Yum China Holdings, Inc. (YUMC) Q1 2023 Earnings Call Transcript

Yum China Holdings, Inc. (NYSE:YUMC) Q1 2023 Earnings Convention Name Might 2, 2023 8:00 PM ET

Firm Individuals

Michelle Shen – Director, IR

Joey Wat – CEO & Government Director

Andy Yeung – CFO

Convention Name Individuals

Michelle Cheng – Goldman Sachs Group

Lillian Lou – Morgan Stanley

Lina Yan – HSBC

Chen Luo – Financial institution of America Merrill Lynch

Anne Ling – Jefferies

Yan Peng – UBS

Operator

Thanks for standing by, and welcome to the Yum China First Quarter 2023 Earnings Convention Name. [Operator Instructions]. I’d now like at hand the convention over to Ms. Michelle Shen, IR Director. Please go forward.

Michelle Shen

Thanks, Ashley. Hiya, everybody. Thanks for becoming a member of Yum China’s First Quarter 2023 Earnings Convention Name. On right now’s name are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung.

Earlier than we get began, I would wish to remind you that our earnings name and investor supplies include forward-looking statements, that are topic to future occasions and uncertainties. Our precise outcomes might differ materially from these forward-looking statements. All forward-looking statements needs to be thought of at the side of the cautionary assertion in our earnings launch and the chance components included in our filings with the SEC.

This name additionally consists of sure non-GAAP monetary measures. It is best to fastidiously think about the comparable GAAP measures. Reconciliation of non-GAAP and the GAAP measures is included in our earnings launch.

You could find the webcast of this name and a PowerPoint presentation on our IR web site. Now I wish to flip the decision over to Joey Wat, CEO of Yum China. Joey?

Joey Wat

Thanks, Michelle. Hiya, everybody, and thanks for becoming a member of us right now. We’re happy to have set new information for first quarter income and working revenue. It is a great begin to 2023, just like the Chinese language saying, [Foreign Language]. I need to thank all of our 400,000-plus staff. With out their exhausting work and dedication, our efficiency won’t be attainable.

System gross sales grew 17% year-over-year. Again in early January, we had low visibility into how situations will unfold after the relief of strict COVID measures. Chinese language New Yr is a crucial buying and selling interval for us. This yr, an earlier Chinese language New Yr was notably difficult resulting from shorter ramp-up interval. We deliberate for a number of eventualities incorporating regional variations and centered on driving gross sales primarily based on the extra optimistic eventualities. Due to this fact, we had been in a position to successfully deploy assets as alternatives emerged.

Working revenue greater than doubled to $416 million. Our efforts in enhancing operational effectivity and changing our price construction previously few years contributed to sturdy profitability within the quarter. And our system gross sales progress in comparison with 2019 is plus 20%, and working revenue additionally in comparison with 2019 is plus 37%. These outcomes exemplify our capability to remain resilient in difficult instances and seize alternatives when higher instances emerge. Our initiatives and investments, together with our resiliency, progress, moat, technique have made us extra agile and responsive.

In the course of the quarter, we had been inspired by early indicators of restoration, notably, dine-in, takeaway, supply all grew year-over-year on a same-store gross sales foundation. Supply accounts for round 36% of gross sales, identical as a yr in the past. Prospects proceed to like the comfort and supply supplies. Off-premise was over 60% of gross sales. Identical-store gross sales grew year-over-year throughout totally different areas and commerce zones. We profit from growing mobility and noticed a 40% plus progress at transportation and vacationer places. Nevertheless, same-store gross sales at these places within the first quarter had been nonetheless 20% to 30% under 2019 stage.

Weekend gross sales progress barely outpaced with day gross sales. Other than elevated social gatherings, worth applications since 2022 additionally contributed to progress. Let me share about how we develop gross sales. We centered on our core pillars, good meals at nice worth and good buyer expertise to seize demand. Good meals at nice worth is our hallmark. We refreshed a number of signature merchandise and achieved nice outcomes.

