Q2 2023 Yum China Holdings Inc Earnings Call
Thank you for standing by and welcome to the Yum, China. They can call that 2023 earnings conference call.
All participants are in a listen only mode. There will be a presentation followed by a question and answer session.
If you wish to ask a question you will need to press the stocky followed by the number one on your telephone keypad.
I would now like to hand, the conference over to MS. Michelle Qi IR director. Please go ahead.
Thank you actually Hello, everyone. Thank you for joining Yum, China's second quarter 143 earnings conference call on today's call are L. D. O is Joey Wat and our CFO , Mr. Andy though before we get started I'd like to remind you that earnings call.
That's the material okay forward looking statements, which are subject to future events and uncertainties.
Actual results may differ materially from these forward looking statements.
All forward looking statements should be considered in conjunction with the cautionary statements in our area.
Great.
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.
You can find the webcast for today's call and a Powerpoint presentation.
Our website.
Now I would like to turn the call over to Joey Wat CEO of Yum, China.
Hello, everyone and thank you for joining us today I'm delighted to report outstanding performance in the second quarter.
Yes.
And bottom line.
No other testament to our resilience and anti fragile at best.
Which allow us to capture upside in good.
Good times and put that in that time.
From the back almost to the front end of line. Our teams are doing a great job.
During the quarter, we reached new highs on multiple fronts.
Sales performance.
Total revenue of 2.65 billion set a new rep cool for second quarter, especially given their exchange rate.
System sales grew 32%.
Same store sales grew 15% year over year.
We also saw strong demand Iran.
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Trading for the labor and Labor day holidays with wisely. However, demand actually is often after what we looked at in customer traffic.
We are just literally with a trusted campaign and regain sales momentum.
On June 1st Children's day, we shipped a record $8 5 billion transaction.
That's equivalent to a transaction every minute and every location across our 13000 plus the portfolio in a single day.
Thanks to our amazing operation team robust end to end its first Asia S. Our supply chain was blessedly handle spikes in demand during campaign without compromising quality and most of it.
The results demonstrate our brand equity and ability to connect with customers with delicious innovative and.
And compelling value for money.
Okay.
Or expansion.
In the first six months this year, we opened 655 net new store setting.
Setting a new record.
We continue to see nice opportunity across all region and city tiers in China.
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Russia expansion hitting 9500 stores in over 1900 cities.
Notably Shanghai became our first city to reach 500 chassis used them.
Okay.
Our five under score is in the Shanghai Library side two to one.
As part of our book Kingdom program for Kids.
A dedicated leading area to promote a lot of reading to children.
It's also one of our studies in the restaurants of KFC China.
The restaurant over the moon, inclusive space or employees and customers with special needs.
It showcases our commitment to a positive social impact in the communities we serve.
Pizza Hut opened a record 169 net new stores in the first half of the year.
Quarter by strength and fundamentals through the revitalization program healthy new store payback give us confidence so it's not a rated growth.
In addition, pizza hut reached 3000 stores in China, a milestone a few casual dining restaurant chain can claim.
Our 3000 store is in qinhuangdao.
Popular holiday destinations in northern China.
This resort seems door well, it's a beautiful patio with stunning C U.
In addition, it was built with eco friendly materials.
And intelligent energy managing management system.
So is profitability.
Our operating profit for the first half of 2023 has already see the entire year of 2022.
Achievement.
Oh, its ability to kept yourselves and repaid our cost structure.
Oh man.
First half was below 9%. This is the best ratio ratio in the past decade.
Now, let's talk about KFC, our value platform generate amazing sounds myself, but crazy Thursday, the famous crazy Thursday from financing he should continue.
Continue to be a tremendous tool driving 50% more so than other weekday.
Sunday buy more save more.
Pumping energize Sunday.
We capture it at home consumption with our Juicy whole chicken meat chunky, we sold 22 million of those brought it in the first time.
And more than double itself year over year.
So our weekday value combos, okay sounds good.
Gaining popularity we at the news, there's a roasted chicken sides booger.
Called the triple to unleash.
And reach our entry price point offering.
Well, Jeff you asked $3 customer loves the new weekday value combos.
Delicious.
Innovative food continues to delight, our customers can't see it.
Second quarter, we introduced the taste that Chris.
Creative twist on pizza that utilized our existing ingredients, we used the red from Australia, and Twister lava jato with you to make the C Corp, and popcorn chicken Jimmy why is the topic.
It's fun in the latest limited time over generated strong so we see great potential for more change the variations in the future.
He called me.
Sales grew 50% with 47 million Coke so in the second quarter, our ice sparkling Ah My Americano with Zesty Lemon.
Sunny She's help makes it is apparently trying to beat the summer heat, we use a soda fountain machines to make this sparkling drank without additional investment in the store.
It has become T called me as best as a limited time offering.
Now, let's talk about our marketing campaigns.
That's N with families and children is the important part of strengthening our brand affinity.
Iran Children's day, we partner with some real suddenly Oh and sold nearly 3 million news that with adorable toys, such as Hello Kitty.
This campaign Concho Bill two are overwhelming success on children's day of course.
This popular toys, ortho black Knight, well adults as well.
