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HomeFinancialYum China (YUMC) Q2 2024 Earnings Name Transcript

Yum China (YUMC) Q2 2024 Earnings Name Transcript


YUMC earnings name for the interval ending June 30, 2024.

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Picture supply: The Motley Idiot.

Yum China (YUMC 0.91%)
Q2 2024 Earnings Name
Aug 05, 2024, 8:00 p.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Individuals

Ready Remarks:

Operator

Thanks for standing by. Welcome to the Yum China second quarter 2024 earnings convention name. All members are in a listen-only mode. There might be a presentation adopted by a question-and-answer session.

[Operator instructions] I’d now like at hand the convention over to Ms. Florence Lip. Please go forward.

Florence LipSenior Director, Investor Relations

Thanks, operator. Whats up, everybody. Thanks for becoming a member of Yum China’s second quarter 2024 earnings convention name. On at present’s name are our CEO, Ms.

Joey Wat; and our CFO, Mr. Andy Yeung. I would prefer to remind everybody that our earnings name and investor supplies comprise forward-looking statements, that are topic to future occasions and uncertainties. Precise outcomes could differ materially from these forward-looking statements.

All forward-looking statements needs to be thought-about at the side of the cautionary assertion in our earnings launch and the chance elements included in our filings with the SEC. This name additionally consists of sure non-GAAP monetary measures. You need to rigorously contemplate the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings launch.

Yow will discover the webcast of this name and a PowerPoint presentation on our IR web site. Please word that in at present’s name, all year-over-year development outcomes exclude the influence of overseas foreign money, until in any other case famous. Now, I wish to flip the decision over to Joey Wat, CEO of Yum China. Joey?

Joey WatChief Govt Officer

Whats up, everybody, and thanks for becoming a member of us. At the moment, Yum China reported document ranges of income, working revenue, and EPS for the second quarter. System gross sales grew 4% on prime of 32% development in the identical interval final yr. Core working revenue grew 12% to USD 275 million.

EPS elevated 19%. I wish to thank our colleagues for his or her laborious work and revolutionary spirit. We’re navigating a fancy and dynamic surroundings. Sure, however we see the various challenges extra as alternatives.

With our industry-leading capabilities and our scale, we’re turning these conditions to our aggressive benefit. We now have taken aggressive steps to drive income and profitability. I wish to spotlight three of them. First, we took a contemporary have a look at each key course of and price ingredient in our companies.

We made numerous improvements to enhance our operational effectivity, improve profitability, and improve resiliency. We’re already seeing outcomes. We’re attaining main value financial savings and reinvesting them into meals and worth. Second, we broadened our addressable market and held market share with our sharp concentrate on worth for cash and revolutionary merchandise.

Our transactions and supply gross sales each grew by double digits within the second quarter. We are going to proceed to innovate throughout our menu to handle buyer wants. Third, our breakthrough enterprise fashions, KCOFFEE and Pizza Hut WOW, achieved encouraging preliminary outcomes. These shops delivered incremental same-store gross sales and incremental revenue.

They’re displaying nice future potential. These methods are working properly. Q2 was our most worthwhile second quarter since our spin-off. Restaurant margins stabilized, OP margin expanded to 9.9%.

Let me first discuss our initiatives to drive operational effectivity. These initiatives cowl all facets of our group. First, Challenge Recent Eye launched in Quarter 4 final yr, helped enhance OP margins this quarter. We’re capturing for best-in-class and best-in-cost.

We’re assessing our operations from our RGM, in different phrases, retailer managers’ standpoint, supporting our RGM higher and sooner. From our eating places to again workplaces, we’re lowering complexity and simplifying operations. All our main initiatives at the moment are in place. The result’s fewer pointless course of burden on our RGMs and higher efficiencies.

Individually, we launched Challenge Crimson Eye on the finish of Quarter 1 to enhance our provide chain effectivity. Our aim is to spend higher and purchase higher. To spend higher, we’re assessing our operations from our prospects’ standpoint, figuring out areas that add no worth for them. We’re additionally simplifying our ingredient SKUs packaging and menu in a sure phase of shops and choose dayparts with out compromising gross sales.

To purchase higher, we’re sourcing instantly from farmers and producers for sure classes by systematically inspecting our operations from contemporary perspective, we’re uncovering quite a few alternatives. We’re doing all of this whereas guaranteeing for security and high quality. Lastly, AI and automation will proceed to play a giant function in our enterprise. We now have automated main restaurant administration duties from gross sales forecasting to labor scheduling and stock administration.

We now have rolled out iKitchen to all Pizza shops. This built-in AI system enhances meals high quality and improves operational effectivity. We had been among the many first in our {industry} in China to undertake generative AI in 2023 to turbocharge our back-office processes. We’re engaged on just a few dozen generated AI purposes, together with shopper insights, buyer assist, meals security, and new product innovation.

These instruments are already serving to us enhance effectivity and make extra knowledgeable data-driven choices. We’re making nice progress with these measures. Some have already impacted our second quarter outcomes, whereas others will take extra time to bear fruit. Importantly, these are structural enhancements that may deliver long-lasting advantages.

With these measures in place, we have now the bullet to compete on worth and pursue development on this dynamic surroundings. With that, let me flip to our model technique, beginning with KFC. In our 37 years in China, KFC has launched many standard product classes. Current improvements embrace our juicy beef burgers and complete hen.

Clients admire these new merchandise, however in addition they love the contemporary power we deliver to our iconic visitors. In Could, we mixed our Authentic Recipe Rooster and mashed potatoes to create a brand-new burger, the Authentic Recipe Rooster Burger, [Foreign language]. By the best way, the basic method to get pleasure from KFC’s Authentic Recipe Rooster is with mashed potatoes, at the least, for teenagers in China. Up to now, they had been ordered individually.

