Q3 2023 Yum China Holdings Inc Earnings Call

November 1, 2023

Thank you for standing by and welcome to the Yum, China third quarter of 2023 earnings Conference call.

I would now like to hand, the conference over to Michelle Michelle Shen. Please go ahead.

Michelle Shen: Thank you, Zach. Hello, everyone. Thank you for joining Yum China's Q3 2023 Earnings Conference Call. On today's call are our CEO, Ms. Joey Wat, and our CFO, Mr. Andy Yeung. I'd like to remind everyone that our earnings call and investor materials contain 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 earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. You can find a webcast of this call and a PowerPoint presentation on our IR website.

Thank you Jack Hello, everyone. Thank you for joining Yum, China's third quarter 2023 earnings conference call on today's call, our CEO, Ms Joey Wat and our CFO, Mr. Andy Yeung.

I'd like to remind everyone that our earnings release.

That's a material a forward looking statement.

They are subject to future events and is very active.

Results may differ materially from these forward looking statements.

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

The earnings release and the risk factors included.

It is with the FCC.

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

Measures is included in our earnings release.

You can find the webcast of this call and a powerpoint presentation.

I R Webb.

Michelle Shen: Now, I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Now I would like to turn the call over to Joe you wont see Oh, Yeah, China Li.

Joey Wat: Hello, everyone, and thank you for joining us today. We held our investor day in September in Xi'an, China. It was wonderful meeting investors face-to-face. At the event, we unveiled our RGM 2.0 strategy with a strong focus on growth. We have set ambitious growth targets for the coming three years. These include reaching 20,000 stores by 2026, achieving double-digit EPS CAGR, and returning $3 billion to shareholders in dividends and share repurchases. With our long-term growth commitment in mind, let's zoom into Q3. Our results reflect continued strength. Q3 net new stores, revenue, and adjusted operating profit all reached record levels. We accelerated new store openings with 500 net new stores in the quarter. While maintaining healthy store payback periods. Our portfolio now exceeds 14,000 stores. System sales grew 15% year-over-year in constant currency.

Hello, everyone and thank you for joining us today.

We held our Investor day in September.

<unk> China.

It was wonderful meeting investors face to face.

At the event, we unveiled our algae empty upon its strategy with a strong focus on growth.

We have set ambitious growth targets for the coming three years.

These include reaching 20000 stores.

By 2026.

Achieving double digit EPS trigger.

And returning 3 billion to shareholders in dividend and share repurchase.

With our long term growth.

Coming moneyline, let's look into the third quarter.

Those reflect continued strength.

Third quarter net new store revenue and adjusted operating profit all reached record levels.

We have thought a ready to use the opening with 500 net new store.

In the quarter.

While maintaining healthy bull pape up to it.

Our portfolio now exceed 14000 sports.

System sales grew 15% year over year in constant currency.

Joey Wat: Adjusted operating profit, excluding temporary relief, grew 21% year over year in constant currency. In the first nine months, adjusted operating profit exceeds $1 billion. Our team's relentless efforts produced these remarkable results. To drive sales in the peak summer trading season, we bolstered crew resources for excellent service, ensured supply pipeline readiness, and execute traffic driving campaigns. Same-store sales growth in Q3 was led by strong transaction growth. During the summer holidays, same-store sales at our tourist and transportation locations surged more than 50% year over year. It's important to remember, though, that consumers have continued to be cautious in their spending. Our formula to capture sales growth has always been simple. The food, the fun, and exceptional value. Now, let me go through what we have done. First, food innovations on a big scale.

Adjusted operating profit, excluding temporary relief grew 21% year over year in constant currency.

In the first nine months.

Just upgrading cockpit exceed 1 billion U S dollar.

Our team's relentless efforts so dear these remarkable result.

To drive sales in the peak summer trading season.

We bolstered crew resources for excellent service and.

Sure right.

Readiness.

Cute.

Traffic driving same store sales growth in the third quarter was led by strong transaction growth.

During the summer holidays same store sales at Alturas and transport patient locations.

More than 50% year over year.

It's important to remember, though that consumers have come to you to be cautious in their spending.

Oh, Paul Miller to kept yourselves grow has always been simple the food, they're fun exceptional value no.

Let me go through what we have done so well innovations on a big scale.

Joey Wat: Our $100 million club showcase at Investor Day illustrates our success in building huge categories to boost sales. Recent innovations at KFC include our juicy whole chicken and beef burger. To put things into perspective, in Q3, these two categories combined exceed 6% of KFC sales mix. This is higher than our Original Recipe Chicken, which we have been proudly serving in China over the past 36 years. It shows our ability to innovate, but also build very big categories. We are continuing to expand these categories with new flavors like Sichuan style spicy whole chicken, offering it from Friday to Sunday only. This spicy whole chicken is perfect for a home consumption. We also collaborate with Ultraman to promote our premium Ultra Cheese 2.0 beef burger. Consumers love them.

Uh huh.

100.

On a million club showcase at Investor day illustrates our success in building huge categories to boost those.

At least that innovation can see include our G C whole chicken and beef booger.

To put things into perspective in the third quarter. These two categories combined exceed 6% of KFC so snakes.

This is higher than our original recipe chicken, which we have been probably a survey in China over the past 36 years it shows.

Our ability to innovate, but also be a really big categories.

We are continuing to expand these categories with new flavor of life's each one style spicy chicken.

John Your thoughts behind me the chunky.

I'll bring it from Friday to Sunday only.

Spicy chicken is perfect for at home consumption.

We also collaborate with ultra Ultra Miami, Oh tomorrow to promote our premium ultra cheap to about a zero based booger.

Cool just your just your other I mean, there's a whole new ball consumers love them.

Joey Wat: At Pizza Hut, we sold over 100 million pizzas in the first nine months of the year. One out of every 5 pizzas we sold was a durian pizza. That's over 20 million durian pizzas, nearly 70% more year-over-year. Our in-house supply chain works with suppliers to secure durian supply and expand capacity to satisfy the growing demand. Second, we are offering our customers amazing value for money on top of the innovative food. KFC Crazy Thursdays is no longer just a marketing campaign. It has become a cultural phenomenon. Crazy Thursday sales consistently outperformed other weekdays in Q3 by around 40%. To keep customers engaged, we rotate offers and regularly launch new flavor variations such as spicy nuggets. We chose products that utilize existing ingredients and involve simple cooking processes to provide exceptional value while ensuring operational efficiency.

At Pizza Hut, we saw over 100 million pizza in the first nine months of the year.

One out of every five pizza, we saw with the DRAM Pizza, that's over 20 million durian pizza, nearly 70% more year over year, our in house supply chain, what with suppliers to secure enterprise.

Expand capacity to satisfy the growing demand.

So again.

We are offering our customer amazing value for money on top of all the innovative food.

Can't be Crazy Thursday won quite a few niche it is no longer just a marketing campaign it has become a cultural phenomenon.

Crazy Thursday cells consistently outperformed although these days in the third quarter by around 40%.

Some key customers engage we rotate alder and regularly launched new reva variations such a spicy nuggets.

Oh Boy Giamati quite.

We chose products that utilize existing ingredients involved simple cooking classes to provide exceptional value, while ensuring operational efficiency.

Joey Wat: At Pizza Hut, we are expanding our selections for pizzas priced below 50 RMB, which is a very significant portion of the overall pizza market. Around 20% of our pizzas we offer are priced below 50 RMB, and that's not enough. We could do more. By enriching our lower-priced pizza offerings, we are tapping into this substantial opportunity that's currently underserved by Pizza Hut. Other than pizzas, we are adding new snacks that customers love. Our new Cheese Tart, Zìsì Dàntā, became our best-selling snack in September and an amazing traffic driver. Not easy for a snack item to be traffic driver compared to pizza. Next, keeping users engaged and having fun along the way. Our loyalty programs topped 460 million members in Q3, up 15% year over year. Notably, sales from members continue to be high at 65%.

To start with.

Expanding our selection for pizza is priced below 50 M D, which is a very significant portion of the overall pizza market.

Around 20% of our pizza, we offer a price below 50 M D.

That's not enough we could do more.

But in reaching our lowest priced pizza offerings, we are tapping into this.

Special opportunity is currently underserved, but pizza hut.

Other than pizza.

At a newsletter that customers love them.

New cheese top just sit on top.

Came a bestselling snap in September.

And amazing Tropic truck or not.

Not easy for us in that item to be trying to drive the comparison pizza.

Yes.

Keeping use them engage and having fun along the way.

Loyalty programs topped 416 million members in Q3.

Oh, 15% year over year, notably South my members continue to be high at 65%.

Joey Wat: We collaborate with pop culture icons that resonate with young generations. KFC's campaign with Honkai: Star Rail, a popular e-game, generated huge social buzz and attract many new customers. Almost 40% of traffic generated from the campaign came from new or inactive members, and a significant portion are young adults, and that's a fantastic news for the brand. We are proud to be exclusive western food catering supplier for the Asian Games in Hangzhou. Over 250 of our crew members from across China were chosen to serve at the sporting event. KFC and Pizza Hut set up nearly 30 pop-up stores and served over 1 million athletes and fans. It shows that our food is good enough and healthy enough for the professional athletes too. We also ran nationwide campaign offering exclusive gifts at our restaurants and through our Super App in celebration.

We collaborate with pop culture icons that resonate with young generation.

<unk> campaign was Hong Kong style rail.

Angel she adult.

Popular eating generated huge social buzz and attract many new customers.

Almost 40 for now it's probably generated from the campaign came from you or in active members.

And a significant portion of young adults and that's a fantastic news for the brand.

We are proud to be exclusive western flows change or a surprise for the Asian games in Huntsville.

Oh, the 250 of our crew members from across China were chosen to serve at the sporting event.

Chelsea and Pizza hut set up nearly 30 pop up stores and served over 1 million athletes and fans and it shows what is good enough and healthy enough for the professional aspects too.

We also ran nationwide campaign already exclusive yes at our restaurants and through our Super App in celebration.

Joey Wat: In closing, I want to thank all of our teams for their hard work in delivering a strong quarter. Next week, we will hold our RGM convention for our restaurant general managers. This marks the first in-person convention for 13,000 attendees since 2019. Very excited about it. It's an excellent occasion to honor our RGM's dedication, celebrate our achievements, and reaffirm our goals for the coming year and beyond. Looking forward, the growth potential in China remains vast, even with moderate economic growth. RGM 2.0 provide us the strategic framework to grow sustainably. Evolving consumer preferences in the post-pandemic environment require us to stay agile and vigilant. Our robust supply chain and innovative digital ecosystem has enabled us to quickly adapt to changing market conditions. I'm confident we can continue to create long-term value for our shareholders. With that, I will turn the call over to Andy.

In closing I want to affirm all of our teams for their hard work in delivering a strong quarter.

Next week, we will hold all all G M convention for our restaurant General manager there.

This marks the first in Hudson collection for 13000 attendees in 2019.

Really excited about it is the external occasion to honor all our young dedication.

Our achievements and reaffirm our goals for the coming year and beyond.

Looking for what it's worth.

Potentially in China remains Bosch, even with moderate economic growth.

G M coupons that will provide us a strategic framework to grow sustainably.

Evolving consumer preferences in the post pandemic environment requires us to stay agile and vigilant.

A robust supply chain and innovative digital ecosystem has enabled us to quickly adapt to changing market conditions.

I'm confident we can continue to create long term value for shareholders.

With that I will turn the call over to Andy. Thank you, Julie and Hello, everyone. Let me share with you our third quarter performance, but before I do that I want to point out foreign exchange had a negative impact of approximately 6% in the quarter.

Joey Wat: Andy?

Andy Yeung: Thank you, Joey, and hello, everyone. Let me share with you our Q3 performance. Before I do that, I want to point out foreign exchange had a negative impact of approximately 6% in the quarter. Overall, we achieved solid results, growing across key metrics. On a year-over-year basis, revenue grew 15% and adjusted operating profit grew 10% in constant currency. Compared to pre-pandemic levels, we have a much larger store portfolio. Although same-store sales remain at approximately 90% of 2019 levels, system sales grew 22% compared to 2019. With that, let's go through the financials in more detail. Q3 total revenues were $2.91 billion in reported currency, a 9% year-over-year increase. In constant currency, total revenue grew 15%. System sales also increased 15% year-over-year in constant currency.

Overall, we achieved solid results growing are called key metrics.

On a year over year basis revenue grew 15% and adjusted operating profit grew 10% in constant currency.

Back to pre pandemic levels, we have a much larger store portfolio.

Although things ourselves remain at approximately 90% of 2019 level system sales grew 22% compared to 2019.

With that let's go through the financial in more detail.

Third quarter total revenues were $2 $91 billion, and we bought a country a 9% year over year increase in constant currency total revenue grew 15%.

Awesome.

Increased 15% year over year in constant currency.

Andy Yeung: The growth was mainly driven by new unit contributions and same-store sales growth of 4%. Dine-in sales continued to rebound year-over-year. By brand, KFC same-store sales grew 4% year-over-year. A strong rebound at transportations and tourist locations contributed to the growth. Same-store traffic grew 9%, while ticket average decreased 5%. These results were mainly driven by successful traffic-driving promotions, lower delivery mix, and rebound of the breakfast day part. Delivery typically carries a higher ticket average than dine-in orders. Thus, a decline in delivery mix lower the overall ticket average. Breakfast orders tend to have a lower ticket average as well, so the rebound in breakfast sales contributed to traffic growth but lower ticket average. Please note that overall ticket average in Q3 was similar to Q2 and higher than 2019. Pizza Hut same-store sales grew 2% year-over-year.

