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spk17: Thank you for standing by and welcome to the Yum! China fourth quarter and fiscal year 2023 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.
spk04: Thank you, Operator. Hello, everyone. Thank you for joining Young China's fourth quarter 2023 earnings conference call. On today's call are our CEO, Ms. Julie Watt, and our CFO, Mr. Andy Young. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. Lease 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 lease call in the PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency unless otherwise noticed. Now I would like to turn the call over to Joey Wah, CEO of Yum China.
spk08: Joey? Thank you. Hello, everyone, and thank you for joining us today. It's Chinese New Year this coming Saturday. I want to wish everyone a happy and healthy Year of the Dragon. I would like to kick off today's call by expressing my sincere appreciation to all our employees. Their incredible efforts helped Young China deliver exceptional growth in the fourth quarter and for the full year. 2023 was a pivotal time for our business. The transformation of our business fundamentals in the past few years have enabled us to seize opportunities emerging from China's reopening and evolving market conditions. In 2023, we hit record-breaking revenue of $11 billion and grew system sales 21% year over year, outperforming the industry. Operating profits soared to $1.1 billion, an all-time high, excluding special items. Core operating profits grew 79%. We opened a record 1,697 net new stores, expanding our total store count to 14,644 stores. KFC reached 10,296 stores, Pizza Hut reached 3,312 stores. On today's call, I would like to walk you through the tremendous growth opportunities we see and discuss our strategies to capture them in 2024 and beyond. For the past 36 years, we have been the market leader in China. During this time, Connors restaurant operators have passed in and out of favor. Instead of being or the favor of the month, we want to be or the favor of the decade, or even next several decades. In this developing market, where the restaurant industry is still growing double digits, even during 2023, we see a long runway of growth for our brand. KFC still only serves one-third of the China population. Our next ambitious target is to expand our reach to half of the population by 2026. How? By being closer to our customers. This means adding store density in existing cities and entering new cities. KFC currently operates across 2,000 cities in China and is tracking an additional 1,000 cities. For Pizza Hut and our emerging brands, the white space is even larger. China is fast with significant regional and city-tier differences. In lower-tier cities, urbanization and long-term consumption upgrades are presenting attractive opportunities for us. With lower living costs, consumers in these cities have significant purchasing power for our products. So, as an example, premium beef burgers sell well in lower tier cities, just as in high tier cities. Over half of our new stores in recent years are in lower tier cities. These stores have performed well, benefiting from lower labor costs and rent. And the ticket average is as good as in higher tier cities. For now, we are mainly serving middle class consumers in these markets. As we expand, we see further opportunity in widening price points to broaden our addressable customer base. Our mission is to reach 20,000 stores by 2026. We will continue to protect our new store payback at two years for KFC and three years for Pizza Hut. Over the past years, we have been improving our fundamental capabilities to reach this target. This is the key reason we can expand at an accelerated speed. Some of these improvements include, first, flexible store format with lower upfront investment open up more site potential across city tiers. Second, core structure refacing lowers our rent ratio in 2023 to 8.7% of sales. the lowest level in the past 10 years. The majority of our leases are based on variable rates. Third, improved operating capabilities. AI-enabled digital tools empower our capable restaurant managers to oversee multiple stores without compromising quality. This also solves the bottleneck of having enough good RGMs as we expand rapidly. Finally, strategic franchise partnerships allow us to gain access to locations that were beyond our reach before, such as highway service centers. In addition to new store growth, Our same-store sales grew 7% in 2023. It was fueled by a 12% increase in transactions, indicating healthy growth. Our innovative menus, excellent value for money, and effective online channels captured over 1.7 billion transactions last year. Now, let's talk about food innovation. In 2023, we rolled out more than 500 new or upgraded products. That means we offer something new every week. Some examples include KFC's beef wrap with spicy duck blood and chicken taco with bull frog and Pizza Hut's black song durian pizza. These may sound a bit exotic, but I can assure you, They are very popular in China.
spk10: Over the years, many of our most popular products have entered our 100 million club in U.S.
spk08: dollar sales, and 2023 was no exception. Our Golden Spar Chicken Burger, Kuan Jin Spar Ji Pai Bao, launched in quarter four of 2022, joined our 100 million club in 2023 with very little spend on marketing. It offers amazing value for money using chicken breast meat and is very popular with younger customers. Chicken breast meat is very high quality protein, but the cost of breast meat is much cheaper in China than fat meat. Our juicy whole chicken is another remarkable success story. We launched it in 2021, and by 2023, we sold over 50 million whole chickens. Whole chicken and beef burgers combined now contribute close to 6% of our sales, more than the original recipe chicken that we have been selling in the last 36 years. K-Coffee also grew rapidly in 2023, driven by product innovation and improving accessibility. 190 million cups were sold last year, a 35% increase year over year. Our coffee offers great value for money at below 9.9 RMB per cup. Great value for money remains a key factor to drive traffic in addition to the great food that I just mentioned. We have strategically enriched our menus with entry price point products to attract incremental customers. Our superb in-house supply chain empowers us to innovate and offer fantastic value while protecting margins. At KFC, apart from our long-lasting value platform, Crazy Thursday, we identified entry-price combos as huge underserved market segments. Last year, KFC expanded the choices of its 20 RMB combo, including our recent Chinese burger, Bing Han Bao. which have been well received by customers. For pizza, the under 50 RMB segment represents a significant portion of the market, but it's underserved at Pizza Hut. In November last year, we launched four entry-price pizza, including the delicious Texas barbecue chicken pizza. We will continue to add more course courses choices to our menu this year to capture incremental sales. We also see amazing potential to further grow delivery sales. We are adjusting our delivery pricing structure to be more aligned with market norms. This will help us capture incremental traffic, especially in the smaller ticket segment. and from more price-sensitive customers. Our third traffic driver is the effective use of our own and third-party online channels. In 2023, our digital sales surpassed $9.2 billion. Of that, about one-third came from our own super app, one-third from mini programs, and one-third from aggregators. Our own super app sales grew rapidly last year, up 35%. We continue to actively recruit and engage members. Our loyalty programs exceed 470 million members, who contribute a record 65% of our sales. The purchase frequency of our key friends our most loyal customers was more than 100 times a year. Our collaborations with major e-commerce and social media platforms extend our reach beyond physical stores. This allows us to attract new customers and promote new offers in a cost-effective manner. We consistently led the industry in terms of sales generated on these platforms. Our brands are deeply ingrained in China, well-loved and trucked by consumers. We continued to deliver amazing growth despite operating in a challenging environment. KFC is thriving and remains our key growth engine. with a record operating profit of $1.2 billion in 2023. Pizza Hut is picking off, adding 409 stores in 2023 alone, compared to just 41 stores in 2019. Their 2023 core operating profit tripled year over year. Lavazza is on the right track, with sales doubled and notable improvement in store economics. Taco Bell is making notable progress, yet there's more work in store model refinement and manual localization to be done. Leadership returned to profitability in 2023. Its innovative store model, which caters to smaller party sizes, has achieved initial success. we expect good momentum in opening stores both in China and overseas. Huang Jinhuang continues to be resilient, maintaining profitability every year since we acquired it in 2020. In 2023, Huang Jinhuang tripled profits and opened 40 net new stores, We will continue expanding our store footprint in China and overseas this year. Onward into 2024, we are serving up a combination of exciting menu items, awesome toys, and games for Chinese New Year. KFC's newest innovation, the Happy Fried Egg in Spicy Sauce Chicken Burger. 快乐肥汁炸蛋烤鸡腿煲 is absolutely delicious. It's comfort food for your soul. We are also offering our wildly popular golden bucket again this year. It has a very lucky and down-to-earth name, 快发财, which means get rich soon. And the first letter also stands for KFC. So right now, it's getting around, getting more popular to reach each other KFC in China. Pizza Hut is launching 18 new products, including Wagyu Beef Pizza, Xiehua He Niu Pizza, at just 69 RMB. The abundant choices and value are amazing. Although consumers are more rational and price sensitive in the current economy, there is a strong desire to indulge, especially during holidays. Our enticing offers are designed to generate excitement and attract traffic. I eagerly anticipate this vibrant trading period. With that, I will turn the call over to Andy. Andy?
spk14: Thank you, Joey, and happy Chinese New Year, everyone. Today, I will discuss our fourth quarter and full year 2023 financial results, followed by our outlook for 2024, as well as our capital allocation strategy. We delivered robust results in the fourth quarter and reached the next milestone for the full year. In response to current operating environment, We adopted our strategy and launched attractive campaigns. This allowed us to drive incremental traffic and sales. We maintained 21% system sales growth in the quarter, same after four years. Core operating profit in the fourth quarter quadrupled year-over-year, and restaurant margin improved on a comparable basis. As you may have noticed, we have introduced core offering profit to enhance comparability of our results and provide additional transparency on how we evaluate the performance of our core operations. This metric excludes foreign exchange impact, special items, and other items affecting comparability. For further details, please refer to the reconciliation table in our earning relief and presentation. Let's now look at our fourth quarter performance in more detail. System sales increased 21 percent year-over-year, led by 12 percent net new unit contribution, 4 percent same-store sales growth, and lapping temporary closure from the pandemic in the prior year. By brand, KFC's system sales increased 20% year-over-year. Same-source sales growth of 3% mainly came from 16% same-source traffic growth and 11% lower ticket average. To put it into perspective, ticket average in the fourth quarter was 39 RMB, the same as last quarter, and higher than 2019. Overall ticket average remain stable in the past five years, and our focus has been to grow our traffic. A strong rebound of sign-in sales, especially for breakfast day parts, and successful expansion of our entry price offerings contribute to lower ticket average. Visa Hut system sales increased 24% year-over-year. StingSource sales growth of 6%, was driven by strong traffic growth of 15 percent and ticket average decrease of 8 percent. It is by design and consistent with our revitalization strategy since 2017. Our recent focus has been to expand pizza offerings below 50 RMB and smaller party size options. The strategy has proven effective. in expanding our addressable market and capturing incremental traffic. Our restaurant margin was 10.7 percent, 30 basis points higher than last year. On a comparable basis, our restaurant margin grew by 170 basis points. Improvement was mainly from self-leveraging, low rider cost, more favorable commodity prices, lower advertising expenses. This, more than offset, increased marketing campaigns and raised inflation. Now, let's go through the key items. Cost of sales was 32.4%, 50 basis points higher year over year. During the quarter, commodity prices were favorable. We passed that to consumers by offering better value for money. Cost of labor was 29.0 percent, slavish year-over-year, or improved 40 basis points on a comparable basis. Sales leveraging, low rider cost, and efficiency gains more than offset rate increases for frontline staff. Occupancy and other was 27.9 percent, improved 100 basis points year-over-year. or 180 basis points on a comparable basis. This came from lower rent and depreciation expenses, as well as more efficient management of marketing and advertising expenses. G&A expenses increased 6 percent year-over-year. We tightly managed costs and headcounts to keep G&A growth below revenue growth. Operating profit was $110 million, core operating profit quadrupled. Our effective tax rate was 24.2% in Q4 and 26.9% for the full year. Lower effective tax rate on a year-over-year basis was mainly due to more preferential tax benefits and higher pre-tax income. WDPS was 23 cents excluding special items, foreign exchange, and major investment. The increase was 164%.
