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spk08: Thank you for standing by. Welcome to the Yum! China second quarter 2024 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. Florence Lipp. Please go ahead.
spk05: Thank you, Operator. Hello, everyone. Thank you for joining Yum! China's second quarter 2024 earnings conference call. On today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yong. 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. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. You can find a webcast of this call and a PowerPoint presentation on our IELTS 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 Watt, CEO of Yum China. Joey?
spk06: Hello, everyone, and thank you for joining us. Today, Yum China reported record levels of revenue, operating profits, and EPS for the second quarter. System sales grew 4% on top of 32% growth in the same period last year. Core operating profit grew 12% to $275 million. EPS increased 19%. I would like to thank our colleagues for their hard work and innovative spirit. We are navigating a complex and dynamic environment. Yes, but we see the many challenges more as opportunities. With our industry-leading capabilities and our scale, we are turning these situations to our competitive advantage. We have taken aggressive steps to drive revenue and profitability. I would like to highlight three of them. First, we took a fresh look at every key process and cost element in our businesses. We make countless innovations to improve our operational efficiency, enhance profitability, and increase resiliency. We are already seeing results. We are achieving major cost savings and reinvesting them into food and value. Second, we broadened our addressable markets, and health market share with our sharp focus on value for money and innovative products. Our transactions and delivery sales both grew by double digits in the second quarter. We will continue to innovate across our menu to address customer needs. Third, our breakthrough business models, K-Coffee and Pizza Hut Wows, achieved encouraging initial results. These stores delivered incremental sales and incremental profits. They are showing great future potential. These strategies are working well. Q2 was our most profitable second quarter since our spin-off. Restaurant margins stabilized. OP margin expanded to 9.9%. Let me first talk about our initiatives to drive operational efficiency. These initiatives cover all aspects of our organization. First, Project Fresh Eye, launched in quarter four last year, helped improve OP margins this quarter. We are shooting for best in class and best in course. We are assessing our operations from our RGM, in other words, store managers' point of view, supporting our RGM better and faster. From our restaurants to back offices, we are reducing complexity and simplifying operations. All our major initiatives are now in place. The result is fewer unnecessary process burdens on our RGMs and better efficiency. Separately, we launched Project Red Eye at the end of quarter one to improve our supply chain efficiency. Our goal is to spend better and buy better. To spend better, we are assessing our operations from our customers' point of view, identifying areas that add no value for them. we are also simplifying our ingredient SKUs, packaging, and menu in a certain segment of stores and select day parts without compromising sales. To buy better, we are sourcing directly from farmers and producers for certain categories. By systematically examining our operations from fresh perspectives, we are uncovering numerous opportunities. We are doing all of this while ensuring food safety and quality. Lastly, AI and automation will continue to play a big role in our business. We have automated major restaurant management tasks, from sales forecasting to labor scheduling and inventory management. we have rolled out iKitchen to all Pizza Hut stores. This integrated AI system enhances food quality and improves operational efficiency. We were among the first in our industry in China to adopt generative AI in 2023 to turbocharge our back office processes. We are working on a few dozen generated AI applications, including consumer insights, customer support, food safety, and new product innovation. These tools are already helping us improve efficiency and make more informed, data-driven decisions. We are making great progress with these measures. Some have already impacted our second quarter results, while others will take more time to bear fruit. Importantly, these are structural improvements that will bring long-lasting benefits. With these measures in place, we have the bullets to compete on value and pursue growth in these dynamic environments. With that, let me turn to our brand strategy. starting with KFC. In our 37 years in China, KFC has introduced many popular product categories. Recent innovations include our juicy beef burgers and whole chicken. Customers appreciate these new products, but they also love the fresh energy we bring to our iconic classics. In May, we combined our original recipe chicken and mashed potatoes to create a brand new burger, the original recipe chicken burger, Yuan Wei Ji Han Bao. By the way, the classic way to enjoy KFC's original recipe chicken is with mashed potatoes, at least for kids in China. In the past, they were ordered separately. Now we put them together. into one burger. As one customer told me, it is a childhood dream come true. This innovative burger sold out in many locations in just two days and drove incremental sales and profits. Since it was so popular, we launched it again for a limited time in June. K-Coffee is available in all KFC stores. Its sales exceed 1 billion RMB in first half of 2024, up 26% year-over-year. During this period, we sold nearly 120 million cups, up 36% year-over-year. We have been accelerating the rollout of our groundbreaking side-by-side K-Coffee Cafe since late last year. From just 100 stores in March, we tripled the number to nearly 300 in July. Side-by-side K-Coffee cafes feature a distinct dining area and menu. Starting at 9.9 RMB at our campus stores, customers can enjoy our innovative coffee and hot dogs. We also took our popular sparkling Americano to