The growth was mainly driven by new unit contribution and things thoughts out global folks.

<unk> sales continued to rebound year over year.

Hi, Brian KFC same store sales grew 4% year over year.

A strong rebound at transplant patients.

This location contributed to the growth.

Thanks, all traffic grew 9% while ticket average decreased 5%.

These results were mainly driven by successful traffic driving promotions.

Our delivery mix and rebound of the breakfast day part.

Delivery typically carries a higher ticket average.

And older.

A decline in delivery mix lower the overall ticket average.

Orders tend to have a lower ticket average as well so the rebound in breakfast south contributor to traffic growth, but lower ticket average.

Please note that overall ticket average in the third quarter was similar to the second quarter and higher than 2019.

These are things ourselves.

2% year over year.

Andy Yeung: Same-store traffic grew 12% and ticket average decreased 9%. We want to highlight that by design, we are expanding our price ranges to enhance Pizza Hut's value propositions and to capture the underserved markets. Consistent with Pizza Hut's revitalization plan, we want to enhance Pizza Hut's value propositions to consumers. Particularly, we are targeting the sub 50 RMB pricing range, which represents a very significant segment of the pizza market in China. We also intend to increase the sale mix of delivery and off-premise dining over time. For Pizza Hut, delivery sales generally have a lower ticket average than dine-in. Finally, we aim to bolster the sales of single-person meals. This is a different market segment compared to Pizza Hut's existing customer base, which tends to be group or family dining. Restaurant margin was 17%, 180 basis points lower than the prior year.

Same store traffic grew 12% and ticket average decreased 9%.

We want to highlight that might be fine.

We are expanding our price wingers to enhance pizza hut value propositions and to capture the underserved market.

Consistent with Pizza hut, we want to have long. So you shouldn't plan, we want to enhance pizza hut value propositions to consumer.

We are talking to some 50 odd be pricing right, which represent a very significant segment of the piece of the market in China.

We also intend to increase the cell makes up delivery and off premise dining overtime for pizza hut delivery sales generally have a lower ticket average.

Finally, we aim to bolster the south all single person mute.

Its different market segments compared to pizza hut existing customer base, which tends to be a family.

Restaurant margin was 17% 180 basis points lower than the prior year.

Andy Yeung: This was mainly due to lapping of last year's temporary relief of $30 million, which translates into 120 basis point margin impact. Excluding this impact year-over-year, margin change is only 6%, 60 basis points. Wage inflation normalizations of staffing at the store level, increase promotional activities also impacted margins. On a positive side, occupancy and other expenses improved year-over-year, primarily due to sales leveraging and ongoing benefit of cost structure rebasing effort. Now let's go through the key items. Cost of sales was 31.1%, 40 basis points higher than the prior year. We increased promotional activities to drive sales, I'm sorry. We also faced higher poultry prices in the quarter.

This was mainly due to lapping last year's temporary relief of $30 million, which translates into 120 basis point margin.

Excluding this impact year over year.

Year over year.

Martin change is only 6% a 660 basis points.

Wage inflation number life patients.

Staffing at the store level increased promotional activities also impact that margin.

On a pocket sized occupancy and other expenses.

Improved year over year, primarily due to <unk>.

Leveraging an ongoing benefit of cost structure, we base, our we basically have one.

Now, let's go to the key items cost of sales was 31, 1% 40 basis points higher than the prior year.

We increased promotional activities to drive topics that we do ourselves.

And we also faced higher poultry prices in the quarter. This was partially offset by more favorable prices for commodities, including beef and cooking oil as well as full utilization of chicken.

Andy Yeung: This was partially offset by more favorable prices for commodities, including beef and cooking oil, as well as full utilization of chicken. Cost of labor was 25.3%, 180 basis points higher than the prior year. Last year, we benefited from temporary relief of $17 million, which translates into 70 basis points margin impact. Two other key factors that impacted labor cost comparison were, one, mid-single-digit rate increase for frontline staff due to annual wage adjustment, and two, normalized staffing level at our stores compared to the pandemic last year. These were partially offset by sales leveraging. Occupancy and other was 26.6%, 40 basis points lower than the prior year, benefiting from improvement in rent and depreciation expenses. We continue to secure more favorable rental terms for our new stores. Lower depreciation resulted from lower upfront investment and store portfolio optimization.

Cost of Labor was 25, 3% 180 basis points tied into prior years.

Last year, we benefited from temporary relief of $17 million, which translates into 70 basis point margin impact too.

Two other key factors that impact that labor cost comparison war, one mid single digit rates increase for frontline staff due to annual wage adjustments and to normalize the staff staffing level at Hausdorff compared to the pandemic last year.

These were partially offset by sales leveraging.

Occupancy and other was $26, 6% 40 basis points lower than the prior year benefiting from improvement in rent and depreciation expenses, we continue to secure.

More favorable rental terms for a new store.

Lower depreciation we saw there from lower upfront investment and small portfolio optimization.

Andy Yeung: It's important to note that 45% of our stores have been built after 2019. This was partially offset by lapping of $13 million in rental relief and other measures associated with the pandemic last year. G&A expenses increased 14% year over year in constant currency, mainly from higher accrual of performance-based incentives. To a lesser extent, wage increases and higher travel expenses from the resumption of business travel. Operating profit was $323 million, increasing 9% in constant currency. Excluding $30 million in temporary relief received last year, adjusted operating profit grew 21% in constant currency. Our effective tax rate was 27.5%. We continue to expect our full-year effective tax rate to be around 30%.

It's important to note that 45% of how store have been built after 2019.

This was partially offset by lapping of the $2 million in rental relief and austerity measure associate with last year.

Operator: Thank you for standing by and welcome to the Yum China Third Quarter 2023 earnings conference call.

G&A expenses increased 14% year over year in constant currency, mainly from higher accrual of performance based incentives.

Michelle Chen: I would now like to hand the conference over to Michelle Chen, please go ahead. Thank you Zach, hello everyone. Thank you for joining the Yum China Third Quarter 2023 earnings conference call.

And to a lesser extent merit increases and higher travel expenses from the resumption of business travel.

Michelle Chen: On today's call, RLCO, Miss Joey Wat, and our CFO, Mr. Andy Young. I'd like to remind everyone that our earnings call and investment materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. Offward-looking statements should be considered in conjunction with the cautionary statement in our earnings for these and the risk factors included, you know, findings with SCC. This call also includes certain non-gap financial measures. You should carefully consider the comparable gap measures. Reconciliation of non-gap and gap measures is included in our earnings release.

Operating profit was $323 million, increasing 9% in constant currency.

Excluding $30 million in temporary relief received last year.

Just the operating profit grew 21% constant currency.

Our effective tax rate was 27, 5%, we continue to expect our full year effective tax rate to be around 30%.

Andy Yeung: Net income was $244 million, and diluted EPS was $0.58, both increasing 18% in reported currency. Excluding the foreign exchange impact, net income increased 26%, and diluted EPS, 27% in constant currency. We generated $410 million in operating cash flows and $243 million in free cash flow in Q3. We returned $211 million to shareholders in cash dividends and share repurchases in the quarter, on track to return $600 to 800 million for the full year 2023. Our balance sheet remains strong, with around $4.2 billion in net cash position by the end of Q3. Now, let's turn to our outlook.

Net income was $244 million and diluted EPS was <unk> 58, both increasing 18% and we bought a crazy.

Excluding the foreign exchange impact net income increased 26% and diluted E. P S 27% in constant currency.

Operator: You can find the webcast of this call in the PowerPoint presentation on our IR website.

We've shown you that $410 million in operating cash flows and $243 million in free cash flow in the third quarter.

Joey Wat: Now I would like to turn the call over to Joey Wat, CFO of Yum China, please. Hello everyone, and thank you for joining us today. We held our investor day in September in China.

We returned $211 million of shareholder cash dividend and share repurchase in the quarter on track to return $600 million to $800 million for the full year 2023.

Joey Wat: It was wonderful meeting investors face-to-face. At the event, we unveiled our RGM 2.0 strategy with strong focus on growth. We have set ambitious growth targets for the coming three years. These include reaching 20,000 stores by 2026, achieving double-digit EPS, CAGA, and returning $3 billion to shareholders in dividend and share repurchase it.

Our balance sheet remains strong with around $4 $2 billion in net cash position by the end of the third quarter.

Now, let's turn to our outlook regarding store opening we opened 500 net new stores in the quarter.

Andy Yeung: Regarding store opening, we opened 500 net new stores in the quarter and 1,155 net new stores year to date. We are on track to meet our 2023 full year target of 1,400 to 1,600 net new stores. The new store payback period for our KFC and Pizza Hut stores remains healthy at 2 years and 3 years respectively. With our healthy new unit payback together with flexible formats and models, we are confident to reach 20,000 stores by 2026, as we unveiled at our Investor Day. Looking ahead, Q4 is seasonally a small quarter for both sales and profit. On the sales front, since late September, we have observed softening demand which extended to October. Consumers have become more value conscious.

And is that 155 net new store yesterday.

We're on track to meet our 2023 full year target of 1400 to 1600 nothing useful.

Joey Wat: With our long-term growth commitment in mind, let's zoom into the third quarter. Our results reflect continued strength. Third quarter, net new stores, revenue, and adjusted operating profit, all-rich record levels. We accelerated new store openings with 500 net new stores in the quarter, while maintaining healthy store-pay metrics. Our portfolio now exceeds 14,000 stores. With some sales growth, 15% year-over-year in constant currency, adjusted operating profit, excluding temporary release, grew 21% year-over-year in constant currency.

The new saw payback periods for our KFC and Pizza hut store remains healthy at two years and three years respectively.

Without helping new unit payback together with flexible format and modules. We are confident to reach 20000 installed our 'twenty 'twenty six.

At our Investor day.

Looking ahead, the fourth quarter is seasonally a small quarter for both sales and profit.

On the cell phone seems that late September we have upset softening demand would you extend it to October.

Consumer have become more value conscious.

Andy Yeung: We have been focusing on food innovation and widening pricing ranges to tap into underserved market to drive growth. Regarding margins, sales remain the biggest factor. Fluctuation in sales may have a pronounced impact on margins in Q4. As a reminder, in Q4 last year, we also received CNY 26 million in temporary relief, which we do not expect to repeat this year. We also anticipate wage inflation of mid-single digits and returning to more normalized staffing levels at our stores. Just a reminder, in Q4 last year, we experienced labor shortage due to widespread COVID infections. The post-pandemic economic recovery is shaping up to be a wave-like and nonlinear process. We will maintain our focus on driving sales and cost efficiency. However, the overall trend towards recovery is evident this year, and many of our performance metrics are setting new records.

We have been focusing on innovation and widening pricing ranges to tap into under served market to drive growth.

Joey Wat: In the first nine months, adjusted operating profit exceeds $1 billion USD. Our team's relentless effort produced these remarkable results. To drive sales in a peak summer trading season, we bolstered crew resources for excellent service, and, in short, supply, pipeline, readiness, and execute, traffic driving campaigns. Think those sales growth in a third quarter was led by strong, During the summer holidays, single sales at our tourists and transportation locations served more than 50% year over year.

Regarding margin sell through.

Because.

Sector fluctuation himself.

They have a pronounced impact on margins in the fourth quarter.

As a reminder, in the fourth quarter last year. We also received 26 million in temporary relief, which we do not expect to repeat this year.

We also anticipate rates of inflation.

Mid single digits, and returning to more normalized staffing levels at all so.

Just a reminder.

In the fourth quarter last year, we experienced labor shortage due to widespread COVID-19 infection.

Joey Wat: It's important to remember, though, that consumers have continued to be cautious in their spending. Our formula to capture sales growth has always been simple, the food, the fun and exceptional value.

The post pandemic economic recovery is shaping up to be a waiflike and non linear pocket.

So we will maintain our focus on driving scale and cost efficiency.

However, the overall trend to work recoveries evident this year and 90 off all cause all the metrics are setting new records.

Joey Wat: Now, let me go through what we have done. First, food innovations on a big scale. Our $100 million club showcase that yesterday illustrates our success in building huge categories to boost sales. Recent innovations at KFC include our juicy whole chicken and beef burger. To put things into perspective, in a third quarter, these two categories combined exceed 6% of KFC sales mix. This is higher than our original recipe chicken, which we have been proudly serving in China over the past 36 years.

Andy Yeung: We have demonstrated our ability to quickly adapt to changing consumer preferences and seize opportunities under different market conditions. We are confident that the successful execution of our RGM 2.0 strategy will help us expand our store portfolio, grow sales, and boost profits, delivering sustainable value creation and long-term returns to shareholders. With that, I will pass you back to Michelle. Michelle?

We have demonstrated our ability to quickly adapt to changing consumer preferences and seize opportunities under different market conditions.

We are confident that the successful execution of all Archie M 2.0 strategy will help us expand our store portfolio grow cells, and both profit delivering sustainable value creation and long term returns to shareholder.

I will pass you back to Michelle Michelle.

Michelle Shen: Thanks, Andy. Now, we'll open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Zach, please start the Q&A.

Now we will open the call for questions.

Give more people the chance to ask questions. Please limit your questions to one at this time.