spk10: Now let's turn to our outlook.
spk14: We remain excited about the vast growth opportunities in China. In 2024, we anticipated opening 1,500 to 1,700 net new stores. After 36 years in China, it's amazing that we're still growing our store at double digits. Our heavy new store payback gives us confidence to continue expansion and reach 20,000 stores by 2026. As we shared at our investor day last year, We aim to grow system sales and operating policies by high single-digit to double-digit compound annual growth rate. And EPS by double-digit compound annual growth rate from 2024 to 2026. We'll continue to capture our new opportunities by innovating new products, launching engaging campaigns, and widening price points. This helps us to expand our addressable customer base and drive incremental sales. We're confident in executing our three-year plan. Cost structure rebasing continues to be a key focus. Our efficient cost management will enable us to pass the savings back to customers and drive traffic while protecting margins. Before I delve into the first quarter outlook, I would like to remind everyone that first quarter 2023 was a phenomenal quarter, during which we achieved record-setting profits. We captured robust demand from the reopening, delivering solid sales. On the cost side, we benefited from substantial temporary relief and VAT deduction benefits which is not expected to recur this year. We also benefited from labor productivity gain from labor shortage in the first quarter last year. Looking ahead to the first quarter this year, as Joey mentioned, we are now operating under a new normal. Consumers are more rational in spending, yet have great expectations and appetites for new and exciting products, and that can offer great value for money. In response, we have statistically planned a very intensive number of new product launches and attractive promotions. We have also dedicated more resources to drive sales and capture the peak Chinese New Year traffic. In light of these challenges, we will work hard on productivity improvement and cost control, including G&A expenses. Our aim is to maintain our core offering profit while stable on a comparable year-over-year basis in the first quarter. This will exclude temporary relief, VAT deduction benefits, and changes in foreign exchange rates. let's turn to capital allocation. There's no better investment than investing in our own organic growth while delivering excellent returns to our shareholders. With a strong focus on efficient capital returns, CapEx in 2023 totaled $710 million at the low end of our original target. In 2024, CapEx is expected to be in the range of $700 million and $850 million. Since the spin-off, we have returned $3 billion to shareholders, and we plan to return an other $3 billion in the next three years. We accelerated return to shareholders in 2023, returning a record $833 million in cash dividends and share repurchases. In 2024, we plan to further accelerate return to shareholders to around $1.5 billion. We raise our dividends by 23 percent, from 13 cents to 16 cents. That would be roughly $250 million for the full year. As for share repurchases, we already have a $750 million program in place and plan to further increase repurchases by around $500 million. So a total of $1.25 billion share repurchase in 2024. This is equivalent to around 9% of our market cap at the current share price. The stepping up of returns demonstrate our confidence in our cash-generating capability and commitment to return accepted cash to our shareholders. Let me pass it back to Joey for closing remarks. Joey.
spk08: Thank you, Andy. Before we turn to Q&A, I would like to just summarize. In 2023, we reached record top line and bottom line, as well as net new store openings. And we returned record level of cash to our shareholders through dividends and buybacks. These achievements were made possible by the transformations we implemented in our fundamental capabilities, ranging from flexible store formats and food innovation at scale to support supply chain management and industry-leading AI applications. We have showcased our expertise and agility to navigate diverse market conditions. Acknowledging the high expectations our shareholders hold for us, we in turn set equally high standards for ourselves. We are fully committed to our three-year growth target and generating long-term sustainable value for our shareholders. I would like to thank our shareholders for your continued support. With that, I will pass it back to Michelle.
spk04: Thank you, Joey. 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. Operators, please start a Q&A.
spk17: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michelle Cheng with Goldman Sachs. Please go ahead.
spk06: Hi. Joy, Andy, congrats for still very resilient results and also the impressive shareholder return. While we understand the company's strong long-term position, but my question still wants to focus a bit on the short-term. So can you give us some colors regarding these pre-Chinese New Year traffic and same-door sales trend? And also, I think Andy mentioned about in first quarter, we are looking for more steady core operating profits. So can you clarify, does this refer to like profit level or margin? Yeah, so that's my question. Thank you.
spk14: Thank you, Michelle. So let me address your question about clarification on our statement on for offering profit in the first quarter. We are looking at the overall level, not the margin size. I think, you know, it's important to keep in mind that, you know, in the first quarter last year was exceptional, phenomenal quarter that we achieved, you know, record profit, which was both by, obviously, you know, the sales leverage from the initial reopening demand surge and then also some significant temporary VAT deductions and labor gains from labor shortage. So, yeah. Those factors, we don't expect them to repeat again this year. And so I hope I answered that question and clarification.
spk08: For the Chinese New Year. Yeah. For the Chinese New Year trading, Andy has mentioned in his presentation earlier, it's a very, very tough lab because last Chinese New Year, we had a phenomenal trading situation. during the 2022 Chinese New Year. But we have prepared a very full and exciting calendar for the Chinese New Year. Not only the excitement of the marketing campaign for products, and this is the first time we launched five new burgers five weeks before going to the Chinese New Year. The excitement is there. The trading so far has been solid. But it's still a bit earlier because we really need to anticipate until the first day of the Chinese New Year. And then right now, the weather, to a certain extent, the extreme weather is a bit of a wild card. So that's where we are. And the focus going into the Chinese New Year after the first day of Chinese New Year is about our golden bucket. That was our total focus of all our But it's a very, very tough quarter, so we'll be happy if we actually can stay flat with the same source out.
spk07: That's where we are right now.
spk17: Your next question comes from Brian Bittner with Oppenheimer. Please go ahead.
spk18: Hi. Thank you. You know, as it relates, I understand the first quarter is a very difficult comparison versus last year, but your goal is to keep the operating profits flat, as I heard it. So what type of sales trends or same-store sales do you need in order to keep those operating profits flat? And then, Andy, once we get past this first quarter difficult comparison, how do you think about the way the year will build. How do you think about the second half of the year and the opportunity to grow sales there versus, say, maybe the first half of the year, which seems to be a more challenging setup?
spk14: Thank you, Brian. Yeah, so I guess there's a lot of questions about, you know, the first quarter outlook, rightly so. But before, you know, again, like diving into more details on, you know, the first quarter outlook, let me just point out a couple things, right? Overall, consistent with our three-year plan, we are confident that we will maintain stable operating margins in the long run. As I mentioned, the emphasis here is the long run because in the near term, we're going to have certain factors that are going to affect the near-term situation. And you know and then over the long term we also will look into potential opportunity as we have been doing so to restructure our call space looking to improve you know our occupancy and other costs and then also leverage you know our digital capability to better manage better use of more effective advertising and also G&A expenses. Now when we look at you know in 2023 restaurant margins and OP improve quite meaningfully. That's driven by, you know, things also have growth, right, and as well as, you know, cost reduction and disruption. So, you know, KFC is already operating at a very high level in terms of margins, and then Pizza Hut, you know, has a little bit more room for improvement in the long term. Now, you know, if we look at the quality fluctuations, you know, That's to be expected, as we mentioned. This is the first year, you know, so normalizing operation post reopening. And in the first quarter and in every quarter, we'll be driven by some seasonality, and then also we'll be driven by, you know, obviously the sales trend and other factors, because sales is always a very important factor in determining margin for us. And, you know, as you mentioned and mentioned previously, Last year, you know, it was high days. You know, we achieved, again, you know, like a very phenomenal quarter with, you know, record-setting operating profits. And so, and then there was also some one-offs. As you can imagine, you can look at, you know, the reconciled table, roughly $30 million of one time that we received last year. So that set up a high base for us this year. Obviously, we work hard, you know, to manage our costs and drive sales. And in the first quarter, we are walking under a new normal, right? And, you know, as we have, you know, mentioned in our prepared remark, consumers are more rational in terms of their spending and eager for, you know, new and good value for money products. And so, you know, as Susie just mentioned, you know, we have set up, you know, a number of very intensive number of, you know, product launches in our candidate. And then we also, you know, make sure that we have significant resources and campaigns to drive that sales and traffic, especially around Chinese New Year, okay? So, you know, again, you know, like Chinese New Year right now is too early to give a very solid outlook. Because this year, China's New Year, is a bit later compared to last year. So right now, as we look at our plan, the new normal is on track. However, as Julie mentioned, there's quite a few uncertainties with China's New Year because millions, hundreds of millions of people are traveling in a very short period of time. And so the weather conditions, as we have observed recently, may or may not have an impact there. So we'll continue to monitor the situation and adjust our plan as we always have been quickly to respond to any changes if necessary. And so on the cost side, as mentioned, obviously we'll focus on productivity improvement, cost control, and then the goal is really to maintain a stable core operating profit after adjusting for the non-recurring items and foreign exchanges. Thank you.
spk17: Your next question comes from Xiaopo Wei with Citi. Please go ahead.
spk03: Good morning. Thank you for taking my question. I'll just look at a little bit longer term in terms of business. And the first thing is, if you look at the financials, in 2023, actually a very good control GNA. If we look at a GNA to sales ratio actually going down. If we look at a 24, as Julie and Andy mentioned, there are some factors which you cannot control in short term, like weather, like macro. So shall we be certain that the GNA to sales ratio will continue to go down in 24 because that we have more control on management of our other mean cost at high quarter level? That is the first question. The second question is Andy and Julie mentioned that the consumers are more rational this year. So could you comment on your competitors? Well, competitors will be more rational as well with more rational consumers. Thank you.
spk05: You handled the other one.
spk14: I will just quickly talk a little bit about our cost effort in conjunction with the GNA. So you can see that over the past few years and last year, we have put a lot of effort to restructure our cost base. Our overall target for field ads have been trying to keep it stable, and we have kept it stable around 31% over the past few years. Obviously, field ads move seasonally somewhat, and we generally kept it around 31% plus or minus 1% for the full year. And then the other one is labor costs. Labor costs, obviously, over the past few years because of the pandemic, we did see you know, some impact on, you know, cost inflation and also do a very mixed shift that, you know, drives up the labor costs. But we're able to more than offset that through, you know, the reductions in occupancy and other costs. There's significant improvement, you know, compared to even pre-pandemic level by almost like 350 basis points. Our rent is at record low right now as percentage of sales. And so that's the longer-term trend, right? And our depreciation costs also come down because we have improved capex efficiency and then also optimized our portfolio. So those are the longer-term trends. In terms of the other major endeavor for us is marketing and advertising because we have invested a lot in digital. And our member base right now is very large, 470 million student members. We have almost 65% of our sales already. So we think we'll be able to work on that in the future. In terms of G&A, a G&A expense as a percentage of sales has improved this year to 5.8%. We continue to aim to continue to sustain that trend by ensuring that G&A growth will remain significantly lower than sales. To do that, obviously, we'll continue to improve labor, like our efficiencies in health, new technologies, and other automation tools to help improve I will make some of those administrative tasks. Thank you.