Now, we put them collectively into one burger. As one buyer instructed me, it’s a childhood dream come true. This revolutionary burger bought out in lots of places in simply two days and drove incremental gross sales and revenue. Because it was so standard, we launched once more for a restricted time in June.

KCOFFEE is offered in all KFC shops. Its gross sales exceed RMB 1 billion in first half of 2024, up 26% yr over yr. Throughout this era, we bought almost 120 million cups, up 36% yr over yr. We now have been accelerating the rollout of our groundbreaking side-by-side KCOFFEE Cafe since late final yr.

From simply 100 shops in March, we tripled the quantity to just about 300 in July. Facet-by-side KCOFFEE cafes characteristic a definite eating space and menu. Beginning at RMB 9.9 at our campus shops, prospects can get pleasure from our revolutionary espresso and a hotdog. We additionally took a preferred glowing Americano to the following stage with the introduction of the Iced Orange Premium Glowing Latte [Foreign language] The mousse-like smoothness, crispy burst, and citrus taste are mind-blowing.

Because of our very good provide chain and environment friendly operations, we’re making wholesome margins, too. This can be a profitable mannequin. By year-end, we anticipate to roll out our KCOFFEE Cafe to 500 to 600 shops. Supply gross sales continued by way of double-digit development momentum at KFC.

We lowered the supply charge in Quarter 1 to seize the underserved smaller ticket phase. These strategic strikes proved profitable as we gained market share on the aggregator platform. We drove incremental gross sales and revenue with out impacting margins. By introducing platform riders at choose places, we optimized rider prices whereas sustaining service high quality and buyer satisfaction.

Now, turning to Pizza Hut. This quarter, Pizza Hut achieved its most worthwhile second quarter because the spin-off. On the gross sales aspect, we had been up in opposition to an outsized comp in April from a profitable IT advertising and marketing marketing campaign final yr. In Could and June, same-store gross sales improved.

Regardless of gross sales deleveraging, we improved our profitability by enhancing operational effectivity. For instance, we considerably diminished product preparation time by simplifying menu and kitchen operations. We additionally deployed automated fried rice machines and robotic service to make our crews workload lighter. Pizza Hut simply hit the three,500-store mark.

We imagine Pizza Hut has large potential. Now, current in over 750 cities, there are 1,300 cities which have a KFC however no Pizza Hut as but. Along with increasing its footprint, Pizza Hut can also be reaching new shopper teams with superb worth, revolutionary merchandise, and enterprise fashions. Listed here are some highlights.

First, menu innovation. Our entry-price pizzas are addressing beforehand underserved segments and grew double digit this yr. Our new Pizza Dough Burger, Pizza [Foreign language], is attracting many solo diners. This distinctive burger made with a freshly baked pizza dough bun is receiving nice buyer suggestions.

In Quarter 2, we bought extra burgers than Hawaiian Pizza, one among our signatures. Inspired by its success, we might be rolling the Pizza Dough Burger out to all 3,500 shops afterward this month. Second, our Pizza Hut WOW retailer mannequin marks a significant breakthrough. We efficiently entice solo diners, younger individuals, and extra value-cautious prospects.

The mannequin options less complicated operations, good meals selection, and glorious worth for cash. It’s the fast-casual format with lighter service. Since opening the pilot retailer simply in Could, we have now transformed over 100 current shops to this mannequin by finish of July. Preliminary outcomes of the WOW mannequin are encouraging.

I visited a few of our newly opened shops final month. Gross sales had been vibrant with prospects queuing outdoors. Our first batch of recent shops achieved vital same-store gross sales uplift. Given the encouraging outcomes, we’re accelerating the shop rollout.

By year-end, we anticipate to greater than double our WOW retailer rely. Now, let me discuss our retailer enlargement. We’re seeing incredible, long-term development alternatives in China. Our versatile new retailer codecs permit us to penetrate profitably throughout metropolis tiers and places.

Our new shops maintained good returns. Their payback interval held regular at two years for KFC and improved to 2 to a few years at Pizza Hut. Round 80% of our new shops achieved month-to-month breakeven inside three months. We targeted on white area to reduce the influence on current shops.

KFC’s small-time mini mannequin is unlocking new web site prospects in lower-tier cities. We now have additionally recognized alternatives in strategic places like faculty campuses, fuel stations, freeway service facilities, and different transportation hub and vacationer places. KFC’s new retailer at Shanghai Jiao Tong College, [Foreign language], for instance, is having fun with busy on-campus visitors. We’re additionally leveraging partnerships with franchisees to unlock alternatives in lower-tier cities and strategic places.

Within the second quarter, internet new shops from franchising reached 25%. We anticipate the ratio will go up barely, exceeding the 15% to twenty% goal we set at our Investor Day final yr. Now, let me recap the three key messages I would like you to remove at present. First, we took actions to drive operational effectivity, which enabled us to put money into worth for cash and to assist our margin.

These efforts weren’t simply one-off value cuts. They had been structural enhancements that ought to ship advantages for years to return. Second, we embraced shopper wants and succeeded in driving strong transaction development. We’re assured that our gross sales initiatives will drive sustainable long-term system gross sales and same-store gross sales development.

Third, improvements in new retailer fashions will proceed to energy our long-term development. Our Q2 outcomes present that our methods are working. Nice firms thrive in powerful situations and switch challenges into alternatives. I am assured in our skill to navigate the present surroundings and emerge stronger than ever.

Earlier than we transfer on to our monetary outcomes, I wish to take a second to acknowledge the super contribution that Andy has made to Yum China. Andy has performed a vital function in enhancing the corporate’s monetary energy, establishing strong value self-discipline, and supporting our development technique. Below his management, the finance crew additional strengthened its core capabilities and upgraded its methods and processes in key areas. He additionally efficiently led the completion of our itemizing in Hong Kong.

