Yum China Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to the Yum China Third Quarter 2023 Earnings Conference Call. I would now like to hand the conference over to Michelle Shen. Please go ahead.

Speaker 1

Thank you, Zach. Hello, everyone. Thank you for joining Yum China's Q3 2023 earnings conference call. Michel. On today's call are our CEO, Ms.

Speaker 1

Joey Watt and our CFO, Mr. Andy Young. I'd like to remind everyone that our earnings Michel. 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.

Speaker 1

Michel. All forward looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non GAAP financial measures.

Speaker 2

Michel. You should carefully consider the comparable GAAP measures.

Speaker 1

Reconciliation of non GAAP and GAAP measures is included in our earnings release. Michelle. You can find the webcast of this call and the PowerPoint presentation on our IR website. Now, I would like to turn the call over to Joey Hua, Michel, CEO of Yum China.

Speaker 3

Hello, everyone, and thank you for joining us today. We held our Investor Michelle. It was wonderful meeting investors face to face. Michelle. At the event, we unveiled our RGM 2.0 strategy with a strong focus on growth.

Speaker 3

Michel. We have set ambitious growth targets for the coming 3 years. These include reaching 20,000 stores Michel, by 2026, achieving double digit EPS CAGR and returning $3,000,000,000 to shareholders in dividends and share repurchases. With our long term growth commitment in mind, let's zoom into the Q3. Michel.

Speaker 3

Our results reflect continued strength. 3rd quarter net new stores, Michel. 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 period. Michel.

Speaker 3

Our portfolio now exceeds 14,000 sports. System sales grew 15% year over year in constant currency. Adjusted operating profit excluding temporary release grew 21% year over year in constant currency. In the 1st 9 months, adjusted operating profit exceeded US1 $1,000,000,000 Michel. Our team's relentless efforts produced these remarkable results.

Speaker 3

To drive sales in the peak summer trading season, Michel. We bolstered crew resources for excellent service, ensured supply pipeline readiness and execute Mishan. Traffic driving campaigns. Same store sales growth in the Q3 was led by strong transaction growth. Michelle.

Speaker 3

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. Michel. Our formula to capture sales growth has always been simple, the food, the fun and exceptional value. Michel.

Speaker 3

Now let me go through what we have done. 1st, put innovations on a big scale. Michel. Our $100,000,000 Club showcased at Investor Day illustrates

Speaker 2

Michel. Our success in building huge categories to boost sales.

Speaker 3

Recent innovations at KFC include our Juicy Whole Chicken and Beef Burger. Michel. To put things into perspective, in the Q3, these two categories combined exceed 6% of KFC sales mix. Michel. This is higher than our original recipe chicken, which we have been proudly serving in China over the past Michel.

Speaker 3

It shows our ability to innovate, but also build very big categories. Lishi. We are continuing to expand these categories with new flavors like Sichuan style, spicy whole chicken, Chunxiang Yanbani, Liqunjing, offering it from Friday to Sunday only. This spicy whole chicken is perfect Michel for a home consumption. We also collaborate with Ultraman to promote our premium Michel.

Speaker 3

Consumers love them. At Pizza Hut, we sold over 100,000,000 pizzas in the 1st 9 months of the year. Michelle. 1 out of every 5 pizza we sold was a durian pizza. That's over 20,000,000 durian pizza, Michel.

Speaker 3

Nearly 70% more year over year, our in house supply chain work with suppliers to secure durian supply on top of the innovative food. KFC Crazy Thursdays Michelle. It's no longer just a marketing campaign. It has become a cultural phenomenon. Crazy Thursday sales consistently outperformed Michelin.

Speaker 3

In the Q3 by around 40%. To keep customers engaged, Michel. We will take over and regularly launch new flavor variations such as spicy nuggets, guaogua, jiama, tikui. Michel. We chose products that utilize existing ingredients and involve simple cooking process to provide Exceptional value while ensuring operational efficiency.

