Q3 2024 Yum China Holdings Inc Earnings Call
Thank you for standing by and welcome to Yum, China's third quarter 'twenty 'twenty four earnings conference call.
Speaker Change: All participants are in listen only mode that will be a presentation followed by a question and answer session. If you wish to ask a question you will need to press. The star followed by the number one on your telephone keypad I would now like to hand, the conference over to Florence lip Senior IR Director. Please go ahead.
Florence Lip: Thank you operator, Hello, everyone. Thank you for joining Yum China.
Florence Lip: <unk> 24 earnings conference call on today's call are our CEO, Ms Joey Wat and our CFO Mr. Adrian.
I'd like to remind everyone that our earnings call and investor materials contain forward looking statements, which are subject to future events.
Yeah.
Florence Lip: Actual results may differ materially from these forward looking statements.
Florence Lip: All forward looking statements should be considered in conjunction with the cautionary statement no earnings release and the risk.
Florence Lip: Included in our filings with the E C.
Florence Lip: This call also includes certain non-GAAP financial measures.
Florence Lip: You should carefully consider the comparable GAAP measures.
Florence Lip: Reconciliation of non-GAAP and GAAP measures is included in our earnings release, which is available to the public through our Investor Relations website located at IR Dot Yum, China not cool.
Florence Lip: You can also find a webcast of this call and a powerpoint presentation on our website.
Please note that during today's call all year over year growth results exclude the impact of foreign currency unless otherwise noted.
Florence Lip: Now I would like to turn the call over to Joey Wat CEO of Yum, China Joey.
Hello, everyone and thank you for joining us.
I'm proud to share that we achieved strong results again in Q3 2024.
Florence Lip: We delivered robust sales growth as well as a salary that solid growth compared to Q2.
Florence Lip: System sales grew 4% year over year same store sales index improved sequentially and 97% of prior year's level.
Florence Lip: Deliveries those achieved double digit growth.
Florence Lip: As it has for 10 quarters dive in it yet.
Florence Lip: On a comparable basis hold restaurant margin and O P margin expanded year over year.
Florence Lip: Core operating profit grew 18% and diluted EPS increased by 32%.
Florence Lip: As we execute our Archie M 2.0 strategy.
Florence Lip: We have a renewed focus on operational efficiency.
Florence Lip: Malaysia.
Florence Lip: Savings generated from improved efficiency allow us to invest in innovation and value for money of it.
Florence Lip: This broadens our addressable market. It also helps us capture more traffic.
Right, so slow and expand profit margins.
Florence Lip: Meanwhile, our innovative business model K coffee coffee and pizza hut, BOL are gaining momentum and successfully catch real customer demand.
Florence Lip: In the first nine months, we set several new records.
Florence Lip: $8 7 billion in U S dollar in revenue.
Florence Lip: Oh, the $1 billion in operating profit.
1200, net new stores.
Florence Lip: And over $1 2 billion dollar return to shareholder.
Florence Lip: We outperformed the industry in a challenging and fluid environment.
Environment.
Florence Lip: Today, I will provide an update on our operations.
Florence Lip: Opening strategy Adrian would then go through the financial performance and our latest capital return plan.
Florence Lip: I will start with operational efficiency.
Florence Lip: We are making great progress with project brush I am project right.
Florence Lip: We introduced these projects in quarter four of last year and quarter one of this year respectively.
Florence Lip: These projects are to enhance operational efficiency.
Florence Lip: Innovations across all aspects of our operation.
Florence Lip: Projects fresh eyes has reshaped our operations.
Florence Lip: We are evaluating processes through the fresh eye of our restaurant managers.
Florence Lip: <unk> E signing to support them more effectively.
Florence Lip: By simplifying centralizing and also made a key processes, we are easing the burden of the restaurant manager.
Florence Lip: So that they can focus on better serving customers.
Florence Lip: We are also using innovative technology and automation in our operations.
Florence Lip: This makes us more efficient.
Florence Lip: For example, intelligent energy management, we use the utility costs.
Well get Red eye has created a fresh mindset to innovate and deliver results by spending better and buying better.
Florence Lip: Our procurement teams are serving our marketing teams better and faster.
Florence Lip: The rate of savings are passed on to our customer and my innovations.
Florence Lip: We are also hearing all product design to optimize ingredient used and improve operational efficiency.
Florence Lip: These initiatives have enabled us to a home is on product innovation and value for money.
Florence Lip: While expanding margins.
Florence Lip: On a comparable basis Q.
Florence Lip: Q3 restaurant margin improved 50 basis points year over year.
Florence Lip: And core op margin expanded 140 basis points.
Importantly, these are sustainable improvements that shrink our business capabilities.
Florence Lip: While driving high levels of customer satisfaction.
Florence Lip: Turning to sell it is true that consumers are becoming more rational and sophisticated in their choices.
But we know that the demand is there consumer see value for money, good quantity and emotional value.
Florence Lip: Just a T I D.
Jesse: This is jesse.
Jesse: That's exactly what we are offering them and its working.
We recapped both system sales and same store sales growth.
Jesse: Equally important.
Jesse: On one hand, we see ample opportunities across China to enter underserved market.
Jesse: N customer assets.
Jesse: On the other hand, we look to balance our unit growth with same store sales growth.
Jesse: Seven consecutive quarters of same store profit growth and sequential improvement in same store. So index for both KFC and Pizza Hut show the strength of our strategy.
Jesse: Our delivery sales grew 18% continuing the double digit annual growth Yum, China has maintained over the past decade.
