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spk05: Good day, everyone. Thank you for standing by. Welcome to Yum! China four-quarter and fiscal year 2021 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any assistance during the call, please press star 0. I would now like to hand the conference over to your first speaker today, Ms. Michelle Shen, IR Director. Thank you. Please go ahead.
spk06: Thank you, Desmond. Hello, everyone, and thank you for joining YamChina's fourth quarter 2021 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Ms. Andy Yoon. Before we get started, I'd like to remind you that our earnings call and investor presentations contain forward-looking statements which are subject to future events and uncertainty. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our findings with SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. Joey will provide an update regarding our performance over this past year and then review key actions. Andy will then cover the financial performance and outlook in greater detail. Finally, we'll open the call to questions. You can find the webcast of this call in the PowerPoint presentation, which contain operational and the financial information for the quarter on our IR website. Now, I would like to turn the call over to Ms. Joey Watts, CEO of Yum China. Yeah, Joey.
spk04: Thank you, Michelle. Hello, everyone, and thank you for joining us today. In the fourth quarter, multiple waves of outbreaks across the nation significantly impacted our business. I would like to express my heartfelt gratitude to all of our employees for taking the right actions to ensure customer safety and minimize business disruptions. For example, during the lockdown in Xi'an, our excellent supply chain team shield us from major disruptions. Our operation teams took immediate actions to quickly resume delivery and take away. They provide vital services to the community in this time of need. We also provided free meals to frontline medical and social workers as a token of our appreciation. We consider people to be a critical pillar of our sustainability strategy. We aim to have a workplace where employees can thrive while protecting them and supporting their careers in times of uncertainty. Therefore, this year, we enhanced medical insurance coverage for our RGMs, restaurant management teams, and supervisors. These greater benefits cover around 100,000 frontline employees. Despite the challenging environment, for the full year we grew revenue by 19%. We delivered operating profit of $1.4 billion, or $766 million, excluding special items. We opened over 1,800 stores, that is equivalent to five new stores per day, compared to three new stores per day just a year ago. On a net basis, we add over 1,200 stores. KFC continued to demonstrate remarkable growth and resiliency. System sales grew 8% in 2021. The brand opened more than 1,200 stores, entering 160 new cities in 2021. More than half of new stores were in lower tier cities, but we're also adding store density in higher tier cities. The business contribute to the majority of Yum China's profit. Pizza Hut came back stronger, achieving think-for-sales growth of 7% for the full year. We are happy to see the growth was driven by transaction volume increase of over 10%. Pizza Hut opened over 300 stores, a record opening since 2016. The brand also strengthened its bottom line with full-year segments, operating profit up 77%. These results reflect the remarkable improvement over the past few years. Now, let me provide some color on the fourth quarter. During the national day holiday in early October, we saw a sequential recovery from the third quarter. As regional outbreaks surged, November same-store sales were done by mid-teens year-over-year, or approximately 20% compared to November 2019. Same-store sales improved slightly in December, but were still more than 10% below both prior year and 2019 levels. Authorities implemented mass testing, regional lockdowns, and stringent travel measures nationwide. These significantly impact the overall restaurant industry in our business. At the height of the outlook, nearly 300 of our stores were temporarily closed or only provide delivery and takeaway services. But more importantly, reduced social activities, less traveling, and softened consumption impact food traffic across our brand. Let me share with you the key actions we took to stabilize our business. First, we drive traffic and sales with great products and value. The ability to innovate is one of our core competitive advantages. We again launched over 500 new or upgraded products last year. At KFC, new categories such as beef burgers and whole chicken have received great customer feedback. Beef burger sales in the fourth quarter exceed 300 million RMB and account for 3% menu mix. Juicy Whole Chicken had another successful limited-time offer promotion, and therefore, we are putting it on permanent menu this year. We also partnered with popular Chinese brands Zhou Heiya from Hubei and Wen Heyou from Hunan to design innovative new menu items. Customers love the chicken and duck sandwich, and spicy crayfish wrap will launch in a quarter. Beyond national launches, in 2021, KFC launched 12 local dishes in regional markets. We expand offerings from breakfast to late-night snacks. Beef and lamb kebab from northwestern China, and cold noodles with sesame sauce from Wuhan, are among customer favorites. We have a mechanism to roll out successful regional offerings to more places or even nationwide. Wuhan Hot Dry Noodle, Wuhan Le Gan Mian, last year was a big hit. At Pizza Hut, we launched special winter themed pizzas for the holiday season, featuring Greek cheese, tiger prawns, and filet mignon. We also offered more flexibility to our customers, allowing them the option to trade up pizza toppings, which translated into higher average tickets. In response to weakened consumption, we increased value promotions across our brand. For example, at KFC and Pizza Hut, we built on our well-established promotion mechanism, Crazy Thursday and Screen Wednesday, to offer effective value promotions. while minimizing margin impact. Second, we capture home consumption demand with all-premises services for both KFC and Pizza Hut. In the fourth quarter, delivery continued to be a key growth driver, mitigating the drop in die-in traffic. Delivery grew 60% in 2021 compared to 2019 and counter-built to approximately 32% of sales Combined with takeaway, off-premise services represent more than half of ourselves. Driving profitable growth in off-premise locations is core to our strategy. Our new retail products are designed to capture home consumption demand by leveraging our online and offline channels. We add more food choices and tripled sales to over 500 million RMB within 2021. Lastly, we unleashed the power of digital in customer service and operations. The KFC and Pizza Hut loyalty program exceed 360 million members as of the end of 2021. It is 60 million or 20% more than the year before. Member sales account for approximately 60%. We continuously enhance our super apps to address the needs of customers and improve their digital experience. For example, KFC's personalized menu display and Pizza Hut's order-together feature. With enhanced digital capabilities, digital sales exceed $7 billion or over 85% in 2021. We empower our RGMs with in-store digitalization using AI, automation, and IoT. At KFC, our system assesses real-time store-level inventory and automatically dispatches coupons to digital ordering users to reduce food waste. We also introduce a quality control system to automatically evaluate the quality of food products based on the color, shape,
spk02: etc., etc.
