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spk12: Thank you for standing by and welcome to the Yum! China second quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Michelle Shen. Please go ahead.
spk06: Thank you, Melanie. Hello, everyone, and thank you for joining YamChina's second quarter 2022 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yang. We are dialing in from different locations today. If we experience a technical difficulty during the call, please remain on the line as we reconnect. 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 uncertainties. 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 in the second quarter. Andy will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find a webcast of this call in a PowerPoint presentation which contains operational and financial information for the quarter on our IR website. Now I would like to turn the call over to Ms. Joey Watt, CEO of Yum China. Joey?
spk14: Thank you, Michelle. Hello, everyone, and thank you for joining us today. Second quarter was the most difficult quarter in the past two and a half years. With our main focus always on keeping our employees and customers safe, we also want to bring joy to our customers. We kept a morale high and came together to deliver better than expected results. I'm both glad and honored to fight the battle alongside the wonderful Young China team. We operated with our Shanghai headquarters under lockdown for over two months and still managed to execute with extraordinary agility, quickly forming cross-functional and cross-brand crisis management teams while working We developed flexible toolkits to tackle each problem as it arose. Through it all, we have stood firm and built the business stronger in so many ways. We have innovated new menu offerings, delivery, and digital solutions, as well as course optimization initiatives. These solve not just the imminent problem, but can serve as our learning base to make us more agile and resilient for the longer term. During this trying time, we continued to execute our RGM strategic framework, that is resiliency, growth, and moat. Let's start with resiliency. Our resiliency shines brightest in tough situations. Let me share with you some of the measures we implemented to overcome considerable operational difficulties. During the city lockdown in Shanghai with very limited restaurant staff and riders, our goal was to sustain minimum level of restaurant operations and serve desired food to customers. With simplified menus, we reduce complexity of operations and inventory management. At the extreme, we just have one bucket of fried chicken on the menu, one item on the menu, and that's it. Fried chicken was perhaps one of the most desired food items in Shanghai during lockdown and brought our customers great happiness. We launched community purchasing, TongGo, as early as mid-March, including packaged food products, not just for KFC and Pizza Hut, but also for our emerging brands, Lavasta, Taco Bell, and Little Sheep. In the Q1 earning call, I shared that with 10% to 15% of the stores open in April, Shanghai achieved 40% to 50% of pre-lockdown sales. In May, with less than half of our stores open, we reached pre-lockdown sales level. This was a remarkable achievement. We were able to continue serving our customers thanks to our in-house and agile supply chain management system, as well as dedicated last mile delivery riders. We obtained the necessary permits and managed to serve the majority of Shanghai under severe mobility restrictions. Digitization also played a very critical role. In just a day's time, our stellar IT team launched an AI-enabled delivery route planning tool for community purchasing in Shanghai. The tool optimized four-day delivery routes covering a wide geography, well beyond our usual store-based vicinity radius. across the country where we face a challenging operating environment. We dialed down advertising and promotions to save costs. Some of you may remember the side duck, Kadiah, and other Pokemon meal companion toys we launched around Children's Day on June 1st. The side duck toy instantly went viral, becoming a smash hit with children and adults alike. The sensational buzz from this campaign drove almost 20% of sales in the first two days of the promotion. Who would have thought that we chose size up just to accommodate our reduced advertising budget? The results were phenomenal. We were thrilled to bring joy to a customer's life during an exceptionally hard time and to see their social media poses. We also focused on driving off-premise sales. Delivery grew 7% year-over-year and reached a record sales mix of 38% in the second quarter. Combined with pick-away, off-premise dining contributed to almost two-thirds of sales. Also excitingly, our new retail package for sales reached 200 million yuan in the second quarter. This more than doubled the sales compared to last year. These initiatives partially offset the reduced buy-in services. Let's move on to growth. Even in conditions like this, we don't stop delighting our customers with innovative food and value campaigns. Our ability to innovate is an important pillar to capture growth opportunities. KFC diversified into adjacent categories to drive additional growth. With Wagyu and Angus beef burgers as premium options, we launched entry price choices at only around half of the price, which is 18 yuan versus 33 yuan. On the weekends, we are now offering juicy whole chicken at 29.9 yuan to drive sales. This juicy whole chicken is one of my personal favorites now, and it's absolutely delicious. These two new categories have proven popular, accounting for mid-single digits of menu mix combined in June. Our food innovation team let their creativity fly when designing new products. At KFC, we launched a super abundant chicken bucket, Duo Duo Tong. in selected cities. This bucket features chicken feet, chicken wing tips, nets, and other parts traditionally favored by Chinese people. For some of the analysts who asked me before when would we start to sell chicken feet, we are officially selling chicken feet right now after 35 years. This follows on the heels of KFC's launch last year of its super popular late-night snack, Chicken Bone Niblets . In addition, the usage of all parts of chicken provides an intriguing variety to a customer at very good cost. Pizza Hut's new menu received amazing customer feedback and generated a boost in sales. We launched to campaign on social media and sponsored TV shows instead of using celebrities. With just one-third of the advertising cost, the menu achieved the same customer awareness as last year's menu. The new menu included 35 brand-new or upgraded items such as stuffed crust pizza with sausage and meat floss, Wagyu Supreme Pizza and deep-fried zero prawns. Yes, we put the cereal around the prawns, and it tastes wonderful. Taco Bell launched a wrist burrito, so one jam, with a lighter sauce and more vegetables tailored for Chinese customers. It gained great popularity and appealed to our more health-conscious