Jesse: In quarter, three delivery sales reached around 40% of ourselves.
Jesse: We have strategically adjust delivery fees.
Jesse: Theres more entry price offering to capture incremental consumer demand.
Jesse: We have enhanced our presence all aggregated platform.
Jesse: And deliberate coverage.
Jesse: Through these initiatives and more we have captured incremental orders, especially from total diners and value cautious customer.
Jesse: As a result, both KFC and Pizza hut has increased their market share on aggregator platforms.
Jesse: Even as we expand an aggregator platform, we continue to maintain strong control over our business sells outside the delivery aggregated a time for over 70% of our total sales, including dying takeaway and delivery.
Let me share a few highlights on Cassie.
Jesse: We continue to breathe fresh energy into our flagship product.
Take the new original recipe chicken Burger S. We introduced in quarter two.
Jesse: He's been exciting innovation.
Jesse: So not so obvious.
Jesse: Taking our cues from the classic way case in China enjoy camps, the original recipe chicken with mashed potato.
Jesse: We combined them into a new Burger product base being the only successful.
Jesse: Building on that is that we introduced and original recipe chicken.
Jesse: Curry gravy in August.
<unk> got a young Lady.
Jesse: At this time.
Jesse: Curry gravy to the original recipe chicken and mashed potatoes.
Jesse: Customers are loving it.
Jesse: As a bona it doesn't require new ingredients in the stores, we met the Mazda use of existing one.
Jesse: While delivering exceptional value N K to our loyal customers.
Jesse: And the first nine months.
Jesse: Chassis, so nearly 200 million comes off K coffee.
Jesse: Supposing All cup so in 2023.
Jesse: During the period, both cells and Cubs, so increased by about 30%.
Jesse: As a membership data indicate that a significant majority of our members have yet to strike K coffee we.
Jesse: We see huge potential for growth.
Jesse: We have just opened last 500 sidebar.
Jesse: Side by side K coffee coffee cause gods coffee this morning, China time.
With a prime location in Shanghai you Jeffrey.
Jesse: We're also tapping English strategic location like college campuses and transportation hubs.
Jesse: By the end of the year, we especially see 600 conveyed.
Jesse: Our distinctive many of coffee drinks and food.
Jesse: Stunning value proposition and convey M B L.
Jesse: Are resonating well with their customers.
Jesse: All disruptive limited time offer of original recipe chicken latte.
Jesse: Yeah, we go away a lot yet generated first there's belief that to reality and finally trial.
Jesse: Perhaps surprisingly it's become one of our best sellers.
K coffee cafes also effectively cross sell to Cherokees loyal customer.
Jesse: Driving incremental sales and profit.
Jesse: K coffee to face potential is exciting.
Jesse: Turning to Pizza hut.
Jesse: The brand is making solid progress.
Jesse: Pizza Hut opened nearly 300 net new stores in the first nine months.
Jesse: Exceeding 3600 stores.
Jesse: Since 2017 Pizza hut has been strategically lowering his ticket average to drive traffic.
Jesse: It has its mass market appeal.
Jesse: We have launched more entry price product design for value of cautious customers and so little diamonds.
Jesse: Capturing more a smaller take that odor.
Jesse: Pizza Hut has also improved.
Jesse: Profitability.
Jesse: Cool, Okay increased 20% year over year in quarter three.
Jesse: Co op margin was up by 140 basis points.
Jesse: With boost operational efficiency with simplified ingredients and leave us on kitchen processes.
Jesse: This also allow us to further improve our high food quality and service level.
Jesse: We continue to fortify our reputation is pizza hut.
Jesse: We have reason to be a great a handful, it's pizza dough or better pace consistency H E a preparation.
In addition, we continue to build on our Central Florida, Durian Pizza Lillian Pizza now our number one best selling pizza.
Jesse: One in every four pizza, so a pizza hut, China is not a durian pizza.
We sold nearly 30 million the land piece, though year to date.
Jesse: We have extended our success with your interest Bill good.
Jesse: Launching the pizza adult E broker with Korea, and pineapple juices genes that Lillian for all new about.
Speaker Change: It sounds unusual.
Jesse: It's perfect for a given.
Speaker Change: And love Us and so they'll quickly.
Speaker Change: Our breakthrough Pizza hut Barstool is looking like a promising vehicle for expanding our addressable market.
Speaker Change: It's being only five months since we converted our first goal.
Initial results are encouraging for buying we have seen significant same store sales growth.
Speaker Change: Other than by incremental transaction, despite lower ticket averages.
Speaker Change: So far we have converted around hunger 50 stores.
Speaker Change: Expanding from Guangdong to over 10 provinces.
Speaker Change: Covering tier one city to launch yet tons.
Speaker Change: Well, we'll continue to refine the model across different locations for both dining and delivery.
Speaker Change: Without your focus on system sales and same store sales growth in mind, let's talk about our store expansion plan.
Speaker Change: In Q3.
Speaker Change: We opened 438 net new stores.
Speaker Change: With over 1200, net new stores year to date.
Speaker Change: We are on track to meet our target of 1500 to 1700 net new stores this year.
Speaker Change: This growth is underpinned by strong new store performance.
Can't see that payback period held steady at two years.
Speaker Change: And at Pizza Hut paper improved to two to three years.
Speaker Change: Around 80 days out of new stores opened in the past few years profits.
Speaker Change: Profitable within three months of opening.
Speaker Change: Alongside our successful equity store model.