Joey Wat: It shows our ability to innovate but also build very big categories. We are continuing to expand these categories with new flavors like Sichuan style, spicy whole chicken, Sichuan Xiang Yanbao, Yanbao Mi, Sichuan Jing, offering it from Friday to Sunday only. This spicy whole chicken is perfect for home consumption. We also collaborate with Ultraman, Ultraman, to promote our premium Ultrafi 2.0 beef burger. This is the whole new box. Consumers love them. At Pizza Hut, we saw over 100 million pizzas in the first mind month of the year.

Please start the Q&A.

Operator: 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 headset to ask your question. Your first question comes from Michelle Cheng from Goldman Sachs. Please go ahead.

Thank you if you wish to ask a question. Please press star one on your telephone and wait for your name to be announced.

Wish to cancel your request. Please press star two if you're on a speakerphone. Please pick up the headsets to ask your question.

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

Michelle Cheng: Hi, Joey, Andy, thanks for taking my question. My question is still about the competition. Especially you mentioned that the trend turns softer since the end of September. Can you share with us how do you see the competition landscape involved? And also, with this value campaign, how should we think about the balance between the top-line growth and also the full cost control? Thank you.

Oh, Hi, Oh, you Andy Thanks for taking my question. My question is still about the competition on a Saturday you mentioned that the trend towards software all seem to end of September so okay show with Us Oh, how how do we see the competition. That's got involved and also a week.

Baidu can pan how should we think about the balance between all the the topline growth and also the awful calls cultural thank you.

Joey Wat: One out of every five pizza we saw was a durian pizza, that's over 20 million durian pizza, nearly 70% more year over year. Our in-house supply chain worked with suppliers to secure durian supplies and expand capacity to satisfy the growing demand.

Joey Wat: Thank you, Michelle. Regarding the competition, we see it as a positive trend and sign because despite some concern towards the macro situation in China in the media, in reality, both international and domestic players are investing aggressively in our industry. That shows that, you know, these players, competitors, are voting with their money and voting with their feet. That's consistent to our view towards the business and our industry in China, particularly for the chain store business model. On top of that, we see very vibrant competition in the lower tier city. Again, that is good because if you remember back to our Investor Day, we have very aggressive store opening plan, especially in the lower tier city.

Thank you Michelle.

Regarding the competition.

We see it as a positive trend.

Travelling I'm fine because despite.

Joey Wat: Second, we are offering our customers amazing value for money on top of the innovative food. KFC Crazy Thursdays, Hongkuan Xingzi市, is no longer just a marketing campaign. It has become a cultural phenomenon. Crazy Thursday sells consistently, upperformed, other with days in the third quarter by around 40%. To create customers engaged, we rotate over and regularly launch new flavor variations such as spicy nuggets, salvo, jiao ma, ti quai. We chose products that utilize existing ingredients and involve simple cooking process to provide exceptional value while ensuring operational efficiency.

So she was the macro situation in China.

In the media.

E. Both international and domestic players are investing aggressively in our industry.

Oh that shows that you know these players kind of competitor are voting with their money and what were they moved their feet.

And that's consistent with our view to us.

Our business and our industry in China, particularly for the change so they can smell it though.

On top of that we see very wide Brent a competition in the in the lower tier city.

Again, a good because if you remember back to our Investor day, we have very aggressive store opening.

Joey Wat: At Pizza Hut, we are expanding our solutions for pizza's price below 50 RMB, which is a very significant portion of the overall pizza market. Around 20% of our pizzas, we offer a price below 50 RMB, and that's not enough, we could do more. But in reaching our lower price pizza offerings, we are tapping into this substantial opportunity to currently underserved by Pizza Hut. Other than pizzas, we are adding new snacks that customers love. Our new cheese cut, this is Dante, became our best selling snack in September and an amazing traffic driver, not easy for a snack item to be traffic driver compared to pizza.

Especially in the lunch yesterday and that resonate well with our view that that's a lot of opportunity in the lower tier cities.

Joey Wat: That resonates well with our view that there's a lot of opportunity in the lower tier cities. You know, we're quite happy to see that. When it comes to the point about value-driven consumer, we have been a player that has benefited from the more cautious and more rational spending by the consumers. We're a fast food company. When customers become more value-driven, it's good for us as long as we have the capability to deliver, and we do. It has been a consistent focus for our company to focus on not only value, but innovative products and fun experience, because value itself is never enough for our customers. We'll continue to do that.

Ah. So so you know, we we were quite happy to see that.

And then when it come to the point about value driven.

Consumer.

We have been a player that has benefits from a more cautious and more rational.

<unk> spending for the consume less cars, where we are in fast food company.

Well when a customer becomes more value driven it's good for us as far as we have the capability to deliver and we do.

Joey Wat: Next, keeping users engaged and having fun along the way, our loyalty programs topped 460 million members in Q3. Up 15% year over year. Notably, sales from members continue to be high at 65%. We collaborate with pop culture icons that resonate with young generations. Jeff's campaign was Hong Kai, Star Rail, Xin Chong, Chi Dao. A popular e-game generated huge social buzz and attract many new customers. Almost 40% of our traffic generated from the campaign came from new or active members and a significant portion are young adults, and that's a fantastic news for the brand.

And.

It has it has being a consistent a focus for our company to focus not only value, but innovative products and fun experience because that of itself, it's never enough for our customers.

And we'll continue to do that and you can see that in this quarter in the past many years.

Joey Wat: You can see that in this quarter, in the past many years, we have been very consistent with our ticket average. With the ups and down, our ticket average compared to the last, you know, sort of more stable year, 2019, is still up a little bit because we are very careful about it with KFC, price increase every year and Pizza Hut, during the turnaround time, for the original product, we kind of keep the price the same, but then we get a bit more opportunity with the new product. The ticket average has been relatively stable. Even in the last quarter, you can see we have very healthy growth of transaction, TC. In our business, TC growth is so good. I mean, it cannot be better to have TC growth.

We have been.

Very consistent.

Our ticket average.

Hmm.

With the up and down our ticket average compared to the last you know sort of more.

Stable, Yeah, 2019 is it still up.

A little bit because we were very careful about it was can see priced English every year and pizza hut during the turnaround time for the for the original product, we kind of keep the probably the same but then we get a bit more opportunity with a new product, but the ticket average has been relatively.

Joey Wat: We are proud to be exclusive Western food catering supplier for the Asian Games in Hanzo. Over 250 of our crew members from across China were chosen to serve at the sporting event. KFC and Pizza Hut set up nearly 30 pop-up stores and served over 1 million athletes and fans, and it shows that our food is good enough and healthy enough for the professional athletes too. We also re-mation why campaigned offering exclusive gifts at our restaurants and through our super app in celebration.

Stable and even in the last quarter you can see we have very healthy growth of transaction T SEC and in our business.

T C growth is so good.

It cannot be better to have T sequel, So it shows them. We we react very quickly and we are very agile and we get yourselves.

Joey Wat: It shows them, we react very quickly, and we are very agile, and we get the sales. Last but not the least, while we are doing all this innovative product, we deliver value, product or we are able to protect our margin with our innovations and value campaign, and that is very important. In fact, our year-to-date margin has already exceeded that of 2019, which is, you know, pre-pandemic. You know, there's some movement. I mean, Andy, I'm sure, Andy will go through it later on. There's some movement between the different lines of cost structure. The restaurant margin, that's where we protect. We reduce the rent, we reduce the O&O, and then we put the money into food and to service, to serve our customers.

Right.

But not the least.

Joey Wat: In closing, I want to thank all of our teams for their hard work in delivering a strong quarter. Next week, we will host our LGM convention for our restaurant general managers. This month's first in-person convention for 13,000 attendees in 2019. Very excited about it. It's an external occasion to honor our audience dedication, celebrate our achievements, and reaffirm our goals for the coming year and beyond.

While we are doing all this innovative product, we we we will deliver value.

That's okay.

Okay State.

We are able to protect our margin with our innovation and value campaigns and that is very important in fact, our year to date margin.

Has already seen that also in the 19th which as you know pre pandemic you know, there's some movement and Andy I'm sure.

Andy will go through it later on just a movement between the different lines of cost structure, but the restaurant market. That's what we put out we we reduce Iran. We reduce the old now and then we put the money into food and to service to serve a customer so net net our company.

Joey Wat: Looking forward, the growth potential in China remains vast even with moderate economic growth. LGM 2.0 provides us the strategic framework to grow sustainably, evolving consumer preferences in the post-pandemic environment, require us to stay agile and vigilant. Our robust supply chain and innovative digital ecosystem head enable us to quickly adapt to changing market conditions. And confidence we can continue to create long-term value for our shareholders.

Joey Wat: Net-net, competition for us is good because we see it's a vote of confidence for our industry and our market. Thank you, Michelle.

Well it is good because we see it.

Covenants for our industry and our market. Thank you Michelle.

Yeah.

Michelle Cheng: Thank you, Joey. That's very clear.

Thank you Joey definitely clear.

Operator: Your next question comes from Lin Sijie from CICC. Please go ahead.

Your next question comes from Lynn C. G from TICC. Please go ahead.

Andy Young: With that, I will turn the call over to Andy. Thank you, Joey. And hello, everyone.

Lin Sijie: Thank you, Joey and Andy. I have one question regarding the margin. Andy has mentioned the reasons behind the margins year-over-year change. If we compare Q3 with the same quarter in 2019, our revenue increased 26%, but operating profit only increased 8%, which is quite different with Q1 and Q2. Could you please help us better understand this? Thank you.

Sijie Lin: Thank you, Joey and Andy. I have one question regarding the margin. Andy has mentioned the reasons behind the margins year-over-year change. If we compare Q3 with the same quarter in 2019, our revenue increased 26%, but operating profit only increased 8%, which is quite different with Q1 and Q2. Could you please help us better understand this? Thank you.

Oh, Thank you Joanne Andy So I have one question regarding the margin. So Andy has mentioned the reasons behind the margins year over year change, but if we compare Q3 with the same quarter in 2019, our revenue increased 26% operating profit on the <unk>.

Andy Young: Let me share with you our third quarter performance. But before I do that, I want to point out for an exchange had a negative impact of approximately 6% in the quarter. Overall, we achieved results growing a called key metrics. On a year-to-year basis, revenue grew 15% in adjusted upping profit, who grew 10% in constant currency. Compared to pre-pandemic levels, we have a much larger store portfolio. Although things are sales, we may add a possibly 90% of 2019 levels, system sales grew 22% compared to 2019.

<unk>, 8%, which was quite different with Q1 and Q2. So could you. Please skip hop okay, perhaps better on just to understand this thank you.

Andy Yeung: Okay. Yeah, thank you for the questions. As we mentioned, you know, if you look at the year-over-year comparisons, you definitely need to take out the impact, you know, from the temporary release last year. You know, when we compare to 2019, you know, obviously, you know, over the past few years, we continue to see, you know, the labor costs that was increasing, you know, over the past few years. We're able to partially offset that by improvement in our O&O, which is, you know, occupancy and other expenses. You know, if you look at by item, you see that COS is actually pretty stable, around 31%.

Okay Hum.

Thank you for the questions and so as we mentioned you know if you look at our year over year comparisons are you definitely need to take out her impact no from the temporary release last year.

Andy Young: With that, let's go through the financial in more details. The quarter total revenues were $2.91 billion in report currency, a 9% year-over-year increase. In constant currency, total revenue grew 15%. System sales also increased 15% year-over-year in constant currency. The growth was mainly driven by new unit contributions, and things for sales grew 4%. Time in sales continued to rebound year-over-year. By brand, KFC things for sales grew 4% year-over-year, a strong rebound at transportation and tourist locations contributed to the growth.

And when we compared to you know 2019, our you know obviously you know over the past few years, we continue to see our you know the labor costs are that the that was increasing Ah you know over the past few years, but were able to partially offset that by improvement in our O N O which is.

Occupancy and other expenses are and then if you look at you know by item.

You see that C. O S is actually pretty stable around 31%, Oh C. O S. A 's megatrends because of wage inflation and the higher mix of delivery.

Andy Yeung: Our COS, as mentioned, because of wage inflations and a high mix of delivery, we have seen, you know, some increase there. However, on the O2O side, we are much better, mainly benefiting from stock flow optimizations, and rent negotiations and better lease terms. We also have other initiative to rebase our cost structure to possibly offset that. You know, if you look at the same-store sales, which is about 90% level of the 2019. Now, you know, as we mentioned a little bit earlier, looking ahead in the Q4 is, you know, smaller quarter for us in terms of sales and profits. As we have mentioned, we have seen some softening demand since September.

Delivery, we have seen some increase there are however, oh, oh, sorry, a weird much better mainly benefiting from cyclical optimization and rent negotiations and better lease terms and you also have other initiatives to rebase, our cost structure could possibly offset that.

Andy Young: Things for traffic grew 9% while ticket average decreased 5%. These results were mainly driven by successful traffic driving promotions, lower delivery makes, and rebound of the breakfast day-pop. Delivery typically carries a higher ticket average than dying in orders. Thus, a decline in delivery makes lower the overall ticket average. Breakfast orders tend to have a lower ticket average so the rebound in breakfast sales contributed to traffic growth but lower ticket average. Please note that overall ticket average in the third quarter was similar to the second quarter and higher than 2019.

If you look at the same store sales, which is about a 90% level. After 2019 now looking at the you know as we mentioned a little bit earlier looking at having a full quarter Oh fourth parties, a smaller quarter for us.

And profit and so as we have mentioned we have seen some softening in demand.