After doing it for greater than a decade, individuals come to count on our Chinese language New Yr bucket at KFC. To seize at-home consumption round household reunions, we add the choice to commerce up for a juicy entire rooster, [Foreign Language]. We bought 11 million entire chickens within the first quarter, greater than doubled year-over-year.

We gave our basic Beef Wrap a localized spicy twist, [Foreign Language]. The innovation spot complete buzz resulting in a sellout in lots of markets in simply 6 days. At Pizza Hut, the Supreme sequence is our hottest pizza lineup, accounting for practically 30% of all of the pizzas we have bought within the first quarter. We launched Wagyu Beef and Seafood Supreme, [Foreign Language] in Chinese language New Yr. By together with premium elements like abalone, sea cucumber and wagyu beef, these pizzas grew to become the right, quickest alternative. We additionally created Double Durian Supreme, [Foreign Language]. For durian supreme, two sorts of durian, [Foreign Language] and [Foreign Language] had been mixed with grapefruit and pineapple to create an explosive tropical taste. Durian lovers like it.

We proceed to make our good meals accessible at nice worth. At KFC, Loopy Thursday and Sunday’s Purchase Extra, Save Extra promotions, [Foreign Language], continued to drive gross sales momentum in its segments. This yr, we supplied these nice values even throughout Chinese language New Yr. We additionally revamped our weekday’s worth combos, [Foreign Language], with extra decisions and lowered costs of choose burger combos to only RMB 19.9. These 3-items combos appeal to new clients and drove frequency. We additionally broaden our widespread purchase one, get one free marketing campaign at Pizza Hut to incorporate pizza and steak choices. Prospects can redeem the free merchandise instantly or of their subsequent go to inside 30 days. The marketing campaign considerably elevated gross sales by encouraging repeat purchases throughout the promotion interval.

Now let’s speak about working effectivity. Late final yr, a good portion of our staff and riders had been contaminated with COVID. On the peak, over 4,000 of our shops had been quickly closed or supplied solely restricted companies. By early January, as individuals steadily recovered from COVID, we made each effort to maintain our shops open and resume regular operations.

We bought prepared for the Chinese language New Yr interval. We deliberate for crews and stock primarily based on the extra optimistic eventualities. We additionally accounted for regional variations and constantly fine-tuned our plans primarily based on regional learnings. We additional improved hiring and incentive program to handle staffing and reduce labor shortages. To boost productiveness, we broaden our initiative to share retailer administration groups throughout a number of shops. It additionally supplies profession growth alternatives for our younger abilities.

Now let me share with you about our digitization. We now have constructed a strong digital ecosystem that is instrumental to our improvements whereas additionally enhancing operational effectivity. We leveraged AI to optimize demand forecasting, stock administration, crew scheduling and manufacturing. Good order system, [Foreign Language], streamlined the meals preparation for dine-in and off-premise orders. These capabilities are notably necessary throughout the peak season like Chinese language New Yr. Additionally, migrating our key infrastructure to non-public YUMC’s cloud enhanced the reliability of our operations. It is particularly necessary once we face important visitors spikes throughout campaigns like Loopy Thursday.

Good supply, [Foreign Language], proceed to enhance supply protection and suppleness. Final yr, we upgraded the system to dynamically modify supply protection for every retailer by daypart. These capabilities, together with our devoted supply riders, enable us to seize extra gross sales and fulfill orders even throughout the Chinese language New Yr peak season.

We continued to enhance digital contact factors for higher engagement with members. Digital orders account for round 89% of gross sales within the first quarter. Our loyalty applications exceed 430 million members. Members steadily contribute to about 60% gross sales. We actively interact members and drive frequency with privileged subscription plans. Okay-Model, [Foreign Language], is an invitation-only program for high 1 million loyal clients. Okay-Model acquired unique coupons and put and a royal crown on the core display screen when ordering in shops. This assist us acquire precious insights to enhance service for our most loyal members and all clients.