customers. Value for money resonates well with customers under the current circumstances. As part of the 35th anniversary celebration in China, KFC offered its signature product at amazing prices. Original recipe chicken at its $19.87 price. And the family bucket at almost 60% off a la carte price. This campaign brought back fond memories and became a hit with customers. We rotate the offers weekly to have the flexibility to adjust according to the market conditions in different regions and customer response. Our iconic crazy Thursday value campaigns have won the hearts of our customers. Since we first launched it back to 2018, we have been constantly spoiling our customers with very attractive offers. The campaign now inspires scores of creative social media posts. Thursdays also generate significant sales uplift compared to regular weekdays and sometimes even weekends. At Pizza Hut, We brought back a signature buffet and sold all 400,000 buffets set in a pre-order promotion in just 15 days. We also launched a buy more, save more combo, offering more abundant options. The new combo successfully lifted ticket average and lowered our courses. Let's move on to most. Digital initiatives. and supply chain infrastructure are the key enablers in our strategic mode. Leveraging our dynamic digital ecosystem, we generated around 4 billion in digital sales in the first half of 2022. This represents 88% of our sales. Our loyalty program exceeds 385 million members as of the end of the second quarter. We share the latest launches and engage with members through our super apps, mini program, and social media groups. We also constantly upgrade these tools to improve our customer service. KSC Super App now features a senior-friendly interface option with simpler graphics, less promotion information, bigger forms for mature eyes, and streamlined ordering functions. We tailored it to the needs of our older customers. Pizza Hut also upgraded their mobile ordering manual for more flexible, buy more, save more combos and customized product displays. Our digital capabilities were crucial to streamline restaurant efficiency. Tools like our restaurant sales forecasting system and Pocket Manager gave us full visibility of the situation in each store. With these, we can rapidly adapt to changing scenarios. Our real-time inventory visibility from logistics center to stores help enable us to dispatch raw materials with greater precision. Restaurants could adjust orders daily based on their operating environment and share inventories across the stores when fulfilling community purchasing or other large orders. As an ongoing effort of delivery 3.0, which allowed rider sharing across trade zones, we now offer the same flexibility to our restaurant staff. Staff now can schedule shifts across stores and even across cities. We continue to invest. in building a world-class intelligent and digitized supply chain to improve operating resiliency and support business growth. Our first two Greenfield Logistics Center in Chengdu and Huai'an in Jiangsu are now complete and operational. And a week ago, we announced construction starting on our new Jia Ding Supply Chain Management Center in Shanghai. This project is our largest GreenView project yet and will serve as the headquarter for our 33 logistics centers across China. It will integrate the latest state of the art digital technologies and support restaurants in Eastern China. 2022 has indeed been extremely challenging. We learned many lessons and now emerge as a stronger and more resilient organization. And I'm not saying this just for KFC and Pizza Hut. Some of our emerging brands have also demonstrated great agility and potential during lockdown. I'm convinced that by executing our RGM framework, we are well positioned for sustainable long-term growth. True to our Hallmark DNA of resiliency, we are taking every action to quickly drive returning traffic to our stores by providing good food great value, and good customer experience. Going forward, we will continue to delight our customers and seize new opportunities to grow our business in China. With that, I'll turn the call over to Andy. Andy?
spk01: Thank you, Joey, and hello, everyone. Let me share some color of our second quarter performance. The COVID situation has significantly impacted our second quarter results. In April and May, same-store sales declined by more than 20% year-over-year. On average, more than 2,500 stores were temporarily closed or provided only limited services. The situation gradually improved in June. We were able to capitalize on that improvement, where same-store sales declined narrow to high single-digit year-over-year, and the number of temporary store closures also reduced. We achieved operating profits of $81 million and restaurant margin of 12% in the second quarter. We were able to generate meaningful profit in the quarter, which exceeded our expectations, not only by capturing sales when the COVID situation improved in June, but also by taking swift and decisive actions. We adjusted offers and promotions, spent tremendous effort in driving for the 50 games secure one-time release, and rebase our cost structure. Let me go through the financials and our cost control initiatives. Unless looked at otherwise, all percentage changes are before the effects of foreign exchange. Foreign exchange has a negative impact of approximately 3% in the quarter. Second quarter total revenue decreased 13% year-over-year. in reported currency to $2.1 billion due to the same-store sales decline and temporary store closures. This was partially offset by the contribution of new units and the consolidation of Hangzhou KFC. System sales were down 16%. Same-store sales were 84% of prior year's level. By brand, KFC same-store sales were 84% of prior year's level with same-source traffic at 75%. Ticket average grew 12%, mainly due to the increase in delivery mix and higher ticket average of community purchasing orders. Pizza Hut's same-source sales were 85% of prior year's level. Same-source traffic was at 80%, while ticket average increased by 6%. This was driven by the higher ticket average of community purchasing. Restaurant margin was 12.1%, down 370 basis points compared to last year. This was mainly due to significant sales deleveraging impact, significant sales cost inflation, and high delivery costs. To take actions, we have taken actions to mitigate the impact. Let me next go through each expense line and the actions we have taken. Cost of sales was 30.9 percent, almost flat year-over-year. We took prompt actions to reduce promotional activities and discounts, to keep commodity price increased to low single digits, and to optimize the distribution frequency from warehouse to store in order to reduce logistics costs. Cost of labor was 27.1 percent, 290 basis points higher than last year, mainly due to sales deleveraging, wage inflation of 5%, and more delivery rider costs resulting from higher delivery mix. This was partially offset by improved labor productivity as we simplify promotions and menu items, reduce