calculation excludes the temporary stall closure.
Speaker 4: Our system cells include same-cell cells growth, temporary cell closure, and also net new cell growth. So when analysts and investors compare the SSG number, they need to factor in the impact of temporary cell closure. For example, this quarter we have about 8% SSG, that's a few points.
Speaker 4: impact from temperature salt closure. So you add that back there, then you will see a probably double digit, you know, as a street improvement. And so I just wanted to make sure that people don't forget, you know, that's a slightly different way of calculating as a street between us and, you know, some other people. And so like, if you look at the overall industry growth, hopefully going top then...
Speaker 3: Also have some question on the cost side. Regarding the VAT benefit, maybe like you know would you elaborate a little bit more the nature of this VAT benefit which contribute 18 million for this quarter and like you know what is the nature like you know and like you know will the next few quarters will be seeing something similar you know what is it based on based on cost of goods.
Speaker 3: actually take a bit longer to recover back to year 2019, given the fact that especially in tier 1 studies, you are increasing your store density. So meaning that we should be looking at your new store growth rather than like, you know, fixate on the same store sales number.
Speaker 3: actually down 41%, but of course I do not know whether there's any difference in any makes in terms of like the back-end capex versus the storefront capex. So maybe you can help us understand a little bit more of this like you know excellent god save things on your side.
Speaker 3: Hi, I'll make a quick comment on the CapFest, Andy, and then you can come in. And the CapFest, the new, the CapFest for new store is down 20%, but we also save a lot of money from pruning the original store portfolio, and that's very important.
Speaker 4: So both the old store and new store help. Okay, Andy back to you. Okay, so let me try to address the VAT deductions questions. If you look at the Chinese government policy, the VAT deductions policy came out in...
Speaker 4: in 2019 and it covers some other external deductions for rate input. However, because of the COVID-19, the policy has continued to be extended over the past couple of years and now the policy has completely expanded.
Speaker 4: this year and depend on where is the situation in how business operate it may be benefits and they may be able to benefit you know from their additional VIP deductions and so this policy you know currently as it stand right now is extended you know to the same half of the whole year
Speaker 4: But the level of benefits that we may be able to join may face out. It has to do with how the input cost and output VAT value is. So it's a little bit complicated to talk about it on a conference call, but you can study the VAT policy from the Child's Government website.
Speaker 4: The other one about the, you know, about I think the depreciation and amortization costs are different. I think the one thing that we want to emphasize is that there's two components to that. One is depreciation. The other one is amortization.
Speaker 4: The big drop there is coming from democratization, as we have mentioned in the past years, that when we acquire the controlling stake in Hangzhou, we also have a, we acquire French house rights and each quarter is roughly about $15 million.
Speaker 4: And so that's one of the big factors there. And that's basically how we started to expire last year.
Speaker 4: So that's why we see that certainly improve your depression relaxation.
Speaker 4: In terms of SSG recovery, I think we're only in the first quarter of recovery. So based on what other countries experience, overall recovery to the pandemic level, we'd likely take time and it's likely going to be...
Speaker 4: uneven and certainly, as I mentioned, the pace and trajectory of that would be gradual and uncertain. And so if you look at the, I think we'll be hard pressed to see the industry itself and also any large restaurant chain.
Speaker 4: will rebound immediately to the pre-pandemic level in the first quarter after the opening. But we're confident, as we have demonstrated in the first quarter, we're able to capture the opportunities when it presents itself. And Chinese New Year, I think, despite a lot of uncertainty at that time, because our, you know, our...
Speaker 4: planning, our team's opportunities and opportunities in our digital investment infrastructure, we're able to capture those opportunities. As we have back then in 2021, when there's a market rebound. Now obviously we cannot predict, as Joey mentioned, what's the uncertainty in the market, but we also confident that given our cost structure, we're basing initiative more flexible and we store in business model we can also deal with.
Speaker 4: potential downside during this recovery. But again, the recovery, we should expect to fully recover to the present level. It will take some time and will be some up and down, but I think we're confident that either way. Thank you.
Speaker 4: during this recovery. But again, the recovery, we should expect to fully recover to pre-credit level. It will take some time and will be some up and down, but I think we're confident that either way we can deal with it. Take care.
Your next question comes from Christine Pang with UBS. Please go ahead. I think your management is still taking my questions. I think most of the questions I have have already been addressed by Joy and Andy. But if I can just ask a follow-up question on the depreciation side, I think many analysts have already asked this question, but I just want to understand a bit more.
Why there is such a big drop in terms of depreciation expenses? If you calculate on a younger basis dropped by around 50 million US dollar. Andy mentioned there was a 50 million impact from the Hangzhou franchise, right? So other than that, are there any factors that investors should be a way off or should we consider?
about $110 million depreciation expenses as recurring while we're tackling the full year depreciation expenses for the full year. Thank you. Christine, yes, let me address that. I quote myself there, we require franchise, right? It's actually $25 million per quarter as mentioned before, and then for full year it's almost $100 million. So echo, echo again, even if it's not in the
The other one is obviously, we have to remember our access is in China, it's based in China. And then so you will be impacted by the value and the depreciation amount will impact by currency exchange in the quarter and be depreciated against.
the US dollar by almost 8%. And so that would have an impact on branches and also the depreciation because of currency transformation as well. And then finally, as we mentioned before, we have also done some store optimizations during the pandemic. So we designed our own network and obviously we closed out some of the more challenging stuff.
so that also has an impact on the depreciation and amortization as well. So all in all, you can think about this $25 million from, you know, up and then you have also almost like, you know, $15 million from, you know, the smartphone exchange and then, you know, the optimization in, you know, our overall.
portfolio and so all the impacts that it bears is from falling down with reductions in depreciation amortization. We will have more details obviously now thank you statements so if you guys are you know interested in more but like that's sort of the three key factors that will drive in depreciation amortization calls.
I just want to remind analysts and investors that don't forget the impact of foreign exchange nearly. Foreign exchange has been pretty volatile over the past year and as I mentioned, foreign exchange has a negative impact of 8% because of the the depreciation. So that's going to have an impact on P&L and also on the balance sheet. Thanks. Thank you. That is all the time we have for questions today.
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