spk04: These technologies improve both the customer experience and our operating efficiency. Now, I would like to briefly update you on our emerging brands. Our coffee business is gaining momentum. We expanded the Lavazza portfolio from 4 to 58 last year, covering all Tier 1 cities and leading Tier 2 cities such as Hangzhou, Wuhan, Changsha, We continue to enrich our food offerings and tap into lifestyle merchandisers to drive further growth. In 2022, we will open more stores to increase our coverage. Coffee & Joy total revenue increased both year-over-year and compared to pre-COVID levels as sales grew by over 30% last year. We end the year with 36 stores with improved store economics reflecting improved fundamentals. K-Coffee sold 117 million cups in 2021, representing a 22% growth compared to 2020. Taco Bell's store count tripled last year, from 12 to 37. We took actions to fine-tune the business and make the brand more approachable for Chinese consumers. Pilot tests on smaller formats have shown improved unit economics. This year, we will continue to refine the formula for long-term success, just as we have done with KFC and Pizza Hut over the years. Our Chinese cuisine brands Little Sheep and Huan Ji Huan faced a particularly adverse situation during COVID-19. A large number of their stores are located in northern and western China. where cases were concentrated. East Dawning was also hit hard due to their transportation location focus. After a careful review, we decided to wind down the operation in 2022 and focus resources on our hot pot brand. Before I pass the call to Andy, I want to emphasize that we face enormous uncertainties and headwinds from the external environment, but we have the ability to embrace change and to innovate and adapt accordingly. We continue to focus on the key levers I just mentioned to drive sales and protect our profit in the short term. We are also building our core capabilities to strengthen our market leadership for long-term sustainable growth. I'm confident that we can emerge from this challenging period even stronger. With that, I will turn the call over to Andy. Andy?
spk01: Thank you, Joey, and hello, everyone. The COVID situation caused a great deal of volatility to our operations in 2021. We delivered strong performance in the first half of the year when COVID conditions was relatively stable. In the second half of the year, our business was significantly affected by regional outbreaks and tighter public health measures. Despite the challenges, on a four-year basis, Revenue reached $9.9 billion. System sales grew 10% in constant currency. We reported offering profit of $1.4 billion and adjusted offering profit of $766 million. In 2021, we received roughly $90 million less in one-time relief from the government and landlords, comparing to 2020. If we remove the one-time relief from the equation, our adjusted operating profit would be up 20% year-over-year. This result reflects the volatility arising from COVID, but also reflects the resiliency of our business and tremendous effort our teams put in. We have accelerated store openings in the past few years. We maintain a healthy store payback period of two years for KFC and three years for Pizza Hut, despite the impact from the pandemic. Even newer stores opened in the first half of 2021 have performed well. A majority of them achieved monthly breakeven within the first three months. There are still a lot of white space opportunities in China, especially in lower tier cities. Small store formats enable us to expand more flexibly. The reduced store size, combined with other cost reduction initiatives, enable us to decrease capex per store by around high single-digit year-over-year. We'll continue to apply a disciplined and systematic approach in our store opening process to ensure we open promising and high-quality stores. Let me review our fourth quarter financial results. Even with the repeated outbreaks since mid-October, fourth quarter revenue grew 1% in reported currency to $2.3 billion and remained possible. System sales were down 3% year-over-year, mainly due to the same software decline, partially offset by new unit growth. Like prior quarters, We are providing performer measures here for convenient comparisons with 2019. KFC's same-store sales were approximately 88% of the prior year's level and 85% of the 2019 level. With same-store traffic at approximately 80% of 2019 level, average ticket grew roughly 6% versus 2019, mainly due to the increased inventory mix partially offset by increased discounts. Pizza's theme store sales were approximately 92% of the prior year and 88% of the 2019 level. Theme store traffic at approximately 96%, close to 2019 level, while the average ticket was down by about 8%. This was driven by the increased mix in delivery which has a lower average ticket than sign-in. KFC was more affected than Pizza Hut in the fourth quarter, due to KFC's having a higher store mix in transportation and tourist locations. This location experienced a sharp decline in sales, down approximately 40% on a two-year basis. The fourth quarter is seasonally the smallest quarter for our sales and margins. So the sales deleveraging impact on margins is more prominent. Restaurant margin was 7.5% down 760 basis points compared to last year. This was mainly caused by significant sales deleveraging, cost inflation, more value promotion, as well as higher delivery costs due to increasing sales in delivery volume. Let me go through each expense line item. Cost of sales was 32.5%, 150 basis points higher than last year. This was mainly due to increased value promotions to drive customer traffic and upgraded packaging to phase out plastics. Cost of labor was 27.9%, 370 basis points higher than last year. This is due to sales deleveraging, wage inflation of 6%, delivery volume increase resulting in higher delivery rider costs, and higher staffing levels as more staff were scheduled to implement increased safety protocols. Occupancy and other was 32.1%. 240 basis points higher than last year. This is mainly attributable to the sales delivery and impact. In addition, utility prices went up by double digits starting in December. G&A expenses increased 7% year-over-year in constant currency, mainly due to increased compensation and benefit expenses, as well as the impact of consolidating Hangzhou KFC. Compared to last year, we received $10 million less will be from the government and landlords. Proactive cost management and productivity enhancement enable us to partially mitigate the headwinds and achieve a profitable quarter. Offering profit was $633 million. Adjusted offering profit was $16 million. The difference is mainly due to the non-cash gain of $618 million from the fair value evaluations of Hangzhou KFC. In December, we completed the investment in Hangzhou Catering, and now own approximately 60% of Hangzhou KFC directly and indirectly. Other than this non-cash gain, the impact from consolidating Hangzhou KFC was small, as the transaction was completed only on December 10th. Effective tax rate was 25.1%, net income was $425 million, and adjusted net income was $11 million. This includes a mark-to-market investment loss of $9 million in May 1, in contrast to a gain of $23 million in the fourth quarter of 2020. Let us now turn to our outlook for 2022. First, we expect stringent health measures to remain in effect in the near future. The development of COVID remains highly uncertain, as we have seen last year. In January, apart from the Delta variant outbreak, Omicron cases also spread to important cities such as Beijing, Shanghai, Tianjin, and Shenzhen. Over 500 of our stores were temporarily closed or only provided delivery and