Andy Yeung: Sales fluctuations will have a more pronounced impact on the profitability and margin. Now, again, in Q4 compared to last year, last year we received $26 million of temporary relief, which we do not expect to repeat this year. Now, in terms of wage inflation, let me just repeat it again, mid-single digit wage inflation, normalization of staffing levels at our stores. Longer term, as we have mentioned our Investor Day, you know, our goal is to maintain a stable margin and potentially improve it over time. You know, obviously, we have to work hard to continue to offset wage inflation impact every year and potentially commodity inflation in the long term. It's important to keep, you know, a short-term and long-term balance in mind.

Timber sales fluctuation.

Have a multiple number of impact on the profitability and margins now again in the fourth quarter compared to last year. We last year, we received $26 million of temporary relief, which we do not expect to repeat this year no hmm come up waiting patiently, let me just repeat it again mid single digit wage inflation.

Andy Young: These results seem to have sales grew 2% year-over-year, seems to have a traffic growth of 12% and ticket average decreased 9%. We want to highlight that by design, we are expanding our price ranges to enhance piece of hut module propositions and to capture their underserved markets. Consistent with piece of hut revitalization plan, we want to enhance piece of hut module propositions to consumer. Particularly, we are targeting the 50R&B pricing range, which represent a very significant significant segment of the piece of market in China.

Amortization of staffing levels and also longer term as we have mentioned at Investor Day are we you know that our goal is to maintain a stable margin and potentially weeks it and improve it over time.

You know obviously, we have to work hard to continue to offset wage inflation impact every year and that's really come all of commodity inflation in the long term.

It is important to keep it short term and long term balance in mind no. We will continue to benefit from pulse structure, we basically I thought that.

Andy Yeung: You know, we will continue to benefit from cost structure basing efforts that will stay in place for a long time. For example, high-level rent, you know, our mega store restaurant staff sharing program. We also have more flexible and lower investment for our store model. We'll maintain our discipline in cost efficiencies and also continue to improve our KPI. That's how we look at the margin in both short term and long term. Thank you.

Andy Young: We also intend to increase the sell mix of delivery and all-prem standing over time. For piece of hut delivery sales generally have a lower ticket average than dying in. Finally, we aim to bolster the sales of single-person mute. This is different market segment compared to piece of hut existing customer base, which tends to be group of family dining. Restaurant margin was 17%, 180 basis pawn lower than the price range. This was mainly due to laughing of last year's temporary relief of $30 million, which translates into 120 basis pawn margin impact.

We stay in place for a long time for example, a highway Bill Rand No. Our Mega saw restaurant stopped sharing program. We also have a more flexible and lower investment.

Model so.

We will maintain our discipline and you can cost efficiencies and also Oh cool, but that's how we look at their margins both short term and most of them. Thank you.

Joey Wat: Thank you, Andy.

Sijie Lin: Thank you, Andy.

Thank you Andy.

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

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

Andy Young: Excluding this impact, year-over-year. Year-over-year, margin change is only 6% basis on. Ration inflation normalizations of staffing at the stall level increase promotional activities also impact margins. On a popular side, occupancy and other expenses improve year-over-year, primarily due to sales leveraging and ongoing benefit of cost structure we're basing at once. Now let's go through the key items. Cost of sales was 31.1%, 40 basis point higher than the prior year. We increase promotional activities to drive traffic sales, also drive sales.

Christine Peng: Thank you, management. I actually have a question which is also related to competition, but I want to ask more details specifically in terms of this Chinese-style burger. I think in the Investor Day, Xi'an, your KFC management actually shared with investors KFC's plan to launch the Chinese-style burger products in the very near future. Can management share with us the timetable as well as more specifics about this product in terms of price strategy, product strategy going forward? Thank you.

Oh, Thank you management I actually have a question, which is also related to competition, but I want to.

More details specifically.

In terms of this Chinese style Burger I think you back today and she your can't see management actually shared with investors are kept six planned to launch in the Chinese are still a broker products are in the very near.

All future so can management share with us the timetable as well as a more specifics on.

About this part of our in terms of price strategy part of our strategy going forward. Thank you.

Joey Wat: Thank you, Christine. We actually have test launched this particular product in three provinces already, Jiangxi, Fujian in particular. It's interesting that we test launch it in not in Guangzhou, Beijing or Shanghai. We do it in sort of second-tier cities. The progress has been good. We are, you know, happy with the result, and we continue to work on our plan and then move to next stage when we are ready. The price point is competitive. It's very affordable. You know, it's one of our strategies that for the lower tier city, we have slightly different product and a more flexible pricing.

Thank you Christine we actually have test launch is a big sort of thought of in three provinces already Jiangsu Fujian.

Andy Young: And we also face higher poetry prices in the quarter. This was partially offset by more favorable prices for commodity including bees and cooking oil, as well as full utilization of chicken. Cost of labor was 25.3%, 180 basis point higher than the prior years. Last year, we benefited from temporary relief of $17 million, which translates into 70 basis point margin impact. Two other key factors that impacted labor cost comparison were, one, mis-single digit rate increase for online staff due to annual rate adjustment, and two, normalized staffing level at our stall compared to the pandemic last year.

So it is interesting that we touched on it in not in Guangzhou, Beijing or Shanghai.

We do it and set up a second tier cities and are there. The progress has been good and we are you know we we are happy with our result, and we're continuing to work on our plan and then a little move to next stage a win win and when they are ready are the price for it.

It is competitive I E.

Very affordable.

And you know it it is one of our strategies that for the launch yesterday, we have slightly different product and a more accessible housing but at the same time, we still maintain the margin for the fourth of business, but it's going well and I tasted proud of myself.

Andy Young: This were partially offset by sales leveraging, occupancy and other was 26.6% 40 basis point low than the prior year, benefiting from improvement in rent and distribution expenses. We continue to secure more favorable rental terms for a new stall, lower depreciation without the low upfront investment and stall portfolio optimization. It's important note that 45% of our stall have been built after 2019. This was partially offset by a lasting of $30,000 in rental relief and of steady measure associated with pandemic last year.

Joey Wat: At the same time, we still maintain the margin for the business. It's going well. I taste the product myself. It tastes great. Hopefully next time, we can get it closer to Hong Kong where you don't have to travel that far to try it. Thank you, Christine.

It tastes great.

So so hopefully next time, we we can't get it closer to Hong Kong, where you can.

You don't have to travel that far to try it.

Thank you Christine.

Yeah.

Operator: Your next question comes from Chen Luo from Bank of America. Please go ahead.

Your next question comes from Chen Luo from Bank of America. Please go ahead.

Andy Yeung: Hi, Joey Wat and Andy Yeung. My question is also on competition. In fact, last time in Xi'an, I also raised a question on testing and the likes of TikTok coupons. I think given our current value campaign and our initiatives to broaden our price range as well as to sell more coupons on TikTok, do we think that the ticket average decline that we saw in Q3 could actually extend into the coming few quarters? Would the ticket count increase can be enough to offset the ticket average decrease? Lastly, in terms of our food and paper cost as a percentage of sales

Chen Luo: Hi, Joey Wat and Andy Yeung. My question is also on competition. In fact, last time in Xi'an, I also raised a question on testing and the likes of TikTok coupons. I think given our current value campaign and our initiatives to broaden our price range as well as to sell more coupons on TikTok, do we think that the ticket average decline that we saw in Q3 could actually extend into the coming few quarters? Would the ticket count increase can be enough to offset the ticket average decrease? Lastly, in terms of our food and paper cost as a percentage of sales

Oh, Hi, Juliet and so my question is also Computershare in fact last time, he or she on I'll also raised a question on Palestine and the likes of.

Andy Young: GNA expenses increase 14% over year. In cost and currency, mainly from higher accrual of performance-based incentives, and to a less extent, near increases and higher travel expenses from the resumption of business travel. Offering costs at what $323,000, increasing 9% in cost and currency, excluding $30,000 in temporary relief relief last year, are just the up and profit grew 21% in cost and currency. Our effective tax rate was 27.5%, we continue to expect our full year effective tax rate to be around 30%.

Oh coupons.

And I think given our current value can pass and our initiatives tool a broader all price range, that's why as to sell more coupons tick tock do we think that the ticket average decline that we saw in Q3 could actually extend.

Into the coming few quarters.

And with the ticket comp increase.

Be enough to offset the ticket average decrease lastly in terms of our foot paper costs as a percentage of sales I do think that in the near term it could be under some pressure on a year over year basis into the coming few quarters. Thank you.

Andy Young: Now income was $244 million, and diluted EPS was 58 cents, both increasing 18% in report of currency. Excluding the five foreign exchange impact, net income increased 26% in value of EPS, 27% in cost and currency. We joined at $410 million in upfront cash flow, and $243 million in free cash flow in the third quarter. We returned $211 million to share a holder in cash dividends and share repurchase in the quarter. On track to return $600 to $800 million for the full year 2020.

Chen Luo: Do you think that in the near term, you could be under some pressure on a year-on-year basis into the coming few quarters? Thank you.

Joey Wat: Thank you, Chen Luo. Let me just point out that the ticket average compared to is not exactly the best comparison, because last year is during the pandemic. Ticket average is unusually high because people are locked down at home, and when they order, they order big ticket size, right? What is more comparable is we look at the ticket average compared to sort of the more normal year. Although we are, you know, our business is very different compared to 2019, but we can compare the ticket average with 2019. The ticket average is still slightly higher in 2019. That is sort of more normal. I ask our investor not to be overly concerned about the ticket average drop compared to last year.

Thanks, chilled water, let me just point out that so ticket average comparison.

It's not exactly the best comparison.

Because last year is doing the pandemic ticket average is unusually high because people are locked down at home and when they order they are the big.

Because that's right.

What is more comparable is we looked at the ticket average compared to.

Sort of the more normal yes, although we have we are you know our business is very different uncompassionate funding 19, AR, but we can compare they'll take the average with 2019 that ticket every Friday Hyatt plenty in 19, so that is sort of more normal so I.

All right not to be overly concerned about their ticker average dropped compared to last year and usually when ourselves move Uh huh.

Andy Young: Xiaopo Wei, Zhang Xiaopo Wei, Jeff Kuai, Leila Zhang We are on track to meet our 2023 four-year target of 1400 to 1600 net news star. The news star payback period for our KFC and piece of hot star remains healthy at two years and three years respectively. Without healthy new units payback together with flexible formats and modules, we are confident to reach 20,000 star by 2026 as we unveil at our investor day.

Joey Wat: Usually, when our sales move, the more focused number is always the ticket transactions, TC. The fact that our TC grow at almost double digit is a good sign. In our business, over many years, just go beyond one quarter, go through the, you know, five years or 10 years, you will see our ticket average is always rather stable. That hopefully address your concern about the ticket average. Go on.

More more more focused numbers always had some fashion P C and the fact that our T C growth at.

Almost double digit is a good sign.

So so in our business over many many years just go beyond one quarter goes through the you know five years or 10 years, you would see all ticket average is always rather stable. So that's a hopefully I trust you all comes out about the ticket average.

Andy Young: Looking ahead, the fourth quarter is a small quarter for both sales and profit. On the cell phone, since the late September, we have observed softening demand which extended to October. Consumer have become more value conscious. We have been focusing on foot innovations and widening pricing ranges to tap into under the third market to drive growth. Regarding margins, sales remain the biggest factor. Fulturation in sales may have a pronounced impact on margins in the fourth quarter.

Andy Yeung: Let me just address both TA. As I tried to, you know, in my prepared remarks, try to decompose, you know, what is driving the TA. Obviously, you know, promotion is a part of that, but it's only one of them, right? If you look at, for example, for KFC, today the TA is still higher than what we have seen in 2019, as Joey mentioned. And, you know, part of that is delivery mix, right? You know, we have high delivery mix compared to 2019.

Yeah.

Just adjusted book T E I as I tried to you during the prepared.

It's hard to decompose what is you know talking to all.

Obviously, you know promotion is a part of that but he's got Barry is the only one out there right. If you look at for example for KFC KFC, a two day to Ta's do you higher than you know what we have seen in 2019 that he mentioned.

And and you know part of that is you know delivery mix right. You know we have hydro very makes compared to 2019 are and then you know if you look at compared to last year. We also will decline.

Andy Yeung: If you look at compared to last year, we also will decline in the mix for delivery as people returning to the store. That would have an impact, you know, on the TA because the delivery TA for KFC obviously is higher than the dine-in component. The other one is, you know, if you look at KFC, for example, you know, we also mentioned about breakfast day part, right? Last year, because of the pandemic, you know, the breakfast day part was impacted more so than the other day part.

The decline in the mix for delivery as well.

Turning to the store and so that would have an impact on you know the 38, because you know that he would be T. April you know cassis, obviously is hard and you know there was I Oh components.

Andy Young: As a reminder, in the fourth quarter last year, we also received 26 million in temporary relief, which we do not expect to repeat this year. We also anticipate racial inflation of mid-tringle digits and returning to more normalized staffing levels at our store. Just a reminder, in the fourth quarter last year, we experienced labor shortage due to widespread COVID infection. The post-pandemic economic recovery is shaping up to be a wave-like and nonlinear process.

The other one is you know if you look at Oh Gosh, you know kept the for example, you know we also mentioned about breakfast day part right. So you know last year. If you will to a pandemic the practice of Paypal was impacted more so than the other day parts.