the next level with the introduction of the iced orange creamy sparkling latte. Very long name. The mousse-like smoothness, fizzy burst, and citrus flavor are mind-blowing. Thanks to our superb supply chain and efficient operations, we are making healthy margins too. This is a winning model. By year end, we expect to roll out our K coffee cafe to 500 to 600 stores. Delivery sales continued their double-digit growth momentum at KFC. We lowered the delivery fee in quarter one to capture the underserved smaller ticket segment. These strategic moves proved successful as we gained market share on aggregator platform. We drove incremental sales and profit without impacting margins. By introducing platform riders at select locations, we optimized rider cost while maintaining service quality and customer satisfaction. Now turning to Pizza Hut. This quarter, Pizza Hut achieved its most profitable second quarter since spin-off. On the sales side, we were up against an outsized calm in April from a successful IP marketing campaign last year. In May and June, things ourselves improved. Despite sales deleveraging, we improved our profitability by enhancing operational efficiencies. For example, we significantly reduced product preparation time by simplifying menu and kitchen operations. We also deployed automated fry rice machines and robotic servers to make our crews workload lighter. Pizza Hut just hit the 3,500 store mark. We believe Pizza Hut has huge potential Now present in over 750 cities, there are 1,300 cities that have a KFC, but no Pizza Hut as yet. In addition to expanding its footprint, Pizza Hut is also reaching new consumer groups with amazing value, innovative products, and business models. Here are some highlights. First, Menu innovation. Our entry-price pizzas are addressing previously underserved segments and grew double-digit this year. Our new pizza dough burger, Pizza Ball, is attracting many solo diners. This unique burger, made with a freshly baked pizza dough bun, is receiving rave customer feedback. In quarter two, we sold more burgers than Hawaiian pizza, one of our signatures. Encouraged by its success, we will be rolling the Pizza Door Burger out to all 3,500 stores later on this month. Second, our Pizza Hut wild store models marked a major breakthrough. We successfully attract solo diners, young people, and more value-cautious customers. The model features simpler operations, good food variety, and excellent value for money. It is a fast casual format with lighter service. Since opening the pilot store just in May, we have converted over 100 existing stores to this model by end of July. Initial results of the WOW model are encouraging. I visited some of our newly opened stores last month. Sales were vibrant, with customers queuing outside. Our first batch of new stores achieved significant same-store sales uplifts. Given the encouraging results, we are accelerating the store rollout. By year end, we expect to more than double our wild store count. Now, let me talk about our store expansion. We are seeing fantastic long-term growth opportunities in China. Our flexible new store formats allow us to penetrate profitably across city tiers and locations. Our new stores maintain good returns. Their payback period held steady at two years for KFC and improved to two to three years at Pizza Hut. Around 80% of our new stores achieved monthly break-even within three months. We focused on white space to minimize the impact on existing stores. KFC's small-time mini model is unlocking new site possibilities in lower tier cities. We have also identified opportunities in strategic locations like college campuses, gas stations, highway service centers, and other transportation hubs and tourist locations. KFC's new store at Shanghai Jiao Tong University, Jiao Da, for example, is enjoying busy on-campus traffic. We are also leveraging partnerships with franchisees to unlock opportunities in lower tier cities and strategic locations. In the second quarter, net new stores from franchising reached 25%. We expect the ratio will go up slightly exceeding the 15 to 20% target we set at our investor day last year. Now, let me recap the three key messages I want you to take away today. First, we took action to drive operational efficiency, which enabled us to invest in value for money and to support our margin. These efforts were not just one-off cost cuts. They were structural improvements that should deliver benefits for years to come. Second, we embrace consumer needs and succeed in driving robust transaction growth. We are confident that our sales initiatives will drive sustainable long-term system sales and same-store sales growth. Third, Innovations in new store models will continue to power our long-term growth. Our Q2 results show that our strategies are working. Great companies thrive in tough conditions and turn challenges into opportunities. I'm confident in our ability to navigate the current environment and emerge stronger than ever. Before we move on to our financial results, I would like to take a moment to recognize the tremendous contribution that Andy has made to Yum! China. Andy has played a critical role in enhancing the company's financial strength, establishing robust cost discipline, and supporting our growth strategy. Under his leadership, the finance team further strengthened its core capabilities and upgrade its system and processes in key areas. She also successfully led the completion of our listing in Hong Kong. I would also like to thank Andy for his commitment to transitioning Adrian Ding into the acting CFO role. Please join me in wishing Andy the very best. am very pleased that Adrian would step up as acting CFO. Adrian is our current chief investment officer and general manager of Lavasta. Over the past five years, Adrian has led multiple investment and capital market projects to enhance our portfolio and organizational strength. He was instrumental in in establishing the Lavazza joint venture and building the Lavazza business in China. With his financial and operational expertise, I'm confident that Adrian will support our growth objectives to create sustainable value for our shareholders. With that, I will turn the call over to Andy. Andy?