takeaway services at the peak in January. Theme store sales in January improved modestly from the fourth quarter. Comparing to the comparable Chinese New Year holiday period in 2021, theme store sales are still down year over year. and remain volatile. Second is on the weakening macro. As the government has recently mentioned, China's economic development is facing triple pressures from demand contraction, supply shocks, and the weakening expectations. Therefore, we will continue to focus on providing our customer exceptional value to drive traffic. On the cost side, Inflation is on the rise globally. Commodities such as chicken feet, beef, and cheese, as well as energy prices, have increased double digits. Our team is taking initiative to rebase our cost structure and to improve efficiency, including locking in prices when they are relatively more favorable, innovating manual items to fully utilize all parts of chicken and cattle, expanding our supplier base, especially local suppliers. With this initiative, we expect to partially mitigate rising costs, but we will still face commodity price pressures this year. Additionally, the increase in delivery sales mix will increase wider costs. We maintain a very strong balance sheet with approximately $4 billion cash, and short-term investments. We resumed share repurchases in the third quarter of 2021. Approximately $617 million remains available for future share repurchases under the authorization. We will continue to return excessive capital to shareholders. We anticipate opening approximately 1,000 to 1,200 net new stores as we increase density in higher tier cities and capture white space in lower tier cities. We'll continue with our disciplined approach of opening high quality new stores. We expect our capital expenditures in 2022 to be in the range of $800 million to $1 billion. The majority of this is allocated to store opening and remodeling. We are stepping up investment in supply chain, infrastructure, and digital as part of our long-term capital allocation as highlighted in the Investor Day last September. These investments are essential to driving the long-term sustainable growth of our business. With that, I will pass you back to Michelle to start the Q&A. Michelle.
spk06: Thanks, Andy. We'll now open the call for questions. In order to give as many people as possible the chance to ask questions, please limit your questions to one at a time. Desmond, please start the Q&A.
spk05: Thank you very much. As a reminder, to ask questions, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. The first question comes from the line of Brian Bittner from Oppenheimer. Please go ahead.
spk08: Your unit openings during a time of heightened uncertainty for the business and I realize the returns are still very strong as you outlined in your repair remarks and as you outlined in your presentation. But can you talk to us what specifically is driving this big step up in unit openings? And it appears it's a trend that is continuing in 2022 based on your outlook. So it wasn't just a one-time situation in 2021. Talk about the dynamics behind this strategy. Do you believe the COVID environment has opened up an elevated amount of development opportunities? just any type of additional color on this new level of unit growth would be helpful. Thank you.
spk04: Thank you, Brian. For our focus on new store opening, the management team has been very transparent about the way that we are thinking. I think we lay out very clearly in our investor day that when we look at how to operate this business in a short-term, long-term, we focus on three things. The RGM, the resiliency, the growth, and the moat. So even for new store opening, our thinking are still the same. In a way, resilience might be even more important than growth. But once we achieve resiliency, then we really will push So that's sort of the holistic thinking, and specifically why we are still opening that many stores. As you have mentioned earlier, Brian, in your question, the most important criteria is whether we are getting the payback that we are looking for. And the answer is yes. For KFC, we're still getting the payback within two years. For pizza, it actually improved. In the past five years, because pizza this year, we opened more stores than any other year since 2016. Actually, the net new store opening is more than all the stores we have opened in the last three years. It has improved. The payback has improved now to three to four years, well, two to three years. from three to four years to two to three years. Particularly the satellite store, we can get a payback almost as good as the KFC. So that's the key criteria. And when we can get the payback, then we should open stores while our operating team can handle. So that's point two. One is our thinking, our strategy two is our requirement of the payback. And third, where are the opportunities? Well, the opportunities are still in lower tier cities. As I mentioned earlier, for KFC alone, we enter 160 new cities. So for these new cities, KFC brand is very strong and there's very limited sales transfer because it's brand new. And then also the other area is the the channel opportunities such as highway station, service center, etc. And there's particular opportunity in franchising as well. And then for Pizza Hut, you know, obviously the white space is even larger because we're only in few, Pizza is only in few hundred cities in China right now. And then even for the existing cities we are in, we see the opportunity to to open more stores to increase the store density. When the store density improves, it has the other benefit to our delivery business because the average distance of the delivery rider has shortened and the convenience has improved. And that both works for the customer because they get better service and it works for the operating cost because the average delivery cost actually improve too. So that gives you a sense of where are the opportunities. And in terms of how COVID gave us more opportunity in store opening, in a way, yes, because I think during good times when the market is growing, it's much harder to see the resiliency of Yum China business. And during bad times, particularly in the last two years, landlords can see that very clearly. So we have become an even more popular tenant for landlords across all tier cities. Not only we can deliver good profit and secure job opportunity to our shareholder and to our employee, but we also can deliver reliable, rental income to landlords. So you can imagine why we are a popular tenant and therefore, you know, a significant percentage of the leads, we are talking about, you know, 70, 80% of our leads have certain, the rent is calculated based on percentage of sales, which give us the flexibility and resiliency in terms of our core structure. So I hope that gives you some more color in terms of the new store opening. We never chase after a specific number. We emphasize it again and again and again. But when we can get the payback two to three years, which is fantastic, then we'll open the store when we see the opportunity. Thank you, Brian.
spk05: Thank you for the questions. Next question comes from the line of Christine Peng from UBS. Please go ahead.
spk02: Hi, management. Thank you for the presentation. So I have a question regarding the delivery competition landscape. In 2021, we noticed that McDonald initiated a much more upgraded version of the app in China. enabling its digital strategy extension in the country. So can you share with us more colors you have observed in terms of the delivery competition landscape in the whole Chinese restaurant industry, particularly considering McDonald's new strategy? Thank you.