I’d additionally prefer to thank Andy for his dedication to transitioning Adrian Ding into the performing CFO function. Please be part of me in wishing Andy the perfect. I’m very happy that Adrian will step up as performing CFO. Adrian is our present chief funding officer and basic supervisor of Lavazza.

Over the previous 5 years, Adrian has led a number of investments and capital market initiatives to reinforce our portfolio and organizational energy. He was instrumental in establishing the Lavazza three way partnership and constructing the Lavazza enterprise in China. Together with his monetary and operational experience, I am assured that Adrian will assist our development targets to create sustainable worth for our shareholders. With that, I’ll flip the decision over to Andy.

Andy?

Andy YeungChief Monetary Officer

Thanks, Joey, and good day, everybody. As this might be my final earnings name with Yum China, I need to categorical my honest gratitude to Joey, my colleagues and shareholders, and our analysts. Over the previous 5 years, it has been a rewarding expertise working carefully with such a gifted and devoted management crew. I am happy with the accomplishment that we have now achieved collectively, navigating the challenges posed by the pandemic and its aftermath.

Yum China emerged from the pandemic, extra resilient, and able to speed up development. I am assured within the firm’s continued success below the succesful management of the present administration crew. Now let’s flip to our monetary outcomes. Within the second quarter, we delivered a stable efficiency and set quite a few new information, together with income of $2.68 billion, working revenue of $266 million, working margins of 9.9%, and diluted EPS of $0.55.

That is, for certain, spectacular given the present market situation. As Joey shared earlier, the initiative that we launched, starting within the fourth quarter of final yr to drive sustainable development and defend margins, are starting to repay. Whereas top-lapping and present market situations impacted same-store gross sales, our margins stabilized. Our gross sales development was led by wholesome visitors.

Whole transactions grew 13% and same-store transactions grew 4% yr over yr within the second quarter. It is a testimony to how properly our model, product, advertising and marketing, and promotions, resonating properly with customers. We entice new prospects and seize extra events from current prospects by broadening our worth vary and providing scrumptious meals at reasonably priced worth level. Regardless of a decrease ticket common, restaurant margin was comparatively flattish yr over yr, on a comparable foundation.

Core working margin truly improved yr over yr, setting a brand new high quality document for working margin, due to our economic system of scale and price measures. Taking an extended view, our system gross sales grew 25% in contrast with the second quarter 2019, outperforming the restaurant {industry}. Working revenue elevated much more by 38% in comparison with 2019, excluding overseas change. Now, let’s take a better have a look at our second quarter efficiency.

By model, KFC system gross sales elevated 5% yr over yr. Identical-store gross sales had been at 97% of prior-year ranges, with 4% same-store visitors development and seven% low ticket common. Taking a look at it from a longer-term perspective, our ticket common within the second quarter was RMB 37, greater than the RMB 35 ticket common within the second quarter of 2019. Our technique is to widen the value vary and seize low-ticket common supply orders are paying off.

Our entry worth combo drove incremental visitors. Supply gross sales grew 12%. Pizza Hut system gross sales elevated 1% yr over yr. Identical-store gross sales had been at 92% of the prior-year stage with visitors development of two% and a 9% decrease ticket common.

Pizza Hut continued to faucet into extra value-conscious customers and solo diner phase with entry-price pizzas, burgers, and one-person meals. The ticket common went down in line with our technique however most likely improved yr over yr to our crew’s relentless efforts to drive effectivity. Now, let’s undergo our margin and key value traces. Our working margin as a share of income was 9.9%, the best second quarter document since our spinoff.

We nonetheless win restaurant margins and proactive financial savings in G&A bills helped us obtain that. Our restaurant margin was 15.5%, 60 foundation factors decrease than final yr or roughly the identical on a comparable foundation. Financial savings in value of labor and occupancy and different prices offset will increase in value of gross sales. Price of gross sales was 31.5%, 80 foundation factors greater yr over yr or 70 foundation factors greater on a comparable foundation.

COS was at a wholesome stage and in line with our long-term vary of 31%, plus or minus 1%. We managed our COS piping regardless of providing extra worth for cash. Our meals innovation capabilities and very good provide chain permit us to put money into sales-driving initiatives and promotions. Price of labor was 26.3%, 10 foundation factors decrease yr over yr.

Improved operational effectivity greater than offset final yr’s price will increase for our frontline employees and the gross sales deleveraging influence. Occupancy and different was 26.7%, 10 foundation factors decrease yr over yr or 50 foundation factors decrease on a comparable foundation. This comes from decrease advertising and marketing and promoting bills and different value optimization. Our G&A bills decreased 11% yr over yr.

We drove operational effectivity positive factors. We additionally save on decrease performance-based compensation this yr. G&A bills as a share of income was 5% within the quarter, bettering from 5.8% a yr in the past. For the complete yr, we intention to maintain the G&A ratio round 5%.

Our efficient tax price was 25.2% within the second quarter, on par with the identical interval final yr. We anticipate our full yr efficient tax price to be within the excessive 20s. Working revenue was $266 million, a second quarter document, rising 7% yr on yr. Core working revenue was $275 million, rising 12% yr over yr.

Diluted EPS was $0.55, additionally a second quarter document, rising 19% yr over yr. Lastly, transferring on to our outlook. The market situations stay difficult. We are going to proceed to put money into worth for cash and step-up product, and advertising and marketing improvements to drive transaction development.

Our operational effectivity, purchase higher, and spend higher initiatives usually are not short-term measures. We anticipate value financial savings from Challenge Recent Eye and Challenge Crimson Eye to proceed within the second half. These transformative modifications ought to place us properly to stay greatest at school and greatest in value in our enterprise, making our worth proposition sustainable and worthwhile in the long term. Our disruptive new enterprise mannequin like KFC, side-by-side KCOFFEE Cafe, and Pizza Hut WOW retailer are promising to additional same-store gross sales development potential.