spk08: Yeah, Paul, I think I'm going to address your question by taking a step back by looking at the trends, the industry trend, the competitive trend, the consumer trend, and then our own observation of our trading trend. And that hopefully will give you a holistic sense of our long-term view. First, industry. It's widely reported everywhere the China economy is growing at mid-single-digit, but it's rarely reported 2023 our industry actually grew at double-digit, actually 20%. So the recovery of the restaurant industry was very vibrant for 2023, and we are doing slightly better than the industry average. For 2023, it was not easy to disaggregate many factors, including the growth or the recovery. One reason is sometimes the headlines could be misunderstood. I'll give you an example. For quarter three, Yum China performance, the headline was reported, we grow sales of revenue by 9%. missed the expectation by 5.7%. In reality, that is due to the foreign exchange difference. In our operating currency, which is renminbi in China, our sales growth was 15%. But the reporting currency is in US dollar, so it's reported at 9%. So if we disaggregate the foreign exchange from the operating currency, we see the difference. But fundamentally, our industry is growing very nicely. And then, of course, quarter two, the actual recovery in terms of the system sales was as much as 32%. So net-net, the industry recovered by 20% for 2023. And that explains why, other than Yamchina, there are so many competitors have been so aggressive to open new stores because opportunities are there. Is it competitive? Yes, absolutely. But fortunately, let's not forget, it has always been competitive in the last 36 years as well, and we have always been able to stay as a market leader in the last 30-some years as well. That's point one. Point two, consumption trends. What I'm going to share is not the mainstream thinking so we can agree to disagree. The mainstream thinking is China is going through consumption downgrade with many challenges. To a certain extent it's true, but to a certain extent customers are just getting more rational. However, what is not being mentioned at all is even with 5% GDP growth or mid-single-digit GDP growth, consumption upgrade is still also happening. Urbanization in China is still happening, and we don't even need to look at the restaurant industry. We can look at China's top 6,000 shopping malls, which we track because we open a lot of stores in those shopping malls. Within the segment of top 6,000 shopping malls, 2023 alone, there were 400 new shopping malls open. Not a small number. And two-thirds of them opened during the second half of the year, quarter three and quarter four. And we are happy to report to our shareholders that these shopping mall location stores are better, are trading better than the rest, well, apart from the tourist and transportation location. So when a shopping mall opens near the high street or close to the high street, you can imagine the traffic move to the shopping mall, and that itself is consumption uptrend. So come back to the rationalization of the customer. How do we respond to it? We are the market leader. Our focus in the last 30-some years and our ongoing focus is how to build a brand with a combination of good value, amazing product, and opening up the price point. It's a combination of all of these. Good food is always number one, and you can see why we continue to roll out so many good food. But at the same time, we are very cautious about the price point. There's a reason why original recipe chicken, after 36 years, the price is less than 5x of the price we launched 36 years ago. Only if the China housing price increased by the same ratio of original recipe, then I think many Chinese people are even happier. So we do a range of the product launch. We launched Wagyu beef burger that priced as much as 50 RMB. But at the same time, we also introduced the entry price value combo at 20. This is the range we're going for. And it's working. Point three, come to the trading pattern. What have we seen during quarter four? And that will give us some idea about the 2024 going forward. We celebrate 10,000 store of KFC during December 15 this year. It was very meaningful for us. And it also, I hope, gives some confidence to our investors that Western QSR, is solid and has nice growth. Quarter four starts with a bit of softness. We don't have to reiterate again, but the trade improved in November and then improved a bit more in December. Good to know the trend is all right. And then the rebound of dying is very strong. However, delivery remains popular. It's still 36% of our business. Customers like the convenience. By trade zone, all improved. As I mentioned earlier, tourist location and transportation are recovering very well. Other than that, shopping malls are doing the best than the others. By region, recovery happened across all regions for port of food and food. Northern part of China recovered the best because last year COVID lapping, they were very difficult last year. And across the year, eastern part of China, which is the most important part of our business, is still the most resilient region. In city tier, tier two inland central part of China are recovering the best, are doing the best. They are the regional hub, vibrant economy, the living expenses are lower. One good example is Changsha. It's the destination for food in China. A lot of amazing food concept there. People go to Changsha just to enjoy different food. But little do people know, Changsha's rent is only about 10 to 15% of Shanghai. And yet, take an average, it's not too different. And these are the example of the cities doing the best and going forward. And Pisa are doing very well in lower tier cities. And that proves that... The Pizza Hut business model works for lower tier cities. Last, last but not least, our weekend trading right now is better than weekday. This is phenomenal for our team because if you remember in a previous earning call, our weekend traffic was more challenged after the pandemic. People's behavior changed. The traffic during weekend dropped. What did we do? We launched the whole chicken and that product, the whole chicken product target very, very, has a very clear focus to drive the delivery business during the weekend. Customer can buy the whole chicken, put it on the table, have a veg and some rice, and this is a very nice meal. And it works. So now our weekend sales actually is better than weekday. Huge milestone for our team ability to build new product and new skill to grow with the change of customer. Thank you for indulging me. It's a long answer, but I hope that gives you give you some sort of long-term view of the way that we train our business. Thank you, Dilpo.
spk17: Your next question comes from Lena Yan with HSBC. Please go ahead.
spk08: Hi, management. Thanks for the very detailed walkthrough of your business. And your points are well taken that you are very nimble in reacting to competition. But when I talk to my clients, what I heard most over the last quarter was the market fair, as you brighten your price point, especially by launching more entry price offerings, it might drag down your ticket size. Obviously, Andy shared some numbers. Your ticket size, 39, was very stable quarter over quarter YOY in fourth quarter. But I'm wondering if you could give us more color in terms of how those entry price offering products are affecting your sales mix and what's the impact on AST and the number of transactions per ticket so that you can maintain a relatively stable 39 ticket size. And on top of that, what would be the impact of entry price offering on your GP margin? Thank you. Thank you. Let me reiterate. We have been able to protect our ticket size and even grow a little bit over the years. So 2019 pre-pandemic, the ticket average is 37. 2020 is 40, and then 39, 42, and then 41 for 2023. So this is the long-term trend. And if we even go back even another five years, it's not too far away. So this is always our trading strategy to keep the ticket average relatively stable. To go to specifics, the introduction of the entry price product always comes with the new product and also price. comes with the introduction of the high-priced product. I mentioned that the beef burger, the beef burger grew by 18% last year, by the way, the category. So 50% R&B Wagyu beef burger and 50% R&B Wagyu beef burger and 20% R&B combo is a good balance. What also helps is when we do promotion, like even for Chinese New Year, We always try to help customers to trade up to a higher ticket average by having a very attractive discount. So it's a combination of the marketing campaign that we have been doing to protect the ticket average. Specifically for the entry price product, it has three purposes, and we are happy to see all three purposes there. One is, it does attract incremental customers as we become more and more mass market, particularly for Pizza Hut. By the way, Pizza Hut's ticket average moved from 120 to right now 90 over the last five years as part of the turnaround strategy. Obviously, it works. Because if we want to open more stores, become more mass market, we need to have product and price point that cater for the incremental customer. So it works. And to what percentage? It's about 5% right now. It's not a huge proportion that will offset the balance of our margin. That's point one. Point two is, interestingly, when we have the entry price product, it's not Does it mean that most of the customers will go there? Not necessarily. If you think about customer's psyche, many customers will still go for the product above the entry price product to feel good. It feels good to choose something in the middle, not the cheapest one, right? You are the customer yourself. Ask yourself, how would you choose? Third, it really actually improves the price perception. By having something very low cost there. I'll give you one example I did 10 years ago with KFC business. I lowered the small Pepsi Coke price in our menu. Lowered it. Because it looks good. It looks very affordable. But how many people actually went for it? Not that many. But the perception is important. It's almost as important as the reality to a certain extent. So I hope that gives a sense about how do we treat the entry-price product. But certainly it helps when we go down to Tier 5, Tier 6 cities to introduce, you know, to introduce our product to certain customers. By the way, it's a fantastic way to recruit young customers such as students as well. Particularly with amazing products like the Golden Spar Chicken Burger, it's breast meat. Breast meat in the U.S., you can sell it at a higher price than duck meat, but in China, it costs us less. So the margin, of course we protect the margin. The margin is just fine. Thank you.
spk17: The next question comes from C.G. Lin with CICC. Please go ahead.
spk21: Thank you, Julie and Andy. So we have talked a lot about the competition. I want to ask one question about Pizza Hut. So we see that Pizza Hut had quite good performance on margin in Q4, driven partially by the labor productivity gain and lower writer cost. And we also mentioned before that Pizza Hut's margin is still lower than CAPTC and there's room for improvement. So what else we can do to further reduce cost and improve efficiency? Thank you.
spk14: Thank you, CJ. So, you know, again, you know, when we look at, you know, our cost and the focus, as we have said many times, including what Joe, you have just earlier mentioned, we generally try to aim for, you know, cost sales to be markedly stable over the long term on a year-over-year basis. And that's because we have a very excellent supply chain team, very disciplined with our pricing. And this also comes from our commitment to continuously innovate and also introduce new products every year. And also, as we have mentioned many times, we make the best efforts to using every part of the chicken or cow so that we can enhance the resource usage, minimize cost. And all these have allowed us to provide great value for the money for our consumer while keeping our cost of sales relatively stable. There will be some new quality seasonality and fluctuation there, but if you look at our track record, we have been able to keep it around like 31% plus or minus 1% over the past three years, including last year, which is way under that 31%. Now, when we look at the overall cost, labor costs, obviously right now we're in a soft path for the economy, so you would be probably more modest in terms of wage increase, but But more importantly, over the years, we have utilized digital and automation tools and technologies like AI-assisted scheduling or inventory that we have mentioned before to enhance labor productivity and manage costs. We are also, with the RGM initiative, basically we are trying to streamline administrative tasks and then like recruitment or training, et cetera, to a more centralized process. as well as centralized food processing to further improve restaurant labor efficiency. And so, you know, obviously there's fluctuation, but in the long term, we aim to keep labor costs massively stable in the long run. Again, the emphasis here is on the long run, because in the short term, it's going to be always impacted by the sales leverage. Now, occupancy and others This goes same for KFC and same for Pizza Hut. It's an area where we will have opportunities. And compared to pre-pandemic, as I mentioned earlier, we improved by almost 350 basis points. Now, rent-of-sales ratio is one. We have good long-term contracts. And then we also have optimized our stock portfolio. As we expand into lower-tier CDEs, They generally also come with low rent. As we mentioned, the rent in Changsha is a lot lower than the TA1 city, for example. And then we also have more flexible formats that are targeting delivery and takeaway that are smaller and also more cost-efficient in terms of rent-to-sales ratio. Now, depreciating costs is another one. We continue to work on this. You can see every year, You know, our capex per stall has improved. Compared to a few years ago, it was around like 2.5 million R&B. To today, it's around like 1.5 million R&B per new stall. So our depreciation cost also improved. And, you know, marketing leverage and extra. So I think for Pizza Hut, obviously, you know, labor potentially is an improvement opportunity there. As I mentioned before, KFC is already running at a very high operating level, so the room for improvement potentially will be in the O&O side.