spk04: Christine, we have been putting delivery at very high priority in our business uh, since a long, long time ago. Um, and, and as you can see, compared to 2019, uh, our delivery business, um, has grown, uh, even stronger. Um, as you can see from our number, uh, you know, 60%, uh, full year delivery growth, uh, versus 2019. And then for KFC alone is 70%, uh, plus, and then, uh, pizza at 37%. So that gives you a sense. We are very focusing on the app to improve the convenience, both in terms of the app experience, but also it might not be so clear to our investors that we also have a team that the digital, we call it digital operation team that work with our store operating team to ensure the seamless experience online and offline for our delivery business. So that helps a lot because one is about the digital experience, two is we have people working together with the store team to deliver the services. And that will include the membership engagement too, right? So that's the second bit. The third bit, which is rather unique to Yum! China, it's not only unique, probably the only one, we have our own hybrid delivery model, which we have been building since 20, well, actually from the very beginning, but we insist on building our our own rider capability. And that can be understood right now, I think, if we use the framework that we share, again, in our investor day, the resilience, the growth, and the moat. And this is the moat, the strategic moat. It's our own long-term competitive advantage with our delivery rider, the hybrid model, while we work with the to source traffic, we rely exclusively on our own rider to deliver the product. And that has multiple advantages. One is the quality. The quality, the percentage of service complaint is much lower, which we have experienced when we convert the Pizza Hut delivery from the past version to current one. When we took the delivery rider service back in-house, we see the drop of the customer complaint and thus the sales increase. So that gives us a very unique advantage in our delivery business. So net-net, it has been a very important part of business. It has become even more important in the last two years, given the COVID situation. And we have very unique resiliency to grow the business in the long term with our unique capabilities that give us strategic mode to continue to deliver good services to our customers. Thank you, Christine.
spk05: Thank you for the questions. Next question comes from Delilah Chenbo of Bank of America. Please go ahead.
spk10: Hi. management team, happy Chinese New Year. So I got a follow-up question on our new store opening. So as we are accelerating our new store opening pace, are we seeing any challenges in terms of training the right store managers and hiring additional staff? Meanwhile, we understand that although the store payback period for new stores could be still pretty impressive, the new stores may actually create cannibalization to the existing stores. And it may also create additional resources requirement in terms of management attention. So with this factor in mind, if our same store sales growth remain under pressure for the coming 12 months because of the COVID impact, is there any chance for us to consider to slow down our store expansion temporarily. Thank you.
spk04: Luo Chen, thank you. Our staff or resources, we managed to handle it quite all right. And as you can see, over actually since 2014 and 2015, despite the growth of our same store sales, despite the growth of our new stores from 7,000 plus stores right now is 11,000 stores. We managed to maintain the total number of staff in our system at 420,000 plus. So we increased the store, but without increasing the total number of staff. And what is the delta here is the automation and AI and digital. So, you know, particularly right now with our store base, we can train our staff to meet the new store opening demand. And if we cannot do it, if we somehow see the challenge in terms of quality of the staff in the new store, then we will adjust our pace of new store opening, of course. So with that, I pass the question to Andy, and Andy can comment about the other numbers impact. from the new stores. Andy?
spk01: Thanks, Joey. So, a lot of things. Happy New Year. So, first of all, I want to say a little bit about, you know, obviously echo what Joey has mentioned, you know, in terms of new store opening. China is still a growth market, and, you know, there's lots of white space, especially in lower tier cities and recently urbanized areas. And so, you know, I think sometimes we encourage, you know, investors and analysts to look more into the system cells rather than SSG. Especially over the past two years, on a quarter-to-quarter basis, we see a lot of volatility because of COVID development. As we have mentioned, over the past two years, we expect a recovery from COVID to be time, nonlinear, and uneven. So it still remains the case right now. In terms of our store opening, we're very disciplined. You know, as we have disclosed in our repair remarks, you know, we apply discipline, you know, evaluation process and to determine our investment. That's why we continue to have consistent payback for KFC, two years, and for Pizza Hut, three years, and, you know, for Pizza Starlight Store, it's close to two years. These are very, very good returns on investment. So we're very comfortable, you know, with our strategies and also in terms of the quality of our store. As I mentioned, even the newest store that we have opened in the first half of 2021, they are also performing well, despite, you know, the overall impact of the pandemic. The majority of them are reaching for even just, you know, the first few months of opening. Now, in terms of capitalization, I think, you know, Certainly, you know, new store opening, sometimes we transfer some sales, especially in delivery to, you know, to a newer store. But, you know, we have been growing our store network over the past, you know, 30-some years. And, you know, if you look back before the pandemic, we're growing, and right now we're growing. We're just very consistent and very disciplined in the way how we deal with it. You know, so we have experience dealing with you know, normalized SSG impact from new store opening. The other one is that, you know, when we look at opening a new store, you know, we also capture incremental sales and profits, you know, and then it also, as Joey mentioned, positive network effects on delivery and takeaway business. So, you know, and given the pandemic and some of the changes, we are also, you know, start redesigning our store network. As Joey mentioned, we look at, you know, e-stalling, for example. We have wind down the operations because it's concentrated on transportation and logistics hub. So, you know, and then allow us to open up more locations that better serve off-premise dining, for example. And so all in all, I think if you, you know, take a step back, you know, in terms of a longer-term view, as we do. We obviously are investing to build up and to enhance our resiliency, but we are positioning ourselves for growth and capturing the market opportunity. And if you look at what we are able to achieve this year, despite some of these very challenging environments, we are able to generate, on a four-year basis, revenue of $9.9 billion. And we grow our system sales by 10% in current currency, And then we also achieved and increased our offering profit on a required basis, $1.4 billion. On an adjusted basis, our offering profit was $766 million. And that's the resiliency, despite the significant impact on the pandemic. Very good. So I think in terms of mobilization, And new store opening, obviously we'll continue to review that, but I think we're pretty confident in the strategy that we have right now.