operating hours as necessary, reduce hiring, and prioritize scheduling of full-time employees. Occupancy and other was 29.9 percent, 60 basis points higher than last year. The modest increase was mainly attributable to sales deleveraging and rise in utility prices, which was partially offset by our cost initiatives. Over the past few years, we've spent considerable effort to reduce the fixed component of our rental expenses, shifting them more to wearable components. This effort continued to improve the flexibility of our operations. In addition, we negotiated meaningful rent relief from landlords. Apart from that, we pulled back on marketing and advertising and took on more energy-saving initiatives. G&A expenses increased 6% year-over-year. mainly due to increased compensation and benefit expenses as well as the consolidation of Hangzhou KFC. This was partially offset by lower share-based compensation expenses. Operating profit was $81 million. The net contribution from Hangzhou KFC consolidation was roughly 3% of operating profit in the quarter. It includes the amortizations of intangible assets acquired which is roughly $16 million per quarter, and that would run through the end of this year. Below the operating profit line, we incur a $16 million mark-to-market net gain on our equity investment this quarter. It was $9 million more than the same period last year. The effective tax rate was 26.5%, 170 basis points higher than last year, mainly due to household KFC consolidation and lower pre-tax income. Prior to consolidation, the equity income from JVs was not subject to tax, resulting in lower tax rates. The effective tax rate in the first half of this year was 30.4%. We expect four-year effective tax rate to be around low 30s. Net income was $83 million. Diluted EPS was 20 cents. The mark-to-market gain in Meituan positively impacted diluted EPS by 4 cents. Despite the challenges in the second quarter, we returned $218 million to shareholders in cash dividends and share repurchases. In total, we returned half a billion U.S. dollars to shareholders in the first half of this year. We will continue to execute on our disciplined and balanced capital allocation strategy. As always, our priorities are to have sufficient cash for daily operations, to deal with contingencies, and to invest in capital expenditures to drive organic growth. Now, let us take a look at the third quarter outlook. We saw some gradual improvement in restaurant traffic in June. Still, we remain cautious on same-store sales. The external environment remains very challenging given the reoccurrence of COVID outbreaks, weakening consumer sentiment, downward economic pressures, and commodity price inflation. In July, the more infectious Omicron subvariants appear in Shanghai, Beijing, and other cities. Nationwide, the number of cases has increased again after two months of sequential decline. Many cities, including Xi'an, Chengdu, and Lanzhou, have experienced some kind of lockdown conditions following the dynamic zero COVID policy. Therefore, we expect sales recovery to take time, to be nonlinear and uneven, and potentially volatile. Our focus is to drive sales recovery. We have planned a variety of new product launches and marketing promotions. We are also working to ensure great value for money to attract consumer spending. In addition, our teams employ extensive scenario planning with regional focus to stay agile in this ever-changing environment. We're delighted with the better-than-planned cost savings in the second quarter. As we look into the third quarter, we are dialing back some of these austerity measures to sustain long-term growth and operational excellence. For example, reduced promotions Simplified menus, shortened store-opening hours, and rent relief are temporary. In addition, sales deleveraging impact is real and will continue to impact our margins. Also, we continue to face headwinds from the inflationary environment. Prices of commodity, such as cooking oil and beef, as well as utilities, have risen significantly this year. On the labor side, we expect labor inflations to soften given the downward economic pressure. However, the increased mix in delivery sales will likely increase rider costs. Despite challenges we face, our expansion strategy positions us well for long-term growth. In the second quarter, We saw openings in response to the COVID outbreaks. Yes, we remain committed to open good off-road stores that will grow for years to come. Over the past few years, we have been innovating store models to cater to different business needs like delivery and takeaway services, to enhance store densities in high-tier cities, and to expand into lower-tier cities. This year, we expect more than half of our new store to be in smaller formats. We lower up some investment and streamline restaurant operations to be more efficient. The smaller format, together with our reputation as a reliable tenant, opened up more potential sites for new store opening. Our new store remains healthy. The latest batch of new stores yield store payback of two years at KFC and three years at Pizza Hut. The majority of store openings in the first quarter of this year were able to achieve break-even in three months. The healthy payback period reflects our disciplined approach to store openings. Reassured by a strong pipeline and healthy new store performance, we maintain the target of 1,000 to 1,200 net new stores for this year. In the near term, we continue to expect volatility in our business due to the resurgence of COVID outbreaks, southern economic conditions, and their impact on consumer sentiment. Nevertheless, we continue to focus on the elements of business that we can control. As demonstrated in the past two and a half years, We are confident that our people, our execution, and our strategy position us well to deal with this very challenging environment, perhaps better than others. Also, our investment in new stores, supply chain, and digital will bring growth opportunities and make us even more resilient. With that, I will pass you back to Michelle to start the Q&A. Michelle.
spk06: Thank you, Andy. We'll now open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Melanie, please start the Q&A.
spk12: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Lillian Liu with Morgan Stanley. Please go ahead.
spk02: Thank you. Thanks a lot, Joey and Andy, and also congratulations to the very solid results. My question is mainly on the margin side because obviously I think every cost line was controlled much better than expectation. Just want to understand with business gradually reopen, especially more stores are reopened, and running at normal hours, how do we see these costs lying on the trend? Because I think Andy and Joey mentioned some of the relatively temporary measures for cost savings. So I want to understand, since health growth continues to be negative, how are we going to project this, I would say, cost changes, especially on the margin side, on the year-on-year basis? Thank you.
spk05: Thank you, William.
