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spk03: Thank you for standing by and welcome to the YamChina Third Quarter 2023 Earnings Conference Call. I would now like to hand the conference over to Michelle Shen. Please go ahead.
spk11: Thank you, Zach. Hello, everyone. Thank you for joining YamChina's Third Quarter 2023 Earnings Conference Call. On today's call are our CEO, Ms. Joey Watts, and our CFO, Mr. Andy Yang. I'd like to remind everyone that our earnings call and investment materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our findings with SEC. This call also includes certain non-GAAP financial measures you should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. You can find a webcast of this call and a PowerPoint presentation on our IR website. Now, I would like to turn the call over to Joey Wang, CEO of Young China.
spk07: Hello, everyone, and thank you for joining us today. We held our investor day in September in Xi'an, China. It was wonderful meeting investors face-to-face. At the event, we unveiled our RGM 2.0 strategy with a strong focus on growth. We have set ambitious growth targets for the coming three years. These include reaching 20,000 stores by 2026, achieving double-digit EPS header, and returning $3 billion to shareholders in dividends and share repurchases. With our long-term growth commitment in mind, let's zoom into the third quarter. Our results reflect continued strength. Third quarter net new stores, revenue, and adjusted operating profit all reached record levels. We accelerated new store openings with 500 net new stores in the quarter. while maintaining healthy store paper periods. Our portfolio now exceeds 14,000 stores. System sales grew 15% year-over-year in constant currency. Adjusted operating profit excluding temporary release grew 21% year-over-year in constant currency. In the first nine months, adjusted operating profit exceeds $1 billion. Our team's relentless efforts produced these remarkable results. To drive sales in the peak summer trading season, we bolstered crew resources for excellent service, ensured supply pipeline readiness, and executed traffic driving campaigns. Simcoe Sales Growth in the third quarter was led by strong transaction growth. During the summer holidays, same-store sales at our tourist and transportation locations surged more than 50% year-over-year. It's important to remember, though, that consumers have continued to be cautious in their spending. Our formula to capture sales growth has always been simple. The food, the fun, and exceptional value. Now let me go through what we have done. First, Food innovations on a big scale. Our $100 million club showcase at Investor Day illustrates our success in building huge categories to boost sales. Recent innovations at KFC include our juicy whole chicken and beef burger. To put things into perspective, in the third quarter, these two categories combined exceed 6% of KFC sales mix. This is higher than our original recipe chicken, which we have been proudly serving in China over the past 36 years. It shows our ability to innovate, but also build very big categories. We are continuing to expand these categories with new flavors like Sichuan-style spicy whole chicken, Chuan Xiang Yan Ba Mian Zi Quan Jin, offering it from Friday to Sunday only. This spicy whole chicken is perfect for a home consumption. We also collaborate with Ultraman to promote our premium Ultra Cheese 210 Beef Burger, Pu Bu Zhi Shi Er Dian Lin, Zhi Zhi Hou Niu Bao, Consumers love them. At Pizza Hut, we sold over 100 million pizzas in the first nine months of the year. One out of every five pizzas we sold was a durian pizza. That's over 20 million durian pizzas, nearly 70% more year over year. Our in-house supply chain works with suppliers to secure durian supplies and expand capacity to satisfy the growing demand. We are offering our customers amazing value for money on top of the innovative food. KFC Crazy Thursdays is no longer just a marketing campaign. It has become a cultural phenomenon. Crazy Thursday sales consistently outperformed other weekdays in the third quarter by around 40%. To keep customers engaged, We rotate over and regularly launch new flavor variations such as spicy nuggets, bao huo, jiao ma, ti kua. We chose products that utilize existing ingredients and involve simple cooking process to provide exceptional value while ensuring operational efficiency. At Pizza Hut, we are expanding our selections for pizzas priced below 50 RMB. which is a very significant portion of the overall pizza market. Around 20% of our pizzas, we offer a price below 50 RMB, and that's not enough. We could do more. By enriching our lower-priced pizza offerings, we are tapping into this substantial opportunity that's currently underserved by Pizza Hut. Other than pizzas, We are adding new snacks that customers love. Our new cheese tart, Sisi Danta, became our best-selling snack in September and an amazing traffic driver. Not easy for a snack item to be a traffic driver compared to pizza. Next, keeping users engaged and having fun along the way. Our loyalty programs