spk04: Thank you, Andy. I think I'll just make one more comment because there's such a strong interest in our new store opening. For our new store, particularly in lower tier cities, it has lower capacity. We have differentiating pricing strategy, means the price will be lower compared to tier one cities. We even have differentiated manual. We will have some special, very special, incredibly good value for money product in that manual only. And we also leverage franchisee to help us as well. So that helps. But just in terms of the numbers and in terms of modeling, I just want to draw your attention to one number historically, CapEx numbers. Our new store opening has increased a lot, and that might be the reason that gives some of you some concern. But if you look at our CapEx numbers historically, 2016, we spent $436 million on CapEx. That's the year we got independently listed. With that amount of money, we opened 575 stores by 2020. we opened twice as many stores our capital is 419 million which is less than 2016. so what it means our efficiency of new store has improved significantly right and on top of that by 2021 we increased the new store to 1800 our campus increased a bit more to I mean, 50% more, $689 million, but the bulk of it is also going to digital and infrastructure as well. So going forward, for the coming year, Andy just mentioned $800 million to a billion. Half of it, or slightly more than half of it, will be on new store openings. So that's the way that we looked at it. number of new stores is one thing, but the key thing is the efficiency and the total amount allocated to CatPass. And that resiliency and our ability to continue to get more efficiency out of CatPass and open new stores in the long term, it becomes a strategic move of our business. Thank you.
spk05: Thank you for the questions. Next question comes from Lillian Luo of Yum China. Please go ahead.
spk11: Thanks a lot, Joey and Andy. Since we talk a lot about the new store opening, maybe switch gear a little bit on another driver for the revenue growth. Despite that, Andy said that we need to focus on sales growth, less on same-style sales growth. But I think a little bit, Carla, can you provide why in fourth quarter the same-style sales growth trend quite similarly in August? Because I remember last In August, our same-star sales growth also down like meetings. And by that time, I think the number of cities that is median or high-risk cities, the number actually is way higher than fourth quarter. So trying to understand the dynamic, the impact to our same-star sales growth from this COVID development. And also, I know that this situation remains challenging. to predict, but standing at the current situation, what do you think is the most possible scenario for our sales growth trend if the COVID continues like the current level? Thank you.
spk01: Andy? Yeah, hi, Vivian. I think Q4 is actually probably the conditions the worst since the first quarter of 2022. I think it's pretty obvious to most folks here in China. We have a Delta variant outbreak, and then later on of the year, we also begin to see Omicron cases popping up here in China. Now, case load may be one, and it's quite deceptive here, because obviously, in China here, generally, we have very stringent health measures. and try to, you know, sort of like, you know, achieve a dynamic zero cases for, you know, for COVID. And so that relied on a lot of these, you know, health restriction measures. So, but now, if you look at the outbreak in the case and also the widespread, it's the worst, you know, since the first quarter of 2020. So as we have mentioned in our press release, you know, in the same trend, you know, we've seen some recovery from the summer outbreak, you know, in October. But then we see significant impact from, you know, the outbreak in November, you know, and then, you know, a little bit recovery in December, but still it's down double digits. Now, you know, obviously, as we have mentioned, when we look at COVID-19, it's going to introduce our duties in our operations. And we have told investors and analysts and internally as well that we need to have analysis and preparation to deal with when time is good, how we can execute well and capture more market opportunities. When situations become more challenging, how we can rely on our resiliency and operations and ensure that even in bad times, we're able to make profit. And so I think, you know, for the fourth quarter, that's what we do. But I think it's worthwhile to step back because, you know, from a quarter-over-quarter basis, it's very hard, or even month-to-month basis, to predict what's going to happen, you know, with COVID. But if you step back for the full year, you know, as I mentioned, you will see, you know, a little bit better picture, right, despite the volatility, you know, and the challenging environment that we operate in 2021. we're able to grow, you know, our revenue, able to grow, you know, our system sales, even grow our profit up in profit. And so I think, you know, in a sense, I think, you know, sometimes we need to take a little bit, but we also have to accept the fact that, you know, with COVID, you know, there will be some uncertainty. Now, in terms of SSG and then also profit, you can see that, you know, like when the situation is stabilized, we're able to execute very well in the first half. And even, you know, the second half in 2020. Now, obviously, when things are challenging, you know, we continue to rely on our team, our operations, our brand, our product and customer, and our digital and delivery. So, it's kind of hard for me to, you know, provide, you know, guidance on, you know, the COVID development and related SSG impact. But as we have mentioned, you know, the biggest impact on SSG right now, the volatility is because of COVID. But, you know, I am confident because over the last couple of years, you know, we do both in terms of, you know, authorities and in terms of our RGM, our operational team, we learned something, you know, over the past two years, how to respond, you know, to when there's a COVID outbreak and try to mitigate some of those impacts. So, you know, I think, you know, the way I look at the situation right now is that, sure, you know, in the short term, we have COVID. We have some of the macro headwinds. So it's, in the short term, a little bit more cautious. But, you know, we are very confident, you know, in our operations, our brand, our products, and consumer loyalties. I think, you know, I have demonstrated it amply. We have the largest, you know, customer membership base, a few hundred thousand members. been growing, you know, 20%, you know, from last year. Now membership accounts for more than 60% of our sales. And, you know, so we're commenting on our operation, our brand and customer base and the product that we have and the new opportunity that Joey has mentioned. And then in the longer term, I think, you know, we still are very optimistic about the opportunity here in China. And that's why we're investing not only in store network expansion, but building our capabilities in digital infrastructure and supply chain. And so hopefully that gives you some perspective on how we look at the market and the situation here in China. Thank you, William.