Speaker Change: We have a subtle reading franchise, the vitamin to unlock additional opportunities.
Speaker Change: Our franchise Friday, he focuses on assessing star T J and remote locations as well as lower tier city.
Speaker Change: That were previously beyond our reach.
Speaker Change: We have built the infrastructure to support our franchisees.
Speaker Change: From food safety to store management.
Speaker Change: We have also innovate news, though models suitable for franchisees such as chassis small-time me. So we allow prepare to pick up the speed.
Speaker Change: Currently franchisees represent 12% of KFC store portfolio.
The franchisee makes four net new stores increased from 15% in 2023% to 27% year to date exceeding the guidance. We gave our last year's Investor day, a 15% to 20%.
Speaker Change: We now expect the ratio will gradually increase to 40% to 50% over the next few years.
Speaker Change: Pizza hut will be on a similar path.
But would take more time to get there.
Speaker Change: For Pizza hut net new stores the franchise like four 7% year to date.
We anticipate this ratio will gradually increase to a 20% to 30% over the next few years.
Speaker Change: With that I will hand, the call over to Adrian day hour and change their vote.
Speaker Change: By way of background Asia has been with Yum, China's saying 2019.
Speaker Change: Leveraging his investment banking background.
Speaker Change: Adrian has led multiple successful strategic investment and capital market projects in his role as our Chief investment Officer.
Speaker Change: He was also instrumental in establishing our Nevada joint venture and building the business in China as our general manager of Lovaza J D.
Speaker Change: <unk> combination of financial background with operational experience make him well suited for this position I'm thrilled to welcome Adrianne to his new role Adrian.
Adrian Day: Thank you Jody and great to be with everyone. Today for my first earnings call.
Adrian Day: In the third quarter, we achieved strong results with major kpis trending positively.
Adrian Day: System sales grew 4% and same store sales index sequentially improved to 97% on prior year level.
Adrian Day: Restaurant margin expanded 50 basis points year over year on a comparable basis.
Adrian Day: Okay. Martin also saw a significant rise of 140 basis points.
Adrian Day: As we grew our topline quadrant proper search by 18%.
Adrian Day: And diluted EPS grew 19%, excluding the mark to market gain on our equity investments.
Adrian Day: As a reminder, restaurant margin on a comparable basis excludes EOG deduction as well as temporary relief from landlords and government agencies receipt in the prior year.
Adrian Day: Operating profit was further excludes foreign exchange impact.
Adrian Day: Two items.
Adrian Day: We're immensely satisfying these meaningful sequential improvements in our quarter three results.
Adrian Day: To demonstrate our ability to offer Columbia industry in both good times and Bob.
Adrian Day: With our confidence in our hoss generating capabilities, we plan to step up our capital return to shareholders.
Adrian Day: Let's take a closer look at our third quarter performance.
Adrian Day: Hi, Graham.
Graham: Cassie system sales increased 6% year over year.
Graham: Same store sale was 98% of prior year levels with 1% same store transaction growth.
Graham: Our strategy is to widen the price range and capture lower ticket average delivery orders are yielding results.
Graham: Actually hide combo with incremental profit.
Graham: And delivery sales continue to grow double digits.
Graham: Our quad three ticket average was RMB, 3% lower than prior year level with an increase from 37, a M b a quarter or two.
Graham: More chicken items like coffee and breakfast continue to outperform.
Graham: Pizza hut system sales increased 2% year over year.
Graham: Same store sales were 94%, Ohio novels, with same store transaction growth of 4%.
Graham: Okay, I wish was 9% lower year over year.
This is in line with our strategy to transform the brand to increase mass market appeal.
Graham: Oh, Hi, Pizza burgers and single person meal attracted incremental topic on value conscious consumers until new diners, which of course my word per person standing.
Graham: The walls to our motto is positioned with even more accessible pricing.
She's a hot topic has grown in response to our strategy and profit margins have improved year over year.
Graham: Thanks to our team's relentless drive for operational efficiency and innovation.
Now, let's go through our margin on key cost lines.
Okay margin as a percentage of revenue was 12, 1%.
100 basis points higher year over year.
Graham: Well 140 basis points higher on a comparable basis.
Graham: Within our restaurant margin and savings from G&A expenses helped us achieve that.
Graham: Our original margin was 17% steady year over year.
Graham: On a comparable basis restaurant margin was 50 basis points higher.
Savings from the cost of labor occupancy and other costs offset the increase in the U S.
Graham: Cost of sales was 31, 7%.
Graham: 60 basis points higher year over year, or 30 basis points higher on a comparable basis.
Graham: We kept the cost of those broadly stable compared to 31, 5% in quarter two.
Graham: Well continue to offer excellent value for money.
Key factors include favorable commodity prices and savings from selling better and find better initiatives under project on.
Graham: Cost of Labor was 25, 1%.
Graham: 20 basis points lower year over year.
Graham: Improved operational efficiency more than offset wage increases from our frontline staff and the impact of sales deleveraging.
Graham: Occupancy and other was 26, 2%.
Graham: 40 basis points lower year over year.
Graham: We're 60 basis points lower on a comparable basis.
Graham: Come from more efficient marketing and advertising initiatives as well as other cost optimization.
Graham: Our G&A expenses decreased 19% year over year.
Graham: This was due to operational efficiency gains and lower performance based compensation this year among other factors.
Graham: G&A expenses as a percentage of revenue were four 5% in the quarter gone by.
Graham: 130 basis points from five 8% a year ago.