Speaker 3

At Pizza Hut, We are expanding our selections for pizzas priced below RMB50, which is a very significant portion Michel. Around 20% of our pizzas, we offer a price below RMB50 And that's not enough. We could do more. By enriching our lower priced pizza offerings, we are tapping into this Michel. Substantial opportunity is currently underserved by Pizza Hut.

Speaker 3

Other than pizzas, Michel. We are adding new snacks that customers love. Our new cheese cut, Cisse dan Tak, became our best selling snack in September Michel. 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.

Speaker 3

Our loyalty programs topped Michel. 460,000,000 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. L.

Speaker 3

Mishi. JFC's campaign was Honkai, Star Rail, Xinqing, Tiedao, a popular e game generated huge social buzz and Michel. Almost 40% of traffic generated from the campaign came from new or inactive members Michel, a significant portion are young adults and that's a fantastic news for the brand. We are proud to be Michel. The 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.

Speaker 3

KFC and Pizza Hut set up nearly 30 pop up stores Michel. And serve over 1,000,000 athletes and fans and it shows that our food is good enough and healthy enough for the professional efforts too. We also ran nationwide campaigns offering exclusive gifts at our restaurants Michelle Michel. 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 Michel, our Restaurant General Manager.

Speaker 3

This marks the first in person convention for 13,000 attendees since 2019. Michel. Very excited about it. It's an excellent occasion to honor our AgM's dedication, celebrate our achievements and reaffirm our goals for the coming year and beyond. Looking forward, the growth potential in China remains Michel.

Speaker 3

Even with moderate economic growth. RGM 2.0 provide us the strategic framework to grow Michel. 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 Michel. Thank you, Mr.

Speaker 3

Li. Thank you, Xiaoyi. I'm confident we can continue to create long term value for our shareholders. With that, I will turn the call over to Andy. Andy?

Speaker 4

Thank you, Zhou Yi, and hello, everyone. Let me share with you our Q3 performance. But before I do that, I want to point out foreign exchange had a negative impact of approximately 6% in the quarter. Michel. Overall, we achieved solid results growing across key metrics.

Speaker 4

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 level, system sales Michel. With that, let's go through the financial in more detail. 3rd quarter total revenues were $2,910,000,000 in reported currency, a 9% year over year increase.

Speaker 4

Michel. 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 same store sales growth of 4%. Michel.

Speaker 4

Dine in sales continued to rebound year over year. By brand, KFC same store sales grew 4% year over year. Michel. A strong rebound at transportations and tourist locations contributed to the growth. Same store Traffic grew 9%, while ticket average decreased 5%.

Speaker 4

These results were mainly driven by successful traffic driving promotions, Lower delivery mix and rebound of the breakfast daypart. Delivery typically carries a higher ticket average Michel. Thus, a decline in delivery mix lower the overall ticket average. Michel. Breakfast orders tend to have a lower ticket average as well.

Speaker 4

So the rebound in breakfast sales contributed to Mishan. Please note that overall ticket average in the Q3 was similar to the Q2 and higher than 2019. Michel. Pizza Hut same store sales grew 2% year over year. Same store traffic grew 12% and ticket average decreased 9%.

Speaker 4

We want to highlight that by design, we are expanding our price ranges to enhance Pizza Hut's value Michel. And to capture the underserved market. Consistent with Pizza Hut's revitalization plan, We want to enhance Pizza Hut's value proposition to consumer. Particularly, we are targeting the sub RMB50 pricing range, Which represent 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.

Speaker 4

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. Michel. This is 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.

Speaker 4

This was mainly due to lapping of last year's temporary relief of $30,000,000 which translates into 120 basis point Michel. Excluding this impact, year over year Margin change is only 6% 60 basis points. Raising inflation normalizations Of staffing at the store level increased promotional activities also impacted margins. On a positive side, Michel. Occupancy and other expenses improved year over year, primarily due to sales leveraging and ongoing benefit Michel.

