YUM CHINA(YUMC)2023-02-08 02:00Financial Data and Key Metrics - Total revenue declined 9% YoY in reported currency to $2.1 billion in Q4 2022, but grew 2% in constant currency [18] - System sales and same-store sales both declined 4% YoY in Q4 2022 [19] - Restaurant margin improved by 290 basis points YoY to 10.4% in Q4 2022, driven by labor productivity, operational efficiency, and temporary relief [19] - Free cash flow for 2022 was $734 million, with $668 million returned to shareholders through dividends and share repurchases [23] - Cash and short-term investments decreased to $3.2 billion from $4 billion in Q3 2022, mainly due to reclassification of $600 million to long-term deposits [23] Business Line Performance - KFC same-store sales were 97% of prior year levels in Q4 2022, with same-store traffic at 84% and ticket average up 16% due to higher delivery mix [19] - Pizza Hut same-store sales were 92% of prior year levels, with same-store traffic at 98% and ticket average at 95% [19] - Delivery sales mix doubled from 20% in 2019 to 39% in 2022, with off-premise sales reaching almost two-thirds of total sales in Q4 2022 [5] - Digital ordering increased from 55% of sales in 2019 to 89% in 2022, generating over $20 billion in digital sales over three years [6] - Packaged food sales grew 90% in 2022, reaching nearly CNY 900 million [14] Market Performance - KFC entered 200 new cities in 2022, focusing on white space in lower-tier cities and increasing density in higher-tier cities [37] - Pizza Hut opened a record 300+ stores in 2022, with a focus on satellite and smaller store formats [70][72] - Lavazza expanded to 85 stores by the end of Q4 2022, with loyalty members more than doubling to 1 million [15] - Taco Bell doubled its store count to 91 stores in 2022, with a focus on menu localization and improving unit economics [15] Strategy and Industry Competition - The company plans to open 1,100 to 1,300 new stores in 2023, with capital expenditure of $700 million to $900 million [26] - Focus on driving sales through product innovation, value promotions, and digital initiatives, while maintaining disciplined store expansion [52][53] - Continued investment in supply chain, digital, and automation to enhance operational efficiency and resilience [7][81] - The company remains committed to returning capital to shareholders, with a raised cash dividend from $0.12 to $0.13 per share [27] Management Commentary on Operating Environment and Future Outlook - The company faced significant challenges in Q4 2022 due to COVID-related labor shortages and temporary store closures, but managed to improve restaurant margins despite lower sales [17][19] - Management is cautiously optimistic about the recovery in 2023, but expects it to be gradual and uneven due to macroeconomic uncertainties and cautious consumer spending [25][45] - The company plans to focus on driving sales growth while maintaining operational efficiency and cost control [25][53] Other Important Information - The company hosted its 2023 Investor Day in Shanghai in September, with plans to share more details about the event [4] - The company has maintained profitability every quarter since the start of the pandemic in 2020, generating $1.9 billion in free cash flow and returning over $1 billion to shareholders [8] Q&A Session Summary Question: New store performance and margins post-COVID [30] - New stores opened during the pandemic have shown strong performance, with KFC stores breaking even within three months and Pizza Hut stores achieving a payback period of two to three years [31][32] - The company has focused on smaller store formats and flexible rent terms, reducing CapEx per store and improving unit economics [33][36] Question: Restaurant margin recovery potential in 2023 [41] - Management expects restaurant margins to improve with sales recovery, but cautions that inflationary pressures and the end of temporary relief measures could impact margins [43][44] - Cost of sales and labor are expected to remain stable, with a focus on reducing occupancy and other operating expenses [46][47] Question: Competitive landscape and promotion strategy [58] - The company has gained market share during the pandemic and plans to continue driving sales through effective promotions and product innovation [59][60] - Pricing strategy includes a mix of lower entry-point products and high-end offerings to cater to different customer segments [61] Question: Recovery pace for KFC and Pizza Hut [63] - KFC performed slightly better than Pizza Hut during the Chinese New Year period, with off-premise sales playing a key role in protecting margins [64][67] - Pizza Hut is focusing on increasing store count and improving resiliency through satellite and smaller store formats [70][72] Question: Regional recovery differences [74] - Recovery has been strong across regions, with lower-tier cities performing better during the Chinese New Year period [75] - Management remains cautious about post-holiday consumer spending and plans to focus on value promotions to drive traffic [76] Question: Supply chain and ESG initiatives [80] - The company plans to continue investing in supply chain infrastructure and automation, with a focus on reducing carbon footprint and working with suppliers to achieve net-zero emissions by 2050 [81][82] - Supply chain innovations, such as the use of rail and sea freight, have improved resilience during disruptions [86] Question: New store opening targets for 2023 [88] - The company plans to open 1,100 to 1,300 new stores in 2023, with a focus on quality of growth over quantity [89][90] - Store expansion will depend on market conditions and unit economics, with a disciplined approach to investment [91]