Andy Yeung: With the rebound in, you know, breakfast day part, which, you know, tend to also have more TA, you know, so the increase in traffic for breakfast day part will also have impact on that. There's a number of components. If you look at our net new adds, you will notice that it's actually very stable, right? Compared to last year, only 40 basis point difference. Compared to 2019, 10 basis point. It's almost flat line, right? We have ability to, you know, manage, you know, the overall, you know, our profitability, our margins, with, you know, with different, you know, driver for TA.

With the rebound in you know breakfast day.

Hey, part yeah.

Which tend to also have a.

The increase in traffic for ballpark, what they probably also have impact on that so there's a number of components.

Andy Young: So we will maintain our focus on tracking sales and cost efficiency. However, the overall trend towards recovery is evident this year, and many of our performance metrics are setting new records. We have demonstrated our ability to quickly adapt to changing consumer preferences and see opportunities under different market conditions.

And if you look at all so as you would notice that it's actually very stable right compared to last year, only 40 basis points different compared to 2000 1910 basis point, he's almost pipeline right. So we have the ability to manage you know the overall you know our belief Oh my margins.

Andy Young: We are confident that the successful execution of our RGM-2.0 strategy will help us expand our stock portfolio, grow sales, and both profits, delivering sustainable value creations and long-term returns to shareholder.

I'm with you know with different you know driver okay.

Joey Wat: Just compare to a lot of times we have food and paper costs. I mean, I think we have shared in our investor day that we're being able to manage the food and paper costs at a very stable number over many years. When there's some factors driving up the food cost, well, such as commodity inflation.

Just come back to everyone tends to be a foot paper costs. I mean, I think we have not missed a day, we'd be money, we're being able to manage that what type of costs at a very stable number over many years.

Michelle Chen: With that, I will pass you back to Michelle. Thank you, Andy.

Operator: Now we will open a couple of questions. In order to give more people the chance to ask questions, please leave me a question to one at a time. That, please start with your name. 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 are on a speaker phone, please pick up the headset to ask your question.

When when there's some effect of driving up the foot cold well such as commodity.

Andy Yeung: Yeah.

And for Asia, we are able to deliver a very stable cost because of our innovations using all pass a chicken and being flexible with our supply chain. So we are always a quite quite stable here and I keep reminding our team internally.

Joey Wat: We are able to deliver a very stable cost because of our innovations and using all parts of chicken and being flexible with our supply chain. We are always quite stable here. I keep reminding our team internally, the problem the food and paper costs become a problem is when it become too low. That means that we are not giving the value for money, the quality of food and the volume of food to customer. It's a relatively stable percentage for the food and paper costs over the many years. Thank you.

The problem there.

Michelle Chang: Your first question comes from Michelle Chang from Goldman Sachs. Hi, Joey Yan, thanks for taking my question.

Paper costs become a problem is when it becomes too low.

That means that we are not giving the value for money Uh huh.

Joey Wat: My question is still about the competition, especially you mentioned that the trend turns off since end of September, so can share with us how to see the competition landscape involved, and also with this value campaign, how should we think about the balance between the top my growth and also the focus control. Thank you. Thank you, Michelle. Regarding the competition, we see it as a positive trend in time, because despite so concerned towards the macro situation in China in the media, in reality both international and domestic players are investing aggressively in our industry.

Quality of food and the volume of fluid to customer. So so it is.

Certainly stable.

On page four the blue paper costs over the many years.

Okay.

Chen Luo: Yes. Thank you, Joey and Andy. We also have confidence in the management ability to stay agile and take the right measures to address competition and further we share. Thank you.

Yes, Thank you Julia Monday, Andy So we also have confidence in the management ability to stay agile and it takes the right measures to address competition that further we sure. Thank you.

Joey Wat: Thank you.

Andy Yeung: Thank you.

Thank you. Thank you.

Yeah.

Operator: Your next question comes from Wilkins Tong from Morgan Stanley. Please go ahead.

Your next question comes from Wilkins Stung from Morgan Stanley. Please go ahead.

[Analyst] (Morgan Stanley): Hey, sorry. This is Lillian from Morgan Stanley. Can you hear me?

Lillian Lou: Hey, sorry. This is Lillian from Morgan Stanley. Can you hear me?

Hey, sorry doesn't Lillian Lou from Morgan Stanley can you hear me.

Andy Yeung: Yeah.

Joey Wat: Yeah.

Chen Luo: We can.

Andy Yeung: We can.

Yeah, Yeah yeah.

Joey Wat: Yeah.

[Analyst] (Morgan Stanley): Yeah. I have a question, again, on margin side, but a different aspect because I think despite all this, losing the subsidy impact and normalization of labor, starting to source, is there any impact from acceleration of store expansion to margin? Because I think going forward, we're gonna keep up this expansion pace. Should we kind of rethink about the margin base, given such situation? Just wanted to really kind of get some color on how to quantify the impact of faster unit expansion to margin. Thank you.

Lillian Lou: Yeah. I have a question, again, on margin side, but a different aspect because I think despite all this, losing the subsidy impact and normalization of labor, starting to source, is there any impact from acceleration of store expansion to margin? Because I think going forward, we're gonna keep up this expansion pace. Should we kind of rethink about the margin base, given such situation? Just wanted to really kind of get some color on how to quantify the impact of faster unit expansion to margin. Thank you.

Yeah. So I have a question again on margin side, but the different aspect because.

I think despite all of this losing that subsidy in pack and a normalization of labor.

Joey Wat: That shows that these players have competitive voting with their money and voting with their feet, and that's consistent to our view towards the business and our industry in China, particularly for the change store business model. On top of that, we see very significant growth. If you remember, back to our yesterday, we have very aggressive, so opening plan, especially in the lower tier city, and that resonates well with our view that there's a lot of opportunity in the lower tier cities.

Stuffing two stores.

Any impact from acceleration of lifestyle expansion to margin because I think of going forward that we're going to keep Papa expansion pace say should we kind of let me think about the margin base Oh.

Oh, such situation I, just wanted to immediate and they'll get some oh.

How to quantify the impact Paul Clark, Australia unit expansion to margin. Thank you.

Andy Yeung: Okay. Thank you, Lillian. You know, so when we look at, you know, our net new store opening, you know, they continue to be very healthy. You know, if you look at the overall cash payback period for our new store opening, is still two years for KFC and three years for Pizza Hut. In fact, as we mentioned, the smallest store model actually, you know, perform even better. Now, if you look at, you know, how they ramp up, obviously there's a ramp-up period for, you know, the newer store. As mentioned, large majority of our new store, actually break even, you know, in the first three months, and they continue to ramp up, you know, through the year.

Okay. Thank you. So when we looked at you know net new store opening you know they continue to be very healthy. If you look at the overall cash payback period for our new store opening a few two years for KFC in three year for Pizza Hut in fact, as we mentioned the small bar model after a week.

Joey Wat: So we're quite happy to see that. And then when it comes to the point about value driven consumer, we have been a player that has stemmed it from the more cautious and more rational spending for the consumers. We're in two companies, when customer becomes more value driven, it's good for us. As far as we have the capability to deliver and we do. And it has been a consistent focus for a company to focus not only value, but innovative products and funding experience because value itself is never enough for our customers.

[laughter] performed even better.

If you look at you know how they ramp up obviously, there's a ramp up period for you know the newest all last mentioned lots of majority of our new store actually breakeven you know in three months and they come to you ramp up you know through the years.

Andy Yeung: You know, it may have a short-term impact when they just open, you know, because it's ramping up sales, the margin tends to be lower, but they tend to be, you know, very healthy in terms of economics, as you know, they progress into a year or two from the opening. There's no change in the way we look at store opening. You know, important thing, the important indicator for us really is to look at, you know, how the new stores are performing in terms of cash payback, in terms of unit economics. As long as those are good, we'll continue to stick with our plan. As we mentioned, we have been quite disciplined about store opening.

Is he may have a short term impact when they just open you know because its moving up thousand model tends to be lower but they tend to be very healthy.

Amit as you know they progressed and.

And to address a few of them to opening so we there's no change in the way we looked at all openings.

You know some enforcing.

[noise] indicator for us really it used to look at you know how the new store, all conforming and jumbo cash payback in terms of.

You know your economics, and that's why when I suppose a good we'll continue to stick with our plan and as we mentioned we have been disappointed by the store opening just driven by you know our investment models and then also just from ground up from out of market. So you have the ultimate acceleration deceleration based on the performance of the scope.

Joey Wat: And we'll continue to do that. And you can see that in this quarter, in the past many years, we have been very consistent with our ticket average. With the ups and downs, our ticket average, compared to the last, you know, sort of more stable year 2019 is still up a little bit, because we are very careful about it with cancer, price increase every year, and piece of heart during the kind of runtime for the original product.

Andy Yeung: It's driven by, you know, our investment models, and then also from ground up from our market. We have a automatic acceleration based on the performance of the store.

Okay.

Joey Wat: Thank you, Andy.

Lillian Lou: Thank you, Andy.

Thank you Andrew and thanks.

Andy Yeung: You're welcome. Thanks.

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

Your next.

Question comes from and Ling from Jefferies. Please go ahead.

Anne Ling: Hey. Hi. Hi, hi, everyone. Thanks for taking my call. Questions, you know, regarding the current trading environment. You guys mentioned about like, you know, being a little bit softer and with like, you know, sales fluctuation. Would you like, you know, elaborate a little bit on that? Is it like, you know, you're talking about like, you know, post-festive event that there is a falloff in terms of sales performance regardless of like, you know, any like, promotion or innovative product that you launch? Or is it because, you know, certain day part that you noticed that didn't really like, you know, perform as expected? Maybe like, you know, or a certain like, you know, geographical area.

Hey, Hi, Hi, everyone. Thanks for taking my call a question regarding the current trading a thorough but Ah you got you guys mentioned about that can help you a little bit softer and and what's it like yourself fluctuation would you like to elaborate on that is it like cabela's, you're talking about like you know post special event that there is.

Joey Wat: We kind of keep the price the same, but then we get a bit more opportunity with the new product. But the ticket average has been relatively stable. And even in the last quarter, you can see, we have very healthy growth of transaction T.C. In our business, T.C, growth is sober. It cannot be better to have T.C, growth. So it shows them, we get very quickly and we are very agile, and we get the sales.

It's a far off in terms of sales performance, regardless of like you know any like promotion or either way just brought up that you launch them or is it because like you know certain day part that you'd notice that didn't really like you know performed as expected maybe like you know Oh all of a sudden like you know geographical area.

Joey Wat: Last but not the least, while we are doing all this innovative product, we deliver value products for companies to stay. We are able to protect our margins with our innovations and value campaigns, and that is very important. In fact, our year-to-day margin has already exceed that of 2019, which is pre-pandemic. There is some movement, and we will go through it later. There is a movement between the different lines of construction, but the restaurant margin, that is what we protect.

Anne Ling: Like, you know, would love to hear a little bit more about like, you know, what drive the softness, you know? Is it like, is there anything that we can do about that? Yeah. Thanks.

Like you know wed love to hear a little bit more about like you know what.

What drives to the softness is it like.

Anything that we can do about that yeah. Thanks.

Joey Wat: Sure, Anne. At the high level, I mean, summer was vibrant. You know, particularly July, there's some pent-up demand. As I mentioned earlier, you know, transportation helped the traffic, you know, increase 50% year over year, which is really a good sign. When it comes to just recent national holiday during the first half of October, it's quite interesting here, actually. We observe sort of first half and second half during the national holiday. Because this year, particularly this year, the national holiday at the beginning is at the same time as Mid-Autumn Festival. We see softness during the first half because after three-year pandemic, Mid-Autumn Festival for Chinese people, what do we do? Go home.

Well and so so so.

The high level I mean, some of it was widespread you know particular July there's some pent up demand. So as I mentioned earlier, you know transportation hot topic, given the increased 50% year over year, which is really at the site and then comes to.

So just a reason.

National holiday in the first half October it's quite interesting he actually we we observe cause sort of first half and second huh.

Joey Wat: We reduce the rent, we reduce the O&O, and then we put the money into food and to serve our customers. So, net net companies are good because we see is the role of confidence for our industry and our market. Thank you, Misha. Thank you, Joy.

The national holiday, because yeah, I think on that this year the national holiday at the beginning and at the same time as meet Awesome Festival. So we see softness during the first half because I'm just putting them in mid autumn festival for Chinese people, what what can we do go home.

Michelle Chang: That's very clear.

Sijie Lin: Your next question comes from Lin Sijie from CICC. Please go ahead. Thank you, Joy and Andy. So, I have one question regarding the margin. Andy have mentioned the reasons behind the margin's year-to-year change, but if we compare Q3 with the same culture in 2019, our revenue increased 26 percent, but our operating profit only increased 8 percent, which is quite different with Q1 and Q2. Could you please help us better understand this? Thank you. Thank you for your questions.

Joey Wat: You know, the first half of the holiday, we see massive number of customers going home, go back to see their families to spend time with them. The demand was soft. By second half of the holiday, after seeing mom and dad, I think people decided they still wanted to travel a little bit. The second half of the October holiday, actually, the traffic picked up. That's a little bit of this, you know, natural human behavior happening during the national holiday, during Mid-Autumn Festival. That's point one. Point two is in terms of the consumption, cautious spending, we do see customers spending a bit less on the premium product.

So so you know the first half of the holiday, we see massive number of customer going home and go back to see their families have to spend time with that so that's not myself.