spk01: So let me answer your question. I think, first of all, I think, you know, as mentioned, you know, the second quarter margins and profit exceeded our expectations. And I think it makes all possible. I think, first of all, is that, you know, it's all thanks to the very incredible effort and resilience and dedication of our team, especially, you know, our restaurant employee who did everything humanly possible and endured a lot of hardships during the lockdown and the pandemic to continue to serve customers in need and keeping our store open, running as normal as possible. So I think those efforts, the current effort, I don't think is possible on a sustainable basis. In terms of, you know, and obviously the outperformance was also benefited from, you know, the improvement in June in terms of the COVID situation and our ability to actually capitalize on that improvement. And so, you know, as we mentioned, things themselves declined narrow to a high single digit in June. But in terms of, you know, in terms of cost fund, we mentioned, you know, already, you know, some of these, you know, initiatives are temporary. So for example, we have cut back quite significantly on marketing and promotional activities. I think as we try to drive sales, I think we will stop there. We also mentioned that in terms of managing the inflation, cost inflation in COS in this first quarter was phenomenal. But I think if you look at the commodity price, it's still in a very elevated level. And, you know, we expect that to continue to creep up. In-house labor, I think, you know, obviously we have simplified menus, items. We have shortened some offering hours during the second quarter. And then we also reduced hiring. And so, you know, some of this is going to have repair facts, you know, especially, you know, as we try to return to more normal operations. So we will have more normal menus and normal offering hours. In terms of, you know, again, like going back to O&O, the reduced advertising spending would have, you know, I think would be payback. I think we'll return to more, you know, proactive advertising to drive spending. And then we actually mentioned also, too, you know, there was some one-offs. you know, in terms of, you know, rent relief and government relief. And so, you know, some of this is directly related to COVID, some of this is not. And so we have about roughly close to $20 million of that in the quarter. And, you know, we're quite uncertain about, you know, if we can receive, you know, the amount in the third quarter. So I think, you know, when we look into the third quarter, as I mentioned, the key thing is obviously is sales, right? Sales delivery is real. And, you know, as we see, you know, the COVID remain, you know, one of the biggest uncertainty going forward. And we see some, you know, resurgence in cases in July nationwide. And then, you know, we see, you know, some cities, for example, Chengdu, Lanzhou, and also Cyan were under some lockdown measures. And so, so this is, you know, so, you know, that's why we say, you know, the recovery of that would remain, take time, will be nonlinear and potentially volatile. Now, obviously, you know, we will continue to sort of like, you know, focus on cost control, you know, try to have scenario planning and try to stay nimble. But I think, you know, we need to be realistic about, you know, the you know, the uncertainty that we face. And then, you know, the sales and leveraging and also globally the inflationary pressure there. Thank you, Lillian.
spk14: Lillian, I just want to give some color about these numbers, behind these numbers. Let's say TIC-COL. Some of the savings will not continue. Some of it will continue. For those will continue, such as the sharing of staff across the store, Some of them will not continue, such as the extreme situation during April and a bit of May. These stores are run by a very few number of employees. You know, typically they stay in the store for one week. They literally live in the store for one week and work nonstop. And then a week after, a second shift staff moving. However, for some smaller brands, the most extreme case is one of my staff stay there for 33 days, the other one stay there for 44 days. You know, I have the fortune to invite some of them to have lunch with me recently to send them. It's, you know, it's truly heartwarming behind these numbers to be really grateful So we have such amazing operation teams. They work this hard so that they can protect their jobs and they can serve the customer and thus they can protect the company. But this kind of extreme arrangement, of course, cannot be sustainable. But if we have gone this far, other innovation and creative arrangements, our team become even more open-minded to embrace any sort of innovations in terms of rebasing the core structure. Thank you, Lydia.
spk12: Thank you. Your next question comes from Michelle Chen with Goldman Sachs. Please go ahead.
spk13: Hi, Joey, Andy. Thanks for taking my question. My question is about the incremental opportunity we observe during the tough time. So you mentioned that there is some new business we are driving, like community group purchase. On top of that, retail products are selling pretty well during the tough time. So are we going to be more aggressive exploring these new business lines? And in addition to that, from the way we do the business, Joey, earlier you mentioned that we have this AI-enabled route to improve the delivery efficiency, et cetera. So just wondering, those opportunities we observed during the top time, how we should think about the sustainability and how we are going to grow these opportunities even further in the future. Thank you. Thank you, Michelle.
spk14: Let me take a step back and then I'll comment on your question about the incremental opportunities. Overall, quarter two, we deliver substantial operating profit versus expected loss. The absolute number is not the highest quarter, 80-some million, but my God, the quality, the amount of effort going into it and the resiliency our team has demonstrated is phenomenal. And we can see the result. April is tough. May improved a little bit. June came back quite a bit. The core of the core are the questions that you just asked. What did we do? How did we manage to do it? Well, I mean, it would go back to our strategic framework, which hopefully make it much easier for our key stakeholders to understand the management team. It's going back to RGM, the resiliency, the growth, and the moat. In terms of resiliency, the two examples that you mentioned, Michelle, the new retail, the community purchasing, and the AI, these are great examples about our resiliency. We react very, very quickly. We are talking about putting together the community purchase program, starting with a hotline, and later on with the mini program . Within a week, across the brand, and we got the entire process, team program done by middle of March. And then we roll it out, and wait for two or three days, and then the demand came in. And that's the kind of speed, agility, and determination, and ability to execute innovative solutions that earn us the resiliency and thus the results. So the Congo, the community projects happened. And then when that happened, of course, we are selling what we can sell at that time, which is fried chicken. But that's not enough. Because of all kinds of limitation, And also at home consumption, you can imagine, increased dramatically. So we put in the new retail, the packaged food. And at the height of the new retail, Pizza Hut, I believe it's May, 50% of the Pizza Hut sales in Shanghai is from the new retail. Well, now time has moved on. Later on, by June, it became 20%, and then now the percentage is smaller. But to go back to your question, Michelle, we doubled the new retail business during the quarter two compared to year-on-year last year. And for first half of the year, we delivered IMB. This is IMB number, 450 million sales. for new retail. And now you can do the math. It's start to be some decent number. And for the entire year of this year, 2022, we are looking at reaching the 1 billion sales for new retail alone. In China, if you compare that sales to many other new retail business, this is not small. I mean, it's relatively small percentage compared to young China business. But as new retail business alone, it's not. And it's a wonderful compliment to our business because you can imagine that we have our scale in terms of supply chain. We have our network of distribution, which is our stores, 12,000 stores, and our online channel that our little brand, Shaofang, has started in 2018. And we have our own riders. to deliver these new retails to customers directly without incremental delivery costs charged to customers. So this will continue, a very good complement to our business. And even emerging brands achieved breakthroughs with the new retail Lavazza, Taco Bell, leadership. I mean, during May, again, sales exceeded pre-lockdown level because of the package product that they have been trying to put together within very short time. And then the next thing you talk about mentioned is the AI, the digital, the supply chain, et cetera. Absolutely. That's the absolute right thing for us to do. And we have been doing it for 35 years. We are one of the few, if not the only one, at our scale, we have dedicated supply chain, TaterMix, so that we can continue and keep the surprising logistics going even during quarter two such difficult time. And now we are building our Greenfield Logistics Center with digitized and AI enabled supply chain to provide us the visual image and the visibility of the supply chain process and the traceability of upstream so that we can move things around and we can be very efficient in terms of cost of doing business. So these incremental opportunities will certainly continue. Therefore, despite such difficult quarter, the morale is best ever. Because as a 450,000 people company, we work so well together. The execution ability, agility is second to none. The team is very proud that we protect the business, protect their jobs. We look at every single cost opportunity possible, except, except the promise and the sense of security that we are not doing any layoffs for staff for 2022. So our staff know that their jobs are protected and they're all in it doing everything we could possibly to protect the customer and to protect the shareholders. I'll pause here, Michelle.
