Yum China Holdings, Inc.

about our journey in the past three years and discuss fourth quarter performance. 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 the PowerPoint presentation, which contains operational and financial highlights on our website. Finally, we plan to host our 2023 Investor Day in Shanghai through September. We look forward to sharing more details about this event with you in due course. Now I would like to turn the call over to Ms. Zhou Yiwan, CEO of Young China. Zhou Yi.

Thank you, Michelle. I want to wish everyone joining us today a happy and healthy Chinese New Year. Before looking at the fourth quarter and full year, I would like to reflect upon our journey these past three years with COVID, some of our key learnings and how we have grown. First, I'm incredibly grateful to the entire Young China team for their agility, creativity, and tenacity during this difficult time. Together, we became a more resilient, nimble business, better positioned for long-term growth. During the past three years, we quickly pivoted when dying traffic came after pressure. Delivery doubled from just 20% sales mix in 2019 to 39% in 2022. Our hybrid delivery model and dedicated riders enable us to capture the increase in demand. Combined with takeaway, off-premise sales reached almost two-thirds in the fourth quarter of 2022. Digital ordering also rocketed from 55% of sales in 2019 to now 89%. That's over $20 billion in digital sales in three years. We maintained our rapid growth. Our store portfolio expanded by nearly 40%, a total of 3,800 net new stores. KFC and Pizza Hut stores maintained a healthy payback of two to three years, respectively. The first year profitability of new stores also improved. Strong new store performance was driven by our flexible store models. We optimized store size and secured more favorable lease terms. For new stores opened in 2022, more than half were in smaller format. Such flexibility allows us to continue to increase density in higher tier cities, which is particularly useful and helpful for delivery, and capture white space in lower tier cities. We enhance the coverage and agility of our world-class supply chain to support business growth. We expand from 29 to 33 logistics centers for better self-sufficiency in each province. During extended lockdowns, we add rail and sea freight to move our infantry apart from our traditional trucks. Our store infantry visibility system allows real-time self-forecasting and smart infantry replenishment. These capabilities help mitigate severe disruption even during lockdowns and minimize wastage. Also support product innovation by securing supply at scale. Apart from our classic offerings, we launched over 500 new or upgraded menu items last year, from regional offers to national launches. We invested in digital and automation to improve operating transparency and efficiency. For example, we are rolling out smart order system at KFC. The AI-powered system more accurately predicts demand and recommends food preparation plans to minimize stock out and wastage and also reduce waiting time for customers. It also enhances customer experience by reducing wait time and providing real-time order updates. And recently, we added robotic servers at one-third of our Pizza Hut restaurants, ,, freeing up crews to serve customers. We remain profitable each and every quarter since the beginning of pandemic in 2020. By refacing cost structures and implementing austerity measures, we cushioned shocks created by the volatile market situation. In the past three years, we were able to generate 1.9 billion U.S. dollars in free cash flow and returned over 1 billion U.S. dollars to shareholders. Notably, I'm proud to say we did this while also protecting the jobs of our employees. We have had no staff layoffs since the pandemic began. Looking back over this period, we see opportunities improve our ability to operate in good times and bad times. Looking forward, our anti-fragile operation will enable us to shine and drive long-term growth in China. Now let me provide some highlights for the fourth quarter and full year. 2022 was filled with unprecedented challenges. In just 12 months, we managed sporadic COVID outbreaks, entire city lockdowns, nationwide infections, and the sudden lifting of COVID-related restrictions. In October and November, COVID infection quickly evolved into major regional outbreaks, leading to tightened COVID-related measures. In December, China entered a new phase of COVID response with brand new challenges. With surging infection rates, a significant portion of our employees and riders became infected, resulting in a labor shortage. Thousands of our stores were temporarily closed or only provided limited services. Many residents also opted to stay at home to avoid infection or recover from symptoms. Dying traffic fell sharply. During this time, as always, the health and safety of our employees and customers remained our top priority. We moved quickly and supported our employees with relief medicine and antigen test kits. We mandate daily testing for all crews and riders to minimize infection, and we organize informative health talks and a consultation hotline for our employees. At the same time, we took immediate steps to address the labor shortage. We simplified manuals, shortened operating hours, and optimized labor shifts. We reallocate crew resources among stores, prioritizing stores with stronger demand. And we adjusted delivery operations, encourage customers to pick up orders, and promote packaged food products. I'm thankful for our team's nimble actions and amazing execution. Even in this challenging quarter, we delivered substantial year-over-year restaurant margin expansion despite lower sales. This was achieved by our extensive scenario planning, operational efficiency improvement, cost rebasing initiatives, and temporary relief. We were also able to open a record 538 net new stores in the fourth quarter, or 1,106 59 net new stores in the full year. Let's move on to the brand. By brand, KFC and Pizza Hut continue to introduce delicious food and exciting campaigns to delight our customers. At KFC, new categories grew with solid momentum. Juicy whole chicken, and beef burger, doubled in sales in 2022. Combined, they generate around 5% of KFC cells mixed in the fourth quarter, nearly equal to our original recipe chicken. We continued to introduce more flavors in these categories, such as the spicy whole chicken, ,, launched during Chinese New Year. Following the success of Pokemon Cider in quarter two, Our toys in the fourth quarter also generated huge social buzz. These include fancy chicken Bun Bun Ji and fluffy chicken popcorn Ji Mi Hua. Both were originally designed as pet toys or toys for your cats, but quickly became very popular with all customers and drove traffic. At Pizza Hut, pizza sales grew nicely for the year. reaching almost 40% of sales. We sold over 100 million pizzas in 2022. That's nearly seven pizzas per second. Apart from our signature pan, hand-tossed, and crispy pizzas, we have added stuffed crust pizzas. Customers can choose fillings like double cheese, sausage, and meat floss, Rochon, These new launches encourage the trade-offs and lift effective price. We continue to offer stunning value for money. Our signature value campaign at KFC, Crazy Thursday, 疯狂星期四, attracts excellent traffic, generating over 50% more sales on Thursdays compared with other weekdays. Sunday, Buy More Save More, 周日疯狂拼, continues to spur weekend sales. Customers love the option to mix and match and the sizeable discount. At Pizza Hut, we brought back the wildly popular two pizza for 59 yuan promotion in November. The amazing value drove great traffic and sales uplift. New retail packaged food provide us flexibility during lockdown and when we were short of staff. In 2022, KFH food sales grew 90% and reached nearly 900 million yuan. We continue to broaden our offerings, adding some of the classics such as our egg tart and popcorn chicken, Jin Mi Hua. Now, moving on to our emerging brands, we have solid management teams and strategies in place. While it would take time to fine-tune and test the business models, we are making solid products. Lavazza continues to execute its four pillar strategy, which includes brand building, menu innovation, digital and delivery, and store development. Throughout the year, we introduce new coffee flavors, such as orange buffalo latte with buffalo milk, , we also introduce sweet and savory foods that pair well with coffee. such as Cube Connect, which is a fluffy lava croissant. Loyalty members more than doubled to 1 million in 2022, contributing to over 40% of sales. We enhanced operational efficiency and optimized new store design, lowering upfront investments. Although COVID disruptions have delayed store openings, Lavazza reached 85 stores by the end of Q4. Taco Bell doubled its store count in 2022 to 91 stores. We continue to localize the menu for Chinese customers. For example, a crispy wonton taco, Ya Xiao Su, used duck and a wonton wrapper in place of a tortilla. Why not? We also continue to improve the value proposition customer experience and unit economics. Little Sheep and Huang Jinghua were accurately impacted by COVID due to their dying focus. We use 2022 to refine their business models and strengthen fundamentals from menu, marketing, store models, supply chain, to digital initiatives. Huang Ji Huang also continued to generate operating profit. To wrap up, with a new chapter opening in 2023, we are excited to see positive momentum in the Chinese New Year season. We took decisive action to ensure operational efficiency and capture sales. At KFC, we brought back our signature golden bucket, Jing Tong, which is a holiday favorite. At Pizza Hut, we introduced a holiday-themed pizza with Wagyu beef and seafood. It's called Xian Tiao Tiang He Niu Pizza, which is inspired by a popular game. It's gratifying to see how our delicious food plays an important part in our customers' celebration during the holiday. Yet COVID remains a reality. and many challenges still lay ahead, including cautious consumer spending post-holiday. While we anticipate the road to recovery will be gradual and uneven, I'm optimistic that brighter days are ahead. We will continue to execute our proven RGM strategy, which stands for resiliency, growth, and strategic mode, to capture the growth opportunities and deliver shareholder value. With that, I will turn the call over to Andy. Andy?