Speaker 4

Now let's go through the key items. Cost of sales was 31.1%, Michel. We increased promotional activities to drive traffic sales, and we also faced Michel. Higher poultry prices in the quarter. This was partially offset by more favorable prices for commodity, including beef and cooking oil as well as full utilization of chicken.

Speaker 4

Cost of labor was 25.3%, 180 basis points higher than the prior year. Last year, we benefited from temporary relief of $17,000,000 which translates into 70 basis point Margin Impact. 2 other key factors that impacted labor cost comparison were: 1, mid single digit wage increase Michel. For frontline staff due to annual wage adjustments and 2, normalized staffing level at our stores compared to the pandemic last Mishier. This were partially offset by sales and leveraging.

Speaker 4

Occupancy and other was 26.6%, Michel. Michel:] 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. It's important to note that 45% of our stores have been built after 2019. This was partially offset Michel.

Speaker 4

G and A expenses increased 14% year over year in constant currency, mainly from higher accrual of performance based incentives and to a lesser extent, mirror increases and higher travel expenses from the resumption of business travel. Operating profit was Michel. $323,000,000 increasing 9% in constant currency. Excluding $30,000,000 in temporary relief received last year, Adjusted operating profit grew 21% in constant currency. Our effective tax rate was 27.5%.

Speaker 4

We continue to expect our full year effective tax rate to be around 30%. Net income was $244,000,000 Michel. 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 $410,000,000 in operating cash flows and $243,000,000 in free cash flow in the 3rd quarter.

Speaker 4

We returned $211,000,000 to shareholders in cash dividends and share repurchase in the quarter, on track to return $600,000,000 to $800,000,000 for the full year 2023. Our balance sheet remains strong with around $4,200,000,000 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 Michel. We are on track to meet our 2023 full year target of Michelin's 14 hundred to 16 hundred net new stores.

Speaker 4

The new store payback period for our KFC and Pizza Hut store remains Michel. With our healthy new unit payback, together with flexible format and modules, We are confident to reach 20,000 stores by 2026 as we unveil at our Investor Day. Looking ahead, the 4th quarter is seasonally a small quarter for both sales and profit. On the sales front, Michel. Since late September, we have observed softening demand, which extended to October.

Speaker 4

Consumers have become more value conscious. We have been focusing on foot innovation and widening pricing ranges to tap into underserved market to drive growth. Regarding margins, sales remain the biggest factor. Fluctuation in sales RMB 26,000,000 in temporary relief, which we do not expect to repeat this year. We also anticipate rate inflation Michel.

Speaker 4

Just a reminder, In the Q4 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 positive. Michel. So we will maintain our focus on driving sales and cost efficiency. However, the overall trend towards Michel.

Speaker 4

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 Michel. We are confident that the successful execution of our RGM Michel. Strategy will help us expand our store portfolio, grow sales and boost profit,

Speaker 1

Michel. Thanks, Wendy. Michel. Now we will open the call for questions. In order to give more people the chance to ask questions, please limit your question to one at a time.

Speaker 1

Michel. Please start the Q and A.

Operator

Thank

Speaker 2

Michel.

Operator

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

Speaker 5

Xiao. Hi, Joe, Andy. Thanks for taking my question. My question is still about the competition. Especially you mentioned that the trend turned softer since the end of the September.

Speaker 5

So can you share with us how 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 Hosoda for Kohl's control. Thank you.

Speaker 3

Thank you, Michelle. Regarding the competition, we see it as a positive trend and sign because despite Michelle. Concern towards the macro situation in China Michel. In reality, both international and domestic players are investing aggressively in our industry. Michelle.

Speaker 3

That shows that these players competitors are 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 chain store Michel. On top of that, we see very vibrant Michelle. If you remember back to our Investor Day, we have very aggressive store opening plan, Michelle. Especially in the lower tier cities and that resonates well with our view that there's a lot of opportunity in the lower tier cities.