spk02: Thank you, Joey, and hello, everyone. As this will be my last earning call with Yum China, I want to express my sincere gratitude to Joey, my colleagues and shareholder, and our analysts. Over the past five years, it has been a rewarding experience working closely with such a talented and dedicated leadership team. I'm proud of the accomplishment that we have achieved together, navigating the challenges posed by the pandemic, and its aftermath. Yum! China emerged from the pandemic more resilient and ready to accelerate growth. I'm confident in the company's continued success under the capable leadership of the existing management team. Now, let's turn to our financial results. In the second quarter, we delivered a solid performance and set numerous new records, including revenue of $2.68 billion offering profit of $266 million, offering margins of 9.9%, and diluted EPS of 55%. That's particularly impressive given the current market conditions. As Joey shared earlier, the initiative that we launched beginning in the fourth quarter of last year to drive sustainable growth and protect margins are beginning to pay off. While tough lapping and current market conditions impacted same-store sales, our margins stabilized. Our sales growth was led by healthy traffic. Total transactions grew 13%, and same-store transactions grew 4% year-over-year in the second quarter. It's a testament to how well our brands, products, marketing, and promotions resonated well with consumers. We attract new customers and capture more occasions from existing customers by broadening our price range and offering delicious food at affordable price points. Despite a low ticket average, restaurant margins was markedly sluggish year-over-year on a comparable basis. Call offering margins actually improved year-over-year setting a new quality record for offering margins thanks to our economy of scale and cost measures. Taking a longer view, our system sales grew 25% compared with the second quarter 2019 outperforming the restaurant industry. Offering profits increased even more by 38% compared to 2019 excluding foreign exchange. Now, let's take a closer look at our second quarter performance. By brand, KFC system sales increased 5% year-over-year. Steam store sales were at 97% of prior year levels, with 4% steam store traffic flows and 7% mobile ticket average. Looking at it from a longer-term perspective, our ticket average in the second quarter was 37 R&D, higher than the 35 RMB ticket average in the second quarter of 2019. Our strategy is to widen the price range and capture low ticket average delivery orders are paying off. Our entry price combo drove incremental traffic. Delivery sales grew 12%. System sales increased 1% year-over-year. Theme store sales were at 92% of the prior year level, with traffic growth of 2% and a 9% lower ticket average. These have continued to tap into more volume-conscious consumers and solo diner segments, with entry-price pizzas, burgers, and one-person meals. The ticket average went down in keeping with our strategy, but probably improved year-over-year through our team's relentless effort to drive efficiency. Now, let's go through our margin and key cost lines. Our operating margin as a percentage of revenue was 9.9%, the highest second quarter record since our spinoff. Resilient restaurant margins and proactive savings in G&A expenses helped us achieve that. Our restaurant margin was 15.5%, 60 basis points lower than last year, or approximately the same on a comparable basis. Saving in cost of labor and occupancy and other costs offset increases in cost of sales. Cost of sales was 31.5%, 80 basis points higher year-over-year, or 70 basis points higher on a comparable basis. COS was at a healthy level and consistent with our long-term range of 31% plus or minus 1%. We manage our COS tightly despite offering more value for money. Our food innovation capability and super supply chain allow us to invest in self-driving initiatives and promotions. Cost of labor was 26.3%, 10 basis points lower year over year. improved operational efficiency more than offset last year's wage increases for our frontline staff and the sales leveraging impact. Occupancy and order was 26.7%, 10 basis points lower year-over-year, or 50 basis points lower on a comparable basis. This comes from lower marketing and advertising expenses and other cost optimization. Our G&A expenses decreased 11% year-over-year. We drove operational efficiency gains. We also saved on lower performance-based compensation this year. G&A expenses as a percentage of revenue was 5% in the quarter, improving from 5.8% a year ago. For the full year, we aim to keep the G&A ratio around 5%. Our effective tax rate was 25.2% in the second quarter, on par with the same period last year. We expect our full-year effective tax rate to be in the high 20s. Operating profit was $266 million, a second quarter record, growing 7% year-on-year. Core operating profit was $275 million, growing 12% year-over-year. Targeted EPS was $0.55, also a second quarter record, growing 19% year-over-year. Finally, moving on to our outlook, the market conditions remain challenging. We will continue to invest in value for money and step up product and marketing innovations to drive transaction growth. Our operational efficiency, buy better and spend better projects, are not temporary measures. We expect cost savings from project fresh I and project red I to continue in the second half. These transformative changes should position us well to remain best in class and best in cost in our business, making our value proposition sustainable and profitable in the long run. Our disruptive new business model, like KFC's side-by-side cake coffee cafe and Pizza Hut's Vow store, are promising to further same-store sales growth potential. As a reminder, we recorded around $15 million in temporary relief and VAT deductions in the third quarter of last year. We do not expect this to recur this year. We expect rate inflation for our frontline staff to remain at low single digits. We opened a record 779 net new stores in the first half and reached 15,423 total number of stores. We are on track to achieve our four-year target of 1,500 to 1,700 net new stores. We are also on track to return $1.5 billion to shareholders. In the first half, we returned nearly $1 billion, including buying back 21.7 million shares. It's equivalent to over 5% of our outstanding shares. Our strong cash flow generation and healthy cash position continue to power our capital return to shareholders. At the end of the second quarter, We have $3.1 billion in net cash. Our three-year growth target remains unchanged. We are committed to returning at least $3 billion to shareholders while driving long-term and sustainable growth. Now, with that, I will pass it back to Fong.