Thank you, Joey. And belated Happy Chinese New Year to everyone. Let me share with you our fourth quarter performance. As Joey mentioned, we faced an extremely fluid and challenging fourth quarter as there were substantial changes in COVID conditions and related policies. In late November, due to rising infections and strict COVID-related health measures, the number of stores that were either temporarily closed or offered only takeaway and delivery services reached a peak of over 4,300 stores. In December, we faced a different situation where most of the COVID measures were lifted. Due to labor shortage, we had to temporarily close or provide limited services at over $1,300 on average. In such a volatile environment, we took quick actions to capture off-premise demand. Furthermore, we controlled cost, limited wastage, and enhanced productivity, despite lower sales. Our team did a wonderful job improving restaurant margins by almost 3 percentage points despite very difficult circumstances. Let us now go through the financials. Unless looked at otherwise, all percentage changes are before the effects of foreign exchange. Foreign exchange had a negative impact of approximately 11% in the quarter. Fourth quarter total revenue declined 9% year-over-year in reported currency to $2.1 billion. In constant currency, total revenues grew 2%. The contribution of new units and the consolidation of Hangzhou KFC were partially offset by same-store sales decline and temporary store closure. System sales and same-store sales both declined 4% year-over-year. By brand, KFC same-store sales were 97% of the prior year's level, with same-store traffic at 84%. Ticket average grew 16% due to the rise in delivery mix, which has a higher ticket average than dining. Pizza Hut's same-store sales were at 92% of prior year level. Same-store traffic was at 98%. Ticket average was at 95%, driven by lower ticket average of delivery orders and smaller party size due to the pandemic. Restaurant margin was 10.4%, 290 basis points higher than the prior year. The yearly increase was mainly driven by labor productivity, operational efficiency, and temporary relief. These were partially offset by their sales leverage and impact, which includes temporary store closures, as well as high rider costs due to high delivery volume. We also faced inflationary headwinds in commodity and labor costs. Our team worked hard to protect margins during the fourth quarter, which is seasonally slow in terms of sales and profits. Let me go through the key items and highlight the action we took. Cost of sales was 31.9%, 60 basis points lower than prior year. We kept commodity inflation relatively modest by strategically locking in prices and innovating the manual. We also carefully planned promotional activities and reduced wastage. Cost of labor was 28.8%, 90 basis points higher than prior year. This was mainly due to increased wider costs from high delivery sales mix, low single digit wage inflation, and sales leveraging. This was partially offset by better labor productivity and temporary relief of $14 million. Occupancy and order was 28.9%, 220 basis points lower than prior year, despite sales deleveraging. This was mainly due to lower rental expense and other cost-saving initiatives. Rental expense as a percentage of sales benefited from rental relief of $12 million, store portfolio optimization, and more favorable lease terms. G&A expenses increased 2% year-over-year, mainly due to increased compensation and benefit expenses, as well as the consolidation of financial KFC. The increase was partially offset by cause control initiatives. Operating profit was $41 million, compared to $633 million in the year period. In the fourth quarter of 2021, we recorded a non-cash gain of $618 million from the reimbursement of our Chris V. Health equity interest in Hangzhou KFC. Excluding the reimbursement gain, adjusted operating profit increased 189% year-over-year from $16 million to $14 million. The net contributions from Hangzhou KFC's consolidation was 12% of operating profit in the quarter. It included the last quarter of amortization of intangible assets acquired, which was worth $15 million. Effective tax rate was 29.9%, 480 basis points higher than prior year due to lower pre-tax income and the Hangzhou KFC consolidation. Prior to consolidation, the equity income from JVs was not subject to tax, resulting in a lower tax rate. Net income was $53 million. Adjusted net income was $52 million. Excluding the $4 million mark-to-market net gain on our equity investment in Meituan in the quarter and the $9 million net loss in the prior year period, adjusted net income grew 154%. Due to diluted EPS and adjusted EPS were 13 cents. The market-to-market gain in May 2021 increased by 0.1%. In December, we acquired an additional 20% stake in Suzhou KFC JV for approximately $115 million. This increased our total ownership in the JV from 72% to 92%. For the fall year 2022, we generated free cash flow of $734 million. we returned roughly $668 million to shareholders in cash dividends and share repurchases. Cash and short-term investment was $3.2 billion, down from $4 billion in the third quarter. The reduction in cash and short-term investment was mainly due to the reclassification of around $600 million from short-term investment to long-term time deposits. We invested in long-term bank deposits to benefit from better interest rates. Let's now turn to our outlook for 2023. In January, most of the temporary closed-door assumed normal services. Our same-store sales from the comparable Chinese New Year holiday season were up mid-single-digit year-over-year, but remained developed to a condensed level. Same-store sales benefited from pent-up demand as the relaxation of COVID policy coincided with the Chinese New Year holiday. However, the real test will be the sales trajectory after the holiday as we face more cautious consumer spending and macroeconomic uncertainty. Looking ahead, we are encouraged by the new COVID policy. The future indeed looks bright. But we must keep a level head and recognize that uncertainties and challenges still lie ahead. Other countries have shown that further outbreaks and the emergence of new COVID variants are real possibility after COVID restrictions are lifted. We also face macroeconomic headwinds, such as elevated commodity and wage inflation, as well as softening global economic conditions. These factors may impact our operations and consumer spending in China. Now, at the risk of sounding like a broken record, we continue to expect recovery to take time and be nonlinear and uneven. For 2023, our top priority is to drive sales. At the same time, we will remain agile. One of the lessons we learned in the recent years is the importance of planning and preparing for a wide range of scenarios. both to capitalize on growth opportunities and to mitigate risk when needed. On store development, we are targeting to open 1,100 to 1,300 new stores. We expect capital expenditure of $700 to $900 million to support organic growth, remodeling, digital, supply chain, and other infrastructure development. As always, the quality of growth is what matters to us the most. not just the quantity. So we will continue our systematic and disciplined approach to investment and growth. Finally, we remain committed to returning capital to shareholders. The board has approved to raise the cash dividend from $0.12 per share to $0.13 per share. This is supported by our healthy balance sheets and strong cash flow. With that, I will pass you back to Michelle to start the Q&A. Michelle.

Thanks, 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. Sorry, please start a Q&A.

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 are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Brian Bittner from Oppenheimen and Company. Please go ahead.

Thank you. Good morning to you. My question is on the new stores that you've built since COVID began. You've built a significant amount of new stores over the last three years, over 3,700 of these new stores. And I know the payback on these stores are still very strong despite operating in the pandemic, which is incredibly impressive. But Andy, can you talk about where the sales productivity and the margins on this class of stores that have been built since COVID, where it currently stands relative to the rest of the asset base so we can kind of understand how to think about the model moving forward?

Thank you, Brian. You know, if we look at, you know, our store opening for the past three years, as Julie has mentioned, you know, we have been opening uh almost increase our heck uh our store account by you know almost 40 percent right um and but nevertheless i think if you look at the new store performance the you know the payback period were very consistent very good uh for kfc it's about three years for uh sorry for cafes about two years and for pizza it's about two to three years um and pizza is you know the reason why it's two to three years because if you look at satellite store model which is the new model that we have uh the performance on par with kfc which is about two years And then, you know, obviously, there's more standard models. The period is a little bit longer. And if you look at overall for this year and last year, you know, the new saw that we opened, you know, their unit economics continued to perform very well. If you look at, you know, the saw that opened recently, you know, they're even, you know, most of them are break evens within, you know, three months of time, even with this very challenging environment. So, if you look at our new store portfolio, the difference with the existing store is that over the past couple years, we did, you know, increase penetration in lower TDCs, where it's the white space, and then we also increased density in the urban area, especially with smaller model, satellite phone model, or KFC smaller model, really to cater to consumers you know, demand for convenience and delivery and takeaway services. The new stores generally are smaller, so their throughput, the sales throughput are generally less than their existing portfolio, roughly about two-thirds of the sales compared to the portfolio average. Now, the probability of those new stores are better. As we mentioned, we have lower, you know, the often investments for, you know, for the small store. If you look at it properly, we probably spent about $2.5 million for new slot opening. And then now, we are spending on average about $2 million R&D. And then for a small model, it's close to $1.5 million R&D. And then also, we have obviously improved the efficiencies throughout this pandemic. As you look at the restaurant margin, for example, last year, in 2022, despite the fair amount of environment throughout the year, and self-leveraging, we managed to improve, you know, restaurant margins, especially at KFC. So, I think, you know, we're pretty confident that, you know, we have the right, you know, format and resources to both our SOAR network at a healthy pace and also, you know, maintain a very, you know, robust payback for our .

Brian, I would just like to add some color to your question. The theme here of the aggressive new store opening is resiliency, because while we emphasize how many stores we have opened in the last three years, 3,700 net new stores, but actually 4,800 growth stores. At the same time, what we did not talk about, but also important, is how many stores we have retired. So when we open the more productive new store, we at the same time retire the less productive assets. And thus, the quality of our assets for Yang China has improved in the last three years. So just have a bit of highlight here. For the new store we open right now, we are talking about 90% of the new store have flexible rents, which make us more resilient. Andy talked about lower cap rates. Even more, if you think about our cap rate, roughly 40-60. 40% is equipment, which we can move around. 60% is suncoast. So the reduction of the cap rate in terms of suncoast is even more than just the total reduction of the cap rate. And the size is smaller. So the productivity of the new store is better, actually. And the location of the stores matter too, because they're both in higher tier cities and lower tier cities. It's about 40-60 spread too. So for lower tier cities, 60% new stores are there. And they're very, very effective in entering new cities. For KFC 2022, we actually entered 200 new cities. And these are white space. And you can imagine these are pretty good market to go. For higher tier cities, our focus is on filling the gap or the distance between the stores to increase the density of our store in high-tier cities, which is incredibly important if you think about our focus on our delivery business. So I hope that gives you some flavor about the new stores in terms of the quality and in terms of the resiliency for the business. Thank you, Brian.

Next. It does. Thank you so much.

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

Thank you, Joey and Andy, and Happy Chinese New Year. So before I raise my question, I'd like to highlight three things, if I may. First, out of the 12 quarters during the pandemic period, For five quarters, we actually reported restaurant margins better than the pre-pandemic level. And despite the fact that for the four quarters, we had same-store sales, like mid to high single-digit same-store sales decline versus 2019, whereas for Q3 last year, we actually saw more than 10% same-store sales decline over the same period in 2019. Apart from the one-time cost relief, We have significantly rebased our cost structure and innovated the store formats, as Joey and Andy just elaborated on. And meanwhile, we also consolidated Hangzhou and Suzhou KFC in the past three years. Supposedly, this portion of business carries higher margins than the group average. So I think the market in general would expect pretty meaningful margin recovery or expansion going forward once sales start to recover. And for point number two, I also noticed that our priority this year is to drive sales. But meanwhile, the market generally believes that the company is very good at balancing top line and margins. And point number three, just now we also highlight that we will be planning for multiple scenarios in a very fluid situation. So I've highlighted all these three points. Now let's come to my question. Sorry, it's a bit long. So I understand the situation is very fluid, but let's assume that for 2023, our macro environment is kind of okay so that the momentum could be similar to that of second half of 2020 and first half of 2021. so that we might see some pretty okay same-source recovery, but may not be fully back to the 2019 level. And under that scenario, is it fair to say that we can actually bring our restaurant margin to a level largely similar to 2019 or even a bit higher than that? So that's my question. Thank you.

Awesome. Thank you for the summary and also summary to the way and also, you know, the question about restaurant market potential. You know, as we have always said, you know, like, you know, when there's things also decline, generally, that will put pressure on, you know, restaurant margins, overall margins, but you know, when there is recovery, you know, on sales, we also expect some optional leverage to now, Obviously, as you mentioned, we are quite encouraged by the relaxation of the COVID policy, I think, which would give us a little bit more certainty about the business environment and store operations, and then also the Chinese New Year trading period. So in general, I think we are cautiously optimistic. The reason we mentioned a couple in terms of the macro conditions and also the COVID field being a reality is really the reality is that we need to keep a level head. I think if you look at the operational improvement, labor productivity improvement, and then some of the margins improvement, as we mentioned before, we expect most of them or some of them would continue. As we have mentioned, we did a lot of work to rebase our cost structure over the past few years. And so if you think about some of our labor structure, our restaurant management versus crew, part-time versus all that, and then also if you think about, as we mentioned, the rental expenses where we also got some favorable lease terms et cetera, I think those will carry forward. Now, obviously, you know, over the past couple of years, because of COVID situation and the fourth quarter this year too, right? So in the fourth quarter alone, we received about $26 million of rental leave and other type of leave. And then for the full year, we received about $86 million in total. So those are likely to go away, as you mentioned, if things become more normalized. And so that would also have an impact. The other one is that we're looking in the commodity prices and labor inflation. I think, you know, obviously for the past year, because of the public and also the overall economic conditions that have been logically modern in China in 2022, cost of sales, commodity price inflation was about low single digits and same for labor cost inflation. Now, we see, if you look at the commodity prices, for example, for chicken prices, they have been rising since the second half last year. And so we do expect probably low single-digit commodity price inflation next year, at least in the first half this year, in 2023. And then we also expect cost of labor inflation to return to more normal pace. As we mentioned, low single-digit is not you know, the normal, mid to high-technology is the norm. So we expect that to gradually return to more normal pace of inflationary pressure there. So that's how we generally look at, you know, the sort of like the margins and the cost environment as we, you know, move into 2023. And thank you.