Pizza Hut left.
Let's move to Pizza hut, we continuously in a way to offer better products at great value.
Our New York.
In May has been a big success in France, I would describe it.
Over half of the menu item I E. The new upgrade from a year ago.
He's a is our biggest category accounting for over one third of selling we.
We continue to fortify our pizza, but image, but rating, it's just been promised a introducing new coffee.
Uh-huh real most immature suppose Supreme Televisa as well and Julianne Iridium Pizza, we introduced a new a new pizza like Bolognese Pizza would be is the real John Doolittle Pizza.
Is that the melia paid oh.
Because of Spaghetti.
And it has become my favorite, especially among children.
Of course, we use quite a bit as they stay ingredient to to simplify the store operation and to keep the ingredients fresh as well.
In addition.
Many customers are trading up to a stuffed crust pizza gems en pizza, which account for nearly 40% keeps us out. Most recently, we launched pineapple cream stuffed crust nice young boy watch them begin to Cumberland.
Other stuffed crust choices of cheese and sausage.
Pizza hut has been sharpening its value proposition and customer engagement.
Our value prevalent Scream Wednesday successfully drove south and traveling well.
Every Wednesday, we all but the real meal choices no pizza steak right.
Pasta to appetizer trusted Christ all three to five dollar U S dollar.
Yeah the choices.
Well, one person news and for social gatherings.
We continue our collaboration with Janssen in Pet Jensen for the second year.
This can be significantly boost sales.
Many young customer we sold more than 2 million meals that receive essentially tripling last year's number at.
It's wildly popular campaign helped us recruit over 1 million new members.
Nevada, let's switch gears to Lovaza.
The Honda continues to make good strides forward in July we crossed the 100 store milestone.
In addition to the coffee shop business, we sell allows the coffee beans, and capsules to premium hotels restaurants and other channels.
And Steve Lavazza also stopped supplying coffee beans to pizza hut to upgrade the coffee at Pizza hut.
Unhappy with the progress we have made and excited about the growth opportunity.
Digital onto digital our digital ecosystem plays a crucial role in recruiting and engaging member.
Driving that activities and unlocking sales performance and potential right.
Our loyalty programs now exceed 445 million member member sales increased to 66% setting a new record.
Our Super App had the major update earlier this year.
All right our customer a better digital experience.
We introduced interesting member exclusive put to tickle, our customer such as App exclusive new product we sell.
And lucky draw and utilizing member points.
In addition, we have been working with third party online platform.
Ben I'll reach for example, prepaid voucher equal chance have been gaining popularity on Shaw media platform.
All right Jill Robert leaves the silly deals.
We effectively attract new members and increased spending on existing customer.
Oh, Andrew and Digitization unleash great potential of our restaurant general manager or Jim.
Our store management teams sharing initiative is progressing well KFC and pizza hut.
She led to our G M for the first time in our history can now manage multiple stores.
Our AI enabled systems have streamline administrative work to help relieve Oh G M of repetitive tasks.
Further integrating our store management system, we enhance the visibility of store operation and cross data.
Crossed all data analytics.
This digital tools empower oh, Jim to manage multiple stores more effectively wow I'm holding operating stand up.
This.
There will be a driver for future store cost.
Management and also address our bottleneck of new store opening so we.
We are looking for more progress going forward.
So the peak season, as we speak we have into our summer peak trading season.
We are ready to capture summer holidays. They tried it with eye catching menu items backed up by a rock solid operation.
See we have brought that our crowd pleasing fried chicken Taco was a new ingredient.
Brock no one pocket it does not translate well, but trust us is that that Christy for a customer in China.
At Pizza Hut, we have extended our popular jewelry and pizza with our new product Doran Cocoanuts lava pizza well, yeah, Julien So your pizza.
Handle increased demand in the summer peak season.
We are ramping up crew resources.
Securing surprise and staying vigilant with multiple scenario planning with that I'll turn the call over to Andy.
Joey.
Hello, everyone. Let me now share with you our second quarter performance.
I'm delighted to report a robust performance in the second quarter, we achieved record revenues of $2.5 billion, representing 25% year over year growth.
Operating profit of 257 million dollar also reached a record level.
More than tripling that of the prior year.
We accelerated new store openings.
542, new stores.
Resulting in net new store growth of 422.
Adding a new second quarter records.
Even though same store sales remain below 2019 levels, we saw a 25% growth.
Revenues and 26% growth in operating profit in the second quarter.
Compared to the levels in 2019.
We accomplished all of these while operating in a challenging and volatile environment and.
An uptick of Covid infections started in late April .
Consumer continue to be value conscious.
So it was materially weakened after the may 1st called it but.
But leveraging multiple scenario planning we swiftly.
Responded by launching attractive offers to drive itself.
Our cells subsequently improve in June .
People want more content.
In the second quarter last year multiple cities were under Lockdown.
We are lapping last year's austerity measures and temporary relief.
Now with that law.
Let's go through the financials.
Foreign exchange had a negative impact.
Possibly 6% in the quarter.
Second quarter total revenue was $2.65 billion.
A lot of crazy eight.