To sum up, we’re extraordinarily happy to ship sturdy first quarter efficiency. A number of state of affairs planning, modern merchandise and worth campaigns, together with our agile provide chain and digital capabilities, allow us to seize market alternatives. As we progress by 2023, we plan to remain nimble to the evolving market situations. Trying forward, we are going to deal with constructing gross sales momentum, increasing our retailer community and fortifying our aggressive moat.

With that, I’ll flip the decision over to Andy. Andy?

Andy Yeung

Thanks, Joey, and hiya, everybody. Let me now share with you our first quarter efficiency. First quarter gross sales rebounded considerably from the fourth quarter. We made super efforts to drive gross sales because the reopening by providing modern meals and compelling worth campaigns.

Restaurant margin reached 20.3%, the best since 2017. Our margin enlargement was pushed by gross sales leveraging, efforts to rebase our price construction in recent times, investments in enhancing working effectivity and non permanent COVID-related reduction from authorities and networks.

Let’s undergo the financials. International trade had a unfavourable affect of roughly 8% within the quarter. First quarter complete revenues had been $2.9 billion in reported foreign money, a 9% year-over-year enhance. In fixed foreign money, complete income grew 18%. System gross sales elevated 17% year-over-year in fixed foreign money. The strong progress was fueled by same-store gross sales progress of 8%. The contribution from new items and considerably fewer COVID-related non permanent retailer closures. Each KFC and Pizza Hut achieved 17% system gross sales progress.

By model, KFC same-store gross sales grew 8% year-over-year. Identical-store visitors grew 6%, and ticket common grew 2%. Pizza Hut same-store gross sales grew 7% year-over-year. Identical-store visitors grew 13%, and ticket common decreased 5%. These outcomes had been largely as a result of profitable promotional actions, which drove sturdy visitors and decrease ticket common.

Restaurant margin was 20.3%, 650 foundation factors larger than the prior yr. Gross sales leveraging contributed to roughly half of the margin enlargement. Labor productiveness good points and decrease occupancy prices had been key components. We additionally loved $18 million profit from further VAT deduction, because of the federal government coverage to assist companies cope with the challenges posed by COVID-19. These are partially offset by price inflation and elevated promotion expense.

Let me undergo the important thing gadgets. Value of gross sales was 30.1%, 100 foundation factors decrease than prior yr. We stored commodity costs low by super efforts locking in costs and innovating the menu. We additionally lowered wastage and benefited from larger VAT deductions. Positive factors had been offset by elevated promotional exercise to drive visitors. Value of labor was 24.6%, 160 foundation factors decrease than the prior yr. Gross sales leveraging and higher labor productiveness greater than offset headwinds from low single-digit wage inflation. We additional improved labor productiveness by retailer administration crew and crew-sharing initiatives.

Occupancy and others was 25.0%, 390 foundation factors decrease than the prior yr. This was primarily pushed by gross sales and leveraging, decrease rental expense in addition to different price saving initiatives. Rental expense improved resulting from clearly extra favorable rental phrases for brand new retailer and retailer portfolio optimization.

We additionally reported $8 million rental launch with associated to COVID surge final yr. G&A expense elevated 16% year-over-year in fixed foreign money, primarily from performance-based bonus and advantage enhance in addition to further [indiscernible] bills from the resumption of enterprise actions. Working revenue was $416 million growing 118% in fixed foreign money — sorry, in reported foreign money. Our efficient tax price was 28.5%. We count on full yr efficient tax price to be round 30%. Internet earnings was $289 million, growing 189% year-over-year in reported foreign money. Diluted EPS was $0.68, a rise of 196% year-over-year. Within the first quarter, we generated $507 million in working money stream and $328 million in free money stream. We returned $116 million to shareholders in money dividends and share repurchases. On the finish of the primary quarter, we had round $3 billion in money in short-term investments and one other $1 billion in long-term deposit, which might profit from higher rates of interest. We expanded our retailer community and remained dedicated to capturing future progress alternatives.

Within the first quarter, we opened 233 web new shops. Within the first quarter, we confronted an earlier Chinese language New Yr and labor scarcity in addition to delays in contract signing and constructing allow deposits as a result of widespread an infection within the fourth quarter. Nevertheless, we’ve got a robust pipeline and are assured in reaching our aim of opening 1,100 to 1,300 web new shops this yr.