Let me add some color here. The way that the management thinks about all these core causes and margins is as follows. If you look at our number historically, cost of sales and cost of labor, going forward, even in 2023, I think for your modeling purpose, we can expect cost of sales or cost of labor, our management team will try to keep it relatively stable if we could because you know we have to manage inflation for cost ourselves but at the same time it won't be too low either you know for for 2022 is about 38 percent if you go all the way back to 2016 when we start get listed it's also about 29 30 percent but the big delta is Actually, PISA at that time – right now, PISA is on 31.5%. At that time, PISA was only 26%, and that was a problem because when the cost of sale is too low, it means the value for money is not good enough for customers, and that's very dangerous. So our goal is to keep it relatively stable. Cost of labor, you know, the fact is it just keeps increasing. Our job is to manage it at a reasonable level. But we have to pay our staff at competitive wages. Otherwise, we won't get good stuff. The area that over the years, which we have improved quite a bit, I would say, is occupancy and other operating expenses, such as rent, semi, A&P depreciation, amortization, et cetera, et cetera. So 2022 is 2020. 8.6% and 2016 is 34.2%, a massive 5.6% delta. Now that shows management teams consistency and focus on reducing the rent, which is always the right thing to do, I would like to believe. And also depreciation, which is from reduced capital. So that has been our focus. But when we Yeah, and that's true for both KC and Pizza Hut, by the way, 5% to 6% improvement for both brands over these many years. However, one thing I would like to emphasize again and again, when we save all this money, we don't just, you know, let it flow through to the margin. We always, always, always pass on some savings back to the customer. That's the way that we build long-term business. So I hope that... that help you to think about management focus for the margin and various key code items.

Thank you. Thank you. That's very helpful. By the way, your Bung Bung Zee toy is really cute. And also, I'm very amazed by the newly launched type of product. So I'm looking forward to have a try. You must close the box.

Yeah. Yeah, go.

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

Good morning, Julie and Andy. Happy New Year. I have a long-term question. We highly appreciate the great rundown of Julie's opening remarks, showing us the journey of the past three years, helping you build your identity and also keep the goals in the long-term target. So my question is, In the past three years, your identity is very visible, which will protect your margin will capture the digital and delivery. But when China reopens, the market will be more dynamic. I just want to get a sense that whether Julian team will be more offensive or a little bit aggressive than before in terms of demand activation. because you're always going to stay ahead of competition. You stay ahead of competition to reserve your cost and protect margin during a bad time. We will be a little bit more offensive in market share gain looking forward upon China reopening. Thank you.

Thank you, Xiaopu. I think I would like to address the narrative that whether in the past three years whether we have been offensive defensive I think we have been very aggressive in the last three years if you consider what we just talked about earlier with Brian's question we have expanded footprint by as much as 40% within three years so our view is we shall take advantage of the crisis and adversity and And I think we did. So, you know, when we look forward from 2023 and beyond, I think we'll continue our pace, which has been rather aggressive, I would say, but the focus is The focus and priority is to drive sales, focus on delicious food, new product, value, exciting campaign, while at the same time continue our disciplined approach to capture more growth. If you think about the last few years, our biggest constraint actually was on the sales side due to disruptions of the pandemic. So, going forward, we will focus even more on driving sales and then continue the disciplining approach, which includes accelerating store growth. Andy talked about targeting 1,100 to 1,300 net new stores in 2023. Secondly, optimize the store format. There's still a lot to be done. We have done a, I think, pretty decent job with KC and Pizza Hut. But let's not forget in the last three years, the smaller brands actually had more challenging time to test, to try their store format, their sales, the different bits and pieces of store models. And we are certainly looking forward to the a bit more supportive environment for the smaller brands to grow. And third, to invest to strengthen our strategic mode in terms of supply chain, digital, et cetera. So I hope that gives you a sense about our focus. Our focus is still on resiliency growth and strategic mode and our anti-fragile operations, which have improved in the past three years, will continue with strong focus on self. Thank you.

Let me add another point, which is when we look at our small network expansions, I think we have been very disciplined, you know, all through, since the spin-off, right? And so we're very consistent about that. Within that very consistent approach, very systematic and disciplined approach, it's building, you know, a mechanism, right, to accelerate growth when, you know, the unit economics perform well, you know, and decelerate when, you know, the unit economics is not performing as well, as we mentioned before. If you think about it, when times are better and the store formats are right and performing really well, the store manager themselves or the market manager themselves will propose a small store and the small store will be approved by our model, vice versa. This is a classic example if you look at Pizza Hut. Pizza Hut, even before the pandemic, it was a rejuvenation program. And you see, you know, there's the soil unit economic at that time, new soil unit economic at that time was, you know, actually constrained. And therefore, you know, you see limited net, you know, new soil growth for Pizza Hut. And then, you know, with the success of the satellite soil model, you see, you know, a pretty significant acceleration for the soil development there. And so I think, you know, our model and our approach is, while it's disciplined and systematic, also reflect very much the current economic conditions and our unit economics, which will accelerate and decelerate according to those problems. Thank you, Xiaobao.

Great, thanks. Looking forward to meeting both of you very soon physically. Thank you. Absolutely. Thank you.

Thank you. Your next question comes from Michelle Chang from Goldman Sachs. Please go ahead.

Hi, Joy, Andy. Thanks for taking my question. So my question is about the promotion activities and the competition landscape. We know in the past few years, the smaller players have been squeezed out significantly, and it's actually benefited our business. So going forward in the new, like, reopening world, how should we think about the competitive landscape changes? And also, on the other side, we know the consumption part has been pretty challenging. these days. So what is your strategies to drive traffic back leveraging those promotion activities? Thank you.

Hi, Michelle. For the competitive landscape, I'm happy to report that I think we have been doing quite all right. I mean, from 2019 to 2022, the overall market in our business has dropped by mixed single digits. But Young China, ourselves, we hold up there. So that means our market share has increased a little bit. So I think we have done something right. Going forward, regarding your question of promotion and sales momentum, We always look at the promotion, product, operation, all in a holistic view. How to drive sales? Well, the focus of driving sales, we always prioritize traffic and then take an average. And we want kind of both. So how to get both? We have the a series of initiatives that form the promotion and sales strategy. We always have fantastic product because it's really not very healthy just to only focus on promotion without amazing product. So product comes first. Therefore, even during the three years pandemic, every year we are still able to launch about 500 new products. with or without the help of traditional marketing because we have now over 430 million members. We can always market the new product to our members. And then with the new product, we have really effective promotions. And that's now becoming more effective over time because we have less promotion campaigns, but more effective promotion campaigns. For example, as I mentioned earlier in the first part of the call, Crazy Thursday, amazing. But it took four years to make, to produce, or to come to amazing Crazy Thursday promotion. And that worked really well for one day. But you know, for weekends, our business has been quite challenging because we do social activities in the last three years. So for 2022, we push buy more, save more for KFC. And then for Pizza Hut, that is like the value promotion for the two pizza for 59. So fewer, but more effective promotion. That drives sales, but that also protects the margin for our shareholders. Now, you'll think about, you probably have the hidden question here is about price increase. It is also, within our plan, but we do it hopefully in a clever way. We expand the range of price. We have lower entry price point products, and we also have some very high-end products to please the customer who will want to treat themselves. Our favorite example is the Wagyu Beef Burger for KFC, which is always a very interesting idea for traditional KFC lovers. So with the combination of multiple initiatives, we hopefully can both drive traffic, maintain the margin, and also preview the sales for our shareholders. Thank you.

Yeah, thank you, Joanne. Thank you for the comment on the pricing.

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

Thank you. Hi, Joey. Hi, Andy. A couple of questions here. First, regarding the company's disclosure that 5% mid-single-digit same-sale sales growth during Chinese New Year, would you share with us more or less similar for both KFC and piece ahead and how does it differ in terms of the pace of recovery, what we should be expecting. And then also, if we take a look at both brands, we have an increase of the delivery business versus year 2019. So how would it change when we have the reopening? Will we see more stabilization on this part? Yeah, thank you.

Hi, Anne. For the Chinese New Year, same sort of sales, the mixed single-digit number. KFC did better, slightly better than Pizza Hut because of the transportation help stores perform very well. As we mentioned in the earnings release this morning, it's even better than the government statistics, so that helps a lot. And in terms of the regional difference, and all regions perform quite well across all regions, and lower tier cities perform better actually. But I have to mention is we need to be prudent to look at the number because this year Chinese New Year is very early. So the comparison is rather difficult. we shall look at the Chinese New Year number to including January and February so that that would the picture would be more more complete in terms of delivery business the increase is is It's good. Between 2019 to 2022, it moved from 20% to 40% for Yum! China. However, I would also like to mention that as the management look at this business, we also look at off-premise business as a whole, because the delivery business is still outperform, still outperform compared to Daim. But the question is, where's the ceiling? I mean, I would just like to highlight the off-premise sales right now for our business is about two-thirds, which I mentioned earlier. And that's incredibly important in our analysis because it's about the resiliency of our business. That is something the management team has worked very hard to achieve. And that's also the reason why we have we have done okay in the last three years. Because when the off-premise business is as high as two-thirds, it helps protect the business. Think about what's our break-even sales. That's how we think about it. What's the break-even sales of our business? Right now, you can work out the number. We only need less than 80% of the ourselves or things ourselves to break even to achieve break even. That means even during the pandemic, when when when a significant portion of our store was shut, we can still achieve break even cells because that cell transfer from dying to to delivery and off premise, even during the lockdown. So that's the way that we look at the business and I hope you guys will also look at the business in this way as well. And that 20% increase, therefore, from 2019 to 2022 is incredibly important. If I mention one more slight point is, if you look at our number during quarter four 2022, KFC did better than Pizza Hut. One reason is KFC's off-premise business is much higher than Pizza Hut. So protect the downside much better. Thank you, Anne.

Interesting. Thank you.

Thank you. Your next question comes from Lillian Lu from Morgan Stanley. Please go ahead.

Thank you, Joey and Andy, for your explanation of the situation. Just a very quick follow-up question. Because that's exactly what Joey just mentioned, that KFC versus Pizza Hut recovery pace. Given this current still volatile situation, and meanwhile we are seeing an improvement of premise traffic. So like for Jen and Seb, and even for 2023, we're seeing like the fear that we can expect that the KFC's momentum in terms of the pickup trend will be stronger than Pizza Hut. and especially how this delivery portion may be normalized down a bit versus last year. How does that kind of impact our focus for same-style sales growth? So I believe traffic will offset some downward pressure on ticket size for KFC and opposite situation for Pizza Hut. So basically, how do we picture this dynamics in the next couple of months and also 2023. Thank you.

For KFC and Pizza Hut, they are very different businesses in a way, right? One is QSR, very clear QSR. And the other one has a very big portion in dine-in and casual dine-in, which is very, very unique. So they will be different. and we talked quite a lot about the KFC already, so I'm going to focus on Pizza Hut in response to your question, Lillian. Pizza Hut, we started to turn around back to 2017, and our focus has been drive the traffic first and then drive the sales. Once we get the sales under control, we move on to make it more profitable. Sales first, profit later. I presume you guys all still remember. After we get the product under control, then we work on the store expansion and resiliency. So for this year, 2022, let's not forget Pizza Hut opened a lot of stores this year. This is the record opening store year for Pizza Hut. Over 300 stores. That's a Well, at least we are very happy about it, so I hope the shareholders are happy about it, too. So what it makes for Pizza Hut is open most stores by increasing their scale. But one very important topic for Pizza Hut going forward is the resiliency. And I think, as I mentioned earlier in the last question from Anne, right now, KFC's resilience is slightly better than Pizza Hut. And therefore, our focus on things that are going forward is small stores and better resiliency.