25% year over year increase.
Constant currency.
Total revenue grew 32%.
System sales increased 32% year over year in constant currency.
This strong growth was mainly from same store sales growth.
15%.
The remaining growth can be roughly split equally between new unit contribution and the lapping of last year's temporary closures.
<unk> rebounded significantly year over year, while delivery continue to quote.
Brian KFC same store sales.
10% year over year.
Same store traffic grew 21% and ticket average decreased 5%.
It was driven by successful traffic driving promotions lapping a large community person orders and the decrease in delivery mix.
Delivery has.
Higher ticket average it's been paid.
Pizza Hut same store sales grew 13% year over year it.
Same store traffic grew 27%.
Average decreased 11%.
It was driven by successful promotional activities.
The lapping of camilli purchasing older.
Lower mix up delivery, which has a lower ticket average and I E. At Pizza hut, partially offset the ticket average decreased.
Restaurant margin was 16, 1%.
400 basis points higher than the prior year.
Occupancy and other improved significantly year over year.
This was primarily due to operating leverage to iPhone hi itself.
On the benefit of cost structure, you're facing.
These were partially offset by lapping last year's all steady mattress.
Kris promotional activities and wage inflation.
Let me now go through the key items.
Cost of sales was 37% 20 basis points lower than the prior year.
We kept our costs those costs are south low despite increased promotional activities to drive traffic.
Our supply chain teams hard work and nobody can use of affordable ingredient contributed to the favorable commodity pricing.
Cost of Labor was 26, 4%.
70 basis points lower than the prior year.
This was driven by operating leverage from south growth.
Lower rider cost due to lower delivery sales mix and benefit from small management sharing initiatives.
This more than offset wage inflation, the lapping of austerity measures and temporary relief last year.
Occupancy and harder was 26, 8%.
210 basis points lower than the prior year.
Rental expense and depreciation improved year over year.
Operating leverage from higher sales.
Our portfolio optimization and more favorable you install rental terms all contributed to the improvement.
This was offset by lapping of stay measured and higher rental fleet.
Last year.
G&A expenses increased.
15% year over year in constant currency.
Mainly from higher performance based incentive accruals and merit increases.
Operating profit was $257 million more than tripled year over year.
Our effective tax rate was 24, 7%.
We continue to expect our full year, if you effective tax rate to be around.
Per se.
Net income was $197 million.
Increasing 138% in reported currency.
Diluted EPS was <unk> 47 cents increasing 135%.
Crazy.
We generated $417 million in operating cash flows and $264 million each.
And free cash flow.
We returned $116 million to shareholders in <unk>.
Cash dividends and share repurchases.
At the end of the second quarter, we had around $3 billion in cash and short term investments and another $1.2 billion in long term bank deposits and not.
The benefit from better interest rates.
Now, let's turn.
Two our outlook for the third quarter.
Driving sales remain our top priority as Joey mentioned earlier we.
We are stepping up promotional activities.
And attractive offers with quick food at a compelling value.
We are also lining up exciting marketing campaigns and resources to support those initiatives to capture peak summer holidays. So.
In term of store opening.
With healthy store economics, and a robust pipeline, we are confident to achieve your loved 100 1300 no.
New stores in the full year.
Our team has put tremendous effort into developing multiple small format.
Lowering topics and securing more favorable lease terms.
We opened 655 net new store in the first half of 2023.
Are you still have maintained a healthy pay back a few years for KFC and three year for Pizza hut.
This give us.
Confidence to expand our calls different city tiers and vision.
Regarding margins.
Our store network expansion and our cost structure, we basing athletes over the past few years.
Situate us well to capture both sell and drive operational leverage it seems that we opened it.
With 40% of all current store opened after 2019, we are opening an average of one new salt F 35 hours.
Our swap portfolio is well suited to operating efficiently.
The office market condition.
We expect our athletes on efficiency improvement and cost structure, we basing two continued to benefit possibly in the long term.
So we looked at last year's record third quarter cholesterol in margin.
Rockets Lehigh benchmark.
Due to austerity measure and $30 million of temporary relief.
The prior year.
We also expect some more hiring normalized inflation inflation of low to mid single digits in the second half.
Now despite macro uncertainty and volatility in the near term almost close to neuro planning capabilities and agility who's here in the us well to capture opportunities.
On and manage the downside.
Catherine.
Cause you to focus on driving sales improving operational efficiency and investing in digital and supply chain for a long time pool.
Before I conclude I would like to highlight our upcoming Yum, China Investor day to be held in September and see on trader.
Joey myself, along with our leadership team, including KFC and Pizza Hut brand manager.
He will share updates on our strategic priorities.
We have also planned foot tasting Julien visit to our restaurant.
Logistics Center and digital center.
Now to Disney Mezz, Investor and analysts can things firsthand insight into the market and our business.
We look forward to hopefully you can see on with that I will pass you back to Michelle Michelle. Thank you Andy if you're interested in attending our Investor day in person. Please reach out to Investor Relations team.
Now we will open the call for questions what is it getting more people with a 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're on a speakerphone please pick up the handset to ask your question.
Your first question comes from Michelle Chang with Goldman Sachs. Please go ahead.