spk08: Let me give an overview and take a step back again. We've been very consistent with the Pizza Hut strategy since 2017 when we embarked on the Pizza Hut turnaround. It sells first, profit later, and then resiliency comes after that. Sales is obviously, you remember, we work on a product, we work on a marketing campaign, we work on the business model, we work on unit economics of each of the stores. Once we turn around the same store sales within 18 months after we make that promise, Then we really turn the focus to profit because sometimes you have to do the trade-off, particularly at the very beginning of a turnaround or building a brand. The trade-off is always sales first, profit later. So later on, we work on the cost lines, all the details Andy just went through with you a minute earlier. And we'll continue to do that. And we want a bit more profit, bit by bit, on every line. What is after is resilience. It's more profit. We are going to open more stores, obviously, across all 30 years to, you know, improve, to utilize the scale of our business to get better rent, to get better cost of sales, et cetera, et cetera. And then next is resiliency. We want to build a very resilient business, even more resilient business They're now as resilient as KFC. Well, it's a very challenging goal, but unfortunately, when you have two brothers, and of course, two brothers compete with each other. It's just normal. So, for example, one challenge we give to ourselves, which we got it already, 2023, is we want each quarter to be profitable. Because Pizza Hut is quite a seasonal business, even more seasonal than KFC. So you can see that quarter four, 2023, we remain profitable. And it's very important because I just don't like business that make a lot, even though that's big and small quarters. And then we'll continue to improve the seasonality, and we'll even continue to improve the resources allocation during the peak hour and the slow hour of the day. That's how we improve the resilience of the business, not only for the shareholders, but for our employees as well. Thank you.
spk17: Your next question comes from Kevin Yin with JP Morgan. Please go ahead.
spk19: Thank you. Thank you, Julie and Andy. My question is on the ASP. Good to see the ticket size was up from 39 to 42, which is very good. We'd like to better understand if the fourth quarter 23 is a bit different versus before. So for example, like for like basis, KFC average ticket size down what percentage and traffic coming back by what percentage of points? So just try to quantify in the fourth quarter ASP down and the traffic back, okay? And secondly, also like to note your source for 2024 your convection level to maintain flattish seam source growth in 2024? And if we're considering the contribution from the GNA cost cutting, et cetera, what's the minimum seam source growth level for you to maintain the restaurant margin in 2024?
spk20: Thank you very much.
spk14: Okay, Kevin, thank you for the question. So, a little bit... classification on the TA and 4Q difference, right? So for KFC, we have same-store sales growth of about 3%, and the transactions, the TC, can increase by 16%. And then the average ticket size was down 11%. For Pizza Hut, you know, the same-store sales growth was about 6%. And then the traffic growth was 15%. And then the average ticket change was about 8%. But as I mentioned before, the TA trend, the average ticket trend, is pretty consistent with our overall strategy and to broaden our market reach. And as Joey mentioned, the strategy approach is to expand our stock footprint, especially in a small city, spending our pricing points, and then offer consumers more product options to drive incremental traffic and sales. So there's some different growth that we have observed, both in transaction and overall system sales growth. As I remind everyone, for both KFC and Pizza Hut, system sales grew more than 20% in the fourth quarter, but also for the full year. So obviously, if you look at the sales number, our strategy is working effectively. Now, when we look at the ticket average changes on a year-over-year basis, it's worth noting that 2023 obviously was the first year of reopening. So this is an important context to keep in mind when we look at the TA movement. And, you know, as we have mentioned before, KFC, we're seeing very robust ticket average in the fourth quarter, 39 RMB, which is consistent with the third quarter and is above what we have seen in the pre-pandemic. In fact, the ticket average, as we have mentioned earlier, have been pretty consistent over the past five years. Obviously, with the recovery in the die-in cells, it was strong this year. coupled with strong performance in our breakfast and coffee sales, has contributed to the year-over-year movement of the average ticket size for KFC. It's also consistent with our approach to expand the pricing range and our product options that, again, effectively show very robust traffic laws.
spk08: Let me just add a little bit here about the quarter four ticket average, and then Andy can wrap up this question. Kevin, the ticket average for Quarter 4 is not that unusual. As Andy just pointed out, 2022 is the unusual year because it was still in lockdown. It's 42. That's very high. If we go back to 2021, Quarter 4 is 38. The 2023 Quarter 4 is 39. But 2021 Quarter 4 is 38. 2020 Quarter 4 is 38. 2019, which is one of our best years, the ticket average for Qalipur is 37. So it's not that different. I mean, the overall feeling is the market is getting more promotional, et cetera, et cetera. But as I went through in great detail that we're the market leader, and when we deal with challenges like that, which is not new to us, by the way, we always have a combination of – good promotion, a good product, good mechanism to protect the TA, et cetera, et cetera. Therefore, we are able to maintain the TA even during the port of four across multiple years. Thank you.
spk14: Right. Thank you, Joey. Again, it's very important to keep that context in mind because as a member, it seems like long time ago, but it was only fourth quarter 2022 that we have this reopening and big surge in infections. At that time, we also experienced some labor shortage because of the infection rise. And then the ticket, I think the delivery mix at that time was 45%, which is very high. And so those are the context for that. And then turning to Pizza Hut, if you look at Pizza Hut, it's a very consistent strategy for us. since 2027 with the turnaround strategy, which is to, as Joey mentioned earlier, drive customer traffic first, then sales, And then finally, enhancing profitability. So we have successfully met those three goals if you look at our results. Moreover, this approach is very much in line with our latest strategy, which is aimed to reach underserved customer segments by expanding our price range, especially for pizza that is less than 50 on the subcategory. And we also want to offer more options for consumers that are suitable for smaller size of individual dining. So thank you. Thank you, Kevin.
spk17: Your next question comes from Chen Lu with Bank of America. Please go ahead.
spk02: Thank you, Julie and Andy. And sorry, actually, my line got disconnected just now, although I'm actually dying to the call at 6.30 a.m. in the morning. So Forgive me if I ask some questions that have already been asked previously. So basically, it's actually on margins. So I noticed that our restaurant margins for 2023 actually has already recovered to a level even slightly higher than 2019. So making it the third highest margin since our spinoff. But compared with five years ago, our margin structure has significantly changed. So our labor costs as percentage of revenue has risen significantly, but our occupancy and others have reduced significantly. So going forward, do we think that there's room for us to maintain a largely stable labor-to-sales ratio, especially given that recently our channel checks suggest we have taken a lot of measures to control the rider cost? such as the introduction of Meitouan and Erleman as our future vendors, as well as our continued rollout of the RGM macro program. So do we think there's room for us to see a largely stable labor cost as opposed to the rising labor cost trend in the past few years? And meanwhile, I noticed that our food and paper costs as TSA has risen by 50 bits, 80 bits for KFC and 50 bits for the whole group, given a very promotional environment. Do you think it's going to be a new normal for the entire year of 2024? And lastly, just now I heard about guidance for largely slattish OP for the full year, excluding SX and one of ICOMS. But then if you look at the reported level, I remember last year we broke a one-off gain of $27 million in our OP. That may actually lead to a single-digit impact. And then given the effects, there's another 5% impact. So is it fair to say that on the reported level, actually the OP may possibly decline by around 10%-ish? Of course, I think this is this should be the worst case. But hopefully, if everything is going in the right direction, the actual decline could be better than that. So these are all my questions. Thank you.
spk08: Thank you, Lawton. Let me actually answer one question that Kevin and Brian asked earlier, and then I'll come to your question. It's about the same-door sales growth. Let me just point out that 60% of our store in our portfolio right now are built after 2019. So there's a reason why we really, you know, we'll continue to drive this info sales, but the system sales growth is incredibly important for our business. And then we come to the core side, mainly O&O. The labor cost, let's talk about all of those first. We have been operating with the guiding principle that we always are sincere about giving the best food to our customer, pass all the savings, pass a lot of savings to our customer. So if you look at our cost of sales over the last few years, it has been very stable, very, very stable. Better times or more challenging times? So if I start with 2019 pre-pandemic, or even, well, 2019 pre-pandemic throughout the time. 2022, 31.1%. 2023, 31%. It's really like less than 1% swing around the 31%. It's always there. Because whenever we have savings, we pass the savings to the customer through food. So you can be assured that we'll continue to stay around 31% about the cost of sales. Because if my team goes significantly below that number, they will have a very hard time for myself. And they all know that. Second is cost of labor. Cost of labor, even in a year like this year, yes, it has increased because There are a lot of sort of insurance and et cetera, et cetera. All these costs are going up. And labor costs is always sort of going up. I spent 10 years in the UK. Even when the GDP was going south during the five years out of 10 years I was there, labor costs were still going up. So we have to every year find ways to help our staff to become more productive which we have been doing that. And going forward, you can see we even go as far as one store managing multiple stores. It has gone up a few points. 2019 is 22.8, and then go up to 23, 25, 26. Now it's staying at 26% the last two years. And the way that we run this business, we generate savings from O&O, from rent, from depreciation, from everything that we could save, and then pass the savings to our staff. We pay them as fair pay, and we hopefully pay them well. We give them really good health insurance, et cetera, et cetera, because we want to have the best staff to provide the best service for our customers. So that will be the direction we'll continue to drive. In terms of OP, as a result of foreign exchange, et cetera, I'm sorry, cannot forecast that. It's beyond a company's capability. So we'll do everything we could to generate sales and to manage costs and then produce the result as a result of our good effort. Thank you, Lorton.
spk17: Thank you. That is all the time we have for questions today. I'll now hand back to Ms. Shen for closing remarks.
spk04: Thank you, Ashley, and thank you, everyone, for joining the call today. For further questions, please reach out through the contact information and our earnings release and our website. Have a great day.
spk11: Thank you. Thank you.