spk05: Thanks, Andy. Now, we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.
spk08: Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michelle Chen with Goldman Sachs. Please go ahead.
spk03: Hi, Joy, and the Congress for the still very strong and resilient numbers. and also all the best. So my question is about this new business format and store concept. And it's really impressive that we have a very aggressive opening year today. And thank you, Joey, also sharing the target by end of the year. But can you please give us more color about the economics and also the contributions, like K-Coffee, side-by-side stores, in-store sales. For those stores, we already have these openings in the past few months. And given it's still more value position, so when we think about economics, should we see that these full cost ratio will be higher, but this will be offset by more simplified cost structures in O&O payroll? And then from the margin perspective, structurally we will see more upside from this new model. And also, are we going to see more new concepts in addition to the cake, coffee, and wall in the next few quarters? Thank you.
spk06: Thank you, Michelle. It's truly amazing for our team to have this breakthrough, and we are very excited about it. And I will answer your last question first, is we are going to focus on these two breakthrough models out of KFC and Pizza Hut. And I think the initial results are very encouraging. And we'll focus on that for the rest of the year and going forward. Come back to the content of the new concept. First of all, the easiest way is travel to Shenzhen. I encourage all our analysts, just cross the border. I recently just visited the one in Yifan Cheng Uni Center, I think. It's a pizza vial. And then we have a few other cake coffees side by side. Then you can see the menu, the operation, and you have a very good feel about it. So for cake coffee, it has its own menu. The menu is very simple. And then in terms of the product, we have some winning products. The sparkling coffee is a fantastic product. And food is also important. And that comes to the next characteristic of K-Coffee is we share the kitchen and the operation with the normal KFC store. So the kitchen is shared, operation team is shared, but it has its own distinct area. And then for the customer, the value for money is amazing, and I will highlight one particular offer, which I mentioned in my remarks, is in the campus store, campus K-coffee store, we actually offer sparkling coffee with a hot dog at 9.9 yuan. You might naturally ask the question, how does it work for the margin? Well, think about it this way. For many years already, we offer our breakfast at 9 yuan, 8 yuan. We offer the food and the coffee comes for free. In K coffee, it's the reverse. We sell the coffee at 9.9 a year, food is free. So it's in our supply chain capability that we can do this in a very competitive way, so the net margin is healthy. And then in terms of results, it adds both incremental sales and incremental profits. Now come to the K-Val Pizza Hut store. So it's sort of a bit more fast, casual, with a bit less service, just a little bit. How do I describe this? The food offering is a bit like Pizza Hut, but tapas. Smaller portion, lower price. But if you go in there by yourself, you can order a bit more for variety. But total ticket average is less than the normal Pizza Hut store. But the traffic is fantastic. So overall, it works. And the same store sales increase is very encouraging. And for the Pizza Hut Vowel store, we just convert some of our pizza hustle into this new concept. It's conversion, basically. So right now, we have 100 stores converted by the end of July, and we plan to achieve over 200 by the end of the year. And in terms of COS margin, it's actually better. Although it's early days, But the unit economics is better because COL and ONO is a bit less. So that's what we can share with you right now. But the number one suggestion, cross the border, go to CSUM in Shenzhen. Thank you, Michelle. Thank you, Joy. Very looking forward to it.
spk08: Your next question comes from Lillian Moe with Morgan Stanley. Please go ahead.
spk04: Hello, thanks. Hello, Joey and Andy. My question is about the recent trend on the things about sales. And also, again, congratulations on getting such a good result and even under a bit of challenging environment. So I want to understand getting into the quarter, fourth quarter, when the top calm kind of elevated a bit and with all this cost efficiency put in place, how we should look at the operation on a holistic basis and have we seen a different trend in different tier of markets in terms of the demand and the cost management like high tier cities and low tier cities. Thank you.