topped 460 million members in Q3. up 15% year-over-year. Notably, sales from members continue to be high at 65%. We collaborate with pop culture icons that resonate with young generations. JFC's campaign was Hongkai, Starrail, Xinchong, Tiegao. A popular e-game generated huge social buzz and attracted many new customers. Almost 40% of traffic generated from the campaign came from new or inactive members, and a significant portion are young adults, and that's fantastic news for the brand. We are proud to be an exclusive Western food catering supplier for the Asian Games in Hangzhou. Over 250 of our crew members from across China were chosen to serve at the sporting events. KFC and Pizza Hut set up nearly 30 pop-up stores and serve over 1 million athletes and fans. And it shows that our food is good enough and healthy enough for the professional athletes, too. We also ran nationwide campaigns, offering exclusive gifts at our restaurants and through our super app in celebration. In closing, I want to thank all of our teams for their hard work in delivering a strong quarter. Next week, we will host our RGM Convention for our Restaurant General Managers. This marks the first in-person convention for 13,000 attendees in 2019. Very excited about it. It's an excellent occasion to honor our RGM's dedication, celebrate our achievements, and reaffirm our goals for the coming year and beyond. Looking forward, the growth potential in China remains vast, even with moderate economic growth. Our GM 2.0 provide us the strategic framework to grow sustainably. Evolving consumer preferences in the post-pandemic environment require us to stay agile and vigilant. Our robust supply chain and innovative digital ecosystem head enable us to quickly adapt to changing market conditions. I'm confident we can continue to create long-term value for our shareholders. With that, I will turn the call over to Andy.
spk02: Thank you, Joey. And hello, everyone. Let me share with you our third quarter performance. But before I do that, I want to point out foreign exchange had a negative impact of approximately 6% in the quarter. Overall, we achieved solid results, growing across key metrics. On a year-over-year basis, revenue grew 15% and adjusted offering profit grew 10% in constant currency. Compared to pre-pandemic levels, we have a much larger stock portfolio. Although same-store sales remain at approximately 90% of 2019 levels, system sales grew 22% compared to 2019. With that, let's go through the financial in more detail. Third quarter total revenues were $2.91 billion in reported currency, a 9% year-over-year increase. In constant currency, total revenue grew 15%. System sales also increased 15% year-over-year in constant currency. The growth was mainly driven by new unit contributions and same-store sales growth of 4%. sign-in sales continued to rebound year-over-year. By brand, KFC theme-store sales grew 4% year-over-year, a strong rebound at transportation and tourist locations contributed to the growth. Theme-store traffic grew 9%, while ticket average decreased 5%. These results were mainly driven by successful traffic-driving promotions, lower delivery mix, and rebound of the breakfast-day part. Delivery typically carries a higher ticket average than dine-in orders. Does a decline in delivery mix lower the overall ticket average? Breakfast orders tend to have a lower ticket average as well, so the rebound in breakfast sales contributed to traffic growth but lower ticket average. Please note that overall ticket average in the third quarter was similar to the second quarter and higher than 2019. Pizza Hut theme store sales grew 2% year-over-year, theme store traffic grew 12%, and ticket average decreased 9%. We want to highlight that by design. We are expanding our price ranges to enhance Pizza Hut's value propositions and to capture their underserved markets. Consistent with Pizza Hut's revitalization plan, we want to enhance Pizza Hut's value propositions to consumers. Particularly, we are targeting the sub-50 RMB pricing range, which represents a very significant segment of the pizza market in China. We also intend to increase the sale mix of delivery and all-premise dining over time. For Pizza Hut, delivery sales generally have a lower ticket average than dine-in. Finally, we aim to bolster the sales of single-person meals. This is different market segment compared to Pizza Hut's existing customer base, which tends to be group or family dining. Restaurant margin was 17%, 180 basis points lower than the prior year. This was mainly due to lapping of last year's temporary relief of $30 million, which translates into 120 basis points margin impact. Excluding this impact, year over year, Year-over-year, margin change is only 60 basis points. Racial inflation normalizations of staffing at the store level increased promotional activities also impacted margins. On a positive side, occupancy and other expenses improved year-over-year, primarily due to sales leveraging and ongoing benefit of cost structure rebasing efforts. Now let's go through the key items. Cost of sales was 31.1%, 40 