Our new shops proceed to carry out properly. We have paid a interval of two years at KFC and three years at Pizza Hut. We are going to proceed to deal with increasing our retailer community in a scientific and disciplined method.

Let’s flip to our outlook. We’re inspired by first quarter efficiency. Gross sales throughout the Chinese language New Yr buying and selling interval had been buoyed by pent-up demand to journey. However same-store gross sales put up Chinese language New Yr has remained at crew’s stage under 2019. Now we’re nonetheless within the early levels of the restoration. The tempo and the trajectory of the restoration are prone to be gradual and unsure. General, world macroeconomic situations stay difficult, and the pandemic continues to be lingering.

So the truth that — so the highest precedence for us this yr continues to be driving gross sales. Shoppers are worth aware, so our funding in promotions to draw extra visitors and gross sales are essential. Within the coming quarters, we count on gradual inflationary stress, and we anticipate the advantages from further VAT deductions and rental launch to tempo up. We now have demonstrated our capability to seize alternatives in good instances and handle the draw back in dangerous instances. We are going to proceed to make the most of intensive state of affairs planning, versatile price construction and operational agility to navigate the unsure surroundings. We stay dedicated to in search of the long-term progress alternatives in China, investing in strengthening our strategic mode and creating worth for our shareholders.

With that, I’ll go you again to Michelle. Michelle?

Michelle Shen

Thanks, Andy. Earlier than beginning the Q&A, we would wish to share a head up that we’ve got scheduled our 2023 Investor Day on September 14 to fifteen. The occasion will happen in Xi’an, China, and it’ll even be webcast for individuals who cannot be part of us in individual. We are going to present extra particulars quickly.

Now we are going to open the decision for questions. [Operator Instructions]. Ashley, please begin the Q&A.

Query-and-Reply Session

Operator

[Operator Instructions]. Your first query comes from Michelle Cheng with Goldman Sachs.

Michelle Cheng

Congrats for the very sturdy outcomes. My query is in regards to the worth content material you talked about on the decision simply now. So since we’ve got been going by this reopening of our [indiscernible] for the previous few months and given we see the development continues to be fairly difficult, so are you able to share with us what’s your fascinated about the shoppers’ spending energy and methods on the product combine?

And associated to this query is in regards to the meals price. So we see a fairly respectable enchancment on the meals paper price financial savings. But when we glance into KFC versus Pizza Hut, it seems just like the KFC profit quite a bit on these price financial savings, whereas Pizza Hut didn’t see that a lot profit. So are you able to additionally share with us how this worth marketing campaign and the product combine adjustment affect the two manufacturers for price?

Joey Wat

Thanks. Thanks, Michelle. Let me touch upon the worth campaigns after which Andy can observe up with the associated fee remark. There are financial challenges proper now. And due to this fact, shoppers are fairly worth cautious. The important thing query here’s what are our methods? They’re 3-pronged — 3 pillars of our technique. One is menu. We actually deal with the meals testing and modern meals on high of worth marketing campaign as a result of the pure worth marketing campaign will not be sufficient. The worth marketing campaign should include good meals in an effort to get the profit. So you will notice the brand new [Foreign Language] and that’s proper after Chinese language New Yr worth marketing campaign product. And that was doing very properly.

After which the nice worth, in fact, is necessary. So you possibly can see we’ve got — KFC, we’ve got the Loopy Thursday. And we save worth combos proper now. After which on high of that, we launched [Foreign Language] marketing campaign, the Sunday worth marketing campaign since center of final yr. And all of those had been fairly properly. So we’ll proceed to work on that as a result of, let’s not overlook, typically — Loopy Thursday has been working since 2018. So it takes a few years’ exhausting work to construct that as a platform. After which with Pizza Hut, we’ve got this Inexperienced Wednesday, which has been working fairly properly.

On high of excellent meals, good worth, we’ve got good enjoyable. We, even proper now, delight clients with some enjoyable toys and even fortunate draw to a visit to Maldives, et cetera. In order that’s the primary pillar of the technique.