Oh, Hi, Oh, you Andy Congrats again off of a very very strong results. My question is about the promotion that competition. So if you imagine the market is still very promotional and also if you're off south smaller players I actually call me back. So on the one side. Okay. You are these guys all share with US your observation on.
The competition side and the most specifically on the margin are we still see all the difficult market manage a pretty well in particular the al can you talk about pizza hut all things off we have been working all these are our value position for many years, but it looks like this quarter. The cost control you saw a pretty decent. So can you also share with us how should.
I think up all these pricing strategy and also part of a calendar for cost. Thank you.
Michelle Thanks, you Oh, no I'll talk about a promotion competition N D were hindered the margin question.
Customer there are very value conscious for sure but at the same time.
And now if we just focus on promotion it has to be promotion.
Sun promotion and good food.
And I'll focus is true focus I'm feel very effective promotion platform. So what are the famous one crazy Thursday is very very fun is user generated content. These days and of course, our food. There is good. So we have some new foot light spring.
Not only normal spring hope a skinny springhill Monday, when the spring Louis smaller they actually teach you can try to with allergists see.
Spring real Crazy Thursday, and then Pizza hut is focusing on screaming Wednesday again, you know very powerful message very simple.
Simple message, but with great food and Great also east from steak to Pizza and Taco Bell are focused on Taco Tuesday, so not only just random promotions are very focused promotion and we keep doing that again and again and again.
One to sell you have to expect because a little do people remember crazy Thursday stopped from that's your 2018. So by now is a very familiar mechanism and that worked beautifully and of course, we continue to build new promotional platform Jesse the new one.
B a buy more save more on Sunday and that has the Korea project focus it's called a whole chicken during normal times. The chicken cellphone 39, <unk> on Sunday weekend itself, where 29. So it was not only promotion our great food.
And I think what people. So also not necessarily correlate our how we differentiate it from all the competitors in driving this promotion we have the unique advantage of having oh very effective powerful agile and nimble supply chain.
Because without the surprising capability to source to innovate and to deliver all these very affordable.
Ingredient.
It's almost impossible to solve.
That's kind of promotion.
On a sustainable basis.
Last but not least operation team.
June to.
She was on children's day, we achieved eight point.
$8 5 million transactions a day, that's a huge number of transaction and the fact that our operation team to handle that.
Amazing well for people, who are running them well.
Well running the restaurants in operation you, we wouldn't be able to appreciate how difficult it is to to be able to handle that peak and that's Mike and Archie system. It did not go down and we can continue to push our system in terms of the stability and efficiency so that.
We'll come together, it's not just marketing promotion is the project is that digital is the operation.
And and and and and while many competitors can probably replicate the marketing campaign, but the.
The <unk>.
Operation, There's a party with digital these are the real pop culture, and a better be very difficult to replicate.
So I'll pause here and move onto margin question Okay.
So in the second quarter improvement in terms of margin I think the I think obviously the number one driver reviews.
The operational leverage from higher sales and and and also if you look at the overall market improvement he called Quito benefit.
Our portfolio optimization over the past few years.
Mentioned earlier you know it.
If you look at our portfolio.
Currently you know, 40% up out of the store opened after 2019 and they're very much geared to our you know what can you personally in our current operating bomb and also a continued benefit from the cost structure, we basing that we initiated over the past couple of years and and so.
So those are the key driver of margin improvement and and I think you know us well for the long term to two operating efficiently.
Certainly if you looked at you know, particularly on cost ourselves.
I think our overall low commodity prices rising in the second quarter was slightly favorable with overall commodity inflation being favorable but you know the chicken price to comprise a quarter. After we continue to experience upward trend.
And you know given you know the spot price and also a contract we expect that to probably.
Extended into the third quarter.
So I think for boyfriend.
They manage their fill us very well over the past two years general rebalancing to expand you know the you know the pricing range. So that we can you know continue to expand our addressable customer base and balancing you know commodity price and also the value proposition to consumers.
We tried to retrace some of the savings to our consumer. So if you look at you know cost up Labor. You know you also improve 70 basis point in the in the <unk> in the quarter and again driven by our cost structure. We basing that we have and then also as Tony mentioned, we have to.
Matt Stahl management sharing initiative that click here, how us one I'll call efficiently.
And and that's more than offset the low single digit labor inflation in the second quarter, we experienced.
And then you know if you look at Illinois merchants, you know biggest improvement over the past few years, we continue to structurally changed you know how to work with a contract only.
We have more wearable components of that whether it was for them, but also overall lease oh rent as a percent.
Revenue.
You know decade levels like best in a decade and so so I think it was structurally change will continue to benefit US and also helped depreciations and also as we walk down the aisle topically lesson coastal that's also personally single I think and then you know look at our Mississippian energy savings and also.
You know also we benefit from our investment in technology. So that you know a M. P also with seeing some leverage until all that couldn't agree with you.
So I think that's how we look at it and some of them like the outlook I think it's a metric law. If I could generally are favorable with the exception that perhaps with the chicken price next quarter in terms of labor cost inflation I think we're looking at low to mid single digit in the.