spk17: That does conclude our conference for today. Thank you for participating. You may now disconnect. So, Thank you. Thank you. Thank you. you Thank you. Bye.
spk09: Thank you. you you Thank you.
spk17: Thank you for standing by and welcome to the Yum! China fourth quarter and fiscal year 2023 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.
spk04: Thank you, Operator. Hello, everyone. Thank you for joining Young China's fourth quarter 2023 earnings conference call. On today's call are our CEO, Ms. Julie Watt, and our CFO, Mr. Andy Young. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. Lease 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 lease call in the PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency unless otherwise noted. Now I would like to turn the call over to Joey Wah, CEO of Yum China.
spk08: Joey? Thank you. Hello, everyone, and thank you for joining us today. It's Chinese New Year this coming Saturday. I want to wish everyone a happy and healthy Year of the Dragon. I would like to kick off today's call by expressing my sincere appreciation to all our employees. Their incredible efforts helped Young China deliver exceptional growth in the fourth quarter and for the full year. 2023 was a pivotal time for our business. The transformation of our business fundamentals in the past few years have enabled us to seize opportunities emerging from China's reopening and evolving market conditions. In 2023, we hit record-breaking revenue of $11 billion and grew system sales 21% year over year, outperforming the industry. Operating profits soared to $1.1 billion, an all-time high, excluding special items. Core operating profits grew 79%. We opened a record 1,697 net new stores, expanding our total store count to 14,644 stores. KFC reached 10,296 stores, Pizza Hut reached 3,312 stores. On today's call, I would like to walk you through the tremendous growth opportunities we see and discuss our strategies to capture them in 2024 and beyond. For the past 36 years, we have been the market leader in China. During this time, Connors restaurant operators have passed in and out of favor. Instead of being or the favor of the month, we want to be or the favor of the decade, or even next several decades. In this developing market, where the restaurant industry is still growing double digits, even during 2023, we see a long runway of growth for our brand. KFC still only serves one-third of the China population. Our next ambitious target is to expand our reach to half of the population by 2026. How? By being closer to our customers. This means adding store density in existing cities and entering new cities. KFC currently operates across 2,000 cities in China and is tracking an additional 1,000 cities. For Pizza Hut and our emerging brands, the white space is even larger. China is fast with significant regional and city-tier differences. In lower-tier cities, urbanization and long-term consumption upgrades are presenting attractive opportunities for us. With lower living costs, consumers in these cities have significant purchasing power for our products. So, as an example, premium beef burgers sell well in lower tier cities, just as in high tier cities. Over half of our new stores in recent years are in lower tier cities. These stores have performed well, benefiting from lower labor costs and rent. And the ticket average is as good as in higher tier cities. For now, we are mainly serving middle class consumers in these markets. As we expand, we see further opportunity in widening price points to broaden our addressable customer base. Our mission is to reach 20,000 stores by 2026. We will continue to protect our new store payback at two years for KFC and three years for Pizza Hut. Over the past years, we have been improving our fundamental capabilities to reach this target. This is the key reason we can expand at an accelerated speed. Some of these improvements include, first, flexible store format with lower upfront investment open up more site potential across city tiers. Second, core structure refacing lowers our rent ratio in 2023 to 8.7% of sales. the lowest level in the past 10 years. The majority of our leases are based on variable rates. Third, improved operating capabilities. AI-enabled digital tools empower our capable restaurant managers to oversee multiple stores without compromising quality. This also solves the bottleneck of having enough good RGMs as we expand rapidly. Finally, strategic franchise partnerships allow us to gain access to locations that were beyond our reach before, such as highway service centers. In addition to new store growth, Our same-store sales grew 7% in 2023. It was fueled by a 12% increase in transactions, indicating healthy growth. Our innovative menus, excellent value for money, and effective online channels captured over 1.7 billion transactions last year. Now, let's talk about food innovation. In 2023, we rolled out more than 500 new or upgraded products. That means we offer something new every week. Some examples include KFC's Beef Wraps with spicy duck blood and Chicken Taco with Bull Frog and Pizza Hut's Black Song Durian Pizza. These may sound a bit exotic, but I can assure you they are very popular in China. Over the years, many of our most popular products have entered our 100 million club in U.S. dollar sales, and 2023 was no exception. Our Golden Spar Chicken Burger, Kuan Jin Spar Ji Pai Bao, launched in quarter four of 2022 joined our 100 million club in 2023 with very little spend on marketing. It offers amazing value for money using chicken breast meat and is very popular with younger customers. Chicken breast meat is very high quality protein, but the cost of breast meat is much cheaper in China than fat meat. Our juicy whole chicken is another remarkable success story. We launched it in 2021, and by 2023, we sold over 50 million whole chickens. Whole chicken and beef burgers combined now contribute close to 6% of our sales, more than the original recipe chicken that we have been selling in the last 36 years. K-Coffee also grew rapidly in 2023, driven by product innovation and improving accessibility. 190 million cups were sold last year, a 35% increase year over year. Our coffee offers great value for money at below 9.9 RMB per cup. Great value for money remains a key factor to drive traffic in addition to the great food that I just mentioned. We have strategically enriched our menus with entry price point products to attract incremental customers. Our superb in-house supply chain empowers us to innovate and offer fantastic value while protecting margins. At KFC, apart from our long-lasting value platform, Crazy Thursday , we identified entry-price combos as huge underserved market segments. Last year, KFC expanded the choices of its 20 R&D combo, including our recent Chinese burger, Bing Han Bao. which have been well received by customers. For pizza, the under 50 RMB segment represents a significant portion of the market, but it's underserved at Pizza Hut. In November last year, we launched four entry-price pizza, including the delicious Texas barbecue chicken pizza. We will continue to add more course courses choices to our menu this year to capture incremental sales. We also see amazing potential to further grow delivery sales. We are adjusting our delivery pricing structure to be more aligned with market norms. This will help us capture incremental traffic, especially in the smaller ticket segment. and from more price sensitive customers. Our third traffic driver is the effective use of our own and third party online channels. In 2023, our digital sales surpassed $9.2 billion. Of that, about one-third came from our own super app, one-third from mini programs, and one-third from aggregators. Our own super app sales grew rapidly last year, up 35%. We continue to actively recruit and engage members. Our loyalty programs exceed 470 million members, who contribute a record 65% of our sales. The purchase frequency of our key friends our most loyal customers was more than 100 times a year. Our collaborations with major e-commerce and social media platforms extend our reach beyond physical stores. This allows us to attract new customers and promote new offers in a cost-effective manner. We consistently led the industry in terms of sales generated on these platforms. Our brands are deeply ingrained in China, well-loved and trucked by consumers. We continued to deliver amazing growth despite operating in a challenging environment. KFC is thriving and remains our key growth engine. with a record operating profit of $1.2 billion in 2023. Pizza Hut is picking off, adding 409 stores in 2023 alone, compared to just 41 stores in 2019. Their 2023 core operating profit tripled year over year. Lavazza is on the right track, with sales doubled and notable improvement in store economics. Taco Bell is making notable progress, yet there's more work in store model refinement and manual localization to be done. Little Sheep returned to profitability in 2023. Its innovative store model, which caters to smaller party sizes, has achieved initial success. we expect good momentum in opening stores both in China and overseas. Huang Jinhuang continues to be resilient, maintaining profitability every year since we acquired it in 2020. In 2023, Huang Jinhuang tripled profits and opened 40 net new stores, We will continue expanding our store footprint in China and overseas this year. Onward into 2024, we are serving up a combination of exciting menu items, awesome toys, and games for Chinese New Year. KFC's newest innovation, the Happy Fried Egg in Spicy Sauce Chicken Burger. 快乐肥汁炸蛋烤鸡腿煲 is absolutely delicious. It's comfort food for your soul. We are also offering our wildly popular golden bucket again this year. It has a very lucky and sound to earth name, 快发财, which means get rich soon. And the first letter also stands for KFC. So right now, it's getting around, getting more popular to reach each other KFC in China. Pizza Hut is launching 18 new products, including Wagyu Beef Pizza, Xiehua He Niu Pizza, at just 69 RMB. The abundant choices and value are amazing. Although consumers are more rational and price sensitive in the current economy, there is a strong desire to indulge, especially during holidays. Our enticing offers are designed to generate excitement and attract traffic. I eagerly anticipate this vibrant trading period. With that, I will turn the call over to Andy. Andy?