spk10: Thank you, Joy. That's very clear. Thank you.
spk12: Thank you. Your next question comes from Brian Wang with CMS. Please go ahead.
spk04: Hi. So basically, actually, I have one question. So I would like to understand your number.
spk14: Brian, would you mind speaking up a little bit?
spk10: We have a very difficult time hearing you, Brian. Hello?
spk05: Well, sure, thank you.
spk04: Yeah, can you hear me now?
spk10: Yes.
spk04: Yeah, sure, thank you. Yeah, sure. Thank you. So basically, I would like to understand your number of stores and the increase. How do you plan to increase your number of stores in the second half? Say, for example, how to break them down by different brands. Say, for example, your plan of increasing your store counts in KFC and also Pizza Hut. And will there be a breakdown by tier of cities? And that's my question. Thank you so much.
spk01: Hi, Brian. So about our new store opening, I think, as you mentioned, we have always deployed a very disciplined process and different methodologies to evaluate store opening. And usually, there's some bottom-up from the market where they propose an appropriate site. We went through the financial models, went through the committees to think about the financial return, the strategic implications, and overall mine conditions to approve those sites. So I think we'll, you know, I don't think there's any change to that process. And, you know, so in terms of like, you know, by brand, you know, because KFCs continue to be, you know, obviously the largest brand within our portfolio and, you know, will continue likely to be, to account for the majority of the new store openings Pizza Hut, as you can see, their new store performance is also very good, especially with satellite store. And you have seen their store opening accelerated last year and this year as well. So I think you can also expect that. In terms of our other brands, I think we can expect coffee, for example, La Bazaar. you know, will continue to, and also Taco Bell, too, will continue to expand in, you know, the second half, although there's still, you know, a smaller portfolio of stores. But in terms of percentage-wise, it would be big, but, you know, in absolute numbers, it would be smaller. And then you have Chinese cuisine business, you know, there's some centrality to, you know, start opening there. They are opened by franchisees. So, you know, generally there will be more start opening before the Chinese New Year, for example. And so that's potentially more. But again, like this year, you know, because of COVID situations, you know, it's a little bit more challenging for restaurant operator and, you know, so franchisees. So we will continue to monitor the situations in the markets. you know, especially given, you know, our Chinese cuisine business, hot pot and store pot business, you know, are, you know, concentrated in, you know, northern part or northwestern part of, you know, China. And we'll have to see, you know, how the coalition evolves in the second half. But that's like by brand. In terms of by tier, you know, as we, you know, I've seen over the past couple years, you know, we have beginning to see, you know, more opportunities in lower tier cities and, you know, the concentrations or the number of new store opening in lower tier cities, you know, have now accounted for the majority of the store open. Now, obviously, we continue to see opportunity to increase the densities of our store network in, you know, the tier one, tier two cities. But I think that's the general trend. I think that trend will continue. That's how we generally look at the stall opening. Again, like, you know, this year we have the target of about, you know, 1,000 to 1,200 net new stall, you know, and as we mentioned, given, you know, the strong pipeline that we have and also given the strong economics that we have seen in our new store that have opened over the past couple of years and also recently. We're pretty confident that we will have good opportunity to open more good possible store that can help us grow our portfolio in the long term.
spk05: Thank you, Brian. Sure, thank you so much.
spk04: Thank you, Andy. So I think this is very clear. So actually, I have one more question. So on the competitive landscape, So, because I heard that, you know, in tier two and tier three cities, and then there are some kind of low price peers, you know, they are similar to KFC. So they are kind of like the Chinese version, you know, um, um, a cheap version, say someone like, so how do you think, you know, your, um, your strengths compared to them is because I have seen the menu, you know, and then their menu is actually quite cheap. So how do you plan to compete with them in these lower tier cities?