Graham: For the full year, we aim to keep the G&A ratio around 5%.
Graham: Operating profit was 371 million.
Graham: Growing 14% year over year.
Graham: Core <unk> increased 18% year over year.
Graham: Our effective tax rate was 27, 3% in quarter three.
Graham: On par with the same period last year.
Graham: We expect our full year ETR in the high Twenty's.
Graham: Net income was 297 million growing 21% year over year.
Graham: Our mark to market equity investment of 126 million positive impact in quarter three this year compared to a negative impact of 3 million the same period last year.
Graham: Excluding this impact our net profit grew 9%.
Graham: As a reminder, we received lower interest income this year on the lower cash balance.
Graham: Diluted EPS was <unk> 77.
Growing 32% year over year or 19%, excluding the mark to market equity investment in <unk>.
Graham: Now, let's turn to capital returns to shareholders.
Graham: Since our spin off we've returned over $4 billion to shareholders.
In the first nine months this year.
Graham: We have already returned more than $1 $2 billion, including over $1 billion in share repurchases and $187 million in quarterly dividends.
Graham: We bought back more than 27 million shares.
7% of our total shares outstanding partially contributing to our EPS growth.
Graham: Our cash position remains healthy with net cash of $3 1 billion as of the end of the quarter.
Graham: We're committed to returning excess capital to our shareholders.
Graham: A year ago, we set out a three year plan to return $3 billion to shareholders through dividends and share repurchases from 2020 for 2026.
Graham: With our cash generation capability is proven in good times and bad we now plan to step up our capital return by 50% to $4 5 billion over the same period.
Graham: This includes $1 5 billion in 2024.
Finally, moving on to our outlook.
Graham: We're encouraged by the recent stimulus policies.
Graham: These measures are a positive step toward.
Graham: And as you all know FERC can take quite a while to trickle down to consumers and thereby move the needle in businesses like ours.
Graham: Entering the fourth quarter was not observed significant changes in market conditions and consumer sentiment.
Graham: Despite this we remain confidence in China's midterm and long term growth opportunities.
Graham: Quarter four is traditionally a low season for us.
With smaller sales and profits.
Graham: We maintain our focus on operational efficiency and innovation to compensate them to our consumers.
Graham: We expect these efforts to continue driving overall sales and profit growth.
Graham: I am confident in our strategy and our ability to navigate this complex and evolving environment and achieve sustainable long term growth.
Graham: As a reminder in quarter four last year, we benefited from 6 million in temporary relief equivalent to around 30 basis points op margin, which we do not expect to repeat this year.
Speaker Change: Let me pass it back to Joey for closing remarks.
Speaker Change: Adrian before we turn to Jamie.
Joey Wat: Just to recap the three key messages I want you to take away today.
First our productivity results highlight our resiliency and growth strategy.
Joey Wat: Our do you focus on operational efficiency and innovation, we are well positioned to capture opportunities in this market.
Joey Wat: Both system sales growth and same store sales skills key focus for us.
Joey Wat: Second we remain bullish on China's long term growth opportunity.
Joey Wat: Our widened price ranges optimized delivery strategy and breakthrough business models help us broaden our addressable market.
Joey Wat: We continue to capture under third cause.
Joey Wat: The most that men with both equity and franchise stores.
Lastly, we maintained our focus on sustainable growth and capital return to shareholders.
Joey Wat: We plan to step up our three year capital return to bolt on $5 billion for 'twenty 'twenty four to 'twenty 'twenty six.
Joey Wat: With that our pilot batch of parents.
Florence Lip: Joey now we will open the call for questions in order to give more people a chance to ask questions. Please limit your questions to one at a time.
Operator, please start the Q&A.
Okay.
Florence Lip: Thank you.
Speaker Change: He wants to ask a question. Please press star one on your telephone and wait for your name to be it out.
Speaker Change: If you wish to cancel your request please press star two.
Speaker Change: If you're on a speakerphone please pick up the handset to ask your question.
Speaker Change: Our first question comes from Sao Paulo away with Citigroup.
Hi, Hi can you hear me Julian are you doing.
Speaker Change: Okay.
Speaker Change: Okay. Thank you think of taking quite question.
Speaker Change: Regulations on the strong quarter I'd, probably want to ask a long term question and it is the first quarter. We are seeing your both your poor Oh P margin and I guess, you're spending and it seems like it was down as you know the market has been focusing on same store self a long, but you seem to.
Speaker Change: To me that is actually as Julie said to the system sells equally important as the city's ourselves Ah shall we say looking forward shall we look more into the same store sales base the transaction volume rather than the same store sales value because.
Speaker Change: As Julie rightly pointed out you guys have you know, they're eating format and now new actually widen your pricing range. So the mix of your products or the S. T actually.
Speaker Change: Distort the traditional understanding of same store so if that's the case.
Is there any other areas you were beauty, where economies of skill in terms of the enlarged of volume to drive your margin resilience for.
Speaker Change: So for thank you for your long term question.
Speaker Change:
Speaker Change: And if I'm allowed to indulge me.
Speaker Change: Give a comprehensive do you.
Speaker Change: Our long term strategy.
Speaker Change:
Speaker Change: You know what it cost us three actually is a good result, and illustration of how I'm trying to execute Oh, Jim two points one strategy in the long term with few focuses on multiple areas.
Speaker Change: It's a seal are now all the questions posed or decision present on Ito or such as you just said it themselves or system sales.
Speaker Change: But.