How to do better resiliency?

The satellite store. Other than all the operational improvement will continue, the satellite store. The satellite store is fabulous. I mean, right now, between the satellite store and the other smaller stores, we have about 20% of the portfolio, about 600 stores. in this category, satellite stores and 60 stores. These are very low investment stores, but with very good sales productivity. And the payback is two years for the satellite store. For total new store for Pizza Hut, the payback is three years. Two years payback. Well, after 30 some years of Pizza Hut business, this is the best payback store model for Pizza Hut. So you can imagine we are going to open more of these. When we open more of the satellite store, the smaller store, you can also imagine the delivery business will also benefit as well. So I think, I hope that you can see our focus for the business is very clear. We know what we are doing and we do it in our own pace. It's like running a marathon. At the beginning, it takes some time, but once we are at a certain speed, we'll run at a certain speed because we can. Thank you.

Thank you, Joey.

Thank you. Your next question comes from Ling Si Jie from CICC. Please go ahead.

Thank you, Joey and Andy, and congrats for another resilient culture. So I have one question which is more about the whole picture. So regarding the recovery of China's consumption, we find that the recent recovery, even after the Chinese New Year, of the shopping mall traffic and restaurant sales is really good in some cities, like maybe Chengdu, Chongqing, Changsha, but not sure if it's a common situation nationwide. So since we have extensive layout in most regions and most city tiers, What is our opinion? May wonder will there remain difference for recovery among regions and city-tales in the future?

Thank you. Thank you. As I mentioned earlier, you know, the Chinese new recovery is encouraging. The momentum is good. And we also saw good recovery across the region, and in particular in some Tier 2 cities like, you know, Chengdu or Xi'an or Changsha, because PISA has a tourist destination for domestic traveling. So they benefit from the CNY. And then our lower tier cities also benefit because people have not been able to go home for three years. So we are happy to see that, but our caution is on post-Chinese New Year trading because while all these happy improvements are happening, we are also cautious that the valuable money, the cost of spending is also happening. while we are happy to see the traffic coming back, we still focus a lot on value promotion to get our customers through the door. Going forward, our focus right now is to look at the post-Chinese media trading because particularly when they are concerned about economy and macro situation, the customer spending post fake holiday might be cautious. And that's not only specific to Chinese. I spent 10 years in UK and I think that consumer behavior is consistent across all countries or everywhere. It's just natural human behavior. So therefore, we have that cautious, optimistic preparation towards the January and February trading, you know, as a holistic trading period itself, just January. Thank you, Sujie.

Yeah, Sujie. And I just want to add a little bit to Zoe's comment. I think in general, we are very encouraged, obviously, by, you know, the new quick policy and also the Chinese New Year trading period. And so we are optimistic for the year. I think things are looking brighter. But I think what we're trying to say is that we do not take sales or growth for granted. We believe that, you know, like the field that's going to be uncertainty and change ahead, and we're going to work hard to drive that sales growth, and then, you know, be disciplined about our store expansion. And so, as the old saying would say, you know, we plan for the best and prepare for the worst. And so, that's the happy, you know, last couple years strategy, and we'll continue that. So, quite positive scenario. Thank you, Sujit.

Thank you, Joey and Andy.

Thank you. Your next question comes from Ethan Wang from CLFA. Please go ahead.

Thank you. Good morning, Joey and Andy. My question is on the supply chain, which is very important to our business, both during COVID and post-COVID, but largely ignored by the market sometimes. So we noticed that we have made a very strong commitment, reduce the carbon footprint on scope three that may apply to our supply chain as well. So just wondering, does that mean we may make some changes in regard to our supply chain choice or we may make some investment to our supply chain partners to achieve our goal and how that's going to affect our business going forward? Thank you.

Hi, Ethan. Thank you for your questions. In terms of supply chain, I think obviously it's going to be a very important competitive advantage for us. And it's very important for our long-term sustainable growth. And so for supply chain, in the next couple of years, we'll continue our, as we mentioned in the previous investor day, we'll step up investment in supply chain and our infrastructure. Obviously, we'll be expanding our footprint in terms of our store, our supply chain centers, and then also including automation, but also investment to reduce carbon footprint, as you mentioned. Now, obviously, it's very important for us to work with our supplier base, our supplier to work to that goal. I think, you know, if you look at, you know, the climate change initiative, it's still relatively new. We're learning it. We have, you know, plans for it, and we have, you know, submitted, you know, the science-based targeting initiative, you know, for our plan. We have committed to, you know, achieving net zero emissions by, you know, And so that's a commitment that not only requires us internally to make investment and improve our operations, but also work very closely with our supplier. And then in the future, we will also work very closely with our consumer, too, to make a sustainable environment to require everyone's involvement. So it's not that we would necessarily change, but we will work together and obviously study and encourage our supplier base to also work towards that goal with us as well. And so that's how generally we think about our supply chain initiative versus the ESG initiative, especially climate change.

I have two points to add, Ethan. One is when we talk about investment in supply chain responding to ESG, some people naturally think that, oh, that means margin impact. That means additional investment. I have to emphasize that in Young China's philosophy, that means that the investment must have desired payback. It does not mean that we just, you know, justify the additional investment because it's the right thing to do. It has to be the right thing to do now and in the future. It has to be sustainable for the business as well. So one example is we invest in little measurement meters in the store to measure the usage of energy. Well, the original, this little equipment is very expensive. It does not justify our payback. Because our overall payback, think about our store economics, two years, three years. Well, we have to work towards that direction. So what did our team do? We worked with the suppliers of that store little cute equipment, get rid of the bells and whistles. So it's very affordable, and we install them in our stores, and the savings is enough to justify the investment. So the payback is still protected. So that's one discipline. And we also share whatever we learn with our suppliers to help them. So that's point one. Point two is supply chain. I'm personally very excited about this area and my team is very, very passionate about it too because there are some really fun and exciting innovations happening in the last few years here. And I can share one with you. During the Shanghai lockdown, during the Shanghai lockdown, we have one warehouse. Well, we have 33 logistics centers to supply the chicken to different province. We have one warehouse to supply the package. the paper box, the bed, etc. for our stores. But that warehouse, what happened was in Shanghai. And Shanghai was completely locked down. That is a serious business, right? How can we keep our store open without the packaging paper, the wrapping paper? Well, our team, which is a brilliant team, when When we are faced with such challenge, we came up with even more brilliant solution. That's when we start to build a logistics site in the most nearby port within a week, and we start to ship these packaging materials through sea freight. One direction went to the north to Tianjin, and then fish bill from Tianjin to cover the entire northern part of China. went down to Guangzhou, it covered the southern part of China. Well, what happened to the middle part of China then? Well, that's railway. The railway can stop everywhere without the problem of lockdown. So some part of these packaging materials get on the train and went to Chengdu and Wuhan, everywhere, and we are okay. So now you can imagine In the past, when we open a logistics center, we look at the trucks. Now we look at the trucks, the rail, and the sea freight, everything. I love it. I think that's the way that we shall do our business in the past few years and going forward. It's fun. Thank you.

Great. Very useful.

Thank you. Your next question comes from Rep Tzu from CNBI. Please go ahead.

hi hello can you hear me yes hi hello Joey and Andy thank you so much for the details sharing and resiliency last year so the question I would like to ask is about your new store target and I'm just wondering if you guys think your new target is a bit too conservative because obviously You guys have done really well last year on opening more than 1,100 stores last year with COVID. And without COVID, do you think the numbers could be a bit more higher this year? And also, it seems your CapEx spend last year is much lower than your previous expectations. And perhaps the per store CapEx is much lower now. And also, the level of rent, it's still lower than the pre-COVID level. And why should we take more advantage of that? And also, do you mind breaking down the number of store openings for the smaller brands like LaFassa and Taco Bell as well? Thank you.

Hi, Rob. Thank you for your questions about our new store opening target. So I just want to echo a little bit about our previous comment, which is for last year, we opened more than 1,800 stores. The more than 1,100 stores is the net new store that was increased. As Joey mentioned, obviously, we're very disciplined, and our new store performance is very good. So we have been opening new stores quite aggressively even during the pandemic period. We also aggressively optimized and improved our portfolio of brands and also our store network. And so that's why you see the number is 1,100 plus for last year. Now this year, as I have mentioned before, obviously the target that we set up is 1,100 1,300 new stores this year. But I always emphasize that. For our company, the quality of growth is more important than the quantity of growth. So we generally do not give a quantitative dictate or number to our staff and say, hey, this year you're going to open X thousands of stores. That's not the way we do it. We do it in a very disciplined way. What we look at is what's reasonable range of store, but ultimately how many stores will be open is really dependent on the market conditions, the unit economics. And I mentioned when the store economics, they perform really well, the market is booming, be sure our market manager, they will be promoting store opening and they will propose more stores for opening. the unit economics good most all would be approved and so there will be accelerations automatically that view is our process but our process is not based on you know a person's or a particular point of view it's really based on a consistent discipline approach that reflects both the market conditions and also the unit economics so we're pretty confident that you know if things are doing really really well I'm sure like we we're We're confident that our stock manager will make the right decision and we'll see very healthy, very strong robot stock network expansion. As we mentioned before, this year our focus is on driving sales growth. This is really important because sales, not only in terms of top line, but also in terms of margins. The biggest driver for margins is really sales. And then we talk about other cost factors. So these will be our focus. And we're confident that, you know, if you look at the number for the last few years, I think we have, you know, outperformed the overall market in terms of, you know, the restaurant industry. And we're confident that, you know, we will be able to, you know, to do it in the long haul.

Brad, I have one point to add. Analytically, or from an analyst's point of view, the the cappers, the rent, the sales, all these are important factors to open stores. But operationally, what is not mentioned enough, the most important factor actually is how many good store managers do we have. And good store managers take some time to train, two to three years. And for us, we don't apologize for that focus because even in our culture, we emphasize on our GM number one. Our store managers are the most important people in our organization. So in order to ensure quality of growth, as Andy mentioned, we need to have all these things under control, the campus, the rent, the operations, the stuff. But the most important job of me and my management team is we make sure we have good store managers to run the store. Thank you.

And rather quickly, right now, in terms of by brand, I think, obviously, KFC remains the largest brand for store opening, and you've seen Pizza Hut have accelerated store opening, as Julie mentioned, record number in probably recent years, within a number of years, even before the pandemic. And then we are continuing to see very robust expansion for Lavasa. So Lavasa now is more than 85 store already. It's been growing very rapidly. And you think about it, compared to last year, it's multiple store increase. And then Taco Bell also has increased the store network expression. In terms of the China exclusive business, we work very closely with our franchisee. We would like to see the net the network included in U-23 for the Chinese business, which includes both leadership and module.

Thank you. Thank you.

Thank you. There are no further questions at this time. I'll now hand back to Ms. Shen for closing remarks.

Thanks, Sari. Thank you all for joining the call today. We look forward to speaking with you on the next earnings call. If you have further questions, please reach out through contact information on earnings release and on our website. Have a great day. Thank you. Thank you everyone. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you. you Thank you. you Thank you. Thank you. Thank you. music music Thank you for standing by, and welcome to the Yum! China Fourth Quarter and Fiscal Year 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 Ms. Michelle Shen, IR Director. Please go ahead.