Second is pricing. After we increase worth, we all the time do it very, very fastidiously and prudently. And we additionally fastidiously design trade-up choices to guard the ticket common and margin. So whereas we’re going heavy with the worth marketing campaign, you possibly can see administration crew has been in a position to shield the margin for the shareholder. And on high of that, we launched wide selection for every worth vary, together with entry worth level merchandise and let the shopper select.

The third pillar of the technique is to maintain the associated fee aggressive in inflationary surroundings. Our provide chain has been doing superb work to safe provide and product innovation at scale. So whereas these worth marketing campaign seen superb advertising marketing campaign, properly, they’re superb, however these are usually not attainable with out the very sturdy pricing behind that. After which we additionally drive operational effectivity, together with employees sharing, reducing the meals waste after which additionally save some huge cash from rents in an effort to go the financial savings again to the shopper. I am going to pause right here and I am going to go to Andy for feedback associated to price.

Andy Yeung

So sure, so I believe if you have a look at Pizza Hut, we’re very inspired and really pleased with the outcomes. In case you have a look at the same-store progress for Pizza Hut, we noticed 7% same-store progress. After which if you happen to have a look at abroad on progress and EBITDA, it grew 70%. Pizza Hut even have seen acceleration in retailer openings. On the identical time, we additionally see very sturdy margin enlargement. We noticed nearly 350 foundation level restaurant margin enlargement. And if you happen to have a look at the working revenue itself, it is nearly double, like 85% enhance on a year-over-year foundation, which is extremely lower than KFC, which is 90%, however nonetheless very respectable.

And I believe once we have a look at the associated fee construction on a line merchandise foundation, clearly, the two enterprise are barely totally different in the best way they function and likewise the fabric that they use. So if you have a look at the meals price, KFC clearly have extra affect product elements, beef, cheese, dairy merchandise, et cetera.

After which additionally for the two manufacturers, in addition they have totally different type of like tempo of promotional actions. And if you happen to have a look at Pizza Hut, you’ve got very sturdy worth marketing campaign, and it drove very sturdy retailer visitors progress. And so I believe the technique, though barely totally different for the two manufacturers, are working fairly properly each at Pizza Hut and KFC. Thanks.

Operator

Your subsequent query comes from Lillian Lou with Morgan Stanley.

Lillian Lou

Congratulations once more, Joey and Andy, for the sturdy outcomes. My query is definitely on the associated fee aspect as a result of I believe Joey and Andy did point out that there are some advantages from price rebase within the first quarter, important margin enchancment except for the gross sales leveraging. And particularly, I believe if we have a look at — look into the main points, there was important financial savings on the depreciation and amortization in comparison with final yr.

So my perceive, going ahead, what is the margin outlook on the year-on-year foundation? Are we — can we count on an analogous sample of price financial savings from operation put apart the phasing out — of launch and likewise together with your steering on the depreciation price for the complete yr, given the numerous lower within the first quarter.

Andy Yeung

It looks as if one other query for me so I’ll take these questions. So inner margins, I believe once we have a look at first quarter margin enchancment, we’re very inspired. Clearly, as we’ve got anticipated, with the growing gross sales, we will see gross sales leveraging. So roughly nearly half the development are coming from the gross sales leveraging.

Now when it comes to the general price construction, we will see that labor productiveness, a number of the efforts that we put into rebasing our price construction there are benefiting the [indiscernible] as properly. So you possibly can see that they are optimizing labor scheduling and labor combine after which we even have their initiative as we talked about on the ready remarks, restaurant administration crew and crew-sharing initiatives.

After which on the working effectivity aspect, I believe you’d additionally see that advantages from much less wastage as a result of we’ve got higher gross sales forecast and realtime stock visibility. In order that’s the good thing about investing in know-how, in digitization. We even have put in some sensible utilization, sensible utility gadgets within the restaurant, so we additionally see higher utility utilization.