Speaker Change: So that is the only acceptable and acceptable Enzo is true. It is both we want both.
Speaker Change: And then the same store sales are obviously is composed of the transaction.
Speaker Change:
Speaker Change: So so the way that we deal with it is we really are pursuing a dual focus because.
Speaker Change: We cannot justify.
Speaker Change: Well the other.
Speaker Change: So I refer to separately in my earlier remarks, but just to recap first we have to focus on system sales growth and same store sales growth and a quota three obviously with the Liverpool presented themselves growth for the quarter and also seven consecutive quarter of same store transaction growth.
Speaker Change: Going forward because between the T. A M T G I.
Speaker Change: You can see our over long term, we focus on transaction growth, which really is the most important one of the most important driver for full business day hours and not to mention are the the growth is also supported by a 10 years old delivery growth.
Speaker Change: Second to none and that related to your margin question, we have to focus on operational efficiency and innovation.
Speaker Change: So so and I certainly believe that any any good company, who wants to survive need to do both.
Speaker Change: So so for Q3 alone this year with the let's say, 18% cooperating profit growth through <unk>.
Speaker Change: Multiple margin improvement improvement project by project Fresh I project Red eyes.
Speaker Change: And then we reinvest our savings into multiple innovations.
Speaker Change: Such as food innovations and then value for money and then some breakthrough model innovations such as K coffee and Pizza hut.
And with with this kind of.
Speaker Change: Operational efficiency and innovation.
K coffee Hefei model and 150 mm Pizza hut store right now they they broaden our addressable market and capture new customer demand to grow the business.
Speaker Change: So we are still focused on opening equity stores and accelerating franchisee vitamin and that helps obviously manage our capital return.
Speaker Change: And so far this year, we opened 1200 plus new stores in the first nine months.
Speaker Change: And we have.
Speaker Change: Oh, they're trying to reach full year target.
Speaker Change: The paper is good and 80% of the new stores turned profitable with things three months as mentioned in the earlier remarks.
Speaker Change: At the same time, we are accelerating the franchisee opening to unlock opportunities in strategic location below or lower tier cities.
Speaker Change: But long.
Speaker Change: Last but not least that you focus on investing in our in business growth and return of capital to shareholder are also happening at the same time.
Speaker Change: So with the cells with the product and yeah. You know, we we we were growing the business and returning capital at the same time.
Speaker Change: So to summarize in each of the above four areas are we do our best to avoid unnecessary compromises.
Speaker Change: And we use all our energy all capability of creativity to get we can have both including both same store sales and.
Speaker Change: Systems up thank you.
Speaker Change: Sure.
Speaker Change: Your next question comes from Lillian Lau with Morgan Stanley.
Lillian Lau: Hey, Thank you.
Lillian Lau: Oh, good evening, Joey and congrats again on your position and also congrats for a D and a very good result, my question is more on the near term because I think Julia has been very clear on our long term strategy and I think in the so called <unk> I noticed that the vocab see out.
Where pricing actually recovered pretty nicely compared to the previous quarter's trend.
Lillian Lau: And I'm, just wanting to check the thinking behind I E do we see some.
Lillian Lau: Elevated a competition that may cause less pressure on pricing or have you done anything to really kind of a support of pricey, so related to that and you're thinking about the pricing strategy in the next couple of quarters. Thank you.
Speaker Change: Oh, Thank you Lillian so so internal competition, we will suddenly see restaurant industry continued to grow.
Speaker Change: And then the global players are still trying to and less aggressively in the China market and the current players are going deeper into lower tier city and we also see some players rationalize promotional intensity in recent quarters.
Speaker Change: And in some aggressive players slowdowns.
Speaker Change: Still opening this year.
Paul Kim surprising, we always try to do from Kersey president be surprising actually in a short or long term.
Speaker Change: Relatively transparent.
Speaker Change: Well, what I can see we try to have stable pricing and so you know we we are of our quota. This quarter is the 38 38 I think.
Speaker Change: And then.
Speaker Change: It is so that's short term, it's done but I E.
Speaker Change: It'd be higher.
Speaker Change: And then and then to the previous quarter.
Speaker Change: No no sorry, decidedly lower than the 36 that's.
Speaker Change: That's really lower than the previous quarter, but it's higher than 2019. So he is ready to be stable.
Paul: Paul Pizza hut pricing strategy.
Paul: We we have very clear if I'm twenty-seven Shin on what are we try to be a.
Paul: A bit more mass market driven so we have continued to lower the uprising. So that it's more of a festival. So in the short and long term that's pretty much our strategy in terms of pricing.
Speaker Change: Okay. Thank you Tony.
Speaker Change: Your next question comes from Ethan Wang with CLSA.
Ethan Wang: Thank you Hello, Jeremy Hunter Adrian. So my question is done that's where I'm talking modal I think I remember that back in our Investor Day, We mentioned in our future P&C franchise next door.
Ethan Wang: Turning to retrench, if I stand up new stores that we are now having a higher hope franchising model. So what makes you change and if we expect more sworn testimony of the future does that also mean, we should expect lower capex spending going forward as well.
Ethan Wang: Thank you.
Ethan Wang: Yeah.
Speaker Change: Thank you Ethan.
Ethan Wang: I guess.
Ethan Wang: Firstly a question regarding what made the change right I think the key channels. The key reason is we're already.
Ethan Wang: For instance for KFC, Oh, we have to our new store model cap sees more time many.
Ethan Wang: We communicated previously the capital expenditure per store. So that model is lower than 0.5 million RMB, which is roughly one third of our regular cast he used to work.