Then my second half of the holiday I'm guessing my mind that I think people decided it still decided to travel a little bit. So the second half of the Towboat Festival actually that's the traffic the traffic picked up.

So so that's that's the that's the.

That's a little bit on the you know not show natural human behavior happening during the National Holiday doing me also basketball.

That's the 0.1 0.2 is in terms of the kind of some shifting a cautious spending we see we do see customer spending a bit less on the premium product, although our premium, but the premium product and pizza still are doing quite well.

Andy Young: As you mentioned, if you look at the year-to-year comparison, you definitely need to take out the impact from the temporary release last year. When we compare to 2019, obviously over the past few years, we continue to see the labor cost that was increasing over the past few years, but we're able to offset that by improvement in our O&O, which is occupancy and other expenses. And then, if you look at by item, you see that COS is actually pretty stable, around 31 percent.

Joey Wat: Although our premium burger, our premium product in pizza still are doing quite well. You know, there's that little trend going. Then it comes to the third point, what are we going to do about it? Well, we have been working on, and we've been doing it quite well, actually, with pretty good result, is widening the price range. It's not only the bottom, the top bit, because we serve very large customer base, and there's always some customer who want to treat themselves, the same customer who want to treat themselves during certain time. You know, the premium beef burger, et cetera, we do that. At the same time, we also enrich entry price offering. Pizza Hut, the pizza is a good example.

But you know that that's a little trend going and then come to the sub point is what are we going to do about it well.

We we have been working on and what we have been doing that quite quite well actually it was pretty good result is widening the price range. So it's not only the bottom the top of it because we saw really large customer base and that's always been customer who want to treat themselves.

Andy Young: I'll still ask, as mentioned, the conservation equations and the high mix of delivery, we have seen some increase there. However, on O&O's side, we are much better, mainly benefiting from stock local optimizations and rent and quotations, and better these terms. And we also have other initiatives to replace our cost structure. To pass it, we've offset that, if you look at the things for sales, which is about 90 percent level of 2019.

The same customer.

On the CIT themselves go into at the time. So you know what the premium pizza et cetera would do that but at the same time, we also enrich entry priced offering a pizza hut pizza is a good example.

Joey Wat: We have sort of single digit revenue coming from pizza below RMB 50. In fact, this is a very big segment for both international and domestic player. We see this as a big opportunity here. You know, you can imagine we are going to have more and more product in this particular segment. Not only the below RMB 50 pizza, but also single person meal. Because for Pizza Hut business, our business model, our average number of customer per transaction is over 2 people. Well, that shows that we have the opportunity to serve the 1 person meal as well. We see good progress in it, and we could do more and get more market share in the 1 person meal sector.

We have we have a sort of single digit revenue coming from he's Oh 50 on beach and in fact this is a very big settlement for both international and domestic play it.

Andy Young: Now, looking at the, as we mentioned a little bit earlier, looking ahead in the fourth quarter, fourth quarter is a smaller quarter for us in our sales and profit. And so, as we have mentioned, we have seen some softening demand since September. So sales fluctuations will have a more pull-down impact on the probability and margin. Now, again, in the fourth quarter, compared to last year, last year, we received 26 million dollar of temporary relief, which we cannot expect to repeat this year.

We we we see this as a big opportunity here. So you know you can imagine that you'd have more and more crowded.

Seven.

Not only that the low 50 M B pizza, but also single person Neil because about pizza hut business, our business model our average.

Andy Young: Now, in terms of weighting inflation, let me just repeat it again, with single digit weighting inflation, normalization of staffing levels and our stock. Long the term, as we have mentioned, our investment. We, you know, go is to maintain a stable margin and potentially improve it over time. You know, obviously, we have a work heart to continue to offset weighting inflation impact every year and potentially come all the inflation in the long term.

Average number of customer concessions, it's over two people.

Well that shows that we have the opportunity to serve the one person meal as well and and we see good promise and we could do more and get more market share in the one person meal that's it.

Joey Wat: Then for KFC, we also, you know, continue to work on the choices of product at the entry price offering to capture untapped potential customers, particularly those in the lower tier cities. You know, we can operate at a wide price range, all the way to tier six city. That's what we do, and therefore, we see very good traffic growth. On top of that, in terms of the day part, weekdays are still doing better than weekends. Why the weekend traffic is still a bit soft, and that has a lot of, you know, reasons behind it. The point is our focus on the whole chicken, which is mainly a home consumption product. Our focus on certain other products to support the weekday traffic.

And then people can see.

We also are.

Continuing to work on the choices on products are at the entry price offering to capture untapped potential of customer, particularly.

Andy Young: It's important to keep, you know, a short-term and long-term balance in mind. You know, we will continue to benefit from constant through basic effort that will stay in place for a long time. For example, high-level rent, you know, our megastore restaurant staff sharing program. We also have more flexible and low investment from our small model. So we will maintain, you know, our discipline and it can cause efficiencies and also to improve the capacity. That's how we look at the margins in both short-term and long. Thank you. Thank you, Andy.

It was in the lower tier city.

So you know we can't operate at a wide price range, all the way through Cheswick City and that's what we do and therefore, we see very good very good traffic growth on top of that in terms of salt to a pot weekday a week they are still doing better.

We can and why the weekend traffic is still is soft and that has a lot of you know the reason behind it.

But the point is our focus on the whole chicken, which is mainly at home consumption product our focus on certain other products to support the weekday traffic.

Christine Peng: Your next question comes from Christine Peng from UBS. Please go ahead. Thank you, management.

Christine Peng: I actually have a question which is also related to competition, but I want to ask more details specifically in terms of this Chinese style burger. I think in an investigation, you see on your KFC management actor shared with investors, KFC's plan to launch the Chinese style burger products in the very near future. So can management share with us the time table, as well as more specifics about this part in terms of price strategy, part of strategy going forward.

Joey Wat: We're doing the right thing, and we see very good results from customers. Therefore, for Q3, we deliver record revenue, record profit. But, you know, of course, the biggest challenge for it is the foreign exchange that eat up 6% of our revenue and profit, which is a problem. But in constant currency, you know, that we are doing quite well. We'll continue to focus on the few things that I mentioned. Really good product and very good price and good experience, but still protect the margin for the investors and shareholders. Thank you, Anne.

We're doing the right thing and we see very good results from from customer and therefore for quarter three we deliver Red court.

Right no rent call profit, but you know of course that because the challenge but is the change that you would have 6% of all of our revenue and profit, which is a problem, but in constant currency and all that.

When you're doing quite well so we will continue to focus on the few things that I mentioned.

With a good product and very good price and put experienced but still put that the margin for the investor and shareholder. Thank you Ed.

Christine Peng: Thank you. Thank you, Christine. We actually have Tesla launch is a particular brother in three provinces already, Jiangxi, Fujian, particular. So it's interesting that we we test launch it in not in Guangzhou Beijing or Jianghai. We do it in sort of second tier cities. And the progress has been good and we are happy with the result and we continue to work on a plan and then move to next stage when we are ready.

Anne Ling: Got it. Can I ask another question, you know, regarding the franchise business? We talked a lot, you know, about this, you know, during the investor day. Can you like, you know, share with us, like, you know, the latest update with your captive franchise, you know, i.e., like, you know, those specialty, those hospital units and also, like, you know, the highway centers. When will we see the ramp-up on the franchise business?

Got it got it.

Can I ask another question regarding the franchise business, we talk a talk a lot about them about this during the Investor day, but could you share with us the latest update with your Yo Yo kept of franchise at all I E like those specialty.

There was also a hospital in all our beauty and I'd also like to note the highway centers.

When would we see that the ramp up on the franchise business.

Andy Yeung: Right. You know, if you know, I'll just be quick about this one. You know, as we look at the, you know, Q3, for example, you know, our franchise, you know, number of new franchises growing, you know, pretty fast, you know, like 20% plus compared to last year. You know, like, for new store opening. I think we're making progress there. Obviously, you know, things is not gonna happen overnight. It's gonna come to ramp. That's how we look at it.

Right. So you know if you know I'll.

I'll be quick about this one you know as we look at the third quarter. For example, you know our franchise a you know a number of new contract is growing you know pretty fast he said it was.

Christine Peng: The price point is competitive. It's very affordable. And you know, it's one of our strategies that for the lower tier cities, we have slightly different product and a more affordable price. But at the same time, we still maintain the margin for the business. But it's going well. I take the product myself. It is great. So hopefully next time, we can get a closer to Hong Kong where you can. You don't have to travel that far to try it. Thank you, Christine.

About 20, 20% Bucks compared to last year, and so you know like for new fall opening. So so I think we're making progress there, but obviously you know things he's not going to happen overnight he's going to come in around Oh. So that's how we look at it.

Anne Ling: Okay. Thank you. Thank you, Andy.

Okay. Thank you. Thank you Andy.

Yeah.

Operator: Your next question comes from Ethan Wang from CLSA. Please go ahead.

Your next question comes from Ethan Wang from CLSA. Please go ahead.

Ethan Wang: Hi, Joey. Hi, Andy. My question is on same-store sales. We see that ticket price at KFC and Pizza Hut decline, but I guess that is understandable with China's consumption space and consumption-based competition. Yeah, it's good to do more promotion if you have more traffic. It's always a balancing act. I just wonder if we decrease ticket sales and maybe prioritize on the traffic, is that gonna like cause some pressure on future margin especially from labor. Because with more people, we need to have more staff, but with every order, the pizza price comes lower. We understand there's the impact from the delivery, but just want to understand when you have some more color on the thinking on this trend going forward. Thank you.

Hi, Jerry Hi, Andy.

So my question is on the same store sales.

So we see you got ticket ticket price I can't see how you guys might be coming back test that is unsustainable.

Chen Luo: Your next question comes from Chen Luo from Bank of America. Please go ahead. Hi, Zhou Ye and Andy. So my question is also on competition. In fact, last time in Xi'an I also raised a question on testing and the likes of ticker coupons. And I think given our current value campaign and our initiatives to broaden our price range as well as to sell more coupons on TikTok, do you think that the ticket average decline that we saw in Q3 could actually extend into the coming few quarters?

China's consumption space and consumption space competition and yeah.

For more information you possible flashy says it all.

Always a balancing act, but I just wonder if.

It would decrease I'm, sorry, 2000, and maybe prioritize on the traffic.

Chen Luo: And would the ticket count increase can be enough to offset the ticket average decrease? Lastly, in terms of our food paper costs as percentage of sales, do you think that in the near term, it could be under some pressure on the younger basis into the coming Thank you. Thank you, Warton.

Is that right.

Caused some pressure hum future margin, especially labor.

More people with.

More staff, but we'd have your orders taken of course.

Impact from deliveries, but just wanted to understand what do you have some more color on retention. So all these trends going forward.

Andy Yeung: Okay. Let me try to address that. In terms of the TA, I think you know there's a couple questions concerning TA. Let me try to you know help folks understand a bit you know more in detail. Again you know if you look at you know the for example KFC TA shift there are three sort of like key components to it. Obviously number of people have mentioned you know traffic-driving promotion activities. But that's only you know part of the story and you know it's not even the main part of that. We also have the lower delivery mix shift right?

Okay. So let me try to address that and then fill in some of our car T. A I think there's a couple of question because I'm a T. A let me try to help folks understand a little bit.

Again, you know if you look at you know the for example kept C. A T. A ship are they arose you saw like T component to it obviously.

Andy Young: Let me just point out that the ticket average compared to it's not exactly the best comparison, because last year is during the pandemic, ticket average is unusually high because people are a lot down at home and when they order, they order a big ticket size, right? What is more comparable is we look at the ticket average compared to sort of the more normal year, although we are, you know, our business is very different compared to 2019, but we can compare the ticket average with 2019, the ticket average is still slightly higher 2019.

Number of people have mentioned you know a traffic driving promotions activities Oh.

But that's only part of the story and you know he's probably going to be part of that we also have to lower the wood room mix shift right. So last year. During the pandemic. We have seen you know very high delivery and you know when it's going to be come back, especially you know what we call like a ordering delivery last year right with baidu deliveries and so when when when this year when things will be talked about.

Andy Yeung: Last year, during the pandemic, we have seen, you know, very high delivery and, you know, when delivery come back, especially, you know, what we call, like, group ordering delivery last year, right? Group buy delivery. When this year, when things return to more normal, we do see, you know, the delivery mix to be, you know, slightly lower than last year. That's normal because people are coming back to the store. That's about impact. The other one is, as you mentioned, you know, the same day part, right? The office shift would also have impact on that. For breakfast, as we mentioned, generally we have a lower TA, and so when that's growing faster, then you would also see, you know, a TA impact on the overall KFC TA.

We got to see you know there will be a mix to be slightly lower than last year and so that's normal because people are coming back to the store.

And so that's what might impact the other one is asking you mentioned that some day part right are they also ship would also have an impact was that a full breakfast that's measured in general we have a well what he a until when that's growing faster than you would also see you know a a T. A impact on the overall KFC T a C.

Andy Young: So that is sort of more normal. So I asked our investor not to be overly concerned about the ticket average drop compared to last year, and usually when ourselves move, the more focused number is always the transaction TTC, and the fact that our TTC growth at almost double digit is a good sign. So in our business, over many, many years, just go beyond one quarter, go through the five years or ten years, you would see our ticket average is always rather stable.