The second half this year.
Again, like you know, but one thing I want to again talk a little bit is that last year. It was a special situations, obviously, even receive about $30 million of one time I believe a few to no public situations last year and then we also have some I'll say program. So.
Thanks.
Thank you. Your next question comes from Brian Bittner with Oppenheimer and company. Please go ahead.
Yeah.
Thank you I just wanted to ask about the sales trends, Andy you mentioned that.
May saw a step back and demand trends, but then you regain momentum and Jim can you just add some context here could you perhaps talk about.
Where your underlying trends are versus 19 or anything else regarding you know, perhaps the consumer environment in China that you're witnessing right now just to help us all get on the same page with with modeling sales moving forward.
Okay, Brian . Thanks for the question I think you know as we mentioned you know we are pretty early you are in the you know we opening.
Second quarter, it seems that the reopening.
So we're going to probably wouldn't have anything to cause some volatility in and whatnot.
And the decline in all all of that goes to them.
Softening in demand May [noise], how did you with a couple of things like what are we seeing the uptake you know in Kuwait are you at.
The end of April starting at the end of April .
And then the other one is all obviously you probably have seen the and you know some of the economic data and you indicated that you know the macroeconomic situation you still want to be funny thing. So continue so consumer you know obviously you have experienced three yeah cold Lake and an end.
And in the end with IV when it took some time to we can you know some of the confidence and so that's why we've seen right now, but you know as we mentioned you know we have multiple scenario planning is always also we take quick actions as we see the change in customer behavior, we have very strong product offering and so subtle campaign and that you know as well.
Oh, we vitalize and yoga south supplemental.
And I think again, you know like I think in the near term that's going to be some well until the uncertainty, but I think we we are well positioned.
To capture the opportunity when it was merch and then they're able to respond quickly should the situation become little bit more challenging.
Brian . Thank you, let me make an overall picture of the business that might help understand herself trend right now as well.
Overall, our strong U.
Yes, all our investor and analyst to really look at the business with a fresh pair of eyes, because the business is rather different visits now compared to pre pandemic.
When might not be true Oh, yes, another 40% of our current so did not exist before the pandemic.
So so the same store sales were the only applied to a bit more than half of our business no because somebody puts out their stores are new.
And even for the portfolio that exist before 2019.
Business is very different to because.
Management team have taken the opportunity in the last few years predominate to prune.
The portfolio.
Particularly those stove with less desirable economics are.
So overall this portfolio is better but even for the stores that have survived the pruning process you bet. So the economics are much better with no around et cetera, et cetera, and I think historical problem. The way we have we used to.
Pandemic time too to sort them out as much as possible.
On top of that we have rebased our cost structure, we have completed the end to end digitization.
And also did utilization of the entire supply chain process.
So the business is more resilient more livable and with better cost structure for the entire company, but also for their store economic for each sport.
So it's very different therefore, the system sales growth.
It's it's quite good and famous the profitability and that's what we want it.
Yeah.
Going forward what in terms of I don't know and he talked about Q2 Q2, Q3, obviously, we're going to focus ourselves we're going to focus on growth, we're going to focus on improved.
Opening more stores and then continues with focus on delicious and innovative food, where they work for a customer.
But in the longer term.
That's true in the short term you know it is hard to predict from month to month basis.
You know China GDP has slowed down a two two growing probably at twice as fast as other developed countries. It's not too bad isn't it and then it's the amazing state market and weakness as 2 billion customer yet and sort of regional growth right in the middle of China, It's very nice to Rome is very good.
Therefore, we are able to open stores are very fast I think out of the Beast.
These what we call new breadbasket.
So what does that mean to KFC pizza hut can see you can see from our Oh for opening in the last few years. We are opening a lot of thought and we are reaching 9500 store in China alone can't see.
In Shanghai alone is 500 city and we're not only just opened a store in a in lower tier city.
We are actually opening still in all tier city.
We are utilizing franchisee, we are utilizing different channels such as.
Some channels are newly fall opportunities, such as University Hospital and high speed service station.
And it was.
And then pizza hut is really ready to asked that I read and growth. After a few years I'll tell you on the margin is good and it surpassed 3000 store mark for casual dining which is quite difficult to get to in terms of scale in terms of casual dining.
So you know the smaller brand also thought opinion, you know Lavazza I'm.
Just the reached a one time their store milestone and also start to sell coffee bean in retail. So so going forward. We are committed and we are optimistic and therefore, you can see our net new store openings. This year. If you are at the at the at the rate that is.
So that caught our whole business in the last 36, yes. Thank you Brian .
Yeah.
Thank you. Your next question comes from Chandler with Bank of America. Please go ahead.
Thank you Joey and Andy and my question is margin there as well so if we combine first half this year with second half last year.
And actually the Ah <unk>.
Imply a full court or.
Our full margin of close to 17% at the restaurant level.
So I remember many years ago, we'd talk about the long term normalized restaurant margin of 70% Oh, no. We no longer talk about long term market, but oh longton talking the marquee usually with Stuart look at 70% as a reference.
Now we are almost there.
How much upside.