By way of — you talked about, when it comes to our O&O bills and depreciation, I believe one is that the rental expense, as I discussed earlier than, we’ve got ratably extra favorable rental phrases for our new retailer, and likewise we’ve got a retailer portfolio optimization. That must also assist us when it comes to our depreciation. After which if you happen to have a look at our total funding for brand new shops, we even have convey up some investments there, and that can even profit in the long run our depreciating expense as properly.

Now within the first quarter, we additionally benefited from some non permanent reduction. As I discussed, $8 million from rental reduction that we did from final yr COVID surge, after which additionally about $18 million from further VAT deduction, which is a authorities coverage that assist enterprise to cope with COVID challenges, and we are going to see how lengthy that coverage would proceed.

By way of outlook, I believe one factor that I wish to emphasize on is that, as I discussed, gross sales is an important consider figuring out our total margin. And so with gross sales enhancing year-over-year, we should always see gross sales leveraging. Nevertheless, I wish to level out that we do have seasonality with our gross sales. Identical quarter January is a stable quarter for gross sales and due to this fact, margin. The opposite one and is that our — once we have a look at the tempo of restoration, I believe put up — as I discussed, put up [indiscernible], we see a extra gradual tempo of restoration. And nonetheless, like if you happen to have a look at the price of items bought, we’ll have a quickly steady price of gross sales with the commodity costs, however we’re already seeing from the spot market that a few of their growing stress on constructing, though far more gradual in comparison with abroad.

We’re additionally prone to see wage inflation by the yr. And usually, we see mid- to excessive single digits. Presently, we’re at low single digits. So I believe we will development again to regular as restoration continues. In order that’s quite a bit like the best way we have a look at it. For margin enchancment, I believe, to final diploma, lower the share by gross sales leveraging. I believe the associated fee construction prices rebasing initiative. We proceed to take maintain, however considerably non permanent reduction would go away for the remainder of the yr.

Joey Wat

Thanks, Lillian, I simply wish to add a couple of feedback on the query. The present price base is definitely extra resilient than 3 years in the past. Final 3 years have been troublesome, difficult, notably 2022. Due to this fact, we actually have been pushing quite a bit to rebase the associated fee. And the result’s displaying proper now.

Let me provide you with some particular examples. For the hire, it is higher. It is really the very best hire within the final decade for two causes. One is our retailer portfolio is best as a result of we’ve got been in a position to prune some low-performing shops whereas constructed new shops with a lot better hire construction. Take into consideration over 40% of our shops had been constructed within the final 3 years. For depreciation, roughly even for simply 2022, our CapEx for brand new retailer is down by 25% to 35% only for 2022. If we add up the development within the final 3 years, the development is extra.

Properly, the BPSA, the gross sales per week can be coming down. Nevertheless, the revenue margin maintained and even improved. And the good thing about decrease CapEx will not be solely benefiting depreciation. Take into consideration the gross sales aspect, Lillian. It additionally advantages the brand new retailer opening. With the decrease CapEx quantity retailer, we’re in a position to open shops in commerce zones that we are going to not be open — we weren’t in a position to open previously. However decrease CapEx enable us to have extra flexibility to open shops and nonetheless keep the profitability.

And third one is the labor price. I believe that is an ongoing problem. However as Andy talked about, we’ve got initiative engaged on crew sharing, beginning with the supply rider and now shifting to retailer employees as properly. And that’s one thing that we’ll proceed to work on. And it is nonetheless fairly early within the course of, however we’ll proceed with that. Thanks, Lillian.

Operator

Your subsequent query comes from Lina Yan with HSBC.

Lina Yan

So I wish to evaluate the restoration sample on a same-store gross sales foundation, first quarter 2023 versus first quarter 2021. In order you talked about in your presentation, with off-line visitors recovered, you continue to see optimistic progress in supply. This was really totally different from what occurred in first quarter 2021. So my query is, was this resulting from a structural shift within the spending sample of shoppers? Like dine-in may by no means come like a yr to love 2019 stage? Or it means with supply nonetheless rising within the post-pandemic age, we even have extra room to develop our off-line visitors and dine-in service. Truly, we’ve got like an even bigger potential versus 2019 to develop our single-store gross sales. In order that’s my query. I hope I defined it properly.