Thank you, Sari. Hello, everyone. Thank you for joining Young China's fourth quarter 2022 earnings conference call. On today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yang. Before we get started, I'd like to remind you that our earnings call and investor materials 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 a cautionary statement in our earnings release and risk factors included in our findings with SDC. 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 talk about our journey in the past three years and discuss fourth quarter performance. Andy will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find the webcast of this call in the PowerPoint presentation, which contains operational and financial highlights on our website. Finally, we plan to host our 2023 Investor Day in Shanghai through September. We look forward to sharing more details about this event with you in due course. Now I would like to turn the call over to Ms. Joey Watt, CEO of Young China.

Thank you, Michelle. I want to wish everyone joining us today a happy and healthy Chinese New Year. Before looking at the fourth quarter and full year, I would like to reflect upon our journey these past three years with COVID, some of our key learnings and how we have grown. First, I'm incredibly grateful to the entire Young China team for their agility creativity and tenacity during this difficult time. Together, we became a more resilient, nimble business, better positioned for long-term growth. During the past three years, we quickly pivoted when dying traffic came after pressure. Delivery doubled from just 20% sales mix in 2019 to 39% in 2022. Our hybrid delivery model and dedicated riders enable us to capture the increase in demand. Combined with takeaway, off-premise sales reached almost two-thirds in the fourth quarter of 2022. Digital ordering also rocketed from 55% of sales in 2019 to now 89%. That's over $20 billion in digital sales in three years. We maintained our rapid growth. Our store portfolio expanded by nearly 40%, a total of 3,800 net new stores. KFC and Pizza Hut stores maintained a healthy payback of two to three years, respectively. Profitability of new stores also improved. Strong new store performance was driven by our flexible store models. We optimized store size and secured more favorable lease terms. For new stores opened in 2022, more than half were in smaller formats. Such flexibility allowed us to continue to increase density in higher tier cities which is particularly useful and helpful for delivery, and capture white space in lower tier cities. We enhance the coverage and agility of our world-class supply chain to support business growth. We expand from 29 to 33 logistics centers for better self-sufficiency in each province. During extended lockdowns, we add rail and sea freight to move our inventory, apart from our traditional trucks. Our store inventory visibility system allows real-time self-forecasting and smart inventory replenishment. These capabilities help mitigate severe disruption, even during lockdowns, and minimize wastage. also supports product innovation by securing supply at scale. Apart from our classic offerings, we launched over 500 new or upgraded menu items last year, from regional offers to national launches. We invest in digital and automation to improve operating transparency and efficiency. For example, we are rolling out Smart Order System at KFC. The AI-powered system more accurately predicts demand and recommends food preparation plans to minimize stock-out and wait stage, and also reduce waiting time for customers. It also enhances customer experience by reducing wait time and providing real-time order updates. And recently, we added robotic servers at OneServe of our Pizza Hut restaurants, ,, freeing up crews to serve customers. We remained profitable each and every quarter since the beginning of pandemic in 2020. By refacing cost structures and implementing austerity measures, we cushioned shocks created by the volatile market situation. In the past three years, we were able to generate 1.9 billion U.S. dollars in free cash flow and returned over 1 billion U.S. dollars to shareholders. Notably, I'm proud to say we did this while also protecting the jobs of our employees. We have had no staff layoffs since the pandemic began. Looking back over this period, we see opportunities improved our ability to operate in good times and bad times. Looking forward, our anti-fragile operation will enable us to shine and drive long-term growth in China. Now let me provide some highlights for the fourth quarter and full year. 2022 was filled with unprecedented challenges. In just 12 months, we managed sporadic COVID outbreaks, entire city lockdowns, nationwide infections, and the sudden lifting of COVID-related restrictions. In October and November, COVID infection quickly evolved into major regional outbreaks, leading to tightened COVID-related measures. In December, China entered a new phase of COVID response we faced brand new challenges. With surging infection rates, a significant portion of our employees and riders became infected, resulting in a labor shortage. Thousands of our stores were temporarily closed or only provided limited services. Many residents also opted to stay at home to avoid infection or recover from symptoms. dying traffic fell sharply. During this time, as always, the health and safety of our employees and customers remain our top priority. We move quickly and support our employees with relief medicine and antigen test kits. We mandate daily testing for all crews and riders to minimize infection, and we organize informative health talks and a consultation hotline for our employees. At the same time, we took immediate steps to address the labor shortage. We simplified manuals, shortened operating hours, and optimized labor shifts. We reallocated crew resources among stores, prioritizing stores with stronger demand. And we adjusted delivery operations, encouraged customers to pick up orders and promote packaged food products. I'm thankful for our team's nimble actions and amazing execution. Even in this challenging quarter, we delivered substantial year-over-year restaurant margin expansion despite lower sales. This was achieved by our extensive scenario planning, operational efficiency improvement, cost rebasing initiatives, and temporary relief. We were also able to open a record 538 net new stores in the fourth quarter or 1,159 net new stores in the full year. Let's move on to the brand. By brand, KFC and Pizza Hut continue to introduce delicious food and exciting campaigns to delight our customers. At KFC, meal categories grew with solid momentum. Juicy whole chicken and beef burger doubled in sales in 2022. Combined, they generate around 5% of KFC sales mix in the fourth quarter, nearly equal to our original recipe chicken. We continued to introduce more flavors in these categories, such as the spicy whole chicken, ,, launched during Chinese New Year. Following the success of Pokemon in quarter two, ,, our toys in the fourth quarter also generated huge social buzz. These include fancy chicken ,, and Fluffy Chicken Popcorn . Both were originally designed as pet toys or toys for your cats, but quickly became very popular with all customers and drove traffic. At Pizza Hut, pizza sales grew nicely for the year, reaching almost 40% of sales. We sold over 100 million pizzas in 2022. That's nearly seven pizzas per second. Apart from our signature pan, hand-tossed, and crispy pizzas, we have added stuffed crust pizzas. Customers can choose fillings like double cheese, sausage, and meat floss. These new launches encourage the trade-offs and lift effective prices. We continue to offer stunning value for money. Our signature value campaign At KFC, Crazy Thursday, Feng Kuan Sing Ji Shi, attracts excellent traffic, generating over 50% more sales on Thursdays compared with other weekdays. Sunday, Buy More, Save More, Zhou Lu Feng Kuan Ping, continues to spur weekend sales. Customers love the option to mix and match and the sizable discount. At Pizza Hut, We brought back the wildly popular two pizza for 59 yuan promotion in November. The amazing value drove great traffic and sales uplift. New retail packaged food provided us flexibility during lockdown and when we were short of staff. In 2022, packaged food sales grew 90% and reached nearly 900 million yuan. We continue to broaden our offerings, adding some of the classics such as egg tarts and popcorn chicken, Jin Mi Hua. Now, moving on to our emerging brands, we have solid management teams and strategies in place. While it would take time to fine-tune and test the business models, we are making solid products. Lavazza continues to execute its four pillar strategy, which includes brand building, menu innovation, digital and delivery, and store development. Throughout the year, we introduce new coffee flavors, such as orange buffalo latte with buffalo milk, ,, we also introduce sweet and savory foods that pair well with coffee, such as ,, which is a fluffy Lava Croissant . Loyalty members more than doubled to 1 million in 2022, contributing to over 40% of sales. We enhanced operational efficiency and optimized new store design, lowering upfront investment. Although COVID disruptions have delayed store openings, Lava has reached 85 stores by the end of Q4. Taco Bell doubled its store count in 2022 to 91 stores. We continue to localize the menu for Chinese customers. For example, a crispy wonton taco, , used duck and a wonton wrapper in place of a tortilla. Why not? We also continue to improve the value proposition customer experience and unit economics. Little Sheep and Huang Jinhua were accurately impacted by COVID due to their dying focus. We used 2022 to refine their business models and strengthen fundamentals from menu, marketing, store models, supply chain, to digital initiatives. Huang Jinhua also continued to generate operating profit. To wrap up, with a new chapter opening in 2023, We are excited to see positive momentum in the Chinese New Year season. We took decisive action to ensure operational efficiency and capture sales. At KFC, we brought back our signature golden bucket, Jin Tong, which is a holiday favorite. At Pizza Hut, we introduced a holiday-themed pizza with Wagyu beef and seafood. It's called Xian Tiao Tiang He Niu Pizza. which is inspired by a popular game, is gratifying to see how our delicious food play an important part in our customers' celebration during the holiday. Yet COVID remains a reality and many challenges still lay ahead, including cautious consumer spending post-holiday. While we anticipate the road to recovery will be gradual and uneven, I'm optimistic that brighter days are ahead. We will continue to execute our proven RGM strategy, which stands for resiliency, growth, and strategic mode, to capture the growth opportunities and deliver shareholder value. With that, I will turn the call over to Andy. Andy?