basis point higher than the prior year. We increased promotional activities to drive traffic sales, drive sales. And we also faced higher poultry prices in the quarter. This was partially offset by more favorable prices for commodity, including beef and cooking oil, as well as full utilization of chicken. Cost of labor. was 25.3%, 180 basis points higher than the prior years. Last year, we benefited from temporary relief of $17 million, which translates into 70 basis points margin impact. Two other key factors that impacted labor cost comparison were, one, mid-single-digit wage increase for frontline staff due to annual wage adjustment, and two, normalized staffing level at our store compared to the pandemic last year. These were partially offset by sales leveraging. Occupancy and other was 26.6%, 40 basis point lower than the prior year, benefiting from improvement in rent and depreciation expenses. We continue to secure more favorable rental terms for our new store. Lower depreciation resulted from lower upfront investment and store portfolio optimization. It's important to note that 45% of our stores have been built after 2019. This was partially offset by a lapping of $30 million in rental relief and austerity measures associated with the pandemic last year. G&A expenses increased 14% year-over-year in constant currency, mainly from higher accrual of performance-based incentives. And to a lesser extent, near increases in higher travel expenses from the resumption of business travel. Offering profit was $323 million, increasing 9% in constant currency. Excluding $30 million in temporary relief received last year, just the offering profit grew 21% in constant currency. Our effective tax rate was 27.5%. We continue to expect our full-year effective tax rate to be around 30%. Net income was $244 million, and diluted EPS was 58 cents, both increasing 18% in re-product currency. Excluding the foreign exchange impact, net income increased 26% and diluted EPS 27% in constant currency. We generated $410 million in operating cash flows, and $243 million in free cash flow in the third quarter, we returned $211 million to shareholders in cash dividends and share repurchases in the quarter, on track to return $600 to $800 million for the full year 2023. Our balance sheet remains strong with around $4.2 billion in net cash positions by the end of the third quarter. Now let's turn to our outlook. Regarding store opening, we opened 500 net new stores in the quarter and 1,155 net new stores year-to-date. We are on track to meet our 2023 four-year target of 1,400 to 1,600 net new stores. The new store payback period for our KFC and Pizza Hut store remains healthy at two years and three years respectively. With our healthy new unit payback, together with flexible formats and modules, we are confident to reach $20,000 by 2026 as we unveil at our investor day. Looking ahead, the fourth quarter is seasonally a small quarter for both sales and profit. On the sales side, since the late September, we have observed softening demand, which extended to October. Consumers have become more value conscious. We have been focusing on foot innovations and widening pricing ranges to tap into underserved markets to drive growth. Regarding margins, sales remain the biggest factor. Fluctuation in sales may have a pronounced impact on margins in the fourth quarter. As a reminder, in the fourth quarter last year, we also received $26 million in temporary relief, which we do not expect to repeat this year. We also anticipate wage inflation of mid-single digits and returning to more normalized staffing levels at our store. Just a reminder, in the fourth quarter last year, we experienced labor shortage due to widespread COVID infections. The post-pandemic economic recovery is shaping up to be a wave-like and nonlinear process. So we will maintain our focus on driving sales and cost efficiency. However, the overall trend toward recovery is evident this year, and many of our performance metrics are setting new records. We have demonstrated our ability to quickly adapt to changing consumer preferences and seize opportunities under different market conditions We are confident that the successful execution of our RGM 2.0 strategy will help us expand our stock portfolio, grow sales, and boast profits, delivering sustainable value creation and long-term returns to shareholders. With that, I will pass you back to Michelle.
spk11: Thanks, Andy. Now we will 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. Zach, please start a Q&A.
spk03: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the headset to ask your question. Your first question comes from Michelle Chang from Goldman Sachs. Please go ahead.
spk08: Hi, Joy and Andy. Thanks for taking my question. My question is still about the competition. Especially you mentioned that the trend turned softer since the end of September. So can you share with us how do you see the competition landscape involved? And also with this value campaign, how should we think about the balance between the top line growth and also the full cost control? Thank you.