Speaker 3

So we're quite happy to see that. And then when it comes to the point about Michelin's value driven consumer. We have been a player that Mitsui. Mitsui:] We have benefited from the more cautious and more rational spending for the Consumers. We are a fast food company.

Speaker 3

When customers become more value driven, it's good for us. As far as we Michel. And it has been a consistent Michelle. Our company to focus not only value, but innovative products and fund experience, because value itself is never enough for our customers. And we'll continue to do that and you can see that in Michel.

Speaker 3

With the ups and downs, our ticket average compared to the last Mitsui. Sort of more stable year 2019 is still up a little bit because we are very careful about it with KFC Michel. Price increase every year and Pizza Hut during the turnaround time for the original product, we kind of keep the Michel. But the ticket average has been relatively stable. And even in the last quarter, you can see We have very healthy growth of transaction, TC.

Speaker 3

And in our business, TC growth is Michel. It's so good. It cannot be better to have TC growth. So it shows that we get very quickly and we are very agile Michel. Last but not the least, while we are doing all this innovative product, Michel.

Speaker 3

We deliver value products or customers and our margins stay. Michel. We are able to protect our margin with our innovations and value campaign and that is very important. In fact, Michel. Our year to date margin has already exceeded that of 2019, which is pre pandemic.

Speaker 3

There's a movement, I mean, Andy, I'm Sure. Andy will go through it later on. There's a movement between the different lines of cost structure, but the restaurant margin, that's what we Michel. We reduced the rent, we reduced the O and O and then we put the money into food and to service to serve our customers. So net net, our company is good because we see is a vote of confidence for our Industry and our market.

Speaker 3

Thank you, Michelle.

Speaker 5

Thank you, Joy. That's very clear.

Operator

Mishan. Your next question comes from Lin Ciej from CICC. Please go ahead.

Speaker 3

Thank you, Joe and 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%, Mishan. Operating profit only increased 8%, which is quite different with Q1 and Q2.

Speaker 3

So could you please

Speaker 4

Michel. Thank you for your questions. And so as we mentioned, if you look at the year over year comparisons, you definitely need to take Michel. The impact from the temporary release last year. And when we compare to 2019, Michel.

Speaker 4

Obviously, over the past few years, we continue to see the labor costs Michel. O and 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%. Our COS, as mentioned, because of wage inflation and higher mix of Michel. We have seen some increase there.

Speaker 4

However, on the O2O side, we are much better, mainly benefiting from Michel. Optimization and rent negotiations and better lease terms, and we also have other initiatives to rebase our cost structure to possibly offset that if you look at the same store sales, which is about 90% level after 2019. Now looking at as we mentioned a little bit earlier, looking ahead in the 4th quarter, Q4 is a smaller quarter for us in terms of sales and profit. Michel. And so as we have mentioned, we have seen some softening demand since September.

Speaker 4

So sales fluctuations will have a Michel. Now again, in the Q4 compared to last year, last year, we received $26,000,000 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 Michel. Longer term, as we have mentioned on our Investor Day, Michel. We our goal is to maintain a stable margin and potentially improve it over time.

Speaker 4

Michel. 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 a short term and long term balance in mind. We will continue to benefit from cost structure rebasing effort that We stay in place for a long time. For example, high RevPAR brand, our megastore restaurant staff sharing program.

Speaker 4

We also have more flexible and lower investment from our store model. So we'll maintain our discipline Michel. That's how we look at the margins in both short term and long term. Thank you.

Speaker 3

Thank you, Andy.

Operator

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

Speaker 5

Thank you, management. I actually have a question which is also related to competition, but I want to Mishan. In the Investor Day, in Xi'an, your KFC management actually shared with investors KFC's the timetable as well as more specifics about this product in terms of price strategy product strategy

Speaker 3

Michelle going forward. Thank you. Thank you, Christine. We actually have test launched Mishina. This particular product in 3 provinces already, Jiangsu Fujian in particular.

Speaker 3

So It's interesting that we test launch in not in Guangzhou, Beijing or Shanghai. We do it in sort of Michel, Second Tier Cities. And the progress has been good, and we are 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.