As a reminder, we recorded round $150 million in short-term reduction and VAT deductions within the third quarter of final yr. We don’t anticipate this to recur this yr. We anticipate price inflation for our frontline employees to stay at low single digits. We opened a document 779 internet new shops within the first half and reached 15,423 whole variety of shops.

We’re on monitor to realize our full yr goal of 1,500 to 1,700 internet new shops. We’re additionally on monitor to return $1.5 billion to shareholders. Within the first half, we returned almost $1 billion, together with shopping for again 21.7 million shares. That is equal to over 5% of our excellent share.

Our sturdy money stream era and wholesome money place proceed to energy our capital return to shareholders. On the finish of the second quarter, we had $3.1 billion in internet money. Our three-year development goal stays unchanged. We’re dedicated to returning at the least $3 billion to shareholders whereas driving long-term and sustainable development.

Now with that, I’ll move it again to Florence. Florence?

Florence LipSenior Director, Investor Relations

Thanks, Andy. Now, we are going to open the decision for questions. With the intention to give extra individuals the prospect to ask questions, please restrict your inquiries to one by one. Operator, please begin the Q&A.

Questions & Solutions:

Operator

Thanks. [Operator instructions] Your first query comes from Michelle Cheng with Goldman Sachs. Please go forward.

Michelle ChengAnalyst

Hello, Joey and Andy, congrats for the very sturdy and resilient numbers. And in addition, Andy, all the very best. So, my query is about this new enterprise format and retailer idea. And it is actually spectacular that we have now a really aggressive opening yr to this point.

And thanks, Joey, additionally sharing the goal by finish of yr. However are you able to please give us extra shade concerning the economics and in addition the contributions at KCOFFEE side-by-side shops in same-store gross sales for these shops? We have already got these openings prior to now few months. And given it is nonetheless extra worth place, after we take into consideration the economics, ought to we see that this full value ratio might be greater, however this might be offset by like extra simplified value construction in O and O payroll? Then from the margin perspective, structurally, we are going to see extra upside from this new mannequin. And in addition, are we going to see extra new ideas along with the KCOFFEE and WOW within the subsequent few quarters? Thanks.

Joey WatChief Govt Officer

Thanks, Michelle. It is actually superb for our crew to have this breakthrough, and we’re very enthusiastic about it. And I’ll reply your final query first is we’re going to concentrate on these two breakthrough fashions out of KFC and Pizza Hut. And I feel the preliminary end result may be very encouraging, and we’ll concentrate on that for the remainder of the yr and going ahead.

Come again to the content material of the brand new idea, to begin with, the simplest means is 12%. I encourage all our analysts. Simply throughout the border, I just lately visited the one in Ivanta and UniCentr, I feel, is a Pizza WOW. After which we have now just a few different KCOFFEE aspect by aspect.

And you may see the menu of the operation, and you’ve got an excellent really feel about it. So, for KCOFFEE, it has its personal menu. The menu may be very easy. After which when it comes to the product, we have now some profitable product, the glowing espresso is a incredible product and meals can also be vital.

And that involves the following attribute of KCOFFEE is we share the kitchen and the operation with the traditional KFC retailer. So, the kitchen is shared. Operation crew is shared, however it has its personal distinct space. After which for the client, the worth for cash is superb, and I’ll spotlight one explicit supply, which I discussed in my remarks, within the campus.

Campus KCOFFEE retailer, we truly supply glowing espresso with a hotdog at 9.9 yuan. You may naturally ask the query, how does it work for the margin? Properly, take into consideration this manner, for a few years already, we provide our breakfast at 9.9 yuan and eight yuan. We provide the meals and the espresso comes free of charge. In KCOFFEE, it is the reverse.

We promote the espresso at 9.9 yuan, meals is free. So, it is in our stunning functionality that we are able to do that at a really aggressive means. So, the margin is wholesome. After which when it comes to end result, it provides each incremental same-store gross sales and incremental revenue.

Now, come to the WOW Pizza Hut retailer. So, it is type of a bit extra quick informal with a bit much less service, just a bit bit. How do I describe this? The meals providing is a bit like Pizza Hut, however [Foreign language] smaller portion, cheaper price. However if you happen to go in there by your self, you may order a bit extra for selection, however whole ticket common is lower than the traditional Pizza Hut retailer.

However the visitors is incredible. So, general, it was and the same-store gross sales improve may be very encouraging. And for the Pizza Hut WOW retailer, we simply convert a few of our Pizza Hut shops into this new idea. It is conversion mainly.

So, proper now, we have now 100 shops transformed by the top of July, and we plan to realize over 200 by the top of the yr. And when it comes to COS margin, it is truly higher. Though it is early days, the unit economics is best as a result of COL and O and O is a bit much less. So, that is what we are able to share with you proper now.

However the No.1 suggestion throughout the board goes to see some incentive. Thanks, Michelle.

Michelle ChengAnalyst

Thanks, Joey. Wanting ahead to it.

Operator

Your subsequent query comes from Lillian Lou with Morgan Stanley. Please go forward.

Lillian LouAnalyst

Whats up, thanks. Whats up, Joey and Andy. My query is concerning the latest pattern on the same-store gross sales and in addition, once more, congratulations on giving such end result even below a bit challenged surroundings. So, I need to perceive moving into the quarter, fourth quarter when the highest comp type of alleviated a bit and with all this value effectivity put in place, how we must always have a look at the operation on a holistic foundation.

And have you ever seen completely different tendencies in numerous tier of markets when it comes to the demand and the fee administration like high-tier metropolis and low-tier cities? Thanks.