Thank you, Joey. And belated Happy Chinese New Year to everyone. Let me share with you our fourth quarter performance. As Joey mentioned, we faced an extremely fluid and challenging fourth quarter as there were substantial changes in COVID conditions and related policies. In late November, due to rising infections and strict COVID-related health measures, the number of stores that were either temporarily closed or offered only takeaway and delivery services reached a peak of over 4,300 stores. In December, we faced a different situation when most of the COVID measures were lifted. Due to labor shortage, we had to temporarily close or provide limited services at over 1,300 stores on average. In such a volatile environment, we took quick actions to capture off-premise demand. Furthermore, we controlled costs, limited wastage, and enhanced productivity despite lower sales. Our team did a wonderful job improving restaurant margins by almost three percentage points despite very difficult circumstances. Let us now go through the financials. Unless looked at otherwise, all percentage changes are before the effects of foreign exchange. Foreign exchange had a negative impact of approximately 11% in the quarter. Fourth quarter total revenue declined 9% year-over-year in reported currency to $2.1 billion. In constant currency, total revenues grew 2%. The contribution of new units and the consolidation of Hangzhou KFC were partially offset by same-store sales decline and temporary store closure. System sales and same-store sales both declined 4% year-over-year. By brand, KFC same-store sales were 97% of the prior year's level, with same-store traffic at 84%. Ticket average grew 16% due to the rise in delivery mix, which has a higher ticket average than dine-in. Pizza Hut's same-store sales were 92% of prior year level. Same-store traffic was at 98%. Ticket average was at 95%, driven by lower ticket average of delivery orders and smaller party size due to the pandemic. Restaurant margin was 10.4%, 290 basis points higher than the prior year. The yearly increase was mainly driven by labor productivity, operational efficiency, and temporary relief. These were partially offset by their sales leverage and impact, which includes temporary store closures, as well as high rider costs due to high delivery volume. We also faced inflationary headwinds in commodity and labor costs. Our team worked hard to protect margins during the fourth quarter, which is seasonally slow in terms of sales and profits. Let me go through the key items and highlight the action we took. Cost of sales was 31.9%, 60 basis points lower than prior year. We kept commodity inflation relatively modest by statistically locking in prices and innovating the manual. We also carefully planned promotional activities and reduced wastage. Cost of labor was 28.8%, 90 basis points higher than prior year. This was mainly due to increased wider costs from high delivery sales mix, low single-digit wage inflation, and sales leveraging. This was partially offset by better labor productivity and temporary relief of $14 million. Occupancy and order was 28.9%, 220 basis points lower than prior year, despite sales deleveraging. This was mainly due to lower rental expense and other cost-saving initiatives. Rental expense as a percentage of sales benefited from rental relief of $12 million, store portfolio optimization, and more favorable lease terms. G&A expenses increased 2% year-over-year, mainly due to increased compensation and benefit expenses, as well as the consolidation of Punggyeo KFC. The increase was partially offset by a cause control initiative. Operating profit was $41 million, compared to $633 million in the year period. In the fourth quarter of 2021, we recorded a non-cash gain of $618 million from the reimbursement of our Chris V. Health equity interest in Hangzhou KFC. Excluding the reimbursement gain, adjusted operating profit increased 189% year-over-year from $16 million to $14 million. The net contributions from Hangzhou KFC's consolidation was 12% of operating profits in the quarter. It included the last quarter of amortization of intangible assets acquired, which was roughly $15 million. Effective tax rate was 29.9%, 480 basis points higher than prior year due to lower pre-tax income and the Hangzhou KFC consolidation. Prior to consolidation, The equity income from JVs was not subject to tax, resulting in a lower tax rate. Net income was $53 million. Adjusted net income was $52 million. Excluding the $4 million mark-to-market net gain on our equity investment in Lei Tuan in the quarter and the $9 million net loss in the prior year period, adjusted net income grew 154%. Due to diluted EPS and adjusted EPS worth $0.13, the market-to-market gain in May 2021 increased diluted EPS by $0.01. In December, we acquired an additional 20% stake in Suzhou KFC JV for approximately $115 million. This increased our total ownership in the JV from 72% to 92%. For the fall year 2022, we generated free cash flow of $734 million. We returned roughly $668 million to shareholders in cash dividends and share repurchases. Cash and short-term investment was $3.2 billion, down from $4 billion in the third quarter. The reduction in cash and short-term investment was mainly due to the reclassification of around $600 million from short-term investment to long-term time deposit. We invested in long-term bank deposit to benefit from better interest rates. Let's now turn to our outlook for 2023. In January, most of the temporary closed-door assumed normal services. Our things-for-sales from the comparable Chinese New Year holiday season were up mid-single-digit year-over-year, but remained devolved to the same level. Things ourselves benefited from pent-up demand as the relaxation of COVID policy coincided with the Chinese New Year holiday. However, the real test will be the sales trajectory after the holiday, as we face more cautious consumer spending and macroeconomic uncertainty. Looking ahead, we are encouraged by the new COVID policy. The future indeed looks bright. But we must keep a level head and recognize that uncertainties and challenges still lie ahead. Other countries have shown that further outbreaks and the emergence of new COVID variants are real possibility after COVID restrictions are lifted. We also face macroeconomic headwinds. such as elevated commodity and wage inflation, as well as softening global economic conditions. These factors may impact our operations and consumer spending in China. Now, at the risk of sounding like a broken record, we continue to expect recovery to take time and be nonlinear and uneven. For 2023, our top priority is to drive sales. At the same time, we will remain agile, One of the lessons we learned in the recent years is the importance of planning and preparing for a wide range of scenarios, both to capitalize on growth opportunities and to mitigate risk when needed. On store development, we are targeting to open 1,100 to 1,300 new stores. We expect capital expenditure of $700 to $900 million to support organic growth, remodeling, digital, supply chain, and other infrastructure development. As always, the quality of growth is what matters to us the most, not just the quantity. So we will continue our systematic and disciplined approach to investment and growth. Finally, we remain committed to returning capital to shareholders. The Board has approved to raise the cash dividend from 12 cents per share to 13 cents per share. This is supported by our healthy balance sheets and strong cash flow. With that, I will pass you back to Michelle to start the Q&A. Michelle.

Thanks, 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. Sorry, please start the Q&A.

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 are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Brian Bittner from Oppenheimer and Company. Please go ahead.

Thank you. Good morning to you. My question is on the new stores that you've built since COVID began. You've built a significant amount of new stores over the last three years, over 3,700 of these new stores. And I know the payback on these stores are still very strong. despite operating in the pandemic, which is incredibly impressive. But Andy, can you talk about where the sales productivity and the margins on this class of stores that have been built since COVID, where it currently stands relative to the rest of the asset base so we can kind of understand how to think about the model moving forward?

Thank you, Brian. If we look at our store opening for the past three years, as Julie has mentioned, we have been opening almost increased our store count by almost 40%. But now, I think if you look at the new store performance, the payback period were very consistent, very good. For KFC, it's about two years, and for Pizza Hut, it's about two to three years. Can people have this, you know, the reason why it's two to three years? Because if you look at the satellite soil model, which is the new model that we have, the performance is on par with KFC, which is about two years. And then, you know, obviously there's more standard models. The period is a little bit longer. And if you look at overall for this year and last year, you know, the new soil that we opened, you know, their unit economics continue to perform very well. If you look at, you know, the soil that are Open recently, you know, they're the break even, you know, most of them are break evens within, you know, three months of time, even with this very challenging environment. So if you look at our new store portfolio, the difference with the existing store is that over the past couple years, we did, you know, increase penetration in low TACs, where it's a white space. And then we also increased density in the urban area, especially with smaller model, satellite phone model or KFC smaller model, really to cater to consumers' demands for convenience and delivery and takeaway services. The new stores generally are smaller, so their throughput, the sales throughput are generally less than their existing portfolio, roughly about two-thirds of the sales compared to the portfolio average. Now, the probability of those new stores are better. As we mentioned, we have lower, you know, the up in investments for, you know, for the small store. If you look at the software, we probably spend about $2.5 million, you know, for new store opening. And then, you know, now, you know, like we are spending on average about $2 million on these. And then, you know, for the small model, it's close to $1.5 million. And so, and then also we have obviously improved the efficiencies throughout this pandemic. As you look at the restaurant margin, for example, last year, in 2022, despite, you know, the fair amount of environment throughout the year and sales leveraging, we managed to improve, you know, restaurant margins, especially at KFC. So I think, you know, we're pretty confident that, you know, we have the right, you know, format and and resources to both our SOAR network at a healthy pace and also, you know, maintain a very, you know, robust payback for our new investment.

Brian, I would just like to add some color to your question. The theme here of the aggressive new SOAR opening is resiliency because while we emphasize how many stores we have opened in the last three years, 3,700 net new stores, but actually 4,800 growth stores. At the same time, what we did not talk about, but also important, is how many stores we have retired. So when we open the more productive new store, we at the same time retire the less productive assets. And thus, the quality of our assets for Yang China has improved in the last three years. So just have a bit of highlight here. For the new store we open right now, we are talking about 90% of the new store have flexible rent, which make us more resilient. And we talk about lower cap. Even more, if you think about our cap, roughly 40-60. 40% is equipment, which we can move around. 60% is some costs. So the reduction of the cap is even more than just the total reduction of the cap and the size is smaller. So the productivity of the new store is better, actually. And the location of the stores matter, too, because they're both in higher tier cities and lower tier cities. It's about 40-60 spread, too. So for lower tier cities, 60% new stores are there, and they're very, very effective in entering new cities. For KFC 2022, we actually entered 200 new cities, and these are white space, and you can imagine these are pretty good markets to go. For higher tier cities, our focus is on filling the gap or the distance between the stores to increase the density of our store in high-tier city, which is incredibly important if you think about our focus on our delivery business. So I hope that gives you some flavor about the new stores in terms of the quality and in terms of the resiliency for the business. Thank you, Brian.

It does. Thank you so much.

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

Thank you, Joey and Andy, and happy Chinese New Year. So before I read my question, I'd like to highlight three things, if I may. First, out of the 12 quarters during the pandemic period, for five quarters, we actually reported restaurant margins better than the pre-pandemic level. And despite the fact that For the four quarters, we had same-store sales, like mid to high single-digit same-store sales decline versus 2019, whereas for Q3 last year, we actually saw more than 10% same-store sales decline over the same period in 2019. Apart from the one-time cost relief, we have significantly rebased our cost structure and innovated the store formats, as Joey and Andy just elaborated on. And meanwhile, we also consolidate Hangzhou and Suzhou KFC in the past three years. Supposedly, this portion of business carries higher margins than the group average. So I think the market in general would expect pretty meaningful margin recovery or expansion going forward once sales start to recover. And for point number two, I also noticed that our priority this year is to drive sales. But meanwhile, the market generally believes that the company is very good at balancing top line and margins. And point number three, just now we also highlight that we will be planning for multiple scenarios in a very fluid situation. So after highlighting all these three points, now let's come to my question. Sorry, it's a bit long. So I understand the situation is very fluid, but let's assume that for 2023, our macro environment is kind of okay so that the momentum could be similar to that of second half of 2020 and first half of 2021. So that we might see some pretty okay same losses recovery, but may not be fully back to the 2019 level. And under that scenario, is it fair to say that we can actually bring our restaurant margin to a level largely similar to 2019 or even a bit higher than that. So that's my question. Thank you.

Awesome. Thank you for the summary and also the question about what's your market potential. You know, as we have always said, you know, like, you know, when there's a decline, generally that will put pressure on you know, restaurant margins, overall margins, but you know, when there is recovery, you know, on sales, we also expect some optional leverage to now, obviously, as you mentioned, we are quite, you know, encouraged by, you know, the relaxation of the COVID policy, I think, which will give us a little bit more certainty, a little bit more certainty about, you know, the business environment and store operations. And then also, you know, the Chinese New Year trading period. So in general, I think, you know, we are cautiously optimistic. The reason we mentioned a couple, you know, in terms of, you know, the market conditions and also, you know, the COVID field being, you know, a reality is really, you know, the reality is that we need to keep a level head. I think, you know, if you look at the operational improvement, labor portfolio improvement, and then some of those margins improvement, as we mentioned before, we expect most of them or some of them would continue. As we have mentioned, we did a lot of work to rebase our cost structure over the past few years. And so if you think about some of our labor structure, our restaurant management versus crew, part-time versus all that, And then also, you know, if you think about, you know, as you mentioned, you know, the rental expenses where we also got some favorable lease term, et cetera, I think those will carry forward. Now, obviously, you know, over the past couple of years because of COVID situation and the fourth quarter this year too, right? So in the fourth quarter alone, we received about $26 million of rental leave and other type of lease. And then for a full year, we received about $86 million in total. So those are likely to go away, as you mentioned, if things become more normalized. And so that would also have an impact. The other one is that we're looking in the commodity prices and labor inflation. I think, obviously, for the past year, because of the COVID and also the overall economic conditions, that have been largely modern in China in 2022. cost of sales, commodity price inflation was about low single digit and same for labor cost inflation. Now, we see, if you look at the commodity prices, for example, for chicken prices, they have been rising since the second half last year. And so we do expect probably low single digit commodity price inflation next year, at least in the first half this year, in 2023. And then we also expect, you know, cost of labor inflation to return to more normal pace. As we mentioned, low single digit is not, you know, the normal. Mid to high single digit is the norm. So we expect that to gradually return to more normal pace of inflation and repressure there. So that's how we generally look at, you know, the sort of like the margins and the cost environment as we, you know, move into 2023. And thank you.