spk07: Thank you, Michelle. Regarding the competition, we see it as a positive trend in science because despite some concern towards the macro situation in China in the media, in reality, both international and domestic players are investing aggressively in our industry. that shows that these players, competitors, are voting with their money and voting with their feet. And that's consistent to our view towards the business and our industry in China, particularly for the chain store business model. On top of that, we see very vibrant competition in the lower tier cities. Again, that is good because if you remember back to our investor day, we have very aggressive store opening plans, especially in the lower tier cities. And that resonates well with our view that there's a lot of opportunity in the lower tier cities. So, you know, we're quite happy to see that. And then when it comes to the point about value-driven consumer, we have been a player that has benefited from the more cautious and more rational spending for the consumers. We are a fast food company. When customers become more value-driven, it's good for us. have the capability to deliver, and we do. And it has been a consistent focus for our company to focus not only value but innovative products and fun experience because value itself is never enough for our customers. And we'll continue to do that. And you can see that in this quarter and in the past many years, we have been very consistent with our ticket average. With the up and down, our ticket average compared to the last sort of more stable year 2019 is still up a little bit because we are very careful about it with KFC price increase every year and Pizza Hut during the turnaround time for the For the original product, we kind of keep the price the same, but then we get a bit more opportunity with the new product. But the ticket average has been relatively stable, and even in the last quarter, you can see we have very healthy growth of transactions, TC. And in our business, TC growth is so good. It cannot be better to have TC growth. So it shows that we react very quickly, and we are very agile, and we get the sales. Last but not the least, while we are doing all these innovative products, we deliver value products to our campaign margins state. We are able to prepare our margins with our innovations and value campaigns, and that is very important. In fact, our year-to-date margin has already exceeded that of 2019, which is pre-pandemic. You know, there's some movement. I mean, Andy, I'm sure Andy will go through it later on. There's some movement between the different lines of cost structure. But the restaurant margin, that's what we protect. We reduce the rent, we reduce the O&O, and then we put the money into food and to service, to serve our customers. So net-net competition for us is good because we see it's a vote of confidence for our customers. industry and our market. Thank you, Michelle.
spk08: Thank you, Joy. That's very clear.
spk03: Your next question comes from Lynn from CICC. Please go ahead.
spk09: Thank you, Joy and Andy. So I have one question regarding the margin. So Andy has mentioned the reasons behind the margins year-over-year change. But if we compare Q3 with the same quarter in 2019, our revenue increased 26%, but operating profit only increased 8%, which is quite different with Q1 and Q2. So could you please help us better understand this? Thank you.
spk02: Okay. Thank you for your questions. And so as you mentioned, if you look at the year-over-year comparisons, you definitely need to take out the impact from the temporary lease last year. And when we compare to 2019, obviously over the past few years, we continue to see the labor costs that was increasing over the past few years. But we're able to partially offset that by improvement in our O&O, which is occupancy and other expenses. And then, you know, if you look at, you know, by item, you see that COS is actually pretty stable, around 31%. Our COS, as mentioned, because of wage inflations and a high mix of delivery, we have seen, you know, some increase there. However, on the O2O side, we are much better, mainly benefiting from stock portfolio optimizations and rent negotiations and better these terms. And we also have other initiatives to re-base our cost structure to possibly offset that. If you look at the theme store sales, which is about 90% level of the 2019. Now looking at, as we mentioned a little bit earlier, looking ahead in the fourth quarter, fourth quarter is a smaller quarter for us in terms of sales and profit. And so, as we have mentioned, we have seen some softening demands since September. So sales fluctuations will have a more pronounced impact on the profitability and margins. Now, again, in the fourth quarter compared to last year, last year we received $26 million of temporary relief, which we do not expect to repeat this year. Now, in terms of wage inflation, let me just repeat it again, single-digit wage inflation, normalization of staffing levels at our store. Longer term, as we have mentioned, our investor days We, you know, our goal is to maintain a stable margin and potentially improve it over time. You know, obviously we have to work hard to continue to offset wage inflation impact every year and potentially commodity inflation in the long term. It's important to keep, you know, a short-term and long-term balance in mind. You know, we will continue to benefit from cost-structural basing efforts that will stay in place for a long time. For example, high variable rents, you know, our megastore restaurant staff sharing program. We also have more flexible and low investment for our store model. So we'll maintain, you know, our discipline in cost efficiency and also continue to improve productivity. That's how we look at the margins in both short-term and long-term. Thank you. Thank you, Andy.