Joey WatChief Govt Officer

Thanks, Lillian. Let me share a bit bit studying from the Quarter 1 buying and selling sample after which make just a few feedback concerning the Quarter 2. By area, the japanese a part of China remains to be essentially the most resilient one, however lower-tier metropolis recovers sooner than higher-tier metropolis each yr on yr and versus long term like pre-pandemic for 2019. By location, the residential places are extra resilient and buying facilities are nearly again to 2019 ranges.

And transferring on to the enterprise surroundings, there’s been a number of consideration to the enterprise surroundings and shopper sentiment in China. We aren’t seeing vital change in market situations and shopper sentiment going to Quarter 3, sorry. With that mentioned, my administration crew and I share one explicit philosophy on that. Sure, enterprise is hard proper now, however very similar to life, proper? It is all the time powerful.

In enterprise as in life, we all the time anticipate the surprising. We do not whine about it. We settle for no matter comes our means, and we adapt and do the fitting factor. Typically, in doing so, we’re capable of flip the disruptions to our competitor benefit by deploying our scale and our capabilities.

By way of the right way to do it, and so on., I’ve coated them in my remarks concerning the particular actions. However the three key factors bear repeating in abstract. To begin with, to reply your query about the fee effectivity, we have now tuned each course of and price ingredient to drive operational effectivity, make our retailer managers’ workload lighter and reinvest into our value-for-money choices and assist our margins. Second, we have now innovated artistic new merchandise, which have beautiful image within the PowerPoint deck, and we widened our worth factors to broaden our addressable market and drive visitors.

Third, we innovate breakthrough retailer mannequin, such because the KCOFFEE cafe and mini retailer for small instances for KFC and the fast-casual mannequin known as Pizza WOW, which I simply described, to energy future development of KFC and Pizza Hut. Like all three methods present sturdy preliminary outcomes. Because of this, for Quarter 2 this yr, we see strong development or truly double-digit development in transaction and supply gross sales. Our restaurant margins stabilized and core OP grew by 12%.

We see essentially the most worthwhile Quarter 2 since spin-off regardless of the {industry} dynamic. Thanks, Lillian.

Operator

The subsequent query comes from Chen Luo with Financial institution of America. Please go forward.

Chen LuoAnalyst

Joey, Andy, that is Chen. And congrats once more on the sturdy end result and in addition my greatest needs to Andy. I would prefer to take a deeper have a look at margins, undoubtedly, our Q2 margin pace expectation. And while you’re wanting into the main points, I observed, to begin with, the meals and paper value as % of gross sales edged down by 60 bps on a QOQ foundation although our promotion appears to be very intense in Q2.

So, what’s driving that? Is that this due to the falling commodity value? Or it is due to our sensible worth or the availability chain initiatives? And secondly, if you happen to have a look at the price of labor, it has declined massive time on a year-on-year foundation for Pizza Hut, and in addition for the group, it is largely flattish versus the same old upward pattern. So, what can also be driving all these modifications? And lastly, I observed that our first half restaurant margin is definitely just about on par with first half of 2019, which is often regarded by the market as a normalized comparability base. Is it honest to say that going ahead, our margins will be largely similar to 2019 for the remainder of the yr? Thanks.

Andy YeungChief Monetary Officer

Thanks, Chen, on your query. By way of quick time period, I feel, clearly, we’re navigating some fairly dynamic, fairly advanced working surroundings within the quick time period. And customers stay very worth acutely aware. And so, that is an vital factor to remember.

So, from our perspective, if you happen to have a look at third quarter final yr, was not notably low base. If you consider final yr, we see the buyer information softened in late September. So, that is one thing that we take note. So, within the quick time period, clearly, gross sales could be an vital driver for margins as we have now talked about on the decision.

However however, as we have now talked about in our ready remarks, we have now taken very decisive actions to regulate our value construction. After which additionally, we have now a really decisive motion to vary a few of our enterprise mannequin to embrace the market change. And so because of this, we’re capable of see stabilized margins. After which additionally, we see expansions in our working margin to imagine that it is the smartest thing to spin-off.

Now if you happen to have a look at our initiative, these initiatives usually are not a short-term measure. They’re long-term structural change in the best way how not solely the fee construction, but additionally how we function our enterprise, make it extra environment friendly. Within the quick time period, I feel like if you consider commodity worth within the quick time period, a number of the commodity costs are extra favorable. However on the similar time, we, once more, have talked about over and over, that’s vital for us to put money into worth, make investments and embrace the buyer modifications, and nonetheless add a while.

in actual fact, as we have now talked about earlier than. We all the time, in the long run, goal 31% plus or minus 1%, and generally seasonality on the fluctuations. I feel all in all, we view our marketplace for that. This quarter is about 31.5%.

So, when it comes to gross sales, sure, you probably did see fairly a little bit of enchancment in labor productiveness. And that may proceed to be a few of our focus. We are going to proceed to look into our operations, simplify a number of the procedures and guarantee that what we do truly provides worth, if what we do does not add worth, they usually’re not worthwhile for the RGM or shopper will take it out. However after we have a look at within the second half of this yr, for instance, the complete yr this yr, we do anticipate CL inflation on the storefront stage to be at low single digit.

After which when it comes to all now, I feel it continues to be an space that we have now initiatives to attempt to enhance. However clearly, these are composed of many, many issues, proper? Capital allocation for retailer investments that influence depreciation after which additionally ran runs the large issues we proceed to work on advertising and marketing leverage from our digital program. And so we may have many initiatives to attempt to enhance incrementally. However one factor I need to remind you of us, as we have now reminded of us within the first quarter earnings name, which is final yr, our firm did get pleasure from some onetime, proper, like we go away and in addition VAT discount, which was a giant sport coverage that we do not expertise within the first half of this yr, and we do not anticipate within the second half this yr.