Let me add some color here. The way that the management thinks about all these core causes and margins is as follows. If you look at our number historically, cost of sales and cost of labor, going forward, even in 2023, I think, for your modeling purpose, we can expect cost of sales or cost of labor. Our management team will try to keep it relatively stable if we could because we have to manage inflation for cost of sales. But at the same time, it won't be too low either. For 2022, it's about 38%. If you go all the way back to 2016, when we start to get listed is also about 29%, 30%. But the big delta is actually PISA at that time. Right now, PISA is on 31.5%. At that time, PISA was only 26%. And that was a problem because when the cost of sales is too low, it means the value for money is not good enough for customers, and that's very dangerous. So our goal is to keep it relatively stable. Cost of labor, You know, the fact is it just keeps increasing, and our job is to manage it at reasonable level. But we have to pay our staff at competitive price, competitive wages. Otherwise, we won't get good stuff. The area that over the years we, which we have improved quite a bit, I would say, is occupancy and other operating expenses such as rent, semi, A&P depreciation, amortization, et cetera, et cetera. So 2022 is 28.6% and 2016 is 34.2%, a massive 5.6% delta. Now that shows management team's consistency and focus on reducing the rent, which is always the right thing to do, I would like to believe. and also depreciation, which is from reduced capital. So that has been our focus. But when we, you know, and that's true for both KCMPs, by the way, and 5% to 6% improvement for both brands over these many years. However, one thing I would like to emphasize again and again, when we save all this money, we don't just, you know, that is so through to the margin, we always, always, always pass on some savings back to the customer. That's the way that we build long-term business. So I hope that helps you to think about management focus for the margin and various key core items.

Thank you. Thank you. That's very helpful. By the way, your Bung Bung Chi toy is really cute. And also, I'm very amazed by the newly launched type of product. So I'm looking forward to have a try.

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

Good morning, Julie and Andy. Happy New Year. I have a long-term question. We highly appreciate the great rundown of Julie's opening remarks, showing us the journey of the past three years, helping you build your identity and also keep the goals in the long-term target. Some of the questions. In the past three years, your identity is very visible, which will protect your margin while you capture the digital and delivery. But when China reopens, the market will be more dynamic. I just want to get a sense that whether Jio and team will be more offensive or a little bit aggressive than before in terms of demand activation, because you're always going to stay ahead of competition. You stay ahead of competition to reserve your cost and protect margin during a bad time, or you'll be a little bit more offensive in market share gain looking forward upon China reopening. Thank you.

Thank you, Xiaobo. I think I would like to address the narrative that whether in the past three years, whether we have been offensive or defensive. I think we have been very aggressive in the last three years. If you consider what we just talked about earlier with Brian's question, we have expanded food trade by as much as 40% within three years. So our view is that we shall take advantage of the crisis and adversity, and I think we did. So, you know, we, when we look forward from 2023 and beyond, I think we'll continue our pace, which have been rather aggressive, I would say, But the focus and priority is to drive sales, focus on delicious food, new product, value, exciting campaign, while at the same time continue our disciplined approach to capture more growth. If you think about the last few years, our biggest constraint actually was on the sell side due to disruptions of the pandemic. So going forward, we will focus even more on driving sales and then continue the disciplining approach, which includes accelerating store growth. Andy talked about targeting 1,100 to 1,300 net new stores in 2023. Secondly, optimize the store format because there's still a lot to be done. We have done, I think, a pretty decent job with KC and Pizza Hut, but let's not forget in the last three years the smaller brands actually had more challenging time to test, to try their store format themselves, the different bits and pieces of store models. and we are certainly looking forward to a bit more supportive environment for the smaller brands to grow. And third, to invest to strengthen our strategic mode in terms of surprising digital, et cetera. So I hope that gives you a sense about our focus. Our focus is still on resiliency growth and strategic mode and our anti-fragile operations, which have improved in the past three years, will continue with strong focus on self-sustainability.

Let me add another point, which is when we look at our store network expansions, I think we have been very disciplined all through, since the spin-off, right? And so we're very consistent about that. Within that very consistent approach, very systematic and disciplined approach, it's built in a mechanism to accelerate growth when the unit economics perform well and accelerate when the unit economics is not performing as well. As we mentioned before, if you think about it, when times are better and the soil formats are right and performing really well, the store manager themselves, or the market manager themselves, would propose more store, and then more store would be approved by our model, vice versa. And so this is a classic example if you look at Pizza Hut. Pizza Hut, even before the pandemic, it was a rejuvenation program. And you see there at the store unit economic at that time, new store unit economic at that time was partially constrained, and therefore you see limited net new stock growth for Pizza Hut. And then, you know, with the success of the satellite store model, you see, you know, a pretty significant acceleration for the store development there. And so I think, you know, our model and our approach is, while it's disciplined and systematic, it also reflects very much, you know, the current economic conditions and our unit economics, which will accelerate and decelerate according to the stock performance.

Thank you, Shabab. Great, thanks. Looking forward to meeting both of you very soon physically. Thank you. Absolutely. Thank you.

Thank you. Your next question comes from Michelle Chang from Goldman Sachs. Please go ahead.

Hi, Joy, Andy. Thanks for taking my question. So my question is about the promotion activities and the competition landscape. We know in the past few years, the smaller players have been squeezed out significantly, and this actually benefit our business. So going forward in the new, like, reopening world, how should we think about the competitive landscape changes? And also, on the other side, we know the consumption part has been pretty challenging. these days. So what is your strategies to drive traffic back leveraging those promotion activities? Thank you.

Hi, Michelle. For the competitive landscape, I'm happy to report that I think we have been doing quite all right. I mean, from 2019 to 2022, the overall market in our business has dropped by mixed single digits. But Young China, ourselves, we hold up there. So that means our market share has increased a little bit. So I think we have done something right. Going forward, regarding your question of promotion and sales momentum, We always look at the promotion, product, operation, all in a holistic view. How to drive sales? Well, the focus of driving sales, we always prioritize traffic and then take an average. And we want kind of both. So how to get both? We have the a series of initiatives that form the promotion and sales strategy. We always have fantastic product because it's really not very healthy just to only focus on promotion without amazing product. So product comes first. Therefore, even during the three years pandemic, every year we are still able to launch about 500 new products. with or without the help of traditional marketing because we have now over 430 million members. We can always market the new product to our members. And then with the new product, we have really effective promotions. And that's now becoming more effective over time because we have less promotion campaigns, but more effective promotion campaigns. For example, as I mentioned earlier in the first part of the call, Crazy Thursday, amazing. But it took four years to make, to produce or to come to amazing Crazy Thursday promotion. And that worked really well for one day. But you know, for weekends, our business has been quite challenging because we do social activities in the last three years. So for 2022, we pushed buy more, save more for KFC. And then for Pizza Hut, that is like the value promotion for the two pizzas for 59. So fewer, but more effective promotion. That drives sales, but that also protects the margin for our shareholders. Now, you'll think about, you probably have the hidden question here about price increase. It is also, within our plan, but we do it hopefully in a clever way. We expand the range of price. We have lower entry price point products, and we also have some very high-end products to please the customer who will want to treat themselves. Our favorite example is the Wagyu Beef Burger for KFC, which is always a very interesting idea. for traditional KFC lovers. So with the combination of multiple initiatives, we hopefully can both drive traffic, maintain the margin, and also preview the sales for our shareholders. Thank you.

Yeah, thank you, Joanne. Thank you for the comment on the pricing.

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

Thank you. Hi, Joey. Hi, Andy. A couple of questions here. First, regarding the company's disclosure that 5% mid-single-digit same-sale sales growth during Chinese New Year, would you share with us more or less similar for both KFC and piece ahead and how does it differ in terms of the pace of recovery, what we should be expecting? And then also, if we take a look at both brands, we have an increase of the delivery business versus year 2019. So how would it change when we have the reopening? Will we see more stabilization on this part? Yeah, thank you.

Hi, Anne. For the Chinese New Year, same sort of sales, the mixed single-digit number. KFC did better, slightly better than Pizza Hut because of the transportation help stores perform very well. As we mentioned in the earnings release this morning, it's even better than the government statistics, so that helps a lot. And in terms of the regional difference, and all regions perform quite well across all regions, and lower tier cities perform better, actually. But the but I have to mention is we need to be prudent to look at the number because this year, Chinese New Year is very early. So the comparison is rather difficult. we shall look at the Chinese New Year number including January and February. So that picture will be more complete. And in terms of delivery business, the increase is It's good. Between 2019 to 2022, it moved from 20% to 40% for Yum! China. However, I would also like to mention that as the management look at this business, we also look at off-premise business as a whole. Because the delivery business is still outperform, still outperform compared to Daim. But the question is, where's the ceiling? I mean, I would just like to highlight the off-premise sales right now for our business is about two-thirds, which I mentioned earlier. And that's incredibly important in our analysis because it's about the resiliency of our business. That is something the management team has worked very hard to achieve. And that's also the reason why we have we have done okay in the last three years. Because when the off-premise business is as high as two-thirds, it helps protect the business. Think about what's our break-even sales. That's how we think about it. What's the break-even sales of our business? Right now, you can work out the number. We only need less than 80% of the ourselves or things ourselves to break even to achieve break even. That means even during the pandemic, when when when a significant portion of our store was shut, we can still achieve break even cells because that cell transfer from dying to to delivery and off premise, even during the lockdown. So that's the way that we look at the business and I hope you guys will also look at the business in this way as well. And that 20% increase therefore from 2019 to 2022 is incredibly important. If I mention one more slight point is if you look at our number during Q4 2022, KFC did better than Pizza Hut. One reason is KFC's off-premise business is much higher than Pizza Hut. So protect the downside much better. Thank you, Anne. Interesting. Thank you.

Thank you. Your next question comes from Lillian Lu from Morgan Stanley. Please go ahead.

Thank you, Joey and Andy, for your explanation of the situation. Just a very quick follow-up question. Because that's exactly what Joey just mentioned, that KFC versus Pizza Hut recovery pace. Given this currency volatile situation, and meanwhile we are seeing an improvement of premise traffic. So like for Jan and Feb, and even for 2023, we're seeing like that fair that we can expect that the KFC's momentum in terms of the pickup trend will be stronger than Pizza Hut. And especially how this delivery portion may be normalized down a bit versus last year. How does that kind of impact our focus for same-style sales growth? So I believe traffic will offset some downward pressure on ticket size for KFC and opposite situation for Pizza Hut. So basically, how do we picture this dynamics in the next couple months and also 2023. Thank you.

For KFC and Pizza Hut, they are very different businesses in a way, right? One is QSR, very clear QSR. And the other one has a very big portion in dine-in and casual dine-in, which is very, very unique. So they will be different. and we talked quite a lot about the KFC already, so I'm going to focus on Pizza Hut in response to your question, Lillian. Pizza Hut, we started to turn around back to 2017, and our focus has been drive the traffic first and then drive the sales. Once we get the sales under control, we move on to make it more profitable. Sales first, profit later. I presume you guys all still remember. After we get the product under control, then we work on the store expansion and resiliency. So for this year, 2022, let's not forget Pizza Hut opened a lot of stores this year. This is the record opening store year for Pizza Hut. Over 300 stores. That's a Well, at least we are very happy about it, so I hope the shareholders are happy about it, too. So what it makes for Pizza Hut is open most stores by increasing their scale. But one very important topic for Pizza Hut going forward is the resiliency. And I think, as I mentioned earlier in the last question from Anne, right now, KFC's resilience is slightly better than Pizza Hut. And therefore, our focus of PISA going forward is more so and better resiliency.