spk14: Thank you, Joey, and happy Chinese New Year, everyone. Today, I will discuss our fourth quarter and full year 2023 financial results, followed by our outlook for 2024, as well as our capital allocation strategy. We delivered robust results in the fourth quarter and reached the next milestone for the full year. In response to current operating environment, We adopted our strategy and launched attractive campaigns. This allowed us to drive incremental traffic and sales. We maintained 21% system sales growth in the quarter, same after four years. Core operating profit in the fourth quarter quadrupled year-over-year, and restaurant margin improved on a comparable basis. As you may have noticed, we have introduced core operating process to enhance compatibility of our results and provide additional transparency on how we evaluate the performance of our core operations. This metric excludes foreign exchange impact, special items, and other items affecting compatibility. For further details, Please refer to the reconciliation table in our earning release and presentation. Let's now look at our fourth quarter performance in more detail. System sales increased 21 percent year-over-year, led by 12 percent net new unit contribution, 4 percent same-store sales growth, and lapping temporary closure from the pandemic in the prior year. By brand, KFC's system sales increased 20% year-over-year. Same-source sales growth of 3% mainly came from 16% same-source traffic growth and 11% lower ticket average. To put it into perspective, ticket average in the fourth quarter was 39 RMB, the same as last quarter, and higher than 2019. Overall ticket average remain stable in the past five years, and our focus has been to grow our traffic. A strong rebound of dine-in sales, especially for breakfast day parts, and successful expansion of our entry-price offerings contribute to lower ticket average. Pizza Hut system sales increased 24% year-over-year. Stingsaw sales growth of 6%, was driven by strong traffic growth of 15 percent and ticket average decrease of 8 percent. It is by design and consistent with our revitalization strategy since 2017. Our recent focus has been to expand pizza offerings below 50 RMB and smaller party size options. The strategy has proven effective. in expanding our addressable market and capturing incremental traffic. Our restaurant margin was 10.7 percent, 30 basis points higher than last year. On a comparable basis, our restaurant margin grew by 170 basis points. Improvement was mainly from self-leveraging, low rider cost, more favorable commodity prices, and lower advertising expenses. This, more than offset, increased marketing campaigns and raised inflation. Now, let's go through the key items. Cost of sales was 32.4%, 50 basis points higher year over year. During the quarter, commodity prices were favorable. We passed that to consumers by offering better value for money. Cost of labor was 29.0 percent, flattish year-over-year, or improved 40 basis points on a comparable basis. Sales leveraging, lower rider cost, and efficiency gains more than offset rate increases for frontline staff. Occupancy and other was 27.9 percent, improved 100 basis points year-over-year. or 180 basis points on a comparable basis. This came from lower rent and depreciation expenses, as well as more efficient management of marketing and advertising expenses. G&A expenses increased 6 percent year-over-year. We tightly managed costs and had time to keep G&A growth below revenue growth. Operating profit was $110 million, core operating profit quadrupled. Our effective tax rate was 24.2% in Q4 and 26.9% for the full year. Lower effective tax rate on a year-over-year basis was mainly due to more preferential tax benefits and higher pre-tax income. Dadulish EPS was 23 cents excluding special items, foreign exchange, and major investment. The increase was 164%. Now, let's turn to our outlook. We remain excited about the vast growth opportunities in China. In 2024, we anticipated opening 1,500 to 1,700 net new stores. 36 years in China, it's amazing that we're still growing our store at double digits. Our heavy new store payback gives us confidence to continue expansion and reach 20,000 stores by 2026. As we shared at our investor day last year, we aim to grow system sales and operating by high single-digit to double-digit compound annual growth rate, and EPS by double-digit compound annual growth rate from 2024 to 2026. We'll continue to capture our new opportunities by innovating new products, launching engaging campaigns, and widening price points. This helps us to expand our addressable customer base and drive incremental sales. We're confident in executing our three-year plan. Cost structure rebasing continues to be a key focus. Our efficient cost management will enable us to pass the savings back to customers and drive traffic while protecting margins. Before I delve into the first quarter outlook, I would like to remind everyone that First quarter 2023 was a phenomenal quarter, during which we achieved record-setting profits. We captured robust demand from the reopening, delivering solid sales. On the cost side, we benefited from substantial temporary relief and VAT deduction benefits, which is not expected to recur this year. We also benefited from labor productivity gain from labor shortage in the first quarter last year. Looking ahead to the first quarter this year, as Joey mentioned, we are now operating under a new normal. Consumers are more rational in spending, yet have great expectations and appetite for new and exciting products, and that can offer great value for money. In response, we have statistically planned a very intensive number of new product launches and attractive promotions. We have also dedicated more resources to drive sales and capture the peak Chinese New Year traffic. In light of these challenges, we will work hard on productivity improvement and cost control, including G&A expenses. Our aim is to maintain our core offering process relatively stable on a comparable year-over-year basis in the first quarter. This would exclude temporary relief, VAT deduction benefit, and changes in foreign exchange rates. Now, let's turn to capital allocation. There's no better investment than investing in our own organic growth while delivering excellent returns to our shareholders. With a strong focus on efficient capital return, CapEx in 2023 totaled $710 million at the low end of our original target. In 2024, CapEx is expected to be in the range of $700 million and $850 million. Since the spinoff, we have returned $3 billion to shareholders. and we plan to return another $3 billion in the next three years. We accelerated return to shareholders in 2023, returning a record $833 million in cash dividends and share repurchases. In 2024, we plan to further accelerate return to shareholders to around $1.5 billion. We raised our dividends by 23 percent from $0.13 to $0.16. That would be roughly $250 million for the full year. As for share repurchases, we already have a $750 million program in place and plan to further increase repurchases by around $500 million. So, a total of $1.25 billion share repurchase in 2024. This is equivalent to around 9% of our market cap at the current share price. The stepping up of returns demonstrate our confidence in our cash-generating capability and commitment to return accepted cash to our shareholders. Let me pass it back to Joey for closing remarks. Joey.
spk08: Thank you, Andy. Before we turn to Q&A, I would like to just summarize. In 2023, we reached record top line and bottom line, as well as net new store openings. And we returned record level of cash to our shareholders through dividends and buybacks. These achievements will make possible by the transformations we implemented in our fundamental capabilities, ranging from flexible store formats and food innovation at scale to support supply chain management and industry-leading AI applications. We have showcased our expertise and agility to navigate diverse market conditions. Acknowledging the high expectations our shareholders hold for us, we, in turn, set equally high standards for ourselves. We are fully committed to our three-year growth target and generating long-term sustainable value for our shareholders. I would like to thank our shareholders for your continued support. With that, I will pass it back to Michelle.
spk04: Thank you, Joey. 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. Operator, please start a Q&A.
spk17: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michelle Cheng with Goldman Sachs. Please go ahead.
spk06: Hi, Joy and Andy. Congrats for still very resilient results and also the impressive shareholder return. While we understand the company's strong long-term position, but my question still wants to focus a bit on the short-term. So can you give us some colors regarding these pre-Chinese New Year traffic and same-door sales trends? And also, I think Andy mentioned about in first quarter, we are looking for more steady core operating profits. So can you clarify, does this refer to like profit level or margin? Yeah, so that's my question. Thank you.
spk14: Thank you, Michelle. So let me address your question about clarification on, you know, our statement on, you know, core operating profit in the first quarter. We are looking at, you know, the overall performance you know, level, not the margin side. I think, you know, it's important to keep in mind that, you know, in the first quarter last year was exceptional, phenomenal quarter that we achieved, you know, record profit, which was both by, obviously, you know, the sales leverage from the initial reopening demand surge and then also some significant temporary VAT deductions and labor gains from labor shortage. So those factors, we don't expect them to repeat again this year. And so I hope I answered that question and clarification.
spk08: For the Chinese New Year. Yeah. For the Chinese New Year trading, Andy has mentioned in his presentation earlier, it's a very, very tough lab because last Chinese New Year, we had a phenomenal trading during the 2022 Chinese New Year. But we have prepared a very full and exciting calendar for the Chinese New Year. Not only the excitement of the marketing campaign for products, and this is the first time we launched five new burgers five weeks before going to the Chinese New Year. The excitement is there. The trading so far has been solid. But it's still a bit earlier because we really need to anticipate until the first day of the Chinese New Year. And then right now, the weather, to a certain extent, the extreme weather is a bit of a wild card. So that's where we are. And the focus going into the Chinese New Year after the first day of Chinese New Year is about our golden bucket. That was our total focus of all our operation team. But it's a very, very tough quarter, so we'll be happy if we actually can stay flat with the same source out.
spk07: That's where we are right now.
spk17: Your next question comes from Brian Bittner with Oppenheimer. Please go ahead.
spk18: Hi. Thank you. You know, as it relates, I understand the first quarter is a very difficult comparison versus last year, but your goal is to keep the operating profits flat, as I heard it. So what type of sales trends or same-store sales do you need in order to keep those operating profits flat? And then, Andy, once we get past this first quarter difficult comparison, how do you think about the way the year will build? How do you think about the second half of the year and the opportunity to grow sales there versus, say, maybe the first half of the year, which seems to be a more challenging setup?
spk14: Thank you, Brian. Yeah, so I guess there's a lot of questions about, you know, the first quarter outlook, rightly so. But before, you know, again, like diving into more details on, you know, the first quarter outlook, let me just point out a couple of things, right? Overall, consistent with our three-year plan, we are confident that we will maintain stable operating margins in the long run. As I mentioned, the emphasis here is the long run because in the near term, you're going to have certain factors that affect the near-term situation. And then over the long term, we also will look into potential opportunity, as we have been doing so, to restructure our call space, looking to improve our occupancy and other costs, and then also leverage our digital capability to better manage more effective advertising and also G&A expenses. Now, when we look at, you know, in 2023, restaurant margins and OPE improved quite meaningfully. That's driven by, you know, things also have growth, right, as well as, you know, cost reduction and disruption. You know, KFC is already offering a very high level in total margins. And then Pizza Hut has a little bit more room for improvement in the long term. Now, you know, if we look at the quality fluctuations, you know, that's to be expected, as you mentioned. This is the first year, you know, so normalizing operation post reopening. And then your first quarter and every quarter will be driven by some seasonality. And then also we'll be driven by obviously the sales trend and other factors because sales is always a very important factor in determining margin for us. And as you mentioned last year, it was the high days. We achieved, again, a very phenomenal quarter with record-setting operating profit. And then there was also some one-off. As you can imagine, you can look at the reconciled table, roughly $30 million of one-time that we received last year. So that set up a high base for us this year. Obviously, we work hard to manage our costs and drive sales. And in the first quarter, we are walking under a new normal, right? And as we have mentioned in our prepared remark, consumers are more rational in terms of their spending and eager for, you know, new and good value for money products. And so, you know, as Susie just mentioned, you know, we have set up, you know, a number of very intensive number of, you know, product launches in our Canada. And then we also, you know, make sure that we have significant resources and campaigns to drive that sales and traffic, especially around Chinese New Year. Again, Chinese New Year right now is too early to give a very solid outlook because this year, Chinese New Year, is a bit later compared to last year. Right now, as we look at our plan, the new normal is on track. As Julie mentioned, there's quite a few uncertainties with China's New Year because millions, hundreds of millions of people are traveling in a very short period of time. And so the weather conditions, as we have observed recently, may or may not have an impact there. So we will continue to monitor the situation and adjust our plan, as we always have been, quickly to respond to any changes if necessary. And so on the cost side, as we mentioned, obviously we're focused on productivity improvement, cost control, and then as the goal is really to maintain a stable core operating profit after adjusting for the non-recurrent items and foreign exchanges. Thank you.
spk17: Your next question comes from Xiaopo Wei with Citi. Please go ahead.
spk03: Good morning. Thank you for taking my question. I just look at a little bit longer term in terms of business. And the first thing is, if you look at the financials in 2023, actually a very good control GNA. If we look at a GNA to sales ratio actually going down. If we look at a 24 as Julie and Andy mentioned, there are some factors which you cannot control in short term. like weather, like macro. So, shall we be certain that the GNA to sales ratio will continue to go down in 2024 because that we have more control on management of our other mean cost at high quarter level? That is the first question. The second question is, Andy and Julie mentioned that the consumers are more rational this year. So, could you comment on your competitors' well, competitor will be more rational as well with more rational consumers. Thank you.
spk05: You handled the other one.
spk14: I will just quickly talk a little bit about our cost effort in conjunction with the GNA. So you can see that over the past few years and last year, we have put a lot of effort to restructure our cost base. Our overall target for field ads have been trying to keep it stable, and we have kept it stable around 31% over the past few years. Obviously, field ads move seasonally somewhat, and we're trying to keep it around 31% plus or minus 1% for the full year. And then the other one is labor costs. Labor costs, obviously, over the past few years because of the pandemic, we did see you know, some impact on, you know, cost inflation and also do a very mixed shift that, you know, drive up the labor costs. But we're able to more than offset that through, you know, the reductions in occupancy and other costs. There's significant improvement, you know, compared to even pre-pandemic level by almost like 350 basis points. Our rent is at record low right now. That's percentage of sales. And so that's the longer-term trend. And our depreciation costs also come down because we have improved capex efficiency and then also optimized our portfolio. So those are the longer-term trends. In terms of the other major endeavor for us is marketing and advertising because we have invested a lot in digital. And our member base right now is very large, 470 million student members. We have almost 65% of our sales already. So we think we'll be able to work on that in the future. In terms of G&A, a G&A expense as a percentage of sales has improved this year to 5.8%. We continue to aim to continue to sustain that trend by ensuring that G&A growth will remain significantly lower than sales. To do that, obviously, we'll continue to improve our efficiencies in-house. new technologies and other automation tools to help automate some of those administrative tasks.