Speaker 3

And it's one of our Strategy that for the lower tier 3, we have slightly different product and a more flexible Pricing, but at the same time, we still maintain the margin for the business. It's going well. I taste the product myself. It is great. So hopefully next time, Michelle.

Speaker 3

We can get it closer to Hong Kong where you can you don't have to travel that far to try it. Michel. Thank you, Christy.

Operator

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

Speaker 6

Hi, Joe and Andy. So my question is also on competition. In fact, last time in Xi'an, I also raised a question on testing Michel. And I think given our current value compare and our initiatives to broaden our price trend 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?

Speaker 6

And would the ticket count increase can be enough to offset the ticket average decrease? Lastly, in terms of our food paper cost as a percent of sales, do you think that in the near term, Michelle.

Speaker 3

Thank you, Luo Chen. Michelle. Let me just point out that the ticket average compared to the last year is not exactly the best comparison Michelle. 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 What is more comparable is we look at the takeout average compared to sort of the more normal year. Although we have our business is very different compared to 2019, but we can compare the ticket average with 2019.

Speaker 3

Michelle. The ticket average is still slightly higher in 2019. So that is sort of more normal. So I ask our investor not to be overly concerned about the ticket Michel. And usually, when our sales move, the more So our more focused number is always the transaction, TC.

Speaker 3

And the fact that our TC growth at Michel. Almost double digit is a good sign. So in our business over many, many years, just Michelle. Go beyond 1 quarter, go through the 5 years or 10 years, you will see our ticket average is always rather stable. So that hopefully addressed your concern about the ticket average.

Speaker 3

And go on.

Speaker 4

Yes. Let me just address both As I tried to in the prepared remarks, trying to decompose what is driving the TAA. Obviously, promotion Michel. It's a part of that, but it's a very it's only one of the right. If you look at, for example, for KFC, Today, the TA is still higher than what we have seen in 2019, as Stuart mentioned.

Speaker 4

And part of that is delivery mix, Michel. We have high delivery mix compared to 2019. And then if you look at compared to last year, we also declined Michel. In the mix for delivery as people returning to the store. And so that would have an impact on the TA because the delivery TA for KFC, obviously, is higher than the dine in component.

Speaker 4

The other one is, if you look at KFC, for example. We also mentioned about breakfast daypart, right? So last year, because of pandemic, Michel. The breakfast daypart was impacted more so than the other daypart. With the rebound in breakfast daypart, Michel, which tend to also have for PA.

Speaker 4

So the increase in traffic for breakfast daypart would also have an impact on that. So there's a number of components. And if you look at our sales ads, you will notice that it's actually very stable, right? Compared to last year, only 40 basis points difference compared to 2019, 10 basis points. It's almost flat line, right?

Speaker 4

So we have ability to manage the overall our profitability, our margins Michel with different driver for TA.

Speaker 3

Just come back to a lot of hands on your food paper calls. I mean, I think we have shared in our Investor Day that we've been able to manage the book paper costs at a very stable number over many years. When there are some factors driving up the food cost, Michel. Well, such as commodity inflation, 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. So we are always quite stable here.

Speaker 3

Michelle. I keep reminding our team internally, the problem of the food paper costs become a problem Michel. So it's a relatively stable

Speaker 6

Thank you, Joe and Mandy. And Nishito. We also have confidence in the management's ability to stay agile and take the right measures to address competition and further we share. Thank you.

Operator

Michel. Thank you. Your next question comes from Wilkins Tong from Morgan Stanley. Please go ahead.

Speaker 3

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

Speaker 2

Michel.

Speaker 3

Yes. So I have a question again on margin side, but in different aspect because I think despite all this losing the subsidy impact and normalization of labor Michelin to Stores. Is there any impact from acceleration of expansion to margin? Because I think going forward, we're going to keep up this expansion pace. So should we kind of rethink about the margin base given Michel.