spk06: Thank you, Lillian. Let me share a little bit learning from the quarter one trading pattern and then make few comment about the quarter two. By region, the eastern part of China is still the most resilient one. By city tier, lower-tier cities recover faster than higher-tier cities, both year-on-year and versus longer-term, like pre-pandemic 2019. By location, the residential locations are more resilient, and shopping centers are almost back to 2019 level. Moving on to the business environment, there's been a lot of attention to the business environment and consumer sentiment in China, we are not seeing significant change in market condition and consumer sentiment going to quarter two. With that said, quarter three, sorry. With that said, my management team and I share one particular philosophy on that. Yes, business is tough right now, but much like life, right? It's always tough. In business, as in life, we always expect the unexpected. We don't whine about it. We accept whatever comes our way, and we adapt and do the right thing. Often, in doing so, we are able to turn disruptions to our competitive advantage by deploying our scale and our capabilities. In terms of how to do it, etc., I have... covered them in my remarks regarding the specific actions, but the three key points bear repeating in summary. First of all, to answer your question about the cost efficiency, we have tuned every process and cost element to drive operational efficiency, make our store managers' workload lighter, and reinvest into our value for money offerings and support our margins. Second, we have innovated creative new products, which have lovely pictures in the PowerPoint app. And we widened our price points to broaden our accessible market and drive traffic. Third, we innovated breakthrough store models, such as the K-Coffee Cafe and Mini Store for small times for KFC, and the fast casual model called Pizza Hava, which I just described. to power future growth of KFC and Pizza Hut. All three strategies are showing strong initial results. As a result, for quarter two this year, we see robust growth, well, actually, double-digit growth in transaction and delivery sales. Our restaurant margins stabilized, and core OP grew by 12%. We see the most profitable quarter two spin-off, despite the industry dynamic. Thank you, Lillian.
spk04: Thanks a lot, Joey. And the best wishes to Andy.
spk02: Thanks, Lillian.
spk08: The next question comes from Chen Lu with Bank of America. Please go ahead.
spk00: Hi, Joey and Andy. This is Chen. And congrats again on the strong result and also my best wishes to Andy. I'd like to take a deeper look at the margins. Definitely our Q2 margin speed expectation. And when you are looking into the details, I noticed, first of all, the food and paper costs as potential sales edged down by 60 bps on the Q&Q basis, despite the fact that our promotion seems to be very intense in Q2. So what is driving that? Is it because of the falling commodity cost or it's because of our smart value or supply chain initiatives. And secondly, if you look at the cost of labor, it has declined big time on a year-on-year basis for Pizza Hut. And also for the group, it's largely flattish versus the usual upward trend. So what is also driving all these changes? And lastly, I noticed that our first half retro margin is actually pretty much on par with first half of 2019, which is usually regarded by the market as a normalized comparison base. Is it fair to say that going forward, our margins can be largely comparable to 2019 for the rest of the year? Thank you.
spk02: Thank you, Luo Cheng, for your question. And in terms of short term, I think, obviously, we are narrating some pretty dynamic, pretty complex, you know, operating environment in the short term. And consumers remain very value conscious. And so that's important to keep in mind. So from our perspective, if you look at, you know, third quarter last year was not particularly successful. low base. If you think about last year, you see, you know, the consumer base softened in late September. So that's something to keep in mind. So in the short term, you know, obviously, sales would be an important driver for margins, as we have mentioned on the call. But nonetheless, as we have mentioned in our prepared remarks, we have taken very decisive actions to adjust our call structure. And so that, and then also we have a very decisive action to change some of our business model to embrace the market change. And so as a result, we're able to see stabilized UC margins, and then also we see expansions in our operating margins to a tune that is the best since our spin-off. Now, if you look at our initiative, those initiatives are not a short-term measure. They are longer-term structural change in the way how not only the cost structure, but also how we operate our business, make it more efficient. In the short term, I think, you know, like if you think about commodity price in the short term, some commodity price is more favorable. But at the same time, you know, we, again, have mentioned over and over again that, you know, it's important for us to invest in value, invest and embrace the consumer changes. And so, you know, COS sometimes, as we have mentioned before, we always, in the long term, target 31% plus or minus 1%. And, you know, sometimes, now there's some fluctuations. I think all in all, we have to be on mark for that. This quarter is about 31.5%. So, in terms of fill-out, yes, you know, you did see, you know, quite a bit of improvement in, you know, labor productivity. And that will continue to be, you know, some of our focus. We continue to look into our operations, simplify some of the procedures and make sure that, you know, what we do actually add value. If what we do don't add value, they're not valuable for the RGM or consumer who will take it out. So, but, you know, when we look at, in the second half this year, but some of the full year this year, we do expect COL inflation at this bottom level to be at low single digit. And then in terms of O&O, I think it continues to be, you know, an area that we have initiative to try to improve that, but obviously it is composed of many, many things, right? Capital allocations for store investment that impact depreciation, and then also rent, rent is a big thing we're continuing to work on. Marketing leverage from our digital program. And so we will have many initiatives to try to improve it incrementally. And so, but one thing I want to remind you folks, as we have been reminding folks in the first quarter earning call, which is last year, our company did enjoy some one-times, like rental relief and also VAT deduction, which was a big government support policy that we didn't experience in the first half this year and we don't expect in the second half this year. So that item, that impact comparatively For the second quarter, last year, it was about $12 million, and then in the third quarter, it's about $15 million. I think that's one factor that when you guys look at the model, you should keep in mind. In terms of G&A, I think, as we have mentioned before, we will aim to keep G&A this year around 5% of our total sales revenues, and that is a significant improvement compared to last year. And it is an improvement even compared to 2019. And so, again, in the short term, that's how we look at it. But in the longer term, I think we aim for more stable, relatively stable margins and look for a way to improve our margins in the long run if possible. And then we, I think, we have demonstrated and I think we're confident that we can manage both growth and profitability in good time and bad time And do we face challenges in the short term? Sure. But we have demonstrated, I think, and you can see the action that we are taking to embrace the market changes, to adjust our cost structure, improve our operating efficiencies, and also change our business model. So that, I think, that ability to make decisive changes, to embrace change, should help us to sustain margin in the long term. Thank you.