Ethan Wang: And for instance for the newly rolled out Oh Wow model could be a you know have a good potential in lower tier city as well and go for franchising, obviously with a reason why yours or you know the French high quality in China has improved meaningfully as well. So overall you know to store model.
Ethan Wang: And as you know our QA readiness, our digital capabilities and the readiness of our franchisees and enabling us to speed up our franchise opening here in China as we mentioned during the prepared remarks, but for KFC. We aim to gradually increase on that and you'll open percentage in franchise to be 40.
Ethan Wang: It was 50% down the road over the next few years for Pizza hut. It takes a bit longer but you know overall, we hope to achieve 20% to 30% of new old town for Pizza hut being franchise model over the next few years.
Ethan Wang: And speaking of our franchise unit economics.
Ethan Wang: He wants who are you know remind everyone here that for each 100 dollar off system sales generated by our franchise fee. We recognized 40 to $45 off of our revenue and that breakdown includes 6% to 7% off the 100 being a Roger fee collected an initial fee collected are also.
Ethan Wang: The other 35% to $36 off of almost a 100 M. B a transaction with franchisees so revenue from transaction with franchisees.
Ethan Wang: That's mainly in the areas of C O S and other services, including a N P or others.
Ethan Wang: I mean post type of cost you know Frank has expense three per cent of like must be willing to pay to Yum brands and our Stanford transaction with franchisees is currently incurred around all cost.
Ethan Wang: But in the future there was a potential for us to wait times touch on margin in the services with franchisees because we have savings from project, but I am proud of your freshmen.
Ethan Wang: Okay.
Ethan Wang: Whether that will lower our capital expenditure and Collins or you know I guess, all I see that as a real question.
Ethan Wang: Over the long term, we do expect our helping Hong Kong all I see in the near term the.
Ethan Wang: The impact will be immaterial, because as we mentioned the overall pacing all that stuff up and franchising will be gradual over the next few years. Thank you Ethan.
Thank you Adrian and congratulations on the exempt thank you.
Thank you.
Speaker Change: Your next question comes from Michelle Chang with Goldman Sachs.
Michelle Chang: Hey, Hi, Troy Adrian.
Michelle Chang: Thanks for having the time to ask the question. So my question is you still are more on the short term I think you already mentioned that Oh quota today, we didn't see a significant changes yet but.
Michelle Chang: But we are positive on that.
Oh, the coffee during last fourth quarter, the bathos coffee Ah shall be shall be easier. So are we still seeing like a queen mental sequentially equal my fourth quarter Cat and also Oh looking ahead of when we can feed up all with all KFC and Pizza hut. He looked at KFC same store sales is still a much more recently.
Michelle Chang: That compared with a pre Colby, let me steal a march on culture. So Oh, well, we look for same store sales growth going forward, we see that the pizza hut I think travel will be gradually gradually stabilize at KFC actually half of them to see the pricing you talked about.
Michelle Chang: Mexico. Thank you.
Speaker Change: Thank you Michelle for questions as I mentioned in the prepared remarks, we're quite encouraged by the stimulus policies well, obviously it will take time, our you know to influence consumer behavior and impact businesses like ours.
Speaker Change: A lot to give some more color into quarter four our performance, especially in the topline so entering in quarter four as I mentioned in the prepared remarks, we've not absorb significant changes in consumer sentiment knowing the macro situation.
Speaker Change: In terms of the October Golden week holiday or SSG slightly improved year over year or do you want the Golden week. However, the consumer spending remain cautious post holiday I think that's a common phenomenon we offer for this year after a long holiday consumer spending.
Speaker Change: We're trying to be cautious for a short span of time after the long holiday.
Speaker Change: Overall speaking for quarter four we still face some top line pressure, but we are confident in our ability to outperform peers in book both the good times and bought and we'll also reasonably confident that all quarter for same store transaction index will continue to be positive for another quarter.
Speaker Change: Lastly, but importantly, our you know we really focus on things within our control. So we continue to execute our strategy, which has proven to be quite effective.
Speaker Change: To capture incremental traffic and protect our margins.
Speaker Change: We believe we're well positioned to capture contango capture consumer needs with our flagship product studying value kind of our strategy and breakthrough models.
Speaker Change: The second part of the question relates to the difference between KFC and Pizza Hut, obviously, you know given the consumers I'm more rationalized and they're sending a pizza hut with their high higher professor spending karni is facing a little bit of a bigger headwind compared to KFC, which is really having a super robust a resilient model. However, I can't work.
Speaker Change: You know all the right things for Pizza hut.
Speaker Change: The worrying that she Asian Orient the per person standing ER and also device and the new store model, such as Pizza Hut, Wow, which is even more accessible and as we mentioned in the prepared remarks about both this quarter and the previous quarter. That's how we do see some initial encouraging results for awhile.
Speaker Change: On the volume side, we see a meaningful increase Nasser Street there are for for a while obviously, it's only five months since we opened the market seems to be converging. The first wireless door back in May. So we're still kind of iterate chance you bumped your in store model hopefully over the steady states that pizza hut Wow will enable the pizza hut to get you off.
Speaker Change: Different a much larger total addressable market.
Speaker Change: And I think your final part of my question is.
Speaker Change: More on the midterm for next year on the Th one for Pizza hut in for KFC as we mentioned for KFC. We looked at yeah. We expect this year to be steady over the mid to long run, although there might be some short term fluctuations depending on macro and competitive dynamics for pizza hut.