So, the objects that influence comparability for the second quarter final yr was about USD 12 million, after which within the third quarter, it is about USD 15 million. I feel that is one issue that while you guys have a look at the mannequin needs to be mined. And so when it comes to G&A, I feel as we have now talked about earlier than, we are going to intention to maintain G&A this yr round 5% of our whole gross sales revenues. And that may be a vital enchancment in comparison with final yr, and that is an enchancment when in comparison with 2019.

And so once more, like within the quick time period, that is how we have a look at it. However in the long run, I feel we intention for comparatively steady margins and search for methods to enhance our working margins in the long term if doable. And I feel we have now demonstrated, and I feel we’re assured that we are able to handle each development and chance in good instances and dangerous instances. And can we face challenges within the quick time period? Positive.

However we have now demonstrated, I feel, and you’ll see the actions that we’re taking to embrace the market modifications, to regulate our value construction, enhance our efficiencies and in addition our change our enterprise mannequin. I feel that chance to make decisive modifications to embrace change, ought to assist us to maintain margin in the long run.

Joey WatChief Govt Officer

I will simply give two concrete examples for you, Luo Chen. For instance, COS, proper, in choose provider proper now, we go straight to the farmer and producer. We get actually good components at higher worth, you may completely think about. We’ll proceed to do this.

Within the COL, what are the particular issues that you may see in our kitchen? 80% of our Pizza Hut retailer proper now have computerized fry rise machine. It is fairly cool. You may contemplate to have one in your home. It is truly very small.

So, it actually resolve the labor scarcity or labor downside, notably throughout the peak time. After which 50% of our Pizza Hut retailer proper now have robotic servers. Not all the shop can do it as a result of so small retailer can not profit from it. [Foreign language] So, this undoubtedly a structural change to the COL.

After which as I discussed in my ready remarks, we have now fewer SKUs at choose daypart. What does that imply? It signifies that we take out some tail for chosen daypart. Not all through complete day, however simply all through sure time of the day, in order that it has much less wastage, spend higher, proper? Much less wastage, due to this fact, much less COS, much less COL that every one is sensible. And these are the particular examples.

Chen LuoAnalyst

Stay up for that computerized frying rice machine whether it is accessible on shelf. And in addition that is my greatest needs to Andy once more. Thanks.

Operator

Your subsequent query comes from Anne Ling with Jefferies. Please go forward.

Anne LingAnalyst

Hello, thanks very a lot for taking my query. So, I’ve a small one. The brand new format once more. So, transferring ahead, for instance, for Pizza Hut WOW, does it imply that sooner or later on the shop opening that as a result of at present, you are primarily doing a conversion on the shop.

So, transferring ahead on your new opening, will that additionally imply that a number of the new opening may even be strict on Pizza Hut WOW. And based mostly in your present community. What number of of them do you suppose that at present you can also make this type of shift and the way shortly you are able to do that? Or like at what level you decide when it comes to accelerating this rollout? After which for the KCOFFEE retailer, the identical query is that below your present retailer community, what number of shops are literally seen for this type of like adjoining retailer format?

Joey WatChief Govt Officer

Yeah. Thanks, Anne. For Pizza Hut WOW mannequin, is likely one of the fashions. For each KCOFFEE and Pizza Hut, we even have a number of retailer mannequin for a number of places and codecs and metropolis, and so on., and so on.

At the moment, for Pizza Hut WOW, we’re testing this mannequin in numerous elements of the nation, and in addition prime tier metropolis, low-tier metropolis you may think about. So, we might be a bit extra clear afterward within the yr about how most of the current shops which have the potential to be transformed. And you may think about a number of the new retailer is appropriate for this mannequin. We are going to open Pizza Hut WOW as a brand new retailer as properly.

Related story for KCOFFEE, however not so related. KCOFFEE shouldn’t be a lot a conversion. KCOFFEE Cafe is a bit like establish current retailer, and we type of have a side-by-side and on type of a definite retailer to the present KFC retailer. However once more, we’re testing it in numerous elements of China proper now and essentially the most distant half is in Shigatse, Sichuan, Tibet.

And in vacationer location after which Guangzho and the Guangzho high-speed railway station you may think about. So, completely different places, completely different metropolis tier, we’re testing it. After which we’re constructing our meals and in addition the drink of the KCOFFEE as properly. So, we have now a bit extra aggressive variety of KCOFFEE, which is by the top of the yr, 500 to 600 shops, however that is what we have now in our thoughts, and we’ll proceed to be taught after which we modify and adapt and we speed up the pace if we have to and we’ll proceed to be taught.

Thanks, Anne.

Operator

Your subsequent query comes from Brian Bittner with Oppenheimer and Co. Please go forward.

Brian BittnerAnalyst

Thanks. Andy, it has been a pleasure working with you. Thanks for all the assistance through the years, and I want you the very best. I hoped you guys may put some guardrails on how to consider the second half of the yr for same-store gross sales.

In fact, if we have a look at final yr, the comparability will get rather a lot simpler within the third and fourth quarter. However given the working surroundings, I am unsure how related comparisons are. So, is there, in actual fact, a chance for same-store gross sales to point out some enchancment within the second half versus the primary half? Or is the message from you that we analysts ought to stay fairly conservative and perhaps anticipate extra of an analogous second half as what we noticed within the first half?

Andy YeungChief Monetary Officer

Brian, thanks a lot on your time, work after which additionally thanks on your query. I feel in macro, I feel there’s a number of information on the macro aspect. I feel a number of the complexities and doubtlessly challenges within the Chinese language shopper area or economic system as properly mentioned. hat we attempt to point out on this name is that as an organization, we proceed to have the ability to take decisive actions to need to drive gross sales and the opposite one is to regulate prices.