spk01: Right. I think we have seen, we always see competitions you know, both in low CC and high tier cities. And so we think, you know, the best thing that we can do is not to be just being cheap, but, you know, we want to focus on having great value for consumer. A good value does not mean, you know, being cheap or low price. What it means is you give good food, you know, at great value, good price to consumer and so that they can enjoy it. We have a fantastic brand. Our customers are very loyal to our brand. We have great quality of products, delicious food, a very comfortable, fun environment that epitomizes our brand identity. So, as we mentioned, if you look at during the pandemic and the lockdown in Shanghai, for example, I think by some indications, KFC fried chicken was mostly side food during that period of time. And so I think our brand was made very well with consumer, our food, and we continue to innovate. You can see, as Joey mentioned, Each brand continues to innovate with new products, with great fun food for consumers, and we continue to deliver great values. As mentioned, the reason why we focus so much on cost and controlling cost is that in order to compete in value propositions, the most important thing is to have a cost structure advantage, and that's what we're trying to do, deliver great value to the consumer.
spk14: To be more specific, at least in three ways, we do it slightly differently in lower tier cities compared to tier one cities. One, we have slightly different manual. The fried chicken we sell there, we could have something like that, which is targeting for lower tier cities to start with. We might sell it in other top tier cities later on, but we do have slightly different manual. And the pricing is differential. So we incorporate it. And then also promotion, we give our store manager flexibility to run certain promotions. That's first. Secondly, the different model. So Andy mentioned investment. Yes. The cost of building up these stores in lower tier cities could be slightly lower, and we have a slightly different way of doing it. So the operating model, the kitchen, blah, blah, blah, will be slightly different. Third is we are very, very focusing on children in lower tier cities, which is something very, very unique to us in the last 35 years. To give you an example, in the northern part of China, which is the most difficult part of a business, even in the last two or three years, despite the impact of the pandemic in the eastern part of China. In the northern part of China, the business is still the more challenging one. For this summer alone, we have run more than 10,000 children's summer events. So the store manager will organize these events for kids during the summer. So you can see we do have a very different model. Of course, if I can take this opportunity to remind our analysts that other than lower tier cities, we have so many different business models of catering customized for slightly different customer groups in different regions, in different consumption occasions, like a transportation hub, the highway station, and university, these days, you name it. Okay, I'll pause here. Let's move on to the next question.
spk12: Thank you. A reminder to please limit your questions to one per person. Your next question comes from Xiaopo Wei with Citi. Please go ahead.
spk03: Good morning, Julie and Andy. Congratulations for another resilient quarterly result. I think in the past few years, YamChina has shown great agility of being defensive. But being defensive, but being agile in operation also means that you can switch back to offensive mode when opportunity arises. If China reopening continues, which I presume you share the same view, how could you be offensive again in operation? Joey has touched base on the new brand, new reach opportunity, et cetera. But if we only talk about the cooperation of KFC, Pizza Hut in the reopening scenario, how could you do differently versus a pre-COVID kind of operation with what you learned in the past two years? Thank you.
spk14: Thank you, Xiaopu. Let me share my thoughts here. Indeed, the business has become more agile. If we just look at the number for quarter two, I think those cells will is 80 84% and same as about system cells. So 16% done. However, we still deliver 4% profit. So technically, you know, we we reduce the break even point to to about 80%. And roughly in our business is is I guess, pretty normal to have the break even point at about mid 80s. So our ability to reduce to sort of the 80s is phenomenal. It gave us this agility to do things. Going forward, I think even for quarter two, you can see when Our fundamentals are intact, and when things are a bit more stable, even the COVID situation is relatively more stable, we are able to bounce back rather quickly. That's what we can see even for quarter two. So we hope, although for quarter three, as Andy mentioned, there's still a lot of uncertainty, even as of right now, still in challenging situation. But in the long term, we are optimistic, and we are still very committed to this market, and thus we're still growing the store. But when things become better, how can we grow faster, if that's your question? The strategy is there. It's not going to be any different from what we have shared since 2019. It's the RGM. It's the resiliency, the growth, and the strategic mode. We might do it slightly faster, but the strategy is the same. You know, it might be a bit difficult to say that in the last few years, but right now I think we can see that sometimes resiliency is even more important than growth. We have the resiliency and we'll continue that with our digital capability with our product innovative product with our great value for money with our ability to control cost and then we'll grow more stores and the growth here come from KFC Pizza Hut and other emerging brands will continue to do what we are very good at for opening the stores and also increasing the sales from off-premise you can you can see our number right now, our off-premise sales is what, about 65% for KFC and 55% for Pizza Hut. And all these numbers move quite a bit in the last few years. And that gave us both the growth and agility because without this high percentage of off-premise sales, we won't be able to deliver the number that we delivered in the last quarter, in the last two and a half years. So the growth will continue, and then we'll continue to build strategic mode, you know, on a daily basis, firm and steady. So the supply chain will continue. We have 33 logistics centers right now. We'll continue to build more Greenfield Logistics Center. We'll continue to invest in our automation from the front all the way to the back. We'll continue to work on our sustainability commitment, the science-based, the target that we have committed to. So I hope that gives you a sense that the directions are clear. We might pick up the speed a bit faster whenever we could, but nice and steady. Thank you.
spk12: Thank you. Your next question comes from C.G. Lin with CICC. Please go ahead.
spk08: Thank you, Joey and Andy. Congrats again for such a strong and resilient performance. I have one follow-up question on the margin side. So we achieved a very resilient retro margin in Q2 through the extraordinary efforts in SWIFT adjustments and some one-time relief. And meanwhile, Andy mentioned that in the future, we are dealing back some strict cost-control measures to sustain long-term growth. So how should we expect our restaurant margin in the long term under the new normal? Would this step be like around 17% target? Thank you.