spk04: Thank you, Andy. Thank you, Andy. And thank you, Lillian. Lillian, I think I'll just like to summarize. Again, the management thinking is very clear in this. We cannot, you know, we don't have the crystal ball towards the COVID situation, but we are very clear about our focus. What do we need to do? Again, three focus, resilience, growth, and strategic mode. Very simple. Resilience, as Andy talked about, is the resilience of operating team. You know, we are fast, we are responsive, and our team, after two years training, even down to each market level, you know, like, you know, Shanghai market, Beijing market, Guangzhou market, that's the national strategy, that's the local strategy. our team know what to do. In terms of growth, two sorts of growth, very clear, as Andy mentioned. The product, you know, in terms of new category, like beef, burger, whole chicken. Why whole chicken is important? Because it's also home consumption, right, which is a trend. The local innovation, you know, the partnership with or the Wuhan, etc. Something exciting, interesting, fun to drive the traffic And we focus on the value. We have done incredibly good job in terms of delivering, well, saving what we can save and pass on the saving to customers through value. Right now, the signature value campaign like Crazy Thursday and Screen Wednesday is something working very well. And then the other source of growth is the off-premise demand, the delivery, the takeaway, the home consumption demand. The home consumption retail for Shaofaner, which is our own retail brand, and KFC and Pizza Hut tripled to over $500 million in 2021 alone. And then last is the strategic mode, which is the digital, of $7 billion of digital sales, of $360 million membership, and not surprising. Our ability in terms of getting the scale, getting the efficiency, and also our ability to rebase our core space and remain competitive in the long term in terms of building our own infrastructure. They all help our business. So the focus is very, very clear. If I could just mention another thing about how do we utilize our core capability to grow the business. For example, We use our hybrid delivery model, our own rider, to deliver the new retail. It makes sense. We have the riders in the stores already, and we utilize the rider to deliver the new retail to our customer directly. Service is good, reliable, and cost is low. So that hopefully gives you a sense of management's very clear focus on resilient growth and mode strategies. given the uncertainties and the evolving situation of COVID. Thank you, Lillian.
spk05: Thank you for the questions. Our next question comes from Xiaobo Wei from Citi. Please go ahead.
spk09: Good morning, Joey and Andy. My question is focusing on your operation of a store in terms of this model. You guys have long preferred self-operating stores to franchising our stores. given all the fluid situation, COVID, you have a better infrastructure, supply chain, etc. Will you consider franchising out more stores looking forward versus self-operating most of stores looking forward? And also clarifying your new opening target for the year, So your target new store opening 1 to 1.2 thousand this year, including only self-operating stores or including both franchise stores and self-operated stores? Thank you.
spk04: Xiaobo, the new store target includes the franchising stores as well. And go back to your question, the first part of your question. The majority of the new store will still be equity store because the payback is so good. However, as you can see, over the years right now, the mix of our franchise store has increased, especially after the acquisition of Huang Xihua. I think it's in the mid-teens already. But going forward, we'll be quite open-minded about the franchising option. And we've always been open-minded about it. We do it when it's right. So in terms of the franchising strategy, there are three focuses. One is we do the franchising in some remote locations such as Tibet or Qinghai. You can imagine why, because it's a lot more efficient to manage it that way instead of managing all the way from the headquarters. Secondly is channel. So the strategic channels such as the highway service center, et cetera. So these are very sensible franchising opportunity. And then the third thing I would like to mention is the ability to use technology to help managing the franchising system. We have been very cautious about the franchising strategy. As you can imagine, you know, there are a lot of advantage of the franchising strategy in China, but there are also a lot of challenges in terms of the quality of the franchising of the service that we care most about. But right now, with the end-to-end digitization process going on, with the IoT, with the automation, our ability to ensure good store operation among the franchising store has improved significantly in the last few years. So that certainly gives us better comfort and hopefully our investors better comfort that when we you know, are more open-minded about franchising strategy, it does not mean that we compromise on the quality of the service. We don't. And particularly in terms of product as well. So I think we have a few more questions. Let's move on to the next one.
spk01: Before we move on to the next one, I just want to jump in there to clarify. You know, the number that we talk about, the net is the net new store that we open, not the gross number of stores. And the net new store opens we expect is about $1,000 to $1,200, which include both franchise and equity stocks. And as Joey mentioned, most of them is going to be our own equity stocks.
spk05: Thank you. Thank you. Next question comes from the line of Anne Ling of Jefferies. Please go ahead.
spk03: Hi, thank you. The first question is for Andy. Regarding the cost trend moving forward, I might have missed it, but would you share with us the cost trend or your cost increase expectation for commodity cost, staff, and also the occupancy cost for the whole year of year 2022 as well as first quarter 22? Sure. Okay.
spk01: I think if you look at obviously right now we look at globally, we see commodity price inflation. You know, if you look at chicken and cheese, beef, cheese, energy costs all up several digits. Now, obviously, without, you know, doing anything, you know, we're probably at, you know, low to mid-single digit, at least, you know, for commodity prices of all now still have. And then also, you know, if you look at cost of labor, you know, there's two components that are driving it. One is obviously, as we have mentioned in last year, we have increased, you know, the wages, you know, at the market level, at the store level. And so we're likely going to continue to see mid to high single-digit wage increase, which is a normalized rate for China. And also we'll probably see a little bit increase in rider costs as we continue to see delivery as a growth driver and continue to grow very robustly. So the mixed shift to delivery will increase delivery costs there as well. Now, on the occupancy and on the other side, one thing is energy costs. In China, the utility price has increased by double digits since December. There's obviously a response to some of the power shortage that we have experienced in the summer and try to encourage more production and more saving energy to balance that market dynamic. And so all in all, I think we're looking at some commodity inflation labor happening. Now, again, also on the margin side, the biggest impact on margin is actually sales leveraged and deleveraged. Obviously, things would have an impact on that. But we're not sitting still, obviously. We have a very good team, and they're taking a lot of initiative to try to fight this headwind, obviously. One is to protect margins, and one is to offer products with a wider pricing range, allow people to upgrade, but also provide a lower entry prices for new customers. Now we also want to leverage our scales and supply chain efficiency to lessen the inflationary pressure. As we have mentioned on the prepared remarks, that including potentially locking in more favorable price when the market opportunity arrives. We will also have, try to look into how to increase our efficiency and utilization of the ingredient that we have. A chicken, how do we use the full chicken, give it part of the chicken? And same for our beef, how we can utilize different parts of that and create products that our customers like, but also gives us good margins. We also have, obviously, a team of supply chain and other people in the brand to work into rebasing overall costs and then also increase the efficiency of our labor. And that technology, as we have always mentioned, is an important part of labor productivity improvement. That's why we're investing, as we have mentioned, a billion dollars in IT investment and digital liquidity investment, and then a billion dollars in supply chain infrastructure over the next few years. So I think, all in all, we're trying to drive that labor productivity, process operational efficiency, to reduce waste and whatnot. And then we also, you know, we continue to try to improve and utilize our membership program, which is one of the largest in the world, 361 members, and to drive marketing efficiency and then also drive member frequency, spend, and overall sales. And so this is how we, you know, look at a commodity pressure, you know, and then how we, the inflation, how we respond to it. Mm-hmm.