spk06: I'll just give two concrete examples for you, Lawson. For example, COS, right? In select calories right now, we go straight to the farmer and producer. We get really good ingredients at better price. You can totally imagine. We'll continue to do that. In the COL, what are the specific things that you can see in our kitchen? 80% of our Pizza Hut stores right now have automatic fry rice machine. It's pretty cool. You might consider to have one in your house. It's actually very small. So it really solved the labor shortage or labor problem, particularly during the peak time. And then 50% of our pizza hot stores right now have robotic servers. Not all the stores can do it because stores too small cannot benefit from it. So these definitely a structural change to the COL. And then we have, as I mentioned in my prepared remark, we have fewer SKU at selected day part. What does that mean? It means that we take out some tail for selected day part. Not throughout the whole day, but just throughout certain time of the day. so that it has less wastage. Spend better, right? Less wastage, therefore less COS, less DOL. That all makes sense. And these are the specific examples. Thank you, Lorten.
spk00: Thanks a lot, Julia and Andy. And also look forward to that automatic rice fry machine if it is available on-shelf. And also, that's my best wishes to Andy again. Thanks, Lorten.
spk08: Your next question comes from Anne Ling with Jefferies. Please go ahead.
spk01: Hi. Thank you very much for taking my question. So I have a small one. It's just like the new format again. So moving forward, for example, for Pizza Hut WOW, does it mean that in the future, on the store opening, Because currently you're mainly doing a conversion on the store. So moving forward for your new opening, that also means that some of the new opening will also be strict on PCIe as well. And based on your current store network, how many of them you think that currently you can make this kind of shift and how quickly you can do that? Or at what point you will make a decision in terms of accelerating this rollout? And then for the K-Coffee store, the same question is under your current store network, how many stores are actually visible for this kind of like, you know, adjacent store format. Yeah, thank you.
spk06: Thank you, Anne. For Pizza Hut wild model, it's one of the model. For both caffeine Pizza Hut, we actually have multiple store model for multiple locations and formats and city tier, et cetera, et cetera. Currently, for Pisa Hava, we are testing this model in different parts of the country and also top tier city, low tier city, you can imagine. So we will be a bit more clear later on in the year about how many of the existing stores that have the potential to be converted. And you can imagine some of the new stores, if suitable for this model, we will open Pizza Havail as a new store as well. Similar story for K-Coffee, but not so similar. K-Coffee is not so much a conversion. K-Coffee Cafe is a bit like identify existing store, and we kind of have a side-by-side add-on sort of a distinct store to the existing KFC store. But again, we are testing it in different parts of China right now, and the most remote part is in Shigatse, right? Tibet. And, you know, in tourist locations, And then Hanzhou Dongzhang, the Hanzhou high-speed railway station, you can imagine. So different location, different city tier, we are testing it. And then we are building our food and also the drink of the cake coffee as well. So, you know, we have a bit more aggressive number of cake coffee, which is by the end of the year, 500 to 600 stores. But this is what we have in our mind, and we'll continue to learn, and then we adjust and adapt, and we accelerate the speed if we need to, and we'll continue to learn. Thank you, Anne. Thank you. And Andy, you're the best.
spk02: Thanks, Anne.
spk08: The next question comes from Brian Bittner with Oppenheimer & Co. Please go ahead.
spk09: Thank you. Andy, it's been a pleasure working with you. Thanks for all the help over the years, and I wish you the best. I was hoping you guys could put some guardrails on how to think about the second half of the year for same-store sales. Of course, if we look at last year, the comparison gets a lot easier in the third and fourth quarter, but given the operating environment, I'm not sure how relevant comparisons are. Is there, in fact, an opportunity for same-store sales to show some improvement in the second half versus the first half, or is the message from you that we analysts should remain pretty conservative and maybe expect more of a similar second half as what we saw in the first half?