spk01: Thank you, C.J. You know, so obviously, as we talked a little bit about short-term and long-term, and as you mentioned, in the second quarter, you know, some of these cost-saving initiatives or efforts, not some of these, you know, multi-career in nature. And then, you know, in the short term, the biggest driver for restaurant margin right now is self-leverage and deleveraging. You know, that to a great extent depends on, you know, COVID situations. But in terms of longer term, I think, you know, we, I think, you know, our goal is obviously to drive growth on the top line and also, you know, return, you know, profit into a more normal level. As we have mentioned in, you know, our last year's investor day, you know, our longer term goal is really to drive, you know, sales growth by, you know, high single digit and to drive our product growth by, you know, high single digit too. And so I think those in parallel is what we were trying to achieve in the long term. And, you know, one thing I think, you know, it's, you know, it appears, you know, the question was staying, you know, in the new normal or when things return to normal, you know, are we confident in capturing that opportunity both in sales and also potentially in margins? I always say although history is not always the predictor of the future, but it's probably the best predictor of the future and show us some lessons. If you take a look at the period, the four-year period between third quarter 2020 and the second quarter 2021, when the global situation was relatively more stable, You would see that, you know, we were able to drive our sales growth. You know, we were able to, you know, see significant market improvement. And that's, you know, that's going back to, you know, what Joey has, you know, a lot of time emphasized on resiliency. and also in terms of our excellent execution. And so our scenario planning helped us to design our operations in case things get worse, but also in case things get better, how we can capitalize on the opportunity and drive sales growth and then also drive sales and margin recovery. So hopefully that gives you some perspective in terms of how we look at the shorter term and also the longer term margin perspective.
spk10: Thank you.
spk12: Your next question comes from Anne Lin with Jefferies. Please go ahead.
spk09: Thank you. Hi, management team. Thank you for taking my call. My question is on the coffee business. I know it's still very small at this stage. But at the same time, I understand that this will be one of our potential growth drivers moving forward, more mid to long term. And if I look at your store opening plan versus the peer, it seems that it's still a little bit slower. So maybe would you share with us your pace of your coffee network rollout? Are we still in the process of testing our model, or we already find the right model to roll it out? And once we roll it out, normally this is the type of business that we need scale and with back-end support. Meaning that if we have 200, 300 stores, we possibly might have to bear some investment initially. But I don't think any of us, as an analyst, factor in any investment in our model. So we just want to check if management can share with us some of your initial plan or what will be the investment for the coffee business. That would be great. Thanks.
spk01: And thank you for your question. So I think, first of all, I think we are very pleased to see the progress. And the progress may not be the same as how they measure by other companies. Other companies may measure by hundreds of stores open in a quarter or whatnot. As we have mentioned, with all investments, including our store network expansion, as with any other investment, it's a very different process. Although, you know, like for the newer brand, like coffee, you know, building a brand, you don't expect them to be profitable immediately on short term. But, you know, there's, you know, we generally expect that, you know, they will figure out, you know, the right business model before they scale up. Because otherwise, you're going to scale up a big problem, right? So, but we're so far, we're very pleased with, you know, the progress so far. You know, the store network right now, you know, has expanded quite significantly, you know, from last year. We have, you know, 74 stores right now in four tier one cities and plus, you know, a number of second tier cities as well. In household sales, you know, we have more than double year over year. And then, you know, even in very challenging times, as Joey mentioned, the team have done, you know, a very tremendous job in sort of like putting together packaged products products to sell in the retail channels, and it would sustain almost better than last year's theme store sales. Obviously, last year we only had a very small number of stores, mainly in Shanghai. In terms of our customer base right now, and we continue to see growing customer loyalty, if you look at member now, member for Labasa have grown four times, year over year. And then, you know, its member contributions continue to grow, a very significant number now. So, obviously, you know, the coffee business, you know, this new brand has also been impacted very significantly by COVID, as you probably know. a large number of their store, almost half of that is in Shanghai. We have the lockdown, and so it was impacted. But as I mentioned, they were able to very quickly pivot into community purchasing, packaged coffee, retail, products like pastry and whatnot. And those products really helped, I think, us reach to, you know, a bigger audience, audience that maybe historically have not taste our product, but you're able to do it through community purchasing and then some of the new retail initiatives. Now, obviously, you know, we cannot say, you know, we have everything all figured out in a perfect model. I think it still would take some work to sort of streamline the restaurant operation there to strengthen some of the fundamentals, you know, and it can take a while for, you know, KFC and Pizza Hut to figure out the rice ball format and some of its product menus and then also improve the efficiency. I think, you know, we should still need to be a little bit more patient with that. And so, yeah, so I think we're happy with the progress so far, but still a lot more work to do. But, nevertheless, we're very confident, and we think it's a very important record for us, and we have a big partnership with La Paz to do that in the coming years. Thank you.
spk12: Okay, thank you. Thank you. Your next question comes from Christine Penn with UBS. Please go ahead.
spk15: Hi, management. Thank you for taking my call, taking my question. So I actually have a similar question, which I'm sure some of the analysts like Xiaobo and Ann have asked previously. But I just want to ask management providing some updates about the new initiatives that you previously mentioned. as we are looking for a post-COVID full recovery in China, possibly in 2023. So I think the two key initiatives management previous mentioned, one is the integration of Huang Xinhua and leadership. Can you provide us more updates as regards to this initiative? And in relation to that, maybe can you provide us more updates in terms of your you know, maybe 2023 plan in terms of the extent of the Chinese cuisine business. I know that business has been struggling with COVID in the past three years. But when we think about 2023, what are your initial, you know, thinking behind the store extension plan, et cetera? So I think that's the first initiative I want to check out. And the second initiative is regarding you know, introducing more, you know, franchise, you know, stores. Is this something, you know, management is thinking right now, given that, you know, management is, you know, I remember previously you mentioned about your initiative to emphasize the supply chain resiliency to provide more possibility of, you know, franchising. So I just want to check out you know, what are the latest thinking behind those long-term initiatives when we are going into 2023.
spk10: Thank you.
spk05: Hi, Christine. Yeah, so let me try to... Thank you.