spk08: Thank you. I think I'm going to address your question by taking a step back by looking at the trends, the industry trends, the competitive trends, the consumer trends, and then our own observation of our trading trends. And that hopefully will give you holistic sense of our long-term view. First, industry. It's widely reported everywhere the China economy is growing at mid-single digit, but it's rarely reported 2023 our industry actually grew at double digit, actually 20%. So the recovery of the restaurant industry was very vibrant for 2023, and we are doing slightly better than the industry average. However, for 2023, it was not easy to disaggregate many factors, including the growth or the recovery. One reason is sometimes the headlines could be misunderstood. I'll give you an example. For quarter three, Yum! China performance, the headline was reported we grow sales of revenue by 9%, missed the expectation by 5.7%. In reality, that is due to the foreign exchange difference. In our operating currency, which is renminbi in China, our sales growth was 15%. But the reporting currency is the US dollar, so it's reported at 9%. If we disaggregate the foreign exchange from the operating currency, we see the difference. But fundamentally, our industry is growing very nicely. And then, of course, quarter two, the actual recovery in terms of the system sales was as much as 32%. So net-net, the industry recovered by 20% for 2023. And that explains why, other than Yum China, there's so many competitors have been so aggressive to open new stores because opportunities are there. Is it competitive? Yes, absolutely. But fortunately, let's not forget, it has always been competitive in the last 36 years as well. And we have always been able to stay as a market leader in the last 30-some years as well. That's point one. Point two, consumption trend. What I'm going to share is not the mainstream thinking, so we can agree to disagree. The mainstream thinking is China is going through consumption downgrade with many challenges. To a certain extent, it's true, but to a certain extent, customers are just getting more rational. However, What is not being mentioned at all is even with 5% GDP growth or mixed single digit GDP growth, consumption upgrade is still also happening. Urbanization in China is still happening. And we don't even need to look at the restaurant industry. We can look at China's top 6,000 shopping malls, which we track because we open a lot of stores in those shopping malls. Within the segment of top 6,000 shopping malls, 2023 alone, there were 400 new shopping malls open. Not a small number. And two-thirds of them opened during the second half of the year, quarter three and quarter four. And we are happy to report to our shareholders that These shopping mall location stores are better, are trading better than the rest, well, apart from the tourist and transportation location. So when a shopping mall opens near the high street or close to the high street, you can imagine the traffic moves to the shopping mall, and that itself is consumption upgrade. So come back to the rationalization of the customer. How do we respond to it? We are the market leader. Our focus in the last 30-some years and our ongoing focus is how to build a brand with a combination of good value, amazing product, and opening up the price point. It's a combination of all of these. Good food is always number one. see why we continue to roll out so many good food. But at the same time, we are very cautious about the price point. That's the reason why original recipe chicken, after 36 years, the price is less than 5x of the price we launched 36 years ago. Only if the China housing price increased by the same ratio of original recipe, then I think many Chinese people are even happier. So we do a range of the product launch. We launch Wagyu beef burger at the price as much as 50 RMB. But at the same time, we also introduce the entry price value combo at 20. This is the range we're going for. And it's working. Point three, come to the trading pattern. What have we seen during quarter four? And that will give us some idea about the 2024 going forward. We celebrate 10,000 store of KFC during December 15 this year. It was very meaningful for us and it also I hope gives some confidence to our investor that Western QSR is solid and has nice growth. Quarter four start with a bit of softness. We don't have to reiterate again, but the trade improved in November and then improved a bit more in December. Good to know the trends. All right. And then the rebound of dying is very strong. However, delivery remains popular. It's still 36% of our business. Customers like the convenience. By trade zone, all improved. As I mentioned earlier, tourist location and transportation are recovering very well. Other than that, shopping malls are doing the best than the others. By region, recovery happened across all regions for Kuala Lumpur and Hunan. Northern part of China recovered the best because last year COVID lapping, they were very difficult last year. And across the year, eastern part of China, which is the most important part of our business, is still the most resilient region. In city tier, tier two inland central part of China are recovering the best, are doing the best. They are the regional hub, vibrant economy, the living expenses are lower. One good example is Changsha. It's the destination for food in China. A lot of amazing food concept there. People go to Changsha just to enjoy different food. But little do people know, Changsha's rent is only about 10% to 15% of Shanghai. And yet, take an average, it's not too different. And these are the example of the cities doing the best and going forward. And Pisa are doing very well in lower tier cities. And that proves that... The Pizza Hut business model works for lower tier cities. Last, last but not least, our weekend trading right now is better than weekday. This is phenomenal for our team because if you remember in a previous earning call, our weekend traffic was more challenged after the pandemic. People's behavior changed. The traffic during weekend dropped. What did we do? We launched the whole chicken and that product, the whole chicken product target very, very, has a very clear focus to drive the delivery business during the weekend. Customer can buy the whole chicken, put it on the table, have a veg and some rice, and this is a very nice meal. And it works. So now our weekend sales actually is better than weekday. Huge milestone for our team ability to build new product and new skill to grow with the change of customer. Thank you for indulging me. It's a long answer, but I hope that gives you give you some sort of long-term view of the way that we train our business. Thank you, Dilpo.
spk17: Your next question comes from Lena Yan with HSBC. Please go ahead.
spk08: Hi, management. Thanks for the very detailed walkthrough of your business. And your points are well taken that you are very nimble in reacting to competition. But when I talk to my clients, what I heard most over the last quarter was the market fair, as you brighten your price point, especially by launching more entry price offerings, it might drag down your ticket size. Obviously, Andy shared some numbers. Your ticket size, 39, was very stable quarter over quarter YOY in fourth quarter. But I'm wondering if you could give us more color in terms of how those entry price offering products are affecting your sales mix and what's the impact on AST and the number of transactions per ticket so that you can maintain a relatively stable 39 ticket size. And on top of that, what will be the impact of entry price offering on your GP margin? Thank you. Thank you. Let me reiterate. We have been able to protect our ticket size and even grow a little bit over the years. So 2019 pre-pandemic, the ticket average is 37. 2020 is 40, and then 39, 42, and then 41 for 2023. So this is the long-term trend. And if we even go back even another five years, it's not too far away. So this is always our trading strategy to keep the ticket average relatively stable. To go to specifics, the introduction of the entry price product always comes with the new product and also price. comes with the introduction of the high-priced product. I mentioned that the beef burger, the beef burger grew by 18% last year, by the way, the category. So 50% RMB Wagyu beef burger and 20 RMB combo is a good balance. What also helps is when we do promotion, like even for Chinese New Year, We always try to help customers to trade up to a higher ticket average by having a very attractive discount. So it's a combination of the marketing campaign that we have been doing to protect the ticket average. But specifically for the entry price product, it has three purposes, and we are happy to see all three purposes there. One is it does attract incremental customers as we become more and more mass market, particularly for Pizza Hut. By the way, Pizza Hut's ticket average moved from 120 to right now 90 over the last five years as part of the turnaround strategy. Obviously it works because if we want to open more stores, become more mass market, we need to have product and price point that cater for the incremental customer. So it works. And to what percentage? It's about 5% right now. It's not like huge proportion that will offset the balance of our margin. That's point one. Point two is, interestingly, when we have the entry price product... Does it mean that most of the customers will go there? Not necessarily. If you think about customer's psyche, many customers will still go for the product above the entry price product to feel good. It feels good to choose something in the middle, not the cheapest one, right? You are the customer yourself. Ask yourself, how would you choose? Third, it really actually improves the price perception. By having something very low cost there. I'll give you one example I did 10 years ago with KFC business. I lowered the small Pepsi Coke price in our menu. Lowered it. Because it looks good. It looks very affordable. But how many people actually went for it? Not that many. But the perception is important. It's almost as important as the reality to a certain extent. So I hope that gives a sense about how do we treat the entry-price product. But certainly it helps when we go down to Tier 5, Tier 6 cities to introduce, you know, to introduce our product to certain customers. By the way, it's a fantastic way to recruit young customers such as students as well, particularly with amazing products like the Golden Spar Chicken Burger. It's breast meat. Breast meat in the U.S., you can sell it at a higher price than duck meat, but in China, it costs us less. So the margin, of course we protect the margin. The margin is just fine. Thank you.
spk17: The next question comes from C.G. Lin with CICC. Please go ahead.
spk21: Thank you, Julie and Andy. So we have talked a lot about the competition. I want to ask one question about Pizza Hut. So we see that Pizza Hut had quite good performance on margin in Q4, driven partially by the labor productivity gain and lower writer costs. And we also mentioned before that Pizza Hut's margin is still lower than KFC, and there's room for improvement. So what else we can do to further reduce costs and improve efficiency? Thank you.
spk14: Thank you, CJ. So, you know, again, you know, when we look at, you know, our cost and the focus, as we have said many times, including what Joey has just earlier mentioned, we generally try to aim for, you know, cost sales to be massively stable over the long term on a year-over-year basis. And that's because we have a very excellent supply chain team, very disciplined with our pricing. And this also comes from our commitment to continuously innovate and also introduce new products every year. And also, as we have mentioned many times, we make the best efforts to using every part of the chicken or cow so that we can enhance the resource usage, minimize cost. And all these collective have allowed us to provide great value for the money for our consumer while keeping our cost of sales relatively stable. There will be some new quality seasonality and fluctuation there, but if you look at our track record, we have been able to keep it around like 31% plus or minus 1% over the past three years, including last year, which is way under that 31%. Now, when we look at the overall cost, labor costs, obviously right now we're in a soft path for the economy, so you would be probably more modest in terms of wage increase, but But more importantly, over the years, we have utilized digital and automation tools and technologies like AI-assisted scheduling or inventory that we have mentioned before to enhance labor productivity and manage costs. We are also, with the RGM initiative, basically we are trying to streamline administrative tasks and then like recruitment or training, et cetera, to a more centralized process as well as centralized food processing to further improve restaurant labor efficiency. And so, you know, obviously there's fluctuation, but in the long term, we aim to keep labor costs massively stable in the long run. Again, the emphasis here is on the long run, because in the short term, it's going to be always impacted by the sales leverage. Now, occupancy and others This goes same for KFC and same for Pizza Hut. It's an area where we will have opportunities. And compared to pre-pandemic, as I mentioned earlier, we improved by almost 360 basis points. Now, rent-of-sales ratio is one. We have good long-term contracts. And then we also have optimized our stock portfolio. As we expand into lower TFCDs, They generally also come with low rent. As we mentioned, the rent in Changsha is a lot lower than the TA1 city, for example. And then we also have more flexible formats that are targeting delivery and takeaway that are smaller and also more cost-efficient in terms of rent-to-sales ratio. Now, depreciating costs is another one. We continue to work on this. You can see every year, You know, our capex per stall has improved. Compared to a few years ago, it was around like 2.5 million R&B. To today, it's around like 1.5 million R&B per new stall. So our depreciation cost also improved. And, you know, marketing leverage and extra. So I think for Pizza Hut, obviously, you know, labor potentially is an improvement opportunity there. O and O, definitely. As I mentioned before, KFC is already running at a very high operating level. So the room for improvement potentially will be in the O and O side.