spk02: Hi, Brian. Thank you so much for your kind word, and then also thank you for your question. I think, you know, in terms of macro, I think that there's a lot of news on the macro side. I think, you know, some of the complexities and potentially challenges in the Chinese consumer space or economy is well discussed. What we try to, as we try to mention on this call, is that, you know, as a company, you know, we continue to be able to take decisive actions to One is to drive sales, and the other one is to control cost. Those two are actually hand-in-hand. So some things, some of this initiative, we would be able to take more control and then yield results quickly. And so as a result, you can see our cost structure has improved quite significantly. And I think the strategy is working. On the other hand, we also pass along the savings to consumer, especially, you know, in the market where consumer are more value conscious. And so we'll continue to do that, you know, channel some of the savings to invest in value campaign, you know, some promotional activities to drive traffic. And I think, you know, we also have some results that we're pretty encouraging. If you look at our traffic growth, we achieve same sort of traffic growth of low single digits this quarter. And then if you look at our overall traffic growth for our franchise, overall, like, you know, the brand, we're seeing, you know, double-digit growth in our store traffic. And that is very important for our restaurant industry because traffic growth is what sustains long-term growth and profitability for our business. And so in terms of the macro outlook, I think, as Joey mentioned earlier, we don't see significant change, you know, going into the third quarter. And we remind folks that, you know, last year's third quarter was not particularly easy, as you put it, because, you know, we're only beginning to see some softening in the consumer space in late September last year. And so you can, you know, if you go back to last year, the trend and what we have coming at that time. And so, but good news is, you know, we have a lot of initiative and to We try that. We have some breakthrough in our business model with Pizza Hut model, with KFC's, you know, K-Coffee side-by-side model. And obviously, we also have a lot of, you know, initiative on food innovation. You know, as a restaurant industry leading player, we are very proud of our innovative capabilities, and that is very important. to drive consumer to the store. And so we'll continue to do that, but I do caution people, you know, be overly optimistic in the second half. We're not pessimistic, but we shouldn't be, you know, overly optimistic.
spk06: Thank you, Brian. Maybe I just add a few comments here. I mean, obviously, nobody has the crystal ball here. And I just want to emphasize that Yum! China is a growing company in a growing market called China. You know, it seems quite fashionable these days to be bearish on China. But I just want to add that even at current growth rate, China still accounts for almost one-third of the world's annual growth. And particularly the shift of growth to lower-tier cities kind of reminds me of the push into the frontier in the U.S. And part of yesterday's Wild West becomes today's Silicon Valley. And something like that has already happened in Shenzhen. So I'm confident that it will happen elsewhere in China as well. Therefore, system sales is equally important compared to same-store sales. And we will try to focus on both system sales and same-store sales to have the balanced approach. And you will appreciate that we are also opening a lot of new stores and that will have certain sales transfer in terms of sales. However, even with that, we are taking a balanced approach as well because 30% of our new stores actually are more on the strategic location or small tier city where the sales transfer can be managed better. And and more than half of our new store in lower tier city these days and last but not least the cake of the pizza Wow actually a very focused on growing the same door cells So we try to we try to focus and and and have a balanced approach Last but not least, you know, it's it's not recorded in media but Last year alone, China actually opened 400 shopping malls, mostly in Tier 2 and below. Think about how many countries in the world these days open 400 shopping malls. And for this year alone, 2024, we are expecting another 300 shopping malls to be open in China. So when new shopping malls open like that, we should open new stores, even though it might imply self-transfer from the traditional high street to the new shopping mall, because that's how economy evolves and low-tier cities develop. So just try to put some content into the background macro here. Thank you, Brian.
spk09: Thank you. And I do appreciate this system sales side of the equation. But the unit growth is what's known, and the same sort of sales is kind of what's unknown. And that was the essence of my question. That's true. But thank you. That's true.
spk06: Thank you, Brian.
spk08: The next question comes from with CICC. Please go ahead.
spk07: Thank you, Joe and Andy. Congrats for the high operational efficiency and strong bottom line. And best wishes to Andy. So I want to better understand our pricing strategy in the coming quarters, especially cap fee, because for Pizza Hut, we want to introduce entry-level pizza and lower the ticket average. But for Pizza Hut, the TA is relatively stable over a longer period. although we are expanding price range. So recently we observed that some other restaurant companies may hope to keep a relatively stable TA this year after a TA cut last year. So how about our pricing strategy, especially for KFC, where we keep it relatively stable or we may further increase promotion because elasticity of the money is still high and to pass savings to the consumer. Thank you.