These two are literally hand in hand, proper? So, a few of these initiatives, we’d be capable of take extra management after which we promote shortly. And so because of this, you may see, our value construction has improved fairly considerably. And I feel the technique is working. Then again, we additionally move alongside the financial savings to customers, particularly available in the market the place customers are extra worth acutely aware.

And so we’ll proceed to do this and channel a number of the financial savings to put money into worth marketing campaign, some promotional actions to drive visitors. And I feel we even have some outcomes that had been fairly encouraging. For those who have a look at our visitors development, we achieved same-store visitors development of low single digit this quarter. After which if you happen to have a look at our general revenue development for our franchise general, just like the model, we’re seeing double-digit development in our retailer visitors.

And that is essential for our restaurant {industry} as a result of visitors development is what sustained long-term development and profitability for our enterprise. And so when it comes to the macro outlook, I feel, as Joey talked about earlier, we do not see vital change going into the third quarter. And we remind of us that final yr, third quarter was not notably straightforward as you place it, as a result of we’re solely starting to see some softening within the shopper area in late September final yr. For those who return to final yr, the pattern and what we have now are available in at the moment.

However excellent news is we have now a number of initiative and to strive that. We now have some breakthrough in our enterprise mannequin with Pizza Hut WOW mannequin with KFC, KCOFFEE Cafe mannequin. And clearly, we even have a number of initiatives on meals innovation as a restaurant {industry} main participant. We’re very happy with our revolutionary capabilities.

And that is essential to drive shopper to the shop. And so we’ll proceed to do this, however as we warning individuals be overly optimistic within the second half. We’re not pessimistic, however it should not be overly optimistic.

Joey WatChief Govt Officer

Thanks, Brian. Possibly I will simply add just a few feedback right here. I imply, clearly, no one has the crystal ball right here. And I simply need to emphasize that Yum China is a rising firm in a rising market known as China.

It appears fairly modern lately to be bearish on China. However I simply need to add that even at present development charges, China nonetheless accounts for nearly one-third of the world’s annual development. And notably, the shift of development to decrease tier metropolis type of jogs my memory of the push into the frontier within the U.S. and a part of yesterday’s Wild West grow to be at present’s Silicon Valley.

And one thing like that has already occurred in Shenzhen. So, I am assured that it’ll occur elsewhere in China as properly. Due to this fact, system gross sales is equally vital in comparison with methods same-store gross sales. And we are going to attempt to concentrate on each system gross sales and same-store gross sales to have the balanced strategy.

And you’ll admire that we’re additionally opening a number of new shops, and that may have sure gross sales switch when it comes to same-store gross sales. Nevertheless, even with that, we’re taking a balanced strategy as properly as a result of 30% of our new shops truly are extra on the strategic location or a small tier metropolis the place the gross sales switch will be managed higher, and greater than half of our new shops are in lower-tier cities lately. And final however not least, the KCOFFEE, Pizza Hut WOW truly are very targeted on rising the same-store gross sales. So, we attempt to focus and have a balanced strategy.

Final however not least, it isn’t reported in media. However final yr alone, China truly opened 400 buying malls in principally in Tier 2 and beneath. I take into consideration what number of nations on the planet lately opened 400 buying malls. And for this yr alone, 2024, we predict one other 300 buying malls to be opened in China.

So, when new shopping center opened like that, we will open new shops. Regardless that it’d indicate gross sales switch from the normal excessive avenue to the brand new shopping center as a result of that is how economic system evolves and low-tier cities develop. So, simply attempt to put some content material into the background macro right here. Thanks, Brian.

Brian BittnerAnalyst

Thanks. And I do admire the system gross sales aspect of the equation, however that the unit development is what’s recognized and the same-store gross sales is type of what’s unknown. And that was the essence of my query. Thanks.

Joey WatChief Govt Officer

Thanks, Brian.

Operator

The subsequent query comes from Sijie Lin with CICC. Please go forward.

Sijie LinAnalyst

Thanks, Joey and Andy. Congrats for the excessive operational effectivity and robust backside line, and greatest needs to Andy. So, I need to higher perceive our pricing technique within the coming quarters particularly KFC as a result of for Pizza Hut, we need to introduce entry-level pizza and decrease the ticket common. However for Pizza Hut, the TA is comparatively steady over an extended interval.

though we’re increasing worth vary. So, just lately, we noticed that another restaurant firms could hope to maintain comparatively steady CA this yr after TA cuts final yr. So, how about our pricing technique, particularly for KFC, will we preserve it comparatively steady? Or we could additional improve promotion as a result of elasticity of demand remains to be excessive and to move financial savings to the buyer.

Joey WatChief Govt Officer

Thanks, Sijie. So, the query is concerning the TA mainly. And I presume the TA hidden query is concerning the margin. So, the TA pattern for each KFC and Pizza Hut is in line with our technique to drive visitors.

Driving visitors is crucial factor in our enterprise, and we see strong same-store transaction development at each KFC and Pizza Hut. And we see 13% whole transaction development for the enterprise. And that represents the well being of our enterprise, by the best way, level two is even with the decrease TA Q2 stabilized restaurant margins and improved working margin as a result of we take proactive steps to enhance the operational effectivity as properly. So, for KFC in the long run, we are going to take a balanced strategy to take care of a gradual TA.

TA fluctuate quarter by quarter and notably in comparison with pandemic. Nevertheless, if we take a long-term view, Quarter 2 TA truly is RMB 37 and it is nonetheless greater than the Quarter 2 TA of 2019. That is pre-pandemic, and that is 35. So, in the long run, KFC, we have now a really balanced strategy.

However within the quick time period, we may have sharp targeted worth, widen the value vary as a result of that labored properly and that drove visitors as we are able to see. Nevertheless, with that mentioned, we additionally will proceed to supply greater ticket objects with sturdy worth for cash corresponding to complete hen, household bucket as a result of they proceed to do properly, they usually steadiness out the TA as properly. For Pizza Hut, TA come down by design since 2017. Yearly, we need to take the TA down a bit.