Andy Yeung: Same to Pizza Hut, maybe slightly differently, as we have mentioned. You know, besides of, you know, the promotional activities, we are actually by design trying to target, you know, and tap market, which is, you know, below RMB 50, you know, segment. Which is very underserved by Pizza Hut, but, you know, it's a very, you know, big part of the pizza market overall, which is, you know, like obviously right now, number of, you know, players are active in that. So we want to penetrate that market. The other one, you know, for TA, for Pizza Hut, as Joey mentioned, is our purposeful, you know, targeting of single-person meal set.

Single Pizza hut, maybe slightly differently.

Imagine.

Besides up you know there are public entities.

We are actually by design trying to target.

Market, which is you know below 50 on B, you know Sigma which is a very underserved by our pizza hut, but you know he's a very big part of the pizza market overall, which is you know like obviously right now no bump if you will.

Players are now active in there so we want to penetrate that market.

Andy Young: So that's hopefully addressed your concern about the ticket average. And go on. Yeah, let me just address this both T.A. As I tried to, you know, in the prepared amount, I'm trying to decompose, you know, what is, you know, tracking the T.A. Obviously, you know, promotion is a part of that, but it's a very easy, it's only one of their, right? If you look at, for example, for KFC, KFC today, the T.A, is still higher than, you know, what we have seen in 2019, as Joey mentioned.

The other one you know for 40 844 for Pizza Hut as Joey mentioned is our purposeful Ah you know targeting of single person do that are you.

Andy Yeung: You know, KFC, if you look at a TA and then you look at Pizza Hut, you will see that, you know, Pizza Hut always have high TA. Then a part of that is because is in group dining and also in family dining. You know, when we have product that defines particularly for, you know, single person meal set, especially working lunch and whatnot, you're going to see, you know, the TA shifting there. Finally, as we look at even before the pandemic, we have done a purposeful job to actually increase the value proposition to, you know, consumer.

You know.

Pizza hut, while KFC, if you've got a T. A and then you'll get Pizza hut you will see that you know people have always had high Ta and then you know and then a part of that is because.

Andy Young: And, you know, part of that is, you know, delivery makes, right? You know, we have high delivery makes compared to 2019. And then, you know, if people get compared to last year, we also will decline in, or decline in the mix for delivery as people returning to the store. And so that would have an impact, you know, on, you know, the T.A. Because, you know, the delivery T.A, for, you know, KFCs, obviously is higher than, you know, the resigning components.

Using group dining and also in family dining.

You know when we have product that besides particularly fall you know thinking about the news that especially the working lunch and whatnot, you're going to see a shifting there.

And and and and finally as you go back even before the pandemic, we haven't done a pellicle job to actually increase the value proposition to you know consumer what are the biggest.

Andy Yeung: One of the biggest, you know, challenge for Pizza Hut, you know, before the Hy-D program was that, you know, their value proposition to consumer. We've been working very hard to hold the price stable and whatnot to drive that. That's why, you know, by design doing that. Because, you know, when Pizza Hut is gonna try to expand and address a bigger customer base, you know, you're going to have a wider pricing range. That's why, you know, you kinda continue expect TA over there have some movement there. That's a lot of components there for our strategy.

Challenge and Paul because he's had you know before there was the high school program, but that's you know the yoga and bypass Cushing to consumer and so we've been working very hard in older price stable and whatnot. If you drive that and so that's why you started doing that because you know when he says he's going to try to expand and address a bigger bigger customer base.

Andy Young: The other one is, you know, if you look at, you know, KFC, for example, you know, we also mentioned about practice, you know, day part, right? So, you know, last year, people are pandemic, you know, the practice day part was impacted more so than the other day part. With the rebounds in, you know, practice day part, we, you know, and which, you know, tend to also have T.A., you know, so there are increasing traffic for practice day part, we also have impact on that.

You know you're going to have a variety of pricing range and so that's why you kind of continue expect ta or that have a movement. There. So that's a lot of components. There are part of our strategy.

Andy Young: So there's a number of components. And if you look at, I'll still add, you will notice that it's actually very stable, right? Compared to last year, only 40 basis from different. Compared to 2019, 10 basis points. It's almost bad line, right? So, so we have ability to, you know, manage, you know, the overall, you know, our possibilities, our margins, with, you know, with different, you know, driver for T.A., so.

Andy Yeung: The key point is that despite all that stuff that goes on, you see that, you know, our COL is very stable, you know, 31%, right? Because we have product innovations. We have a very strong supply chain managing that. Overall, that's how we want to keep a balance between, you know, driving, you know, the traffic, expanding our addressable market, and at the same time maintaining our TA. Now obviously for COL, the biggest concern on the long term is, you know, the demographic change in China and whatnot. It's very important for us to continue to invest in automation, digital, and to improve, you know, our restaurant operations so that we can continue to improve the labor productivity, you know, of our workforce.

But the key point is that despite all of that stuff that goes on and you see that you know I'll see what I believe very stable.

You know, 31% right because we have innovation.

We have a very strong supply chain managing that you know so so so you know overall, that's how we want to keep a balance between you know driving you know topic, expanding our addressable market.

Joey Wat: Just come back to a lot of time to be a food paper cause. I mean, I think we have shared that yesterday that we've been managed, we've been able to manage the food paper cause at a very stable number over many years. When there's some factors driving up the food cause, well, such as commodity inflation, we are able to deliver a very stable cause because of our innovations and using all parts of ticker and being flexible with our supply chain.

And at the same time, maintaining alethia now obviously foreseeable out the biggest concern on their long term use you know the demographic change in China and whatnot and so you know the starting point for ethical debate basking automation digital and to improve our operation. So that we can continue to improve the labor.

Uh huh.

Andy Yeung: We've been quite successful doing that before the pandemic. Coming out from pandemic, we're also pretty stable at about 25, 26%. You know, that's the things that in the long run, as we mentioned, try to maintain the overall margins and expand it potentially over time. Thank you.

I work for and we've been quite successful at doing that before the pandemic and coming out of a pandemic. We also pretty stable at about 25, 26% and you know that's the the things that in the long run after imagine trying to maintain the overall margin and expanded how would how should we think you.

Joey Wat: So we are always quite stable here. And I keep reminding our team internally, the proper food paper cause, become a problem is when it becomes too low. That means that we are not giving the value for money, the quality of food and the volume of food to customer. So it's a relatively stable percentage for the food people cause over the many years. Thank you.

Joey Wat: Maybe I just add some color on the COL side in particular. If we look beyond just one quarter, we look at our COL over the last few years as we share in our Investor Day when we have few thousand stores, 6,000, 7,000 stores, we have 430,000 people, or 450,000 people actually. Now we have 14,000 stores, almost double. We still only have 430,000 people. So as Andy mentioned, we use, you know, automation, digitization to manage labor costs.

Maybe I'd just add some color on the C O L side in particular.

If we look beyond just one quarter we.

Looking at our C O L over the last few years as we share you know unless the date when we have the 1000 67000. So we have four near 30000 people also under 50000 people actually now we have 14000, so almost double where you still only have four under 30000 people. So that's it.

And dimension, we use you know automation and digitization to manage our labor costs are when it comes to sort of.

Operator: Yes, thank you, Joey and Mandy. And so we also have confidence in the management ability to stay agile and take the right measures to address competition and further we share. Thank you.

Joey Wat: When it comes to handling the promotion and while managing the COL, well, as I mentioned in my prepared remarks, we tend to pick those products that utilize the existing ingredients and that they are very easy to make. We are very careful about, you know, maximum number of items that the staff can handle in our store. That's why having an amazing, I would say second to none operation team is important. We do have pretty dedicated and good balance of how many items we sell in a store and what's the impact on the COL, and most important, what's the quality of food that we can protect in order to deliver in the short term and long term. Thank you, Ethan.

More.

When it comes to handling the promotion and and and while managing to fill out well as I mentioned in my prepared remarks, we tend to take those products.

Lillian Lou: The next question comes from Wilkins Tong from Morgan Stanley. Please go ahead. Hey, sorry, this is Lillian from Morgan Stanley. Can you hear me? Yeah, yeah.

Utilize the existing ingredients and that they are very easy to make and we are very careful about you know maximum number of item. It's got the staff can handle it now so and that's why having a amazing I was they used against the non operation T Amazing Porton.

Wilkins Tong: Yeah, so I have a question, again, our monitoring side, but in different aspects, I think despite all this losing the subsidy impact and normalization of labor, starting to stores, is there any impact from acceleration of self expansion to margin? Because I think going forward, we're going to keep up the expansion pace. So should we kind of rethink about the margin base given such a situation? I just wanted to really kind of get some color on how to quantify the impact of faster and even expansion to margin.

We do have pretty at that.

<unk> K and the violence of how many items, we sell in the store and what's the impact on the C O and most important what's the quantity of food.

That we can protect in order to deliver in the short term and long term. Thank you Ethan.

Andy Yeung: Got it. That's fair. Thank you, Andy. Thank you, Joey.

Ethan Wang: Got it. That's fair. Thank you, Andy. Thank you, Joey.

Got it that's fair thanks.

Sure Andy Thank you Jordan.

Joey Wat: Thank you.

Okay. Thank you.

Andy Yeung: Thank you.

Operator: Your next question comes from Xiaopo Wei from Citi. Please go ahead.

Your next question comes from Shell fall away from Citi. Please go ahead.

Xiaopo Wei: Morning, Joey and Andy. I have a quick follow-up question on restaurant margin. In Q3, did you see any widened divergence of restaurant margin of high-tier city versus low-tier city? Andy, in the prepared remarks, you explained a lot about we are having concession rent for new store, et cetera. Looking forward, shall we expect our Occupancy and Other expenses-to-sales ratio to keep low? Because in the past two years, this has been very good factor to mitigating other inflation component in the restaurant margin. Thank you.

Good morning, Julien Andy I have a quick follow up question on restaurant margin.

Andy Young: Thank you. Okay, thank you, Wilkins. You know, so when we look at, you know, our net new start opening, you know, they continue to be very healthy. You know, if you look at the overall cash payback periods for our new start opening, you see two years for Pepsi and three year for Pizza Hut. In fact, as we mentioned, the small model actually, the performance better. Now, if you look at, you know, how they ramp up, obviously, there's a ramp up period for, you know, the new start.

In the third quarter did you see any widening divergence of a restaurant margin of hydrous Youtube question, but what's your C T.

Also Andy in the prepared remarks, he's playing a lot about a week.

Conceptually rend, if a new store in central looking forward shall we expect our.

Occupancy and other expenses to social issue to keep low because in the past two years. These have been very good effect her to mitigating all their inflation component and the restaurant margin. Thank you.

Andy Young: We mentioned last majority of our new start. Actually, right even, you know, in the third three months and they continue to ramp up, you know, through the years. You know, it may have a short term impact when it's just open, you know, because it's wrapping up sales and money tends to be lower. But they tend to be, you know, where healthy, you know, economic as, you know, they progress and to, you know, ideas to come from the opening.

Yeah.

Okay.

Andy Yeung: Thanks, Xiaopo. So in terms of, you know, the different variants, I think, you know, that's not material changes to the way, you know, margins pan out, as we have mentioned before. You know, obviously in the Tier 1 cities, Tier 2 cities, the high-tier cities, you know, generally, you know, those stores have higher footprint at the store. But you know, generally, you know, you have, you know, a slightly lower margin because higher costs, labor and rent. And then in low-tier cities, you know, you, although you have a smaller footprint, you know, through the store, generally costs are lower, labor and all that. So the margin is slightly higher in the lower tier cities.

Thanks, Paul So in terms of you know the different whereas I think you know that's not material changes to the way you know imagine there could pan out as we have mentioned before you know obviously in the tier one C. D D to C. D E C D a.

We still have higher throughput at the stall and but you know generally you know you have a you know outside.

Andy Young: So we, there's no change in the way we look at small opening, you know, you know, the important thing, the 20 indicator for us, we use to look at, you know, how the new start up performing in terms of cash payback, in terms of, you know, you know, economics and as long as those are good will continue to stick with our plan. And as we mentioned, we have been predisposed about small opening is driven by, you know, our, you know, investment models and then also from ground up from our market. So it has an automatic acceleration based on the performance of the thought.

Even though our market because high cost labor and rent and.

And then in low tier cities you know, although you have a smaller pool could you go through the store generally costs are lower our labor and all that so.

Operator: Thank you.

So the margin is slightly higher in the lower tier cities, but all in all you know because also the investment upfront investment is different at different here. So we end up you'll have a pretty good payback periods are what both top tier and they'll both your cities.

Andy Yeung: Overall, you know, because also the investment, upfront investment is different in different tiers. We end up, you know, having a pretty good payback period for both, you know, the top tier and the lower tier cities. That's, you know, in terms of the variance between margins in different tier cities. Now, in terms of O&O, you know, I think as we have mentioned, you know, obviously last year we had some temporary relief, but overall, like, you know, O&O even including those, you see continued improvement there. You know, those contracts are long-term contracts and when you get, you know, a favorable long-term lease, you're gonna have a favorable long-term impact.

And so so so that's you know what you're talking about you know the.

Variance between our margins in different tier of cities now in trouble OLED Oh, you know I think you had mentioned you know obviously last year, we have some temporary relief by the all new halt like Oh, even including dose you see continued improvement there dos contract along with having contracts that when you got you know verbal longtime we used.