spk06: Thank you, Sijie. So the question is about the TA, basically. And I presume the TA's hidden question is about the margin. So the TA trend for both KFC and Pizza Hut is consistent with our strategy to drive traffic. Driving traffic is the most important thing in our business. And we see robust same-store transaction growth at both KFC and Pizza Hut. and we see 13% total transaction growth for the business. And that represents the health of our business, by the way. Point two is even with the lower TA, Q2 stabilized restaurant margin and improved operating margin because we take proactive steps to improve the operational efficiency as well. So for KFC in the long term, we will take a balanced approach to maintain a steady TA. TA fluctuates quarter by quarter, and particularly, you know, compared to pandemic. However, if we take a long-term view, quarter two TA actually is RMB 37, and it's still higher than the quarter two TA of 2019, that's pre-pandemic, and that's 35. So in the long term, KFC, we have a very balanced approach. But in the short term, we will have sharp focus value, widen the price range, because that worked well, and that drove traffic, as we can see. However, with that said, we also will continue to offer higher ticket items with strong value for money, such as whole chicken, family bucket, because they continue to do well. And they balance out the TA as well. For Pizza Hut, TA come down by design since 2017. Every year, we want to take the TA down a bit. For quarter two, it's probably a bit more than we expected, but it's okay. And let me add, the Pizza Hut, actually, April... The theme store sales TA suffered because of outsized promotion campaign last year, April. And by May and June, actually, it recovered. The particular theme store sales recovered pretty close to KFC. But Pizza Hut will continue to tap into more value-cautious consumer and solo diner segments with entry-price pizzas, burgers, and one-person meal, etc. And then, of course, the pizza hot valve. By the way, for the entry-price pizza, which is below 50 RMB, which we talked about it in the last earning release, this particular price point pizza is growing a double digit for us. It's very nice because it's expanding our market share in this particular segment. Thank you, Sijie. Thank you, Joey. That's very clear.
spk08: The last question comes from Xiaopo Wei with Citigroup. Please go ahead.
spk09: Hi. Can you hear me? Yes. Hello?
spk10: Yeah. Okay. Thank you for taking my question. This is Xiaopo Wei of Citigroup. Yeah. A lot of things have been discussed in the prepared remarks and the prior Q&A. I just want to understand that given these environments, A lot of things have been done by Julie and her team on the efficiency improvement. Have you thought about any disposal of a small business in this environment? Because the small business in the past was intended for expansion of the business, but giving all the environment and the focus on efficiency. The small business may be a distraction of the resources. I just want to seek Joey's thinking on this perspective. Thank you.
spk06: Thank you, Xiaopu. I mean, your thinking is completely along the line of our thinking. We constantly review our portfolio of the smaller business. And if I would like to make a few comments here, for example, the new retail, some packaged foods, That smaller business served us well during the pandemic when we could not open any stores in certain markets. However, now business is sort of more back to normal and we can see the historical mission of the packaged food is probably accomplished. So we are going to probably, you know, reduce our involvement bit by bit very soon. So that's one example. And then for other smaller business, we always have a very disciplined approach, which Andy has shared in previous interactions with our shareholders and analysts. We only invest a very small percentage of our profit on the small business. While it gives us the opportunity, the smaller business gives us the opportunity to learn, to train our staff, and to fail. It's not set up to fail, but smaller business is very challenging. So we'll continue to review our portfolio. Lavasa actually is making really good progress. We have more, significantly more, breakeven stores this year than last year. We are happy about it. The retail bean business of Lavasa is actually turning profitable in quarter two of 2024, and we expect meaningful sales growth this year. And for Lavazza, we actually are moving coffee bean production from Italy to China so that we have fresher bean, more nimble innovation, lower cost, et cetera. So Lavazza will continue, and it takes time to build a good business, but it's really building step by step. And then the Huang Ji Huang and Little Sheep. Huang Ji Huang is a very resilient business. We are adding 15 new stores in the first half, bringing our total to over 800 stores globally. And Little Sheep, we have this new model called Zuan Zuan Guo, is to convert part of the store, sometimes the new store, to serve one person and has achieved initial success. And we are building more stores this year. And then Taco Bell is having a bit of a harder time because it is indeed a bit more foreign concept to Chinese consumer. So we need a bit more time and we are starting out the portfolio to further improve the business model. And that's where we are. But Xiaopo, we are constantly reviewing the health of the smaller business. Thank you so much.
spk02: Yeah, so I will add a little bit more there. As any capital deployment in our company, we're very disciplined about it, be it store model or be it the brand. I think we have demonstrated in the past and we'll continue to do that, which is when we see something that has potential, we'll continue to invest in it. We don't have a requirement to say, well, you immediately need to be profitable for smaller brands. For example, building a coffee brand in China would take time, right? But we see quick progress and we'll continue to invest in that. We also historically have closed some brands like CMJ, right? Like when you think we need to consolidate our resources to focusing on the coffee business on Labasa and now K-Coffee at the lower end, functional end of the coffee business. And so, yeah, so like, you know, capital deployment, including for the brand, for the store, the overall portfolio. We continue to remain, you know, very disciplined about it to make sure that, you know, capital is deployed efficiently for our shareholders. Thank you, Xiaobo.
spk08: Thanks, Xiaobo. Thanks, Joey. Great, thanks.
spk10: And Andy, all the best. Thank you so much.
spk06: Thank you all. Thank you.
spk05: Thank you for joining the call today. For further questions, please reach out through the contact information in our earnings release and on our website. Thanks.
spk02: Thank you.
spk05: Thank you so much, guys.
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