Are we going to see from here in particular as Mandy Andy mentioned previously starting from Q3, we are going to see pretty high lapping for margins is it fair to say that from now on the low hanging fruit from coffee basi is no longer industrial.
And the majority of the margin expansion will come from the same store sales or sales leveraging in the future. Thank you.
Hum and thank you for your questions is one of those questions. You know and then there's also a wonderful question Oh, That's you mentioned the issue to deal with right because.
After the reopening.
Oh, there's restructuring cost structure, we're pacing that we have to fall over the past few years.
There you know as we mentioned.
Portfolio change couldn't entirely different almost entirely different.
A small portfolio. We are now you know obviously are at multiyear right no.
Finally at least five years, even though all time high until Martin, we all think that efficiently at this point.
And you know as mentioned even despite the near term you know Luckily and challenges in the market we are operating very efficiently.
And so I think you know a couple of things that we I wasn't mentioned you know if you look at the cost of should we be using as we mentioned it was a very fundamental change in terms of how we operate.
A restaurant.
And also you know that.
Cost structure yourself now.
Oh, you know, 17% and and Oh.
So I'm glad that you know when you mentioned you know over the comparable quarter you averaged always moved there we don't give guidance on our margins, but we just do it sometimes right and so we we we didn't mention at all about you know you too, but you know I think it will continue to focus on doing that so we could have confidence in.
Some of you know our cost structure basically with Dallas.
We're pretty confident that you know how Newport, New store performance, our new store economics are at multi year I guess, you have the offering and the bad thing about high here level and so that gave us confidence in how our portfolio moving forward as we open more store. So so we before to do that.
You know improvement continuing however.
However, as we've always mentioned you know we we generally you know look at cost ourselves, we try to maintain debt staple bogey. There. The reason why we do that is because you know we obviously have a veteran of weight a team that can help us to mitigate some of the volatility in commodity prices.
We also use efficiently our policy that we have over the year, so totally utilizing resources like pulled chicken and beef.
And then also our supply chain tremendous I believe you actually locked in long term contract for example, coffee bean over last couple of years will say well how are you able to lock him about the treaty of contracts.
However, we always you know being fairly cautious about pricing and a price increase and people. It's the reason that we wanted to make sure that our consumer appeal to benefits from cost saving and also enjoy it until like quick bodies. So we're trying to try to keep people as well who was stable.
And then C O L. A you know I think we have an initiative to improve labor productivity improvement.
We have to you know them.
Small mesh win short initiative to invest in technology.
Enable our team member to work more efficiently.
But we have got to also look at you know the ongoing labor inflation, you said fight in our industry, but we always have to do with labor cost inflation until sometime so we tend to also try to keep that stable. So I've mentioned, the one O N E.
Over the years and not only the last couple of years, but even over the past five years 10 years and so as we mentioned we are at.
Pretty efficient level, but we see continued room for improvement.
So that's generally how we look at the overall margin obviously, the you know the next quarter or so that was something to all of you all year over year basis, because last year a temporary leave in April .
Well I think that our trajectory is why trajectory.
That's what I'm, saying.
Yeah.
Thank you. Your next question comes from Anne Lange with Jefferies. Please go ahead.
Hey, Hi, Thank you very much what taking my call I have plus another question also on what the the restaurant margin side.
It looks like you know pizza hut, improving and assessing the restructuring well what would be the normalized from a restaurant margin would be over time, a tennessee like you know without like you know what they mean.
Or could it be as high as like you know cats, he's like 18% plus at all and if that's the case and what are the drivers are is it more on the scale of the hold that what or is it more on like adult so I think the south pistol, a full sort of normalization and Joey last Todd mentioned.
Now the purpose called out you would love to see a further increase in the telephony.
This is for the Pizza hut side of all this strategy that we can facilitate this decade.
Yeah, Hi, yeah. Thank you for the questions Oh, we got into this we're very happy to see that you know that would be why do I say shouldn't program. How 'bout cheap you know very strong without you know over the past.
The last two quarter already we continue to see very strong topic, you know both of them.
You do see a strong south Oh.
And.
Joe You mentioned you know that's been topic Pollock coming out from from Pizza Hut and also pizza over the past two years as we have kept pricing you know people have continued.
Continue to improve its value proposition to consumer value Oh, great and then you can look at the brand.
Luckily, we did well with consumer as well, especially with some of the campaign goes in and out of there that really connect with all new customers. So I think it's wonderful that they make this transformation because I think you know it.
And the pricing range improve the value proposition.
Continue to drive you know that addressable market right. So now we're at 3000 store level.
Now, obviously, a great opportunity to grow into.
Into mothball, a and in fact, if you look at you know that's all opening the opening right now is at record.
Hmm and if you look at you know in the quarter alone, we probably opened more restaurants than you know like last couple of years combined and so so I think that's tremendous off with and I think you know we do hope to see you know Kathy.
Network, especially especially with chicken by Sally store in a smaller store format.
And then continued view.
That value proposition.
And then also you know if they have been doing it off of a quarter.
Who you know their margin and all the time, so but when you say normalized level I think the way not only modestly even heightened till 19 I don't know.
Yeah.
Normalized.