For Quarter 2, it is most likely a bit greater than we anticipated however it’s OK. And let me add the Pizza Hut truly, April, the same-store gross sales TA endure due to outsized promotion marketing campaign final yr, April. And by Could and June, truly, it recovered the actual same-store cells, get well fairly near KFC. The Pizza Hut will proceed to faucet into extra value-cautious shopper and solo diner segments with entry worth pizzas, burgers and one individual meal, and so on.

After which, in fact, the KCOFFEE WOW. By the best way, the entry worth pizza, which is beneath RMB 50, which we talked about it within the final earnings launch. This explicit worth level pizza is rising at double digit for us. It’s totally good as a result of it is increasing our market share on this explicit phase.

Thanks, Sijie.

Sijie LinAnalyst

Thanks, Joey. That is very clear.

Operator

The final query comes from Xiaopo Wei with Citigroup. Please go forward.

Xiaopo WeiAnalyst

Hello. Are you able to hear me?

Operator

Sure.

Xiaopo WeiAnalyst

OK. Thanks for taking my questions. Sure. Xiaopo Wei with Citigroup.

Sure. A variety of issues have been mentioned within the ready remarks and the prior Q&A I simply need to perceive that given this surroundings, a number of issues have been performed by Joey and the crew on the effectivity enchancment. Have you considered any disposal of a small enterprise on this surroundings as a result of the small enterprise prior to now was meant for enlargement of the enterprise, however given all of the surroundings and concentrate on effectivity, the small enterprise could also be a distraction of the assets? I simply need to search Joey’s considering on this attitude.

Joey WatChief Govt Officer

Thanks, Xiaopo. I imply your considering is totally alongside the road of our considering. We continually evaluation our portfolio of the smaller enterprise. After which if I wish to make just a few feedback right here, for instance, the brand new retail, I imply some packaged meals, that smaller enterprise served us properly throughout the pandemic.

Once we couldn’t open any shops in sure markets. Nevertheless, now enterprise are type of extra again to regular and we are able to see the historic mission of the packaged meals might be achieved. So, we’re going to most likely scale back our involvement a bit very quickly. So, that is one instance.

After which for different smaller enterprise, we all the time have a really disciplined strategy, which Andy has shared in earlier interactions with our shareholders and analysts. We solely make investments a really small share of our revenue on the small enterprise. Whereas it offers us the chance, the smaller enterprise give us alternative to be taught, to coach our employees and to fail. It is not set as much as fail however smaller enterprise may be very difficult.

So, we’ll proceed to evaluation our portfolio. Lavazza truly is making actually good progress. We now have considerably extra breakeven shops this yr than final yr, we’re joyful about it. The retail bean enterprise of Lavazza is definitely turning worthwhile in Quarter 2 of 2024, and we anticipate significant gross sales development this yr.

And for Lavazza, we truly are transferring espresso bean manufacturing from Italy to China in order that we have now more energizing, extra nimble innovation, decrease value, and so on. So, Lavazza will proceed, and it takes time to construct enterprise, however it’s actually constructing step-by-step. After which the [Foreign language] is a really resilient enterprise. We’re including 15 new shops within the first half, bringing our whole to over 800 shops globally.

And little ship, we have now this new mannequin known as [Foreign language] is to transform a part of the shop, generally the brand new retailer to serve one individual and has achieved preliminary success, and we’re constructing extra shops this yr. After which Taco Bell is having a little bit of a more durable time as a result of it’s certainly a bit extra comfortable overseas idea to Chinese language shopper. So, we want a bit extra time, and we’re checking out the portfolio to additional enhance the enterprise mannequin. And that is the place we’re however, Xiaopo, we’re continually reviewing the well being of the smaller enterprise.

Xiaopo WeiAnalyst

Thanks a lot.

Andy YeungChief Monetary Officer

Yeah. Positive, Xiaopo. I’ll add a bit bit extra there. As any capital deployment in our firm, we’re very disciplined about it.

Retailer mannequin albeit the model. I feel we have now demonstrated prior to now, and we’ll proceed to do this, which is after we see one thing which have potential, we’ll proceed to put money into that. And we do not have a requirement to say properly you want and have to be worthwhile for a smaller model. For instance, constructing a espresso model in China will take time, proper? However we see nice progress, and we’ll proceed to put money into that.

We additionally traditionally have closed some manufacturers like C and J, proper, like while you’re saying we have to consolidate our assets specializing in the core enterprise on Lavazza and now KCOFFEE on the decrease finish useful finish of the espresso enterprise. And so sure, so like capital deployment, together with for the model, for the shop, the general portfolio will proceed to stay very disciplined about it to guarantee that capital deployed effectively for our shareholders. Thanks, Xiaopo.

Xiaopo WeiAnalyst

Thanks, Joey. Thanks, Andy, and all the very best.

Joey WatChief Govt Officer

Thanks a lot.

Andy YeungChief Monetary Officer

Thanks.

Florence LipSenior Director, Investor Relations

Thanks for becoming a member of the decision at present. For additional questions, please attain out by way of the contact data in our earnings launch and on our web site. Thanks.

Andy YeungChief Monetary Officer

Thanks.

Joey WatChief Govt Officer

Thanks a lot, guys.

Period: 0 minutes

Name members:

Florence LipSenior Director, Investor Relations

Joey WatChief Govt Officer

Andy YeungChief Monetary Officer

Michelle ChengAnalyst

Lillian LouAnalyst

Chen LuoAnalyst

Anne LingAnalyst

Brian BittnerAnalyst

Sijie LinAnalyst

Xiaopo WeiAnalyst

Extra YUMC evaluation

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