spk09: Thank you, Andy.
spk03: Your next question comes from Christine Pang from UBS. Please go ahead.
spk05: Thank you, management. I actually have a question which is also related to competition, but I want to ask more details specifically in terms of this Chinese-style burger. I think in the investor day in Xi'an, your KFC management actually shared with investors KFC's plan to launch the Chinese-style burger products in the very near future. So can management share with us the timetable as well as more specifics about this product in terms of price strategy, product strategy going forward? Thank you.
spk07: Thank you, Christine. We actually have test launched this particular product in three provinces already, Jiangxi, Fujian in particular. So it's interesting that we test launch it not in Guangzhou, Beijing, or Shanghai. We do it in sort of second tier cities. And the progress has been good, and we are happy with the result. We continue to work on a plan and then move to next stage when we are ready. The price point is competitive. It's very affordable. And it's one of our strategies that for the lower tier cities, we have slightly different product and a more accessible pricing. But at the same time, we still maintain the margin for the business. But it's going well. I taste the product myself. It tastes great. So hopefully next time we can get it closer to Hong Kong where you don't have to travel that far to try it. Thank you, Christine.
spk03: Your next question comes from Chen Luo from Bank of America. Please go ahead.
spk04: Hi, Julia and Andy. So my question is also on competition. In fact, last time in Xi'an, I also raised a question on testing and the likes of Tick-Tock coupons. And I think given our current value campaign and our initiatives to broaden our price range, as well as to sell more coupons on Tick-Tock, Do you think that the ticket average decline that we saw in Q3 could actually extend into the coming few quarters? And would the ticket count increase can be enough to offset the ticket average decrease? Lastly, in terms of our food paper costs as potential sales, do you think that in the near term it could be under some pressure on a year-on-year basis into the coming few quarters? Thank you.
spk07: Thank you, Lawton. Let me just point out that the ticket average compared to last year is not exactly the best comparison because last year is during the pandemic. Ticket average is unusually high because people are locked down at home, and when they order, they order big ticket size, right? What is more comparable is we look at the ticket average compared to sort of the more normal year. Although we are, you know, our business is very different compared to 2019, but we can compare the ticket average with 2019. The ticket average is still slightly higher in 2019. So that is sort of more normal. So I asked our investor not to be overly concerned about the ticket average drop compared to last year. And usually when our sales move, the more So more focus number is always a tick transaction, TC. And the fact that our TC grow at almost double digit is a good sign. So in our business, over many, many years, just go beyond one quarter, go through the five years or 10 years, you will see our ticket average is always rather stable. So that hopefully address your concern about the ticket average. And go on.
spk02: Yeah, let me just address both TA. As I tried to, you know, in a prepared amount, try to decompose, you know, what is, you know, driving the TA. Obviously, you know, promotion is a part of that, but it's only one of their, right? If you look at, for example, for KFC, today the TA is still higher than, you know, what we have seen in 2019, as Joey mentioned. And, you know, part of that is, you know, delivery mix, right? You know, we have high delivery mix compared to 2019. And then if you look at competitive last year, we also declined in the mix for delivery as people were returning to the store. And so that would have an impact on the TA because the delivery TA for KFCs obviously is higher than the dine-in component. The other one is if you look at KFC, for example, We also mentioned about breakfast, you know, day part, right? So, you know, last year, because of the pandemic, you know, the breakfast day part was impacted more so than the other day part. With the rebounds in, you know, breakfast day part, we, you know, and which, you know, tend to also have PA So the increase in traffic for practice data would also impact on that. So there's a number of components. And if you look at our SEO ads, you will notice that it's actually very stable. Compared to last year, only 40 basis points difference. Compared to 2019, 10 basis points. It's almost flat line. So we have the ability to manage the overall, our possibilities, our margins, with different drivers for TA.
spk07: Just come back to your food paper costs. I think we have shared yesterday that we've been able to manage the food paper costs at a very stable number over many years. When there are some factors driving up the food costs, such as commodity inflation, we are able to deliver a very stable cost because of our innovations and using all parts of chicken and being flexible with our supply chain. So we are always quite stable here. And I keep reminding our team internally, the problem of the food paper cost become a problem is when it becomes too low. That means that we are not giving the value for money, the quality of food and the volume of food to customers. So it's a relatively stable percentage for the food paper cost over the many years. Thank you.