spk08: Let me give an overview and take a step back again. We've been very consistent with the Pizza Hut strategy since 2017 when we embarked on the Pizza Hut turnaround. It sells first, profit later, and then resiliency comes after that. Sales is obviously, you remember, we work on a product, we work on a marketing campaign, we work on the business model, we work on unit economics of each of the stores. Once we turn around the same-store sales within 18 months after we make that promise, Then we really turn the focus to profit because sometimes you have to do the trade-off, particularly at the very beginning of a turnaround or building a brand. The trade-off is always sales first, profit later. So later on we work on the cost lines, all the details Andy just went through with you a minute earlier. And we'll continue to do that. And we want a bit more profit, bit by bit, on every line. What is after is resilience. It's more profit. We are going to open more stores, obviously, across all 30 years to, you know, improve, to utilize the scale of our business to get better rent, to get better cost of sales, et cetera, et cetera. And then next is resiliency. We want to build a very resilient business, even more resilient business They're now as resilient as KFC. Well, it's a very challenging goal, but unfortunately, when you have two brothers, and of course, two brothers compete with each other. It's just normal. So, for example, one challenge we give to ourselves, which we got it already, 2023, is we want each quarter to be profitable. Because Pizza Hut is quite a seasonal business, even more seasonal than KFC. So you can see that quarter four, 2023, we remain profitable. And it's very important because I just don't like business that make a lot, even though that's big and small quarter. And then we'll continue to improve the seasonality, and we'll even continue to improve the resources allocation during the peak hour and the slow hour of the day. That's how we improve the resilience of the business, not only for the shareholder, but for our employees as well.
spk07: Thank you.
spk17: Your next question comes from Kevin Yin with JP Morgan. Please go ahead.
spk19: Thank you. Thank you, Julie and Andy. My question is on the ASP. Good to see the ticket size was up from 39 to 42, which is very good. We'd like to better understand if the fourth quarter 23 is a bit different versus before. So for example, like for like basis, KFC average ticket size down what percentage and traffic coming back by what percentage of points? So just try to quantify in the fourth quarter ASP down and the traffic back, okay? And secondly, also like to note your source for 2024 your convection level to maintain flattish same-store sales growth in 2024? And if we're considering the contribution from the GNA cost-cutting, et cetera, what's the minimum same-store sales growth level for you to maintain the restaurant margin in 2024?
spk20: Thank you very much.
spk14: Okay, Kevin. Thank you for the questions. So a little bit... classification on the TA and 4Q difference, right? So for KFC, we have same-store sales growth of about 3%, and the transactions, the TC, can increase by 16%. And then the average ticket size was down 11%. For Pizza Hut, you know, the same-store sales growth was about 6%. And then the traffic growth was 15%. And then the average ticket change was about 8%. But as I mentioned before, the TA trend, the average ticket trend, is pretty consistent with our overall strategy and to broaden our market reach. And as Joey mentioned, the strategy approach is to expand our stock footprint, especially in a small city. spending our pricing points, and then offer consumers more product options to drive incremental traffic and sales. So there's significant growth that we have observed, both in transaction and overall system sales growth. As I remind everyone, for both KFC and Pizza Hut, system sales grew more than 20%, both in the fourth quarter, but also for the full year. So obviously, you know, if you look at the sales number, you know, our strategy is working effectively. Now, when we look at the ticket average changes on a year-over-year basis, it's worth noting that 2023 obviously was the first year of reopening. So this is an important context to keep in mind when we look at, you know, the TA movement. And, you know, as we have mentioned before, KFC, we're seeing very robust ticket average in the fourth quarter, 39 R&B, which is consistent with the third quarter and is above what we have seen in the pre-pandemic. In fact, the ticket average, as we have mentioned earlier, have been pretty consistent over the past five years. Obviously, with the recovery in the die-in cells pretty strong this year, coupled with short performance in our breakfast and coffee sales has contributed to the year-over-year movement of the average ticket size for KFC. It's also consistent with our approach to expand the pricing range and our pricing options that, again, effectively show very robust traffic laws.
spk08: Let me just add a little bit here about the quarter four ticket average, and then Andy can wrap up this question. Kevin, the ticket average for quarter four is not that unusual. As Andy just pointed out, 2022 is the unusual year because it was still in lockdown. It's 42. That's very high. If we go back to 2021, quarter four is 38. The 2023 quarter four is 39. But 2021 quarter four is 38. 2020 quarter four is 38. 2019, which is one of our best years, the ticket average for Q4 is 37. So it's not that different. I mean, the overall feeling is the market is getting more promotional, et cetera, et cetera. But as I went through in great detail that we're the market leader, and when we deal with challenges like that, which is not new to us, by the way, we always have a combination of – Good promotion, but good product, good mechanism to protect the TA, et cetera, et cetera. Therefore, we are able to maintain the TA even during the port of full across multiple years. Thank you.
spk14: Right. Thank you, Joey. Again, it's very important to keep that context in mind because as a member, it seems like a long time ago, but it was only fourth quarter 2022 that we have this reopening and big surge in infections. At that time, we also experienced some labor shortage because of the infection rise. And then the ticket, I think the delivery mix at that time was 45%, which is very high. And so those are the contacts for that. And then turning to Pizza Hut, if you look at Pizza Hut, it's a very consistent strategy for us. since 2027 with the turnaround strategy, which is to, as Joey mentioned earlier, drive customer traffic first, then sales, and then finally enhancing profitability. So we have successfully met those three goals if you look at our results. Moreover, this approach is very much in line with our latest strategy, which is aimed to reach underserved customer segments by expanding our price range, especially for pizza that is less than 50 R&B subcategory. And we also want to offer more options for consumers that are suitable for smaller size or individual dining. So thank you. Thank you, Kevin.
spk17: Your next question comes from Chen Lu with Bank of America. Please go ahead.
spk02: Thank you, Julie and Andy. And sorry, actually, my line got disconnected just now, although I'm actually dying to the call at 6.30 a.m. in the morning. So forgive me if I ask some questions that have already been asked previously. So basically, it's actually on margins. So I noticed that our restaurant margins for 2023 actually has already recovered to a level even slightly higher than 2019. So making it the third highest margin since our spinoff. But compared with five years ago, our margin structure has significantly changed. So our labor costs as percentage of revenue has risen significantly, but our occupancy and others have reduced significantly. So going forward, do we think that there's room for us to maintain a largely stable labor-to-sales ratio, especially given that recently our channel checks suggest we have taken a lot of measures to control the rider cost? such as the introduction of Meituan and Ulema as our future vendors, as well as our continued rollout of the RGM macro program. So do we think there's room for us to see a largely stable labor cost as opposed to the rising labor cost trend in the past few years? And meanwhile, I noticed that our food and paper costs as tax and revenue has risen by 50 bits, 80 bits for KFC and 50 bits for the whole group, given a very promotional environment. Do you think it's going to be a new normal for the entire year of 2024? And lastly, just now I heard about the guidance for largely status OP for the full year, excluding SX and one of items. But then if you look at the reported level, I remember last year we broke a one-off gain of $27 million in our OP. That may actually lead to around mid-single-digit impact. And then given the effects, there's another 5% impact. So is it fair to say that on the reported level, actually the OP may possibly decline by around 10%-ish? Of course, I think this is This should be the worst case, but hopefully if everything is going in the right direction, the actual decline could be better than that. So these are all my questions. Thank you.
spk08: Thank you, Lawton. Let me actually answer one question that Kevin and Brian asked earlier, and then I'll come to your question. It's about the same-door sales growth. Let me just point out that 60% of our store in our portfolio right now are built after 2019. So there's a reason why we really, you know, we'll continue to drive the central sales, but the system sales growth is incredibly important for our business. And then we come to the core size, mainly and O&O. The labor cost, let's talk about O and O first. We have been operating with the guiding principle that we always are sincere about giving the best food to our customer. Pass all the savings, pass a lot of savings to our customer. So if you look at our cost of sales over the last few years, it has been very stable. Very, very stable. Better times or more challenging times? So if I start with 2019 pre-pandemic, or even, well, 2019 pre-pandemic throughout the time. 2022, 31.1%. 2023, 31%. It's really like less than 1% swing around the 31%. It's always there. Because whenever we have savings, we pass the savings to the customer through food. So you can be assured that we'll continue to stay around 31% about the cost of sales. Because if my team goes significantly below that number, they will have a very hard time for myself. And they all know that. Second is cost of labor. Cost of labor, even in a year like this year, yes, it has increased because There are a lot of sort of insurance, et cetera, et cetera. All these costs are going up. And labor costs is always sort of going up. I spent 10 years in the UK. Even when the GDP was going south during the five years out of 10 years I was there, labor costs were still going up. So we have to every year find ways to help our staff to become more productive. which we have been doing that. And going forward, you can see we even go as far as one store managing multiple stores. It has gone up a few points. 2019 is 22.8, and then go up to 23, 25, 26. Now it's staying at 26% the last two years. And the way that we run this business, we generate savings from O&O, from rent, from depreciation, from everything that we could save, and then pass the savings to our staff. We pay them as fair pay, and we hopefully pay them well. We give them really good health insurance, et cetera, et cetera, because we want to have the best staff to provide the best service for our customers. So that will be the direction we'll continue to drive. In terms of OP, as a result of foreign exchange, et cetera, I'm sorry, cannot forecast that. It's beyond a company's capability. So we'll do everything we could to generate sales and to manage costs and then produce the result as a result of our good effort. Thank you, Lorton.
spk17: Thank you. That is all the time we have for questions today. I'll now hand back to Ms. Shen for closing remarks.
spk04: Thank you, Ashley, and thank you, everyone, for joining the call today. For further questions, please reach out through the contact information in our earnings release and our website. Have a great day.
spk11: Thank you.
spk04: Thank you.
spk17: That does conclude our conference for today. Thank you for participating. You may now disconnect.
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