Speaker 3

Just wanted to really kind of get some color on how to quantify Michel.

Speaker 4

Okay. Thank you, Michel. So when we look at our net new store opening, they continue to be very healthy. If you look at the overall cash payback period For our new store opening, it's still 2 years for KFC and 3 years for Pizza Hut. In fact, as we mentioned, the smallest Michel.

Speaker 4

So our model actually better perform even better. Now if you look at how they ramp up, obviously, there's a ramp up period for the newer store. We have mentioned large majority of our new store actually breakeven in the 1st 3 months and they ramp up through the years. Michel. It may have a short term impact when they just open because it's ramping up sales and margins tend to be lower, but they tend to be very healthy unit economics Michel as they progress and to adhere to from the opening.

Speaker 4

So we there's no change in the way we look at Michel. The important indicator for us really is to look at how Mr. Michel. The new store are performing in terms of cash payback, in terms of unit economics. And as long as those are good, we'll continue to stick with our plan.

Speaker 4

Michel. And as we mentioned, we have been very disappointed about store opening. It's driven by our investment models and then also from ground up Michel from our market. So you have an automatic acceleration based on the performance of the cell.

Operator

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

Speaker 7

Hi, everyone. Thanks for taking my call. Questions regarding the current trading environment. You guys mentioned about like being a little bit softer And with sales fluctuation, would you elaborate a little bit on that? Is it like you're talking about post festive event That there is a far off in terms of sales performance regardless of like any like promotion or innovative product that you launch?

Speaker 7

Michel. Or is it because certain daypart that you noticed that didn't really like perform as expected? Maybe Michel. Or certain geographical area, we'd love to hear a little bit more about what drives the softness? Is it like Michel.

Speaker 7

Is there anything that we can do about that? Yes. Thanks. So

Speaker 3

At the high level, I mean, some of it was vibrant. Particularly July, there's some pent up demand. So as I mentioned earlier, Michel. How the traffic increased 50% year over year, which is really a good sign. And then comes to Michelle.

Speaker 3

So just recent national holiday during the first half of October. It's quite interesting here actually. Michelle. We observe sort of first half and second half during the national holiday because this year, Michel. Particularly this year, the national holiday at the beginning is at the same time as Mid Autumn Festival.

Speaker 3

So we see softness during the first half Michelle. Because after 3 year pandemic, mid autumn festival for Chinese people, what do we do, go home? Michelle. So the first half of the holiday, we see massive number of customers going home, go back to see their families, 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.

Speaker 3

So that's a little bit of this Michelle. Natural human behavior happening during the national holiday, during mid of the festival. That's the point 1. Point 2 is, in terms of Michel. A bit less on the premium product.

Speaker 3

Also, our premium burger, our premium product and pizza still are doing quite well, but Michelle. That little trend going. And then it comes to the third point is, what are we going to do about it? Well, Michelle. We have been working on and we have been doing it quite well actually with pretty good result is Michel.

Speaker 3

There's always some customer who want to treat themselves, the same customer who want to treat themselves during certain time. Michel. So the premium, deep burger, etcetera, we do that. But at the same time, we also Enrich entry price offering, Pizza Hut Pizza is a good example. We have Michelle.

Speaker 3

So single digit revenue coming from Kisse, below RMB50. And in fact, this is a very big segment for both international and domestic player. We see this as a big opportunity here. Michelle. So you can imagine we are going to have more and more product in this particular segment.

Speaker 3

Not only the below With the IMBP server also single person meal, because for Pizza Hut business, our business model, our Michelle. Average number of customers per transaction is over 2 people. Well, that shows that Michel. We have the opportunity to serve the 1 person meal as well. And we see good progress in it and we could do more and get more market share in the 1 person meal sector.

Speaker 3

And then for KFC, we also Michel. Continue to work on the choices of products at the entry price offering to capture untapped potential of customers, Particularly those in the lower tier cities. So we can operate at a wide price range Mitsheng all the way to GSX City. And that's what we do and therefore we see very good traffic growth. On top of that, in terms of the safe part, we say are still doing better than we can.