Ethan Wang: Your next question comes from, and link from Jeffries, please go ahead. Hey, hi, hi, hi, everyone. Thanks for taking my call. Questions, you know, regarding the current trading environment. You guys mentioned about, like, you know, being a little bit softer and, and with, like, you know, self-fuctuation, would you, like, you know, elaborate a little bit on that? Is it, like, you know, you're talking about, like, you know, post-effective event that there is a, there is a four of in terms of self-performance regardless of, like, you know, any, like, promotion or innovative product that you launch, or is it because of, you know, certain day part that you notice that didn't really, like, you know, perform as expected.

You're going to pay both welcome you back and then we also have other cost structure.

Andy Yeung: We also have other cost structure, you know, initiative and portfolio optimization. I think, you know, O&O improvement would stay. You know, obviously, you know, that's also, you know, limited in terms of how low we can get, right? No one's gonna give a free rent. I think, you know, in the long run, I think we'll continue to see, you know, pretty healthy O&O as a percentage of sales.

Michigan and portfolio optimization. So I think you know and Oh excuse me I would say, but you know obviously you know that's also come up how long we can get it right and then what is going to give you a free rent, but I think we know in the long run I think we will continue to be.

Pretty pretty healthy or no.

Ethan Wang: Maybe, you know, or certain, like, you know, geographical area, like, you know, we love to hear a little bit more about, like, you know, what drives the softness, you know, is it, like, is there anything that we can do about that? Yeah. Thanks. So, at the high level, I mean, someone was widespread, you know, particularly July, there's some kind of demand. So, as I mentioned earlier, you know, transportation helped the traffic going to increase 50% year over year, which is really good sign.

That's supposed to help them.

Yeah.

Xiaopo Wei: Thank you.

Thank you.

Andy Yeung: Thanks, Xiaopo.

That's helpful.

Operator: There are no further questions at this time.

Yes, no further questions at this time.

Michelle Shen: Thank you for joining the call today.

Thank you for joining the call today.

Michelle Shen: For further questions, please reach out through the contact information in our earnings release and on our website. Goodbye.

For further questions. Please reach out to the contact information in our earnings release, and Oh I'm sorry.

Got it. Thank you. Thank you.

[Company Representative] (Yum China): Thank you.

Andy Yeung: Thank you.

Christine Peng: Thank you.

Joey Wat: Thank you.

Yeah.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.

That does conclude our conference for today. Thank you for participating you may now disconnect.

Ethan Wang: And then comes to, so just a reason, national holiday in during the first half of October. It's quite interesting here, actually, we observe sort of the first half and second half during the national holiday. Because this year, particularly this year, the national holiday at the beginning is at the same time as meat art festival. So, we see partners during the first half because after three year pandemic, meat art festival for Chinese people, what do we do for home?

Okay.

Ethan Wang: So, you know, the first half of the holiday, we see massive number of customers going home, go back to see their family, spend time with them. So, the demand was off. And then by second half of the holiday, after seeing mom and dad, I think people decided, still decided to travel a little bit. So, the second half of the October festival, actually, the traffic picked up. So, that's a little bit of this, you know, natural human behavior happening during the national holiday, during meat art festival.

Okay.

Yeah.

Okay.

Yeah.

Okay.

Yeah.

[noise].

Okay.

Yeah.

Okay.

[noise].

Ethan Wang: That's the point one point to is in terms of the consumption, cautious spending, we do see, we do see customer spending a bit less on the premium product. Well, we have been working on, and we have been doing it quite well, actually, with pretty good result is widening the price range. So, it's not only the bottom, the top bit, because we serve very large customer base. And that's always the customer who want to treat themselves, the same customer who want to treat themselves during certain time.

Yes.

Okay.

[noise].

Okay.

Ethan Wang: So, you know, the premium people, etcetera, we do that. But at the same time, we also enrich enterprise offering. Pizza Hut, the pizza is a good example. We have, we have sort of single-digit revenue coming from pizza, the low 50RMB. And, in fact, this is a very big segment for both international and domestic players. We see this as a big opportunity here. So, you know, you can imagine we are going to have more and more product in this particular segment.

Yeah.

Okay.

[noise].

Okay.

Ethan Wang: Not only that the low 50RMB pizza, but also single-person meal, because for pizza Hut business, our business model, our average, average number of customer per transaction is over two people. Well, that shows that we have the opportunity to serve the one person meal as well. And we see good progress in it and we could do more and get more market share in the one person meal capture. And then for KFC, we also continue to work on the choices of products at the enterprise or rings to capture untapped potential customers, particularly those in the lower TSEs.

Yes.

Okay.

[noise].

Ethan Wang: So, you know, we can operate at a wide price range all the way to TSE city. And that's what we do. And therefore, we see very good, very good traffic growth on top of that in terms of the state part. We say, we say, are still doing better than we can. And why do we can't travel is still a bit soft and that has a lot of, you know, reasons behind it.

Okay.

Yeah.

Okay.

Ethan Wang: But the point is, our focus on the whole chicken, which is mainly at home consumption product. Our focus on certain other products to support the, we say, traffic. We're doing the right thing and we see very good results from customer. And therefore, for quarter three, we deliver red cost, you know, red cost profit. But, you know, of course, the biggest challenge for us is the foreign change that it up 6 percent of our, our brand new and product, which is the problem.

Okay.

Yeah.

Okay.

Yeah.

Okay.

Ethan Wang: But in constant currency, you know, we're doing doing quite well. So, we will continue to focus on the few things that I mentioned, with a good product and very good price and good experience, but still put at the margin for the investor's shareholder. Thank you, Anne. Got it, got it. And can I ask another question, regarding the franchise business, we talk a lot about this during the investor day. Can you share with us the latest update with your captive franchise, i.e, those special T, those hospital, you know, uni and also the highway centers.

Okay.

Yes.

Okay.

[noise].

Ethan Wang: When will we see the ramp up on the franchise business? Right, so, you know, if you, you know, let's be quick about this one. You know, as we look at the, you know, third quarter, for example, you know, our franchise, you know, a number of new countries is growing, you know, pretty fast. It's like 20 percent plus, compared to last year. And so, you know, like for news for opening. So, I think we're making progress there, but obviously, you know, things is not going to happen overnight. It's going to come in your realm. So, that's how we look at it. Okay, thank you. Thank you, Anne.

Okay.

[music].

Okay.

Yeah.

Okay.

Yeah.

Okay.

Yeah.

[noise].

Andy Young: Your next question comes from Ethan Wang from CLSA. Please go ahead. Hi, Joey. Hi, Andy. So, my question is on Financial Sales. So, we see that tickets, ticket price at TFC and either have become, I guess that is understandable with the kind of consumption space and consumption space competition. And yeah, it's good to do more promotion. You have more traffic. It's always violence and acts, but I just wonder if it would decrease to get sales and maybe price on the traffic.

Okay.

Yeah.

Okay.

Yeah.

Okay.

Yeah.

Andy Young: It's an example, and like, cause some pressure, future margins, especially from May, but with more people, we need to have more staff, but without the orders, the future price comes lower. We're going to send this in-pad from the deliveries, but just want to understand when it has some more color on the symptoms on the trend going forward.

Okay.

[noise].

Okay.

Andy Young: So let me tell you just that. And then so in terms of the T.A. I think you know, there's a couple questions caught on in T.A. Let me try to, you know, help focus on a little bit, you know, more in detail. Again, you know, if you look at, you know, the first time a KFC T.A. We also have the lower delivery makes shift, right? So last year, if you're in the pandemic, we have seen, you know, very high delivery.

Okay.

[noise].

Andy Young: And you know, when this will be come back, especially, you know, we call like group ordering delivery last year, right? We'll buy delivery. And so when, when, when this year, when things return to more normal, we have to see, you know, the delivery makes to be, you know, slightly lower than last year. And so that's normal because people are coming back to the stock. And so that's about impact. The other one is, as we mentioned, you know, the Sunday part, right?

Andy Young: The office shift would also have impact on that. For breakfast, as we mentioned, generally have a lower T.A. And so when that's going faster, then you would also see, you know, a T.A, impact on the overall KFC T.A. Single of pizza hut, maybe slightly differently, as we have mentioned, you know, besides, you know, the public activities, we are actually by design trying target, you know, and tap market, which is, you know, below 50 and be, you know, segment, which is very underserved by pizza hut.

Andy Young: But, you know, it's a very, you know, big part of the pizza market overall, which is, you know, like obviously right now, number of players are active in there. So we want to penetrate that market. The other one, you know, for T.A. For pizza hut, as Joey mentioned, is our purpose for, you know, targeting of single person new set. You know, KFC, while KFC, if you look at a T.A. And then you know, pizza hut, you will see that pizza hut always have high T.A.

Andy Young: And then, you know, and then a part of that is because it's in group dining and also in family dining. So, you know, when we have product that defines particularly for single person use that, especially working lunch and whatnot, you will never see, you know, the T.A, shifting there. And finally, as we have, even before the pandemic, we have done a purposeful job to actually increase the volume proposition to, you know, consumer.

Andy Young: One of the biggest, you know, challenge and for the pizza hut, you know, before the high T.A, program was that, you know, the volume proposition to consumer. And so we've been working very hard and hold the price table and whatnot to drive that. And so that's why you know, by deciding that because you know, when pizza hut is going to try to expand and address a bigger, bigger customer base, you know, you're going to have a wider pricing range.

Andy Young: And so that's why, you know, you know, you continue to expect T.A, over there, have some movement there. So that's a lot of components there for our strategies. But the key point is that despite all that stuff that going on, you see that, you know, I'll still add this very stable, you know, 31 percent, right? Because we have product innovations. We have a very strong supply chain managing that, you know. And so, so, so we, you know, overall, that's how we want to keep abundance between, you know, driving, you know, the traffic, expanding our dressable market.

Andy Young: And at the same time, maintaining our T.A. Now, obviously for CLL, the biggest concern on the long term is, you know, the demographic change in China and whatnot. And so, you know, it's very important for us to continue to invest in automation, digital, and to improve, you know, our restaurant operation. So that we can continue to improve the labor productivity, you know, our workforce. And we've been quite successful during that before the pandemic. And coming up in pandemic, we're also pretty stable at about 25, 26 percent. And, you know, that's the thing that in the long run, as we mentioned, China maintained over margins and expanded potentially over time.

Joey Wat: Thank you.

Joey Wat: Maybe I just add some color on the CLL side in particular. If we look beyond just one quarter, we look at our CLL over the last few years, as we share in a university, when we have few thousand stores, six, seven thousand stores, we have four hundred, thirty thousand people, or four hundred, fifty thousand people actually. Now we have fourteen thousand stores, almost double, we still only have four hundred, thirty thousand people.

Joey Wat: So, as Andy mentioned, we use automation, digitalization to manage labor costs. When it comes to handling the promotion and while managing the CLL, well, as I mentioned in my superior remark, we tend to pick those products that utilize the existing ingredients, and that they are very easy to make, and we're very careful about, you know, maximum number of items that the staff can handle in our store. And that's why having an amazing, I would say, second to none, operation team is important.

Joey Wat: We do have pretty static and good balance of how many items we sell in a store, and what's the impact on the CLL? And the most important, what's the quality of food that we can protect in order to deliver in a short term and long term? Thank you, Ethan. Sorry, that's very, thank you, Andy. Thank you, Jordan. Thank you.

PLP Away: Your next question comes from PLP away from City. Please go ahead.

Andy Young: Morning, Julian, Andy. I have a quick follow-up question on restaurant margin. In the third quarter, do you see any widened divergence of the restaurant margin of a high-tier city versus a low-tier city? And also, Andy, in the prepared markets, he's playing a lot about, we are having concession in rent, the new store, and the actual. Looking forward, shall we expect occupancy and other expenses to self-resue, to keep low? Because in the past of two years, this has been a very good factor to mitigating other inflation component in the restaurant margin.

Andy Young: Thank you. Thanks a lot. So, in terms of the different variants, I think that's not material changes to the way margin, actual panel, as we have mentioned before, obviously in the 1 CD, 2 CD, 2 CD, 2 high-tier cities. Generally, those stores have higher throughput, it's the store, but generally, you have a slightly lower margin because high cost, labor, and rent. And then in low-tier cities, although you have a smaller throughput through the store, generally costs a lower labor and all that, so the margin is slightly higher in the low-tier cities.

Andy Young: But on all, because also the investment of the investment is different here, so we end up have a pretty good payback period for both top-tier and low-tier cities. And so that's in terms of the variants between margins in different tier cities. Now, in trouble, O and O, I think, as we have mentioned, obviously last year, we have some temporary relief, but all who are, like, O and O, even including those, you see continuing improvement there.

Andy Young: Those contracts along the time contracts, and when you get, you know, payable, long-term release, you're going to payable, long-term payback. And then we also have other cost structure, you know, initiative and portfolio optimization. So I think, you know, O and O, improvement would stay, but, you know, obviously, you know, that's also, you know, limit in term of how low we can get, and then we're going to keep it free when. But I think, you know, in the long one, I think we will continue to see, you know, could it be healthy, or I know that's a good thing about that.

Operator: There are no further questions at this time.

Operator: Thank you for joining the concert today. For further questions, please reach out through the contact information in our earnings release and our website.

Operator: Good bye. Great. Thank you.

Operator: That concludes our conference for today. Thank you for participating.

Operator: You may now disconnect. [inaudible] Thank you. Thank you. [inaudible] a lot of work to do, she's got a lot of work to do, she's got a lot of work to do, she's got I'm sorry. I'm sorry.

Q3 2023 Yum China Holdings Inc Earnings Call

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