spk03: Got it. And just to clarify, you know, for this commodity cost increase estimate that you provide, like low to mid-single digit or the labor cost of mid to high single digit increase, that's before your efficiency exercise. Is that correct?
spk01: Well, you know, like the commodity prices itself, you know, in the marketplace, you know, you have to increase by double digit. And so obviously we're taking to reduce that. We're expecting a normalized rate of meat to high single-digit. We also, as mentioned last year, we're beginning to phase out plastics all through the country, and then we have rolled that out last year, and then we continue to roll out to more markets this year.
spk03: Okay, got it, got it. And my second question is on the store opening, the 1,200 net store opening. I understand that majority of the store opening will be under KFC brand. But would you share with us, like, you know, what is your estimate or your budget for, like, Lavazza, your other coffee brands? as well as Pizza Hut, which I believe like last year you resumed the store opening plan for Pizza Hut as well. So maybe you can share with us the store opening plan moving forward for the other brands.
spk01: Sure. So I think, you know, like if you break it down, obviously KFC is, you know, the very important and largest brand for us. It's going to have for the majority of, you know, store opening. But if you are Pizza Hut because, you know, improve economics, unit economics at Pizza Hut store, It also has accelerated store opening last year. In fact, if you look at Pizza Hut, it opened 335 new stores, higher since 2016. If you look at the net store increase of 235 last year, I think if I remember correctly, it's a combined of the previous three years total. And so I think you know, this has obviously will play an important role especially with you know, the success of the satellite store model Lavasa is also, you know have you know, I Would say it's like, you know at the beginning of last year. We have about you know, you know, you have four store We have opened up, you know Fifty some stuff and now we you know, and obviously, you know, it's still pretty uh, you know, new brand in China. But, you know, we have expanded the drug venture with Labaster, you know, last year. We have great plans, you know, for the brand. As we have mentioned, we give more as our third growth engine. So now we're not only in, you know, the you know, the top tier cities, the tier one cities, but also in several, you know, tier two cities. We'll continue to look into, you know, experimenting with different, you know, store formats and then expand to more markets. And then for Brian, I think we have all seen, you know, pretty good, you know, membership growth. And so as such, you know, we will expect, you know, LaBasse to open more stores in this year. And think of Taco Bell, you know, like a brand that, you know, we, We did not talk as much, but we also opened some 20-some stores last year at Taco Bell. Again, it's one of the highest store openings in many years combined. So I think in terms of all opportunities, I think going back there is how we utilize the store format to target the markets. how we're able to take some cost initiative, we design the format of the store, the menu at the store, that allow us to open store more flexibly. And I think the smaller format right now is very key to overall development across all these brands. So that's generally how we look at it. The key is going to still be KFC, and then Pizza Hut, and then coffee, and then another segment of the business.
spk05: Thank you. Thank you for the questions. We have the questions from the line of Michelle Ching of Goldman Sachs. Please go ahead.
spk12: Hi, Joey, Andy. Thanks for taking my questions. I do want to follow up a little bit on the cost front. So if we look at the occupancy and other costs, it seems that the leverage impact is more significantly And you mentioned the energy cost has contributed this increase. But I remember in the past few years, these items actually drive a lot of efficiency gains. So can you still give us more color, take aside the energy cost, like rental, other cost items, whether there's anything we see more precious in the near term. And on top of that, wage cost, So since the digital orders are already contributing close to 90% of the sales. So is there any further room to say the labor staff number per store or any delivery efficiency gain we can expect going forward? Thank you.
spk01: Hi, Michelle. Yeah, thank you for your questions. In terms of O and O, I think, you know, obviously, you know, one thing to point out is utility price increase because, you know, it's obviously a government policy change that, you know, we've seen double-digit increase in utility prices. The other one is obviously rent. As we have mentioned to folks, even though we have a high percentage, you know, of our store have a component, almost 80% of our store have a component of, you know, variable rent. But, you know, there's also a fixed component of that. And so when there's a southward leveraging, you know, generally we see impact on O&O as a percentage of revenues. And so that's what, you know, the key driver for that. The other one is, you know, in terms of our labor productivity improvement. I think, you know, obviously, you know, Some of these improvements you can see on the store, for example, using digital app or kiosk to make orders and make digital payments. And so I think that has rolled out quite a bit already. But there's also things that you do not see that digital actually help a lot in labor productivity. We have mentioned before, we have the pocket manager that helps our store manager to manage their store more efficiently, get more real-time information. It also helps them to do staff scheduling. We continue to invest in IoT to automate, you know, our kitchens and also our inventory count and all that. I think, you know, right now I think digitization is moving, not only investing in the front end with the customer, but more moving into the kitchens and more into our supply chain and in our back office, right? So supply chain will continue to you know, invest over there in terms of routing, in terms of, you know, integration with suppliers that allow us to do better forecast, demand, and cost management. You know, and then also in our back office, you know, as I mentioned before, you know, we have a three-year disaster program, for example, even for our finance department, right, to go into ultimate manual process and then link up, you know, the data across the company. And then also in the delivery side, right, as Joey has mentioned, you know, not only we use delivery to better optimize the queuing of, you know, our food production, but also, you know, better routing for our rider. Also, you know, more optimized trade zone design, as well as, you know, potentially, you know, having other product initiatives such as, you know, tea time, you know, and also new retail to basically better utilize the rider that we have. So there's a lot of ways to look at labor productivity improvement, you know, and if you look at overtime, you know, we have done, you know, quite well despite, you know, labor increase and all that. We have seen labor cost as a percentage of overall revenues before the pandemic, relatively stable. And, you know, given enough time, I think, you know, we're able to continue to improve people's safety to offset, you know, some of these, you know, near-term shock from COVID.