But I think I think that in the right trajectory for sure I think and the ultimate question for Pizza Hut is not necessarily only about margin I will.
Gold four.
For Pizza hut going forward after Tony Iran is to continuing to work on it the Chilean sea and growth.
Because I'm going to turn it around in basketball, we want the problem, but Greg Mcdowell resiliency is it's not so comfortable isn't it so grill resiliency and growth.
And then of course next step is the most strategic moat right. We are very consistent with nothing came out G M.
So the question is how to get there what was the key to unlock to get the resiliency to get more cells to manage our investment and to get profit.
No shortcut Atlanta well.
Our view of the tea, which we're working on is just that's the model.
Is.
Overall, we look at the result of the newest old pay back Pizza hut moved from four years to three years.
Weak separately like so really they live Oh. These are the smallest all focus on takeaway and delivery, which is your second question.
So separate I still do the trick and satellite so require less investment it required a different menu because they may need delivery and takeaway is drilling.
And the problem is very good and the payback is two years. So when we put a satellite store and Oh, that's supposed to get at the overall payback three yet.
So we have found a T because saturday so we just need the time to build more and more and more and more from top tier city, all the way to lower tier city and the girl story a piece of it is not difficult to understand Cassie only I E 1900 cities in China with 9500 stores.
And Pizza hut, we only have 3000 adult Inc.
800 citizen in China, So that's more than 1000 cities in China that have pizza hut, that's all I have.
Uh Huh, Chelsea does not have a pizza hut.
So you can see why we are quite confident about the growth potential of tease out he himself. So Tom it resiliency. Thank you Ann.
Thank you. Your next question comes from Linda C. J with C. I C. C. Please go ahead.
Oh, Thank you Joanne M D. Oh I have a follow up question on promotional and competition. So we're saying that our insistence on value for money needs to have ever resilient sales recovery, but we're also saying crazy promotional and more about O combos like okay. So Paul So do we think this is only because.
Those people out there who calls sure it's under the economic environment or are these also has a relationship with more intense competition from Mcdonald's from peso thing and Oh, all the competitors are and how will this impact our ticket average and so first of all thank you.
Oh, thank you.
Okay. So I'm doing now is new.
Now is the lowering of all our low single digit in terms off so snakes.
Key thing here is well.
Customers are very cautious and it doesn't hurt to open up the price range, what does that mean in the past we don't have that.
Alright at 1919 or not yen as a combo when we introduced at the most critical thing that we're looking for an incremental step in.
Any particular incremental it seems though ourselves what's not to like.
It's fantastic if you break it.
For it.
And then in terms of its proponents of crossett at T O well people my saying that it worked very well in low tier cities actually not really it was better in top tier cities. Because this is more for what we called guys shoot that's plenty should know kind of assumption for the lunch.
So it was better for the top tier city before launch yesterday's actually give us insight when might we we we still can open more stores.
[laughter] Oh, we kept more of the Muslim in-laws yesterday to capture that functional consumption.
So we are we're happy with it and and the.
Again, that's T. Two to unlock this okay. So again, how the though we take Campbell is ability in supply chain well the weekend. So its such a affordable ingredient to deliver that price point and still at least in the province, and our teams did it.
Thank you.
Your next question comes from Lillian Lou with Morgan Stanley . Please go ahead.
Oh I think so yeah in N D for all the answers I have a quick follow up questions on changed ourselves well, so because that Joe you just mentioned that our store network right now is very different from take hold that so when they look tacky seems style shell squirrel, which compared to pre COVID-19 I eat 2000.
19 level.
Our second quarter was still temperature envelope, but if we look at it more on the holistic basis, because we're adding more and more on our smaller stores does that mean that actually I'll wash himself outflows will be below 2019 for level for a longer period of time, even though our underlying op.
Shipments already tango close to back to normal that's more like mathematics problem.
Sure.
And Josh on the also in the operation perspective, what has been dragging our same store sales growth of below normal level. In particular are they still being tried that hop stores or in certain area or even second tier cities all store formats. Thanks a lot.
I'll leave it so let me try to clarify this our you know see themselves as 25% year over year, our same store growth was at 15.
15% year over year, and then you know if you are just Paul you know the.
You know impact of temporary store closure last year our system. The same source as well you know last time people use that industry would be about 20 or 25 with the O N.
And then sorry, our system to go sub 2%. So if you look at that not just that you know like a seamless telco would be close to 24% year over year. So I think you know even if you can.
Mentioned some of this one does.
May period. In fact, you know you know all seems ourselves as well, but very robust and strong.
And you know obviously you know the driver for you know the different shares even slightly different.
So Mitch I, even mentioned this but what do you see these generally you know roll. This out there and then you know and then you mentioned about you know the TMT space empty space.
For us and we continue to see incredible buzz recovery over there you know and if you look at a tourist locations I think you know he's doing you know, it's quite well a couple of quite well.
Even at the major transportation hub for domestic travel uncle, Hiseq mellow and Paul domestic flight.
They called me to improve I think that trajectory will go because obviously you didn't necessarily travel flight travel you go to software.
I'll take the longest time until the flight schedule got sought out and so so I think you know in terms of same store sales growth.