Speaker Change: Our strategy to lower the T. A and then we have been doing at a reasonably effectively with the positive transaction growth.
Speaker Change: You know over the past quarters.
Speaker Change: And we.
Speaker Change: We look to continue that strategy down the road as well. Thank you Michelle. Thank you Adrian I just add some color about the pizza hut.
Speaker Change: So so the pizza hut.
Speaker Change: Hum.
Speaker Change: Good profit, but one step at a time as Adrian mentioned, we see a very nice improvement in the dying Haynesville shale and.
Speaker Change: 150, <unk> T cells also actually one third 50 store.
Speaker Change: In Guangdong in itself and because of the scale of the pizza so relative to the bundle told us, though we see some meaningful improvement Oh, Oh self unknown Haynesville stuff, which is it's a exciting up again you know we have over three.
Speaker Change: <unk> thousand 600, Oh, okay.
Speaker Change: Around the country right now so it will take some time, but the progress is good lots, but not need that's what it's really a small it's a small quarter.
Speaker Change: So.
Speaker Change: None of the numbers could could cause swings either way. Thank you.
Speaker Change: So much.
Speaker Change: Thank you Tony a couple of details.
Speaker Change: Thank you.
Speaker Change: Your next question comes from C. J Lynn, let's see I see.
Thank you Joanne Asian Ah Congrats on another strong quarter and generous shareholder return I have one question. So we have seen some food safety cases overseas. So Hudson, we balance on one hand, the cost control and all the other hand, the quality of the.
Speaker Change: Protagonist service. Thank you.
Speaker Change: I think you said, yeah, well first of all I presume you refer the first safety case overseas.
Speaker Change: It's caused by real onion first of all we only use cook onion, so that shouldn't have.
Speaker Change: Similar invitation to our business when it comes to the overall for safety versus cost control is always our strong philosophy and operation that we put through search tea at the most important our position.
Speaker Change: We are fully compliant with regulation.
Speaker Change: And also.
He is one of the few issues that if there's any issue are we at.
Speaker Change: Reported directly to myself and then we also are reported to two hour pool all of what we have is what safety committee on this one so we absolutely see get treated as times are.
D C N N pretty cheap and it's reflected.
Speaker Change: Reflected in a holistic quality assurance system, and our comprehensive safety process with city all of it.
Entire value chain from suppliers are two two largest take all the way to our stores and last but not least I just want to reassure you that.
Our investment in our digital supply chain in the last many years have pay off and we have a very good visibility means digital visibility all I loved with say T.
Speaker Change: Without inventory and to the point that the stock replenishment to the in store is automatic.
Speaker Change: So is it's episode of important last but not it means we have more than 300, plus QA employees.
Right across China, focusing on this important medicine. In addition to the technology that we have in that too.
Speaker Change: Two to monitor this particular important.
Speaker Change: Party interest so much.
Speaker Change: Thank you Jerry.
Speaker Change: Uh huh.
Speaker Change: Your next question comes from Anne Ling with Jefferies.
Anne Ling: Hey, Hi, Thank you Hi management team just a question on the K coffee, you know and now with $500 you know and what we hear underground is that you know its been doing amazingly. Good. So just wanted to check like to know whether you can share with us like you know the incremental benefit you know because it's.
The side by side still what's your existing at KFC. So maybe like you know would you share with US that you know what is the incremental like same store AR benefit them and also that you know are in terms of profitability. You know if there's anything that you can share with us.
Speaker Change: Thank you and thank you well you know.
Speaker Change: Long story short the incremental <unk> sales.
Speaker Change: Sales uplift to the store we have observed is a single digit south uplift and it does produce incremental profit.
Speaker Change: Because of our very unique operating model. So that is the short answer in terms of longer and so we are indeed very excited and today actually we opened almost 500 stores.
Speaker Change: She got who is she going in Shanghai and right next to our headquarters and in a very prime area in Shanghai.
Speaker Change: The the the increase of the Soc and or the number of Cups is a 30, plus 30% plus roughly.
Speaker Change: And this is very exciting compare it, especially when we take the background of the overall market seems ourselves in coffee as the background Matt.
And the good.
Speaker Change: The opportunity here is.
Speaker Change: A significant majority of all the members of our Yum, China members had yet to trial K coffee.
Speaker Change: And in our side by side models and the cross sell from KFC to K coffee.
Speaker Change: Is amazing. So so we are we are excited about it and it took US 10 years from selling coffee to built the first K coffee cafe, but we see really good progress we have 100 or so in March and now we have a 500 store and then.
By year end, we expect to exceed 600, plus though and we we are expanding to campus and transportation location as well.
Speaker Change: Food is good and we have very distinctive coffee sparkling coffee.
Speaker Change: So and then the eight times or the gigantic eight time. So so things are looking looking very exciting and positive. Thank you Ann.
Ann: Thank you.
Ann: Your next question comes from Walter <unk> with C. N V I.
Walter: Oh, Hi, Hello, Julian agents can you hear me.
Ann: Yes.
Okay. Thank you Oh, congratulations on Guy to yoga studio and results and the things against that for the Audi efforts. So my question is about the pizza while at the store formats. So a can you comment on the south end market performance. After a piece of all stores and also the midterm a room for it.
Ann: Potential growth and are they suitable for all the regions in China and also well I remember the last time when I die in the wild stores Dominion looks really appealing and they have lots of choices and the prices are cheap and however, when I really ordered a many of the items were just not available. So this.