spk01: Go ahead.
spk09: Do you want to go ahead?
spk01: Go ahead.
spk09: No, no. Go ahead. Go ahead.
spk01: Okay. Okay. So yeah, so for want you all and we'll ship as you mentioned, you know, obviously, you know have been impacted, you know by the outbreak Because it's dying in nature and then a lot of locations are in north and northern northeastern part of China now, so I think obviously the number one priority for them is really to try to drive sales recovery, and then also have the franchisees to strengthen the operations, particularly in the delivery business. So in a sense, they probably have not been, have a big part of the business in delivery. So I think this is something that we can help the franchisees to do, given our overall comfort building. Leadership also, during the pandemic, also being quite creative and innovative. and make pretty good progress, including goods and services, and then also their overall cost management. And especially in Shanghai, during the lockdown, they were able to capture a lot of opportunities in both delivery and also community purchasing and retail business. So I think the priority for the Chinese business next year is really to try to drive sales recovery, help the franchisees to to run their business and then also continue to work on the fundamentals and integrations. So, Joey, do you want to comment on the franchise questions?
spk14: Christine, equity store will continue to be the driving force for our business going forward. However, we do have the terrifying franchisee strategy. So right now, you know, in market, So a bit of long and thin market like the Tibet, the Qinghai, and these are very good franchisee market. And then also for some emerging business, new business models such as the stores along the highway station, we have established strategic partnership already to build a store. So the franchisee strategy is not going to be general. It will have its own strategic purpose. And given the time today, I think I'll just pause here. We could have more detailed exchange of thoughts later on.
spk10: Okay, thank you.
spk12: Thank you. Your next question comes from Lucy Yu with Bank of America. Please go ahead.
spk11: Hi, Joey. Hi, Andy. Thank you for taking my question. My question is more on the GP margin side. So how should we think about the promotion and discounting plan in the second half? Especially we are fighting against commodity headwinds and COVID uncertainty, while at the same time, we're trying to stimulate the sales. So how should we think about the promotion and discounting in second half? Thank you.
spk05: Thank you, Lucy.
spk01: Yeah, as you mentioned, you know, in the second quarter, obviously we saw a cutback on marketing and also in promotional activities. And then as we move into, you know, the second half and the third quarter, with the COVID situation improved a bit, even though with some volatility, I think the key focus for us is really driving sales recovery. And so we likely going to see quicker marketing and promotional activities there. And then also have more value campaigns, value for money campaign. Because as you mentioned, personal sentiment is relatively weak because of the prolonged COVID situations and then some of this macroeconomic pressure. And so value for money is very important. And so that's how we see in the second half this year. But as always, we're always trying to be very cautious about using price increase to start off to offset inflationary pressure. We always try to First, it's a way for us to run our business better and lower the cost before we say we have to increase prices. We do increase prices annually by a small amount, but usually it's below the inflation rate. Thank you, Lucy.
spk10: Thank you, Andy.
spk12: Thank you. Our final question today is from Walter Wu with CMB International. Please go ahead.
spk07: Hi. Hello, Andy and Joey. Congratulations for your highly resilient results. My question was asked by another analyst previously, so perhaps I can ask about your member cells. So while the number of members continue to grow very healthily, but it seems the member cells as percentage of total system cells has declined year on year. So do you mind explaining the reason behind and is that a concern for you guys? And how do you see the growth potential and your strategy over the members and the member cells going forward? Thank you.
spk14: Really quick, Walter. The member cells is around 60%-ish. It's not a concern for us because the total member size they're still growing which is um very nicely actually i mean our our member cells is 355 million roughly for kfc and then and then 150 million for pizza hut and when it comes to member and non-member cells the member cell 60 something it's already high enough and then the next the next target for us is to uh other than quantity is to work on the quality the stickiness of the member, the overall experience of the member, et cetera, et cetera. So I guess we cannot just increase the member sales forever. It does not make much strategic sense. For us, it's quantity first, then quality. But it's a very, very important part of our business, and there's still so much that we can do to improve and to get something out of it Just to give an example, what about the cross-brand health? Cassie and Pizza Hut, how can we do better, and how can we serve the same customer better with Cassie Pizza, Little Sheep, and et cetera? So a lot to do here, but the focus is more on the quality of our experience for now. Thank you, Watson.
spk07: Thank you, Zoe. And just a little bit follow-up. So if the members' growth is still very healthy and the member sales mix has declined, so that means we have more new customers being affected in the second quarter or in the past few months. So do you see that trend? We have more new customers or new clients? I mean,
spk14: the China population. Go on, Andy.
spk01: Yeah, yeah. So, I think, as Julie mentioned, you know, like, we have a very large membership base. We already have, like, 280 million members, and it's a very large population in the urban area already. The other part of this is that, you know, this always, you know, it's not always higher the member sales, percentage of member sales the better. But if I have 100% member sales, that means I have no new customers. So there's always a balance between a mix of member sales and the new members. And so there will be some fluctuations from time to time depending on the marketing campaigns and depending on the market conditions. But I think, you know, at 67%, it's a pretty healthy level. And so, and then in terms of, you know, for us, you know, we, as Julie mentioned, we try to drive that, you know, quality of member sales, you know, driving cost sales among our customers. And then, you know, continue to increase, you know, their stickiness and frequency, you know, over the long term so that, you know, the payback for our marketing and new customer recruitment continues to improve. So those are a number of matrices. I think member sales is one of them, and it's not always the higher the better.
spk07: Thank you.
spk06: Thank you.
spk07: Thank you.
spk06: Thank you. Thank you. That concludes the call today, and we look forward to speaking with you on the next earnings call. Have a great day.
spk12: That does conclude our conference for today. Thank you for participating. You may now disconnect.
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