Pretty robust.
So I don't want you until you have anything to mention them.
Oh there is this thing Oh that open in fall of 2019, as Andy mentioned, the transportation hub actually are coming back.
And doing the man, particularly during the holidays.
And and by the way that's sort of another consumer behavior right now that's consumption during the holiday and festival are amazingly well. It just in between is a bit more depressed, but we have programs to manage that.
For children to occasion, I'm actually it has to recover we do really well and particularly in the tier two cities.
You know at ICR and whatever so you start off.
Tourism destination in tier two cities that athlete where the well.
Back to pre 2019 level already.
To answer your other question about the holistic same thoughts as well she had the the ultimate question is how to cook she needed to grow our same store sales.
Suddenly when our stores are getting smaller and smaller and smaller, particularly at our newly opened one because the smallest doors require less capital and the paper is good well it sounds silly, but why not growing the same store sales outside that's full of it.
Yeah, So it's rather important to continue to drive the delivery.
[noise] away and that goes for both KFC and Pizza hut, and therefore would be emphasizing how important it is to grow the off premise, though and the new retail.
New retail, it's still low single digit comp.
Parents with anti Yum, China itself, but the absolute number is not small.
And it provides very nice resilience.
Self drive up, particularly during the tough time.
And let me be a bit more specific about KFC, how do we do it outside that Paul if you'll come to China have opportunity I think what are they getting ala and.
And that's a day, you will see more and more and more all camps. You still will have a window opened up so that you don't even need to catch him I don't even need to go inside the store to get you, a coffee ice cream or whatever snap or nil.
And that improved convenience health and you bet, we are doing with doing it at scale.
Whenever we could.
And then you will see more coffee trucks, all standalone coffee well.
Well, that's just themselves, but it's nicely, but if we looked at of course can't see coffee compared to last year. It only increased by 50%, which is not too bad isn't it and the coffee and that's why it's slow it's lovely, it's so cute in any tourist location or anywhere without.
Okay. It's okay.
So we only have about you know 200, right now, but you bet, we're gonna have small.
And then during the holiday and festival.
Oh Wow.
Well actually it's not something new we just don't talk enough about it.
We do a lot of the pop up store during Chinese new year, and right now it won't fall holiday and festival too so.
It doesn't matter.
Well to a Saturday met it but we don't want the the size of that starts with limit I don't think so because we cant go outside you will see more and more and more worse, that's yeah and Ryan.
That's all these days it was bold forecast in pizza hut.
You know, even though it's already very convenient pick up breakfast from us, though we further improve the convenience, but bringing the breakfast to the cause that's subway station, etc cetera.
So I hope that gives you.
A sense of how hard we tried the holistic same thought though despite all stores are getting smarter. Thank you.
Your next question comes from Christine Peng with UBS. Please Scott. Please go ahead.
Thank the management for the presentation as well as answering most of the questions I think investors care about so I Havent very quick question regarding the capital allocation.
Look at the first half you know 'twenty 'twenty sweep our cash our free cash flow.
Ease picture, so basically all the matches, yes. It suggests that the cash accumulation at all for the company has been very strong.
But as we look at the cash dividends and share repurchases Oh, he was not really a suggesting a big you know pick up compare was the pandemic a period.
I was just trying to understand what's the logic.
Behind this and what's the future fault are in terms of dish building a more you know cash Ah Ah Ah.
Towards our investors. Thank you.
Yeah.
Thank you Christine I think you know couple things one is that you know of our.
Couple of outpatient as always.
All shopping bargain at close and so you know is on store opening is on a solid.
Probably modeling.
That would tell you we captured more than 6% of our you know our capex.
Capex spending and then we also look into investing obviously, you know Neill, Brian and also just too and their supply chain to make sure that we continue to run our operations effectively efficiently and also accurately so that you know we tend to feel.
Given the uncertainty.
One is you know a full council locations, obviously, Oh, we want to have a strong balance sheet to make sure that we can do with any contingency that may come up.
You know officially optimistically, we look at investments, especially investment that was both all capabilities I'm, hoping to technologies skull operation.
<unk>.
We're very committed to returning capital.
Capital to the shareholder no. If you look at our in the quarter, we have returned.
No more than $110 million to shareholder.
The pace of share repurchase obviously will vary depending on number of factors, but I think you know we hold a strong commitment to.
To return excess cash to shareholder.
Dividends you know as we are.
We have done so in the first quarter of this year, we have raised dividends no part.
Part of this year.
Hi.
Almost eight 9% and so so where are we with it you know all these dividend policy with our board every quarter and every year.
And so so but you know again.
We're very glad are in the house.
Strong operating performance generate good operating cash flow.
A good free cash flow in the same quarter in the first half of this year and so we'll come to you a little continue to yourself, we turned out excess cash to shareholder for sure.
Excuse me.
Thank you that is all the time, we have for questions today, I'll now hand back to Ms. Michelle Qi for closing remarks.
Thank you for joining the call today. If you have further questions. Please reach out through the contact information you know earnings release and on our website.
Okay, great. Thank you that does conclude our conference for today. Thank you for participating you may now disconnect.
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