spk04: I think in the long term, I would like to comment two things, Michelle. One is, in a way, if you think about it, our expansion of delivery business helped reduce the rent. thing about this, right? Because when our delivery business continues to grow, it means the location, the new store location, we don't need to be in the prime, prime, prime area. We can compromise a little bit, and that helps. So the saving of the rental expenses helps the delivery cost side, point one. Point two, in terms of riders, the way that we look at the rider cost is also show our mentality, our philosophy in resilience and strategic mode. Because the fact is, right now, the cost of average order, the cost of delivery rider per order is higher than a platform. And we understand that. We have the options, but we keep it because our riders right now deliver better quality of service. So when it comes to cost, quality first, then we work on the cost side. And instead of pushing down to pay the rider less, because if you pay them less, they go, right? They leave. We make sure that they pay well, but then we leverage our rider to deliver higher average ticket items, such as new retail. So that's the way that we think about the cost structure of the delivery rider side as well. Thank you, Michelle.
spk05: Time. The last questions will come from Walter Wu from CMB International. Please go ahead.
spk07: Hi. Hello. Hi, Andy and Joey. Can you hear me?
spk01: Hi, Walter.
spk07: We can hear you well. Okay. Thank you so much for the chance to ask questions. So my question is about your ticket size. If we check out the positive impact from the increased delivery sales mix, was KFC average ticket is still increasing in the last quarter? And given the industry dynamics and the outlook in FY22, do you think it is still suitable for KFC and PSAR to increase the average tickets? or perhaps the reduction of the level of promotions? This is the first question.
spk01: Hi, Wada. Yeah, so let me address a little bit about, you know, the TA situation. And TA situation, obviously, for KFC and Pizza Hut are slightly different. You know, for, you know, KFC, the delivery actually increased the takeover average. So the makeshift delivery actually would, you know, will help them work there normally. When, you know, it's just kind of opposite, you know, at Pizza Hut, because Pizza, generally, historically, have been, you know, a place for, you know, gathering social activities. And so, you know, their dining actually have a ticket, you know, average that is higher than the grocery side. So when there's a mixed shift there, that would have, you know, an impact there. Now, I think, you know, the questions regarding, I think, the ticket average and higher and lower, I think, is, you know, really depend on a couple other things too. One is also the promotional activities that we have. Obviously, right now, you know, we have more camping public. The other one is that, you know, overpricing strategy. You know, I think it's important for us to look at, you know, the pricing, especially in face of COVID uncertainty and rising inflation and some of the consumer sentiments. So we want to make sure that, you know, what we offer is quick value to our customers. And so, as we mentioned, you know, how do we protect our margins? And, you know, as Joey mentioned, I'm just going to, you know, say it again. Offer quick products to customers. Products that, you know, cover a wide range, you know, both high price, low price, because value is different from pricing. The other one is, again, leverage our supply chain and supply chain efficiency, our scale, to have that cost-compatible advantage to make it more prominent. The other one is enhance, obviously, the usage of our resources, including the meat that we have to reduce wastage. Like chicken bone, for example, we turn it into a product that's kind of popular with consumers. We also want to continue to invest in technology to improve efficiency and productivity. And the membership program is a very important thing. So the membership program continues to help us to drive spending. So if you look at our TFC, for example, member, if you have a privileged member subscription, generally that customer, that member, spends twice as much as non-member. So a lot of things that we would like to do, so the ticket average is one of the moving parts.
spk07: Got it. Very clear. And my next question is about your performance during the Chinese New Year. How was it compared to last quarter? And it seems the number of travelers returning home had increased versus last year as well. So was that a positive to your business at the transportation hubs? Or how does it impact your overall business? And then how do you see this domestic traveling trend going into the next two quarters?
spk01: Right. So I think, you know, this year, Chinese New Year is a little bit earlier than, you know, last year. You know, obviously, you know, in last year, it was mostly in, you know, middle of, you know, February, you know, for Chinese New Year. And this year is the beginning of February for Chinese New Year. So in January, we did see, you know, a modest, you know, improvement sequentially compared to, you know, the fourth quarter. But, you know, as I mentioned on the prepared remarks, for the comparable Chinese New Year period, which is basically for the Chinese New Year, 15 days before the Chinese New Year and 15 days after the Chinese New Year, for that comparable period, at least so far, we're still in the middle of it. So far, we see that still down the over year. In terms of travel, I think the travel pattern is probably a little bit different compared to last year, but I think overall, if you look at the overall travel and whatnot, I think it will still take some time for the transportation offices to recover to any reasonable level compared to the pre-COVID level. So the way we look at it is that it's likely down year over year compared to last year, but still there's a good deal of uncertainty. And we have launched different campaigns. Obviously, when we go into China's New Year, There's quite a bit of uncertainty, you know, in terms of, you know, travel, because, you know, we do see, you know, authorities have encouraged folks to stay put, stay in the cities, to, you know, locally celebrate, you know, Chinese New Year. But, you know, the pandemic, you know, now extending to a third year. So I think, you know, there's also uncertainty about, like, how people respond to that. So we have different conditions to plan, and we'll continue to respond to the changes in the market, is what we think.
spk05: Thank you for the questions. I'd now like to call back to the management for closing remarks.
spk06: Thank you for joining the call today. We look forward to speaking with you on the next earnings call. Have a great day.
spk05: Thank you, everyone.
spk06: Thank you. Thank you.
spk05: This concludes today's conference call. Thank you for participating. You may now disconnect.
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