How to do better resiliency?

The satellite store. Other than all the operational improvement will continue, the satellite store. The satellite store is fabulous. I mean, right now, between the satellite store and the other smaller store, we have about 20% of the portfolio, about 600 stores. in this category, satellite stores and 60 stores. These are very low investment stores, but with very good sales productivity. And the payback is two years for the satellite store. For total new stores for Pizza Hut, the payback is three years. Two years payback. Well, after 30-some years of Pizza Hut business, this is the best payback store model for Pizza Hut. So you can imagine we're going to open more of these. When we open more of the satellite stores, smaller stores, you can also imagine the delivery business will also benefit as well. So I think, I hope that you can see our focus for the business is very clear. We know what we are doing and we do it in our own pace. It's like running a marathon. At the beginning, it takes some time, but once we are at a certain speed, we'll run at a certain speed because we can. Thank you.

Thank you, Joey.

Thank you. Your next question comes from Ling Si Jie from CICC. Please go ahead.

Thank you, Joey and Andy, and congrats for another resilient culture. So I have one question which is more about the whole picture. So regarding the recovery of China's consumption, we find that the recent recovery, even after the Chinese New Year, of the shopping mall traffic and restaurant sales is really good in some cities, like maybe Chengdu, Chongqing, Changsha, but not sure if it's a common situation nationwide. So since we have extensive layout in most regions and most city tiers, What is our opinion? May wonder will there remain difference for recovery among regions and city-tales in the future?

Thank you. Thank you. As I mentioned earlier, you know, the Chinese new recovery is encouraging. The momentum is good. And we also saw good recovery across the region, and in particular in some Tier 2 cities like, you know, Chengdu or Xi'an or Changsha, because PISA has a tourist destination for domestic travelers, so they benefit from the CNY. And then our low-tier cities also benefit because people have not been able to go home for three years. So we are happy to see that. But our caution is on post-Chinese New Year trading because while all these happy improvements are happening, we are also cautious that the value for money, the cost of spending is also happening. While we are happy to see the traffic coming back, we still focus a lot on value promotion to get our customers through the door. Going forward, our focus right now is to look at the post-Chinese New Year trading because particularly when they are concerned about economy and macro situation, the customer spending post big holiday might be cautious. And that's not only specific to Chinese. I spent 10 years in UK and I think that consumer behavior is consistent across all countries or everywhere. It's just natural human behavior. So therefore, we have that cautious, optimistic preparation towards the January and February trading, you know, as a holistic trading period itself, just January. Thank you, Sujie.

Yeah, Sujie. And I just want to add a little bit to Zhouyi's comment. I think in general, we are very encouraged, obviously, by, you know, the New Court policy and also the Chinese New Year trading period. And so we are optimistic for the year. I think things are looking brighter. But I think what we're trying to say is that we do not pick cells or grow for granted. We believe that, you know, like the field that's going to be uncertainty and charge ahead, and we're going to work hard to drive that cell's growth. And then, you know, be disciplined about our expansion. And so as the old saying would say, you know, we plan for the best and prepare for the worst. And so that's the happy, you know, last couple years strategy, and we'll continue that. So quite positive scenario. Thank you, Sujit.

Thank you, Joey and Andy.

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

Thank you. Good morning, Joey and Andy. My question is on the supply chain, which is very important to our business, both during COVID and post-COVID, but largely ignored by the market sometimes. So we noticed that we have made a very strong commitment, reduce the carbon footprint on scope three that may apply to our supply chain as well. So just wondering, does that mean we may make some changes in regard to our supply chain choice or we may make some investment to our supply chain partners to achieve our goal and how that's going to affect our business going forward? Thank you.

Hi, Ethan. Thank you for your questions. In terms of supply chain, I think obviously it's going to be a very important competitive advantage for us. And it's very important for our long-term sustainable growth. And so for supply chain, in the next couple of years, we'll continue our... As we mentioned in the previous Investor Day, we'll step up investment in supply chain and other infrastructure. You know, obviously, you know, we'll be expanding our supreme in terms of our store after our our supply chain centers and then also including Automation but also investment, you know to use our reduced carbon footprint as you mentioned Now obviously it's very important for us to work with our supplier base our supplier partner and to work towards that goal. I think, you know, if you look at, you know, the climate change initiative, it's still relatively new. We're learning it. We have, you know, plans for it, and we have, you know, submitted, you know, the science-based targeting initiative, you know, for our plan. We have committed to, you know, achieving net zero emissions by, you know, And so that's a commitment that not only requires us internally to make investment and improve our operations, but also work very closely with our supplier. And then in the future, we will also work very closely with our consumer, too, to make a sustainable environment to require everyone's involvement. So it's not that we would necessarily change, but we will work together and obviously study and encourage our supplier base to also work towards that goal with us as well. And so that's how generally we think about our supply chain initiative versus the ESG initiative, especially climate change.

I have two points to add, Ethan. One is when we talk about investment in supply chain responding to ESG, some people naturally think that, oh, that means margin impact. That means additional investment. I have to emphasize that in Young China's philosophy, that means that the investment must have desired payback. It does not mean that we just justify the additional investment because it's the right thing to do. It has to be the right thing to do now and in the future. It has to be sustainable for the business as well. So one example is We invest in little measurement meters in the store to measure the usage of energy. Well, the original, this little cute equipment is very expensive. It does not justify our payback. Because our overall payback, think about our store economics, two years, three years. Well, we have to work towards that direction. So what did our team do? We worked with the suppliers of that store. little cute equipment, get rid of the bells and whistles. So it's very affordable and we install them in our stores and the savings is enough to justify the investment. So the payback is still protected. So that's one discipline. And we also share whatever we learn with our suppliers to help them. So that's point one. Point two is supply chain. I'm personally very excited about this area and my team is very, very passionate about it too because there are some really fun and exciting innovations happening in the last few years here. And I can share one with you. During the Shanghai lockdown, during the Shanghai lockdown, we have one warehouse. Well, we have 33 logistics centers to supply the chicken to different province. We have one warehouse to supply the package. the paper box, the bed, et cetera, for our stores. But that warehouse, what happened was in Shanghai, and Shanghai was completely locked down. That is a serious business, right? How can we keep our store open without the packaging paper, the wrapping paper? Well, our team, which is a brilliant team, when When we are faced with such challenge, we came up with even more brilliant solution. That's when we start to build a logistics site in the most nearby port within a week and we start to ship these packaging materials through sea freight. One direction went to the north to Tianjin and then distribute from Tianjin to cover the entire northern part of China. went down to Guangzhou, it covered the southern part of China. Well, what happened to the middle part of China then? Well, that's railway. The railway can stop everywhere without the problem of lockdown. So some part of these packaging materials get on the train and went to Chengdu and Wuhan, everywhere, and we are okay. So now you can imagine In the past, when we open a logistics center, we look at the trucks. Now we look at the trucks, the rail, and the sea freight, everything. I love it. I think that's the way that we shall do our business in the past few years and going forward. It's fun. Thank you.

Great. Very useful.

Thank you. Your next question comes from Rep Tzu from CNBI. Please go ahead.

hi hello can you hear me yes hi hello Joey and Andy thank you so much for the detailed sharing and resiliency last year so the question I would like to ask is about your new store target and I'm just wondering if you guys think your new target is a bit too conservative because obviously You guys have done really well last year on opening more than 1,100 stores last year with COVID. And without COVID, do you think the numbers could be a bit more higher this year? And also, it seems your CapEx spend last year is much lower than your previous expectations. And perhaps the store CapEx, it's much lower now. And also the level of rent, it's still lower than the pre-COVID level. And why should we take more advantage of that? And also, do you mind breaking down the number of store openings for the smaller brands like Lavasa and Taco Bell as well? Thank you.

Hi, Rob. Thank you for your questions about our new store opening target. So I just want to echo a little bit about our previous comment, which is, you know, like for last year, we opened more than 1,800 stores. You know, the more than 1,100 stores is the net new store that was increased. As Joey mentioned, you know, obviously, you know, we're very disciplined, and our new store performance is very good. So we have been opening new stores quite aggressively, even during the pandemic period. We also aggressively optimized and improved our portfolio of brands and also our store network. And so that's why you see the number is 1,100 plus for last year. Now this year, as I have mentioned before, obviously the target that we set up is 1,100 1,300 new stores this year. But I always emphasize that. For our company, the quality of growth is more important than the quantity of growth. So we generally do not give a quantitative dictate or number to our staff and say, hey, this year you're going to open X thousands of stores. That's not the way we do it. We do it in a very disciplined way. What we look at is what's reasonable range of store. But ultimately, how many stores will be open is really dependent on the market conditions, the unit economics. And I mentioned when the store economics, they perform really well, the market is booming, be sure our market manager, they will be promoting store opening and they will propose more stores for opening. and the unit economic is good, most all will be approved. And so there will be accelerations automatically that build our process. But our process is not based on, you know, a person's or a particular point of view. It's really based on a consistent discipline approach that reflects both the market conditions and also the unit economics. So we're pretty confident that, you know, if things are doing really, really well, I'm sure we're confident that our stock manager will make the right decision and we'll see very healthy, very strong robust stock network expansion. As we mentioned before, this year our focus is on driving sales growth. This is really important because sales not only impact the top line, but also impact the margins. The biggest driver for margins is really sales. And then we talk about other cost factors. So these will be our focus. And we're confident that, you know, if you look at the number for the last few years, I think we have, you know, outperformed the overall market in terms of, you know, the restaurant industry. And we're confident that, you know, we will be able to, you know, to do it in the long haul.

Rep, I have one point to add. Analytically, or from an analyst's point of view, the the cappers, the rent, the sales, all these are important factors to open stores. But operationally, what is not mentioned enough, the most important factor actually is how many good store managers do we have. And good store managers take some time to train, two to three years. And for us, we don't apologize for that focus because even in that culture, we emphasize on our GM number one. Store managers are the most important people in our organization. So in order to ensure quality of growth, as Andy mentioned, we need to have all these things under control, the campus, the rent, the operations, the sales. But the most important job for me and my management team is we make sure we have good store managers to run the store. Thank you.

Right.

And rather quickly, right now, in terms of like by brand, I think, you know, like obviously, KFC remains, you know, the largest brand for, you know, store opening. And you've seen, you know, Pizza Hut have accelerated store opening, as Joanne mentioned, record number in, you know, probably recent years, you know, within a number of years, even before the pandemic. And then we are continuing to see very robust expansion for Lavasa, right? So Lavasa now is more than 85 store already. It's been growing very rapidly. And you think about it compared to last year, it's multiple store increase. And then Taco Bell also have increased the store number expression. In terms of the Chinese cuisine business, we work very closely with our franchisee. We would like to see the next network included in 2023 for the Chinese business, which includes both leadership and module.

Thank you. Thank you.

Thank you. There are no further questions at this time. I'll now hand back to Mishen for closing remarks.

Thanks, Sari. Thank you all for joining the talk today. We look forward to speaking with you on the next earnings call. If you have further questions, please reach out through contact information on earnings release and on our website. Have a great day. Thank you. Thank you.

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