Ann: Disappointed me a little bit and do you think this is a problem and how do you see their wallet and store formats are now and going forward and also we are also aware that oh, if you're a new store format called K probes are there any inflows that you're ready to share. Thank you.
Speaker Change: Thank you so for Pizza boat I mean, let's let's take a step back it is only really innovation to happen only five months ago. So I think I'll speak of really now is very sparse already we are at about 150 stores.
And the breakthrough model is very exciting as I had mentioned in the prepared remarks.
The.
Speaker Change: The impact on the buying and if things go South is a is very exciting there more work to be done or the delivery side.
Speaker Change: And then in terms so the the the profit we are continue we continue to work on it well let.
Speaker Change: Let me just bring back all the deal focus our innovation and operational efficiency.
Operational efficiency and innovation it it goes both ways. So full I'll call. It business, we achieved operational efficiency and we take the savings and we felt we were messing innovations.
Speaker Change: Well a piece of Oh, we have the innovations buzz.
Speaker Change: And that is reflected in exciting south.
Speaker Change: But the operational efficiency will come later, which I hope address your your disappointment on the part of it.
Speaker Change: Because it does not happen.
Speaker Change: Atlanta Korea, and that's another reason why whenever we turn around business KFC are laid on pizza hut, we always focus on South first 12. It later.
Speaker Change: One step at a time so for Pizza Hut BOE a go back to our framework, we have the innovation first and then operational efficiency later.
Speaker Change: So I I I believe that things are.
Speaker Change: In is good progress and and I'm very happy to see we will have we achieved so far for pizza have all but a lot more work to be done is only five months.
Speaker Change: We got in K 12.
Speaker Change: We have been opening heal the small number of K postal in Hangzhou Shanghai Guangdong.
Speaker Change: Although actually and it's still small right now and obviously any time, there's health conscious consumer with products like <unk>.
Speaker Change: Energy bowls and smoothies.
Speaker Change: Very healthy choices.
Speaker Change:
Speaker Change: And it's still in pilot stage by the way so there's still a lot to be learned but that's one thing that we already are.
Are doing which is sharing the learnings from K coffee is a gang is side by side [laughter] are the newer stores that are side by side with our KFC coastal so that we can share that we can share some investment oh, they're kept pets.
But that's still early days okay. Thank you.
Thank you.
Speaker Change: Your next question comes from Linda Huang with him see.
Speaker Change: Excuse me.
Speaker Change: Sorry.
Linda Huang: Yeah, Yeah, Hi, Ashwin can you hear me.
Speaker Change: Yes.
Speaker Change: Yes.
Yes. My question is regarding for all capital allocation are we appreciate that the company and step up the total deep returned to full point 5 billion and a piece of Cobra correct me, if I'm wrong because it based on your cash flow right am I found out to every single year on free cash flow will be around.
Speaker Change: 100 to 800 million, but if we return back to 1.5 billion that means that probably in three years. So we can't use up all our cash in our balance sheet. So I'm just wondering based on the capital return does that mean that for the three year next three years, we were just purely focused on the.
Organic growth and we never think about any like a peak and then eight will happen.
Speaker Change: In the next three years or are we can strike the balance there is a big deal coming up and we are but we're willing to take out some debt to a D.
Speaker Change: And M&A opportunities. So that's my question.
Thank you.
Speaker Change: Thank you Linda I guess, there's two parts of the question Firstly regarding the sustainability of our capital return. Obviously, you were very confident in our ability to generate cash and as we mentioned we have to focus on our business growth and a return to shareholders. A people focused a game [laughter] so for 2024 months.
Speaker Change: 26, we plan to step up our return them from 3 billion to $4 5 billion and that includes the $1 5 billion for this year of 'twenty 'twenty four.
Speaker Change: And ask a question regarding the longer term right. Obviously as you correctly pointed out we probably cannot do a you know 1.5 billion every year forever.
Speaker Change: But you know I think in terms of our company's philosophy, we have always been a you know a shareholder value conscious. So we're continuing to evaluate how best to deliver long term shareholder value.
Speaker Change: You know, obviously I will not be surprised on the road Oh, we won't be able to return a meaningful portion of our free cash flow generated each year to our shareholders beyond 'twenty 'twenty six obviously, we have no concrete plans yet up I will provide some more concrete guidance down the road at the appropriate time.
Speaker Change: On your second question regarding M&A on sports huge opportunities.
Speaker Change: We have been very prudent in terms of you know M&A approach are obviously, we are prudently and proactively to evaluate potential M&A opportunities both historically as far as in the future and will only it you know.
Speaker Change: Go ahead with our M&A to the extent it makes sense and creates value for shareholders.
Speaker Change: So obviously you talked to M&A as I said as you know we will actually have a robust discussion with our board as well.
Speaker Change: He sent me a very major M&A comes out and then to the extent that it makes a lot of sense to Yum. China, then we may or may not adjust our capital return plan, obviously, we may or may not take on debt to fund our M&A, depending on size up the M&A, but again, we're very prudent in terms of our M&A approach well only do M&A has to determine its supersensible.
Speaker Change: Our shareholders hopefully that address your question. Thank you Linda.
Linda Huang: Okay. Thank you very much.
Speaker Change: There are no further questions at this time I'll now hand back to Nick for closing remarks.
Nick: Thank you. Thank you for joining the call today for further questions. Please reach out through the contact information in our earnings release and on our website.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: That does conclude our conference for today. Thank you for participating you may now disconnect.
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