spk04: Yes. Thank you, Joey and Andy. So we also have confidence in the management ability to stay agile and take the right measures to address competition and further win-share. Thank you. Thank you.
spk03: Your next question comes from Wilkins Tong from Morgan Stanley. Please go ahead.
spk06: Hey, sorry. This is Lillian from Morgan Stanley. Can you hear me? Yeah, so I have a question, again, on margin side, but in different aspects. I think despite all this losing the subsidy impact and normalization of labor staffing to stores, is there any impact from acceleration of stock expansion to margin? Because I think going forward, we're going to keep up this expansion pace So should we kind of rethink about the margin base given such a situation? Just wanted to really kind of get some color on how to quantify the impact of faster unit expansion to margin. Thank you.
spk02: OK. Thank you, Lillian. You know, so when we look at, you know, our net new store opening, you know, they continue to be very healthy. You know, if you look at the overall cash payback period for our new store opening, it's still three years for KFC and three years for Pizza Hut. In fact, as we mentioned, the smaller store model actually performs even better. Now, if you look at, you know, how they ramp up, obviously there's a ramp up period for, you know, the newer store. As mentioned, the large majority of our new stores actually break even, you know, in the first three months and they're going to ramp up, you know, through the years. You know, it may have a short-term impact when it just opened, you know, because it's ramping up sales and margins tend to be lower, but they tend to be, you know, very healthy in terms of economics as they progress into a year or two from the opening. So there's no change in the way we look at store opening. The important indicator for us really is to look at how the new stores are performing in terms of cash payback, in terms of unit economics. And as long as those are good, we'll continue to stick with our plan. And as we mentioned, we have been quite disappointed about store opening It's driven by our investment models and then also from ground up from our market. So you have the automatic acceleration and deceleration based on the performance of the software.
spk06: Thank you, Andrew.
spk03: Your next question comes from Anne Ling from Jefferies. Please go ahead.
spk10: Hi, everyone. Thanks for taking my call. Questions regarding the current trading environment. You guys mentioned about being a little bit softer and with sales fluctuation. Would you elaborate a little bit on that? Is it like you're talking about post-festive event that there is a fall-off in terms of sales performance? regardless of any promotion or innovative product that you launch? Or is it because in a certain day part that you notice that didn't really perform as expected? Or a certain geographical area. We'd love to hear a little bit more about what drives the softness. Is there anything that we can do about that? Yeah. Thanks.
spk07: Sure, Ann. So at the high level, I mean, summer was vibrant. You know, particularly July, there's some kind of demand. So as I mentioned earlier, you know, transportation helped the traffic, you know, increase 50% year over year, which is really a good sign. And then comes to just a reason, national holiday during the first half of October. It's quite interesting here, actually, we observe sort of first half and second half during the national holiday. Because this year, particularly this year, the national holiday at the beginning is at the same time as Mid-Autumn Festival. So we see softness during the first half because after three years of pandemic, Mid-Autumn Festival, for Chinese people, what do we do? Go home. So, you know, the first half of the holiday, we see massive number of customers going home, go back to see their families, spend time with them. So the demand was soft. And then by second half of the holiday, after seeing mom and dad, I think people decided, still decided to travel a little bit. So the second half of the October Festival, actually, the traffic picked up. So that's a little bit of this natural human behavior happening during the national holidays, during meet of the festivals. That's the point one. Point two is in terms of the consumption, cautious spending, we do see customers spending a bit less on the premium product. Our premium burger, our premium product and pizza still are doing quite well. But there's that little trend going. And then it comes to the third point is what are we going to do about it? Well, we have been working on and we have been doing it quite well actually with pretty good results is widening the price range so it's not only the bottom, the top bit because We serve very large customer base, and there's always some customer who want to treat themselves, the same customer who want to treat themselves during certain time. So, you know, the premium beef burger, et cetera, we do that. But at the same time, we also enrich entry price offering. Pizza Hut, the pizza is a good example. We have... sort of single-digit revenue coming from PISA below 50 RMB. And in fact, this is a very big segment for both international and domestic players. We see this as a big opportunity here. So, you know, you can imagine we have more and more product in this particular segment. Not only the below 50 RMB PISA, but also single-person meals. Because for Pizza Hut business, our business model, our average number of customers per transaction is over two people. Well, that shows that we have the opportunity to serve the one-person meal as well. And we see good progress in it, and we could do more and get more market share in the one-person meal sector. And then for KFC, we also... you know, continue to work on the choices of products at the entry price offerings to capture untapped potential customers, particularly those in the lower tier cities. So, you know, we can operate at a wide price range all the way to tier six cities. And that's what we do. And therefore, we see very good traffic growth. On top of that, in terms of the State part, weekdays are still doing better than weekends. And why the weekend traffic is still a bit soft, and that has a lot of reasons behind it. But the point is our focus on the whole chicken, which is mainly at-home consumption product, our focus on certain other products to support the weekday traffic. We're doing the right thing, and we see very good results from customers. And therefore, for quarter three, we deliver record revenue, record profit. But of course, the biggest challenge for us is the foreign exchange that eat up 6% of our revenue and profit, which is a problem. But in constant currency, we are doing quite well. So we will continue to focus on the few things that I mentioned. Really good product. and very good price and good experience, but still protect the margin for the investors and shareholders. Thank you, Anne.