Speaker 3

Michelle. And why the weekend traffic is still a pissed off and that has a lot of reasons behind it. But the point is Michel. Our focus on the whole chicken, which is mainly at home consumption product, our focus on certain other products to support the Mitshuis. We're doing the right thing and we see very good results from customers.

Speaker 3

And Michelle. Therefore, for quarter 3, we delivered record revenue record profit. But Michelle. Of course, the biggest challenge for us is the foreign exchange that eat up 6% of our revenue and profit, which is a problem. Michel.

Speaker 3

But in constant currency, we are doing quite well. So we will continue to focus on the few things that I mentioned, Michel. Really good product and very good price and good experience, but still protect the margin for the investors and shareholders. Thank you, Anne.

Speaker 7

Got it. Got it. And can I ask another question regarding the franchise business? Michel. We talked a lot about this during the Investor Day.

Speaker 7

Can you share with us the latest update with Michel. Your captive franchise, I. E, like those specialty those hospital, beauty and also like the highway Michel. When will we see the ramp up on the franchise business?

Speaker 4

Right. So if you I'll just be quick about this one. As we look at the Q3, for example, our franchise number of new franchise is growing pretty fast, it's like 20 Michel. 20% plus compared to last year. And so like for new store openings.

Speaker 4

So I think we're making progress there. But obviously, things is not going to happen overnight. Michel. So that's how we look at it.

Speaker 3

Okay. Thank you. Thank you, Andy.

Operator

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

Speaker 2

Michel. Hi, Joey. Hi, Andy. So my question is on same store sales. So we see that Ticker Price at KFC and Pegaard.

Speaker 2

The combined test that is understandable with China's consumption space and consumption Mission. And yes, it's good to do for more promotions. It has more traffic. So it's always balancing act. I just wonder, if we decrease ticket sales and maybe prioritize on the traffic, Is that going to like cause some pressure on future margin, especially Michel.

Speaker 2

With more people, we need to have more staff, but with every order, the pizza price comes lower. We understand that's the impact on the delivery, Michel. I just want to understand what you have some more color on the thinking on this trend going forward. Thank you. Michel.

Speaker 2

So let me try

Speaker 4

to address that. And then so in terms of TA, I think there's a couple of questions concerning TA. Michel. Let me try to help folks understand a little bit more in detail. Again, if you look at the first time of KFC TA shift, there are 3 Michel.

Speaker 4

Key component to it. Obviously, a number of people have mentioned traffic driving promotion activity. But that's only part of the story and it's not the even main part of that. We also have the lower delivery mix shift, right? So Last year, during the pandemic, we have seen very high delivery and when this delivery come back, especially what we call like group Order and delivery last year, right, to buy delivery.

Speaker 4

And so when this year, when things return to more normal, we do see the delivery 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 about impact. The other one is, as we mentioned, the certain day part, Michel. Right.

Speaker 4

The office shift would also have impact on that. For breakfast, as we mentioned, generally have a lower TA. And so when that is going faster, And you would also see a TA impact on the overall KFCTA. Same to our Pizza Hut, maybe slightly differently, as we have mentioned, Michel. Besides of the proportion of this, we are actually by design trying to target an entire market, which is below 50 and B segment, which is very underserved by Pizza Hut, but it's a very big part of the pizza market overall, Which is obviously right now, a number of new players are active in there.

Speaker 4

So we want to penetrate that market. Michel. The other one for TA, for Pizza Hut, as Joey mentioned, is our purposeful Michel. Targeting of single person news sets. Pizza Hut well, KFC, if you look at the TA and then you look at Pizza Hut, You will see that Pizza Hut always has IPA and then a part of that is because Michel.

Speaker 4

It's in group dining and also in family dining. So when we have product that we signed particularly for Singapore The Muse, especially working lunch and whatnot, Michel. You will never see the EA shifting there. And finally, as we look at even before the pandemic, we have done Michel. A purposeful job to actually increase the value proposition to consumer.