spk10: Got it, got it. And can I ask another question regarding the franchise business? We talk a lot about this during the investor day. Can you share with us the latest update with your captive franchise, i.e., those specialty franchises those hospital, you know, duty and also like, you know, the highway centers. When will we see the ramp up on the franchise business?
spk02: Right. So, you know, if you, you know, I'll be quick about this one. You know, as we look at the, you know, third quarter, for example, you know, our franchise, you know, number of new franchisees growing, you know, pretty fast, you know, like 25. 20% plus compared to last year. And so, you know, like for new for opening. So, so I think we're making progress there. Uh, but obviously, you know, things is not going to happen overnight. Uh, it's going to come to your realm. Uh, so that's how we look at it. Okay.
spk10: Thank you. Thank you, Andy.
spk03: Your next question comes from Ethan Wang from CLSA. Please go ahead.
spk00: Hi, Joey. Hi, Andy. So my question is on things themselves. So we see that ticket price at KFC and I guess that is understandable with China's consumption space and consumption space competition. And yeah, it's good to do more promotions if you have more traffic. So it's always a balancing act. But I just wonder... If we decrease ticket sales and maybe price highs on the traffic, is that going to cause some pressure on future margins, especially from labor? Because with more people, we need to have more staff, but with every order, the ticket price comes lower. We understand there's impact from the delivery, but just want to understand we have some more color on the trend going forward.
spk02: Thank you. Okay. So let me try to address that. So in terms of the TA, I think there's a couple of questions concerning TA. Let me try to help folks understand a little bit more in detail. Again, if you look at, for example, KFC TA shift, there are three key components to it. Obviously, a number of people have mentioned traffic driving promotion activities. But that's only part of the story, and it's not the main part of that. We also have the lower delivery mix shift. So last year, during the pandemic, we have seen very high delivery, and when this delivery comes back, especially what we call group ordering delivery last year, group buy delivery. And so this year, when things return to more normal, we do see the delivery mix to be slightly lower than last year. And so that's normal, because people are coming back to the store. And so that's about impact. The other one is, as we mentioned, you know, the Sunday pot, right? The office shift would also have an impact on that. For breakfast, as we mentioned, generally we have a lower TA, and so when that's going faster, then you would also see, you know, a TA impact on the overall KFC TA. Same for Pizza Hut, maybe slightly differently, as we have mentioned. you know, besides of, you know, the proportion of 50s, we actually, by design, try to target, you know, an intact market, which is, you know, below 50 R&B, you know, segment, which is very underserved by Pizza Hut, but, you know, it's a very, you know, big part of the pizza market overall, which is, you know, like, obviously, right now, a number of, you know, players are active in there. So we want to penetrate that market. The other one, you know, for TA, for... for Pizza Hut, as Joey mentioned, is our purposeful targeting of single-person news sets. You know, Pizza Hut, well, KFC, if you look at a TA, and then you look at Pizza Hut, you will see that Pizza Hut always have high TA. And then, you know, and then a part of that is because is in group dining and also in family dining. So, you know, when we have products that are designed particularly for, you know, single-person meals, especially working lunch and whatnot, you will never see, you know, the TA shifting there. And finally, even before the pandemic, we have done a purposeful job to actually increase the value proposition to consumers. One of the biggest challenges for P-SAT before the revalidation program was the value proposition to consumers. And so we've been working very hard to hold the price stable and whatnot. to drive that and so that's why you know by design doing that because you know when this is going to try to expand and address a bigger customer base you know you're going to have a wider pricing range and so that's why you know you kind of continue to expect TA over there have some movement there so that's a lot of components there by our strategy but the key point is that despite all that stuff that goes on you see that you know our COS is very stable 31% because we have power innovation. We have a very strong supply chain managing that. So overall, that's how we want to keep abundance between driving the traffic, expanding our addressable market, and at the same time, maintaining LTA. Now, obviously, for COL, the biggest concern in the long term is the demographic change in China and whatnot. And so it's very important for us to continue to invest in confirmation digital and to improve our operations so that we can continue to improve the labor productivity of our workforce. And we've been quite successful doing that before the pandemic. And coming off the pandemic, we're also pretty stable at about 25%, 26%. And that's the thing that in the long run, as you mentioned, trying to maintain the overall margins and expand it potentially over time. Thank you.
spk07: Maybe I just add some color on the COL side in particular. If we look beyond just one quarter, we look at our COL over the last few years as we share in the investor day. When we have few thousand sold, 6,000, 7,000 sold, we have 430,000 people or 450,000 people actually. Now we have 14,000 stores, almost double. We still only have 430,000 people. So as Andy mentioned, we use automation, digitalization to manage labor costs. When it comes to handling the promotion and while managing the COL, well, as I mentioned in my prepared remarks, we tend to pick those products that utilize the existing ingredients and that they are very easy to make and we're very careful about you know maximum number of items that the staff can handle in our store and that's why having an amazing I would say second to none operation team is important we do have pretty and a good balance of how many items we sell in the store and what's the impact on the COL, and most important, what's the quality of food that we can protect in order to deliver in the short-term and long-term. Thank you, Ethan.
spk00: Got it. That's fair. Thank you, Andy. Thank you, Joy.
spk03: Thank you.
spk00: Thank you.
spk03: Your next question comes from Chiapo Wei from Citi. Please go ahead.
spk01: Morning, Julie and Andy. I have a quick follow-up question on restaurant margin. In the third quarter, did you see any widened divergence of the restaurant margin of high-tier city versus low-tier city? And also, Andy, in the prepared remarks, explained a lot about we are having concession rent for new stores, et cetera. Looking forward, shall we expect our occupancy and other expenses to sell to keep low? Because in the past two years, this has been very good factor to mitigating other inflation component in the restaurant market. Thank you.
spk02: Thanks, Paul. So in terms of, you know, the different variants, I think, you know, there's not material changes to the way, you know, margins actually pan out, as we have mentioned before. You know, obviously in tier one cities, tier two cities, the high tier cities, Generally, those stores have higher throughput at the store, but generally you have slightly lower margin because higher cost, labor and rent. And then in low-key cities, although you have a smaller throughput through the store, generally cost lower, labor and all that. So the margin is slightly higher in the lower-key cities. But all in all, you know, because also their investment, our investment is different in different tiers. So we end up, you know, have a pretty, you know, good payback period for both, you know, top tier and lower tier cities. And so that's, you know, in terms of, you know, the variance between margins in different tier cities. Now, in terms of O and O, I think, as we have mentioned, obviously last year we had some temporary relief, but all in all, O and O, even including those, you see continuing improvement there. Those long-term contracts, when you get favorable long-term lease, you're going to have favorable long-term impact. And then we also have other cost structure initiative and portfolio optimization. I think, you know, O&O improvement would stick. But, you know, obviously, you know, that's also, you know, we must think about how low we can get when no one's going to give us free rent. But I think, you know, in the long run, I think we'll continue to be, you know, pretty healthy O&O as a percentage of sales.
spk01: Thank you. Thanks, Shabba.
spk03: There are no further questions at this time.
spk11: Thank you for joining the class today. For further questions, please reach out through the contact information in our earnings release and our website. Goodbye.
spk02: Thank you.
spk11: Thank you.
spk03: That does conclude our conference for today. Thank you for participating. You may now disconnect.
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