Speaker 4

One of the biggest challenge for BOPISAT Michel. Before the revised program was that the value proposition to consumer. And so we've been working very hard and hold the price stable and whatnot Michel. So that's why by design doing that. Because when design is going to try to expand and address a Bigger customer base, you're going to have a wider pricing range.

Speaker 4

And so that's why you continue to expect TA There has a movement there. So that's a lot of components there by our strategy. But the key point is that despite all that stuff that's going on, You see that our sales is very stable, 31%, right, because we have product innovation. We have a very strong supply chain managing that. So overall, that's how we want to keep a balance between Michel.

Speaker 4

Driving the traffic, expanding our addressable market and at the same time, maintaining our OTA. Now obviously, for COL, the biggest concern on the long term is the demographic change in China and whatnot. And It's very important for us to continue to invest in confirmation, digital and to improve our operation So that we can continue to improve the labor productivity of our workforce, and we've been quite successful during that before the pandemic Michel. And coming off from the pandemic, we are also pretty stable at about 25%, 26%. And that's the things that in the long run, as you mentioned, trying to maintain the overall Michel.

Speaker 3

Maybe I'll just add some color on the CLL side in particular. Michelle. If we look beyond just 1 quarter, we look at our CLL over the last few years as we share in our Investor Michel. When we have few 1,000 stores, 6, 7000 stores, we have 430,000 people or 450,000 people actually. Now we have 14,000 stores, Almost double.

Speaker 3

We still only have 430,000 people. So as Andy mentioned, we use Automation, Digitization to manage labor costs. When it comes to sort of more when it comes to Handling the promotion and while managing the CLL, 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. And we are very careful about Michelle. Maximum number of items that the staff can handle in our store, and that's why having an amazing, Michel.

Speaker 3

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 CLL and most important what's the quantity of food

Speaker 2

Michel. Got it. That's fair. Thank you, Andrew. Thank you, George.

Speaker 6

Thank you. Thank you.

Operator

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

Speaker 8

Good morning, Julie and Andy. I have a quick Follow-up question on restaurant margin. In the Q3, did you see any widened divergence of restaurant margin of high tier city versus low tier city? Michel. And also Andy, in the prepared remarks, explained

Speaker 6

a lot about we are having concession rent for new store, etcetera. Looking forward, shall we expect our occupancy and other expenses to sales ratio to keep low? Because in the past 2 years, this has been very Michel. Good factor to mitigating other inflation component in the restaurant market. Thank you.

Speaker 4

Thanks, Paul. So in terms of the variance, I think there's not material changes to the way margin After Pan, as we have mentioned before, obviously, in the Tier 1 cities, Tier 2 cities, the high tier cities, generally, those stores have Michelin. At the store, but generally, you have a slightly lower margin because higher cost, labor and rent. And then in lower tier cities, although you have a smaller throughput through the store, generally cost a lower labor and all that. Michel.

Speaker 4

So the margin is slightly higher in the lower tier cities. But all in all, because also their investment Michel. So we end up have a pretty good payback period for both top tier and lower tier cities. Michel. So that's in terms of the variance between margins in different tier cities.

Speaker 4

Now in terms of O and O, I think as we have mentioned, obviously, last year we have some temporary relief. But Like O and O even including those you see continued improvement there. Those contracts are longer term contracts. So when you get favorable long Michelle. And then we also have other cost structure initiative and portfolio optimization.

Speaker 4

So Michel. I think O and O, including with stake, but obviously, that's also limit income of how Michel. Hello, we can get out and no one is going to give a free run. But I think in the long run, I think we will continue to see pretty healthy O and O

Speaker 2

Michel. Thank you. Thanks, Saba.

Operator

Michel. There are no further questions at this time.

Speaker 1

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

Operator

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

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Earnings Conference Call
Yum China Q3 2023
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