Joey Wat

Lina, I perceive your query. Possibly, Andy, you go forward.

Andy Yeung

Sure. So thanks, Joey. So I believe, clearly, in 2021 and right now, it is fairly totally different macro surroundings and likewise when it comes to the general COVID restoration. So at totally different instances totally different place. I am not so positive it is comparable simply taking a look at 2023 versus 2021. What I can say is that if you happen to have a look at supply, supply, we’re — and off-premise, typically, have been rising earlier than the pandemic and proceed to develop all through the pandemic.

As we’ve got talked about in final quarter and with the reopening, we do count on dine-in visitors to rebound in supply however we additionally see that supply stay very strong. I believe we’re taking a look at supply gross sales total final yr, on the finish of final yr, as a result of the pandemic spiked to about 39% of our gross sales. Now it’s roughly about 36% of our gross sales. I believe inside that 35% up and down [indiscernible] is inside our expectation.

Now we additionally profit not simply because the general apparent shoppers proceed to get the favourite and the profit from having fun with that good thing about off-premise dine-in, the comfort and whatnot, but in addition, we additionally profit from our retailer community restructuring. You may take into consideration that. We now have talked about over the previous couple of years, we proceed to construct extra entities inside the metropolis that we’ve got have already got stopped, and with the shop that format that extra catering in the direction of supply and takeaway enterprise. And so we’re seeing some community impact there, proper? So we’ll profit from that.

After which additionally, if you happen to have a look at our supply enterprise mannequin, it is very distinctive in a manner that we ship — we’ve got devoted riders to ship our meals to client for the final month. And that enable us to make sure good service high quality, good meals, well timed method. After which extra importantly, when the labor scarcity in rider had been — will kill like Chinese language New Yr or what we’ve got in [indiscernible] ship, we do have capability to offer that to supply companies than maybe might not.

So total, I do know we even have continued to enhance our commerce zone. As we talked about, we’ve got invested in know-how to assist us to extra successfully handle our commerce zone for supply and likewise the effectivity when it comes to our supply companies, each when it comes to meals manufacturing course of, chilling, and likewise [indiscernible] aspect on the routing for our rider. So I believe digital supply will proceed to be an important progress driver for us going ahead. Clearly, with the rebound in retailer visitors, we may even see a share change and fluctuate. However I believe long run, we’re fairly — we’re assured in off-premise eating. Thanks. Joey, do you’ve got something so as to add?

Joey Wat

That is it. Thanks, Andy.

Operator

Your subsequent query comes from Chen Luo with Financial institution of America.

Chen Luo

Congratulations once more on the complete yr outcomes. So my query can be associated to same-store take a look at progress as I wish to get extra detailed coloration on the Q1 same-store gross sales. So initially, our outcome announcement talked about that of CNY, our same-store gross sales really was under the 290 stage by teenagers stage. So evidently there might be some sequential weak point. However then again, is it truthful to say that on a year-on-year foundation, or if we evaluate it with 2022 stage, really, in March, we’re seeing even higher year-on-year same-store gross sales progress because the Shanghai lockdown really began from the center of March in [indiscernible].

And secondly, by metropolis tier and areas, which components have we — have really registered even higher progress? Are we seeing higher progress in Tier 1, Tier 2 cities or decrease tier cities? Or during which areas, reminiscent of in Japanese China or Southern China? Which a part of the areas even have seen even higher progress?

And likewise lastly, with regards to dine-in, which was additionally the main focus of the earlier query by Lina. Other than the truth that we talked about that our shops in transportation hub and vacationer places nonetheless for 20% to 30% same-store gross sales decline versus 2019, are there some other drags that we’ve got noticed when it comes to the same-store gross sales on the dine-in stage? Is it due to too many new shops in our mature markets, which can trigger cannibalization? Or are there some other drags? And the way are we going to do to handle these points in order that we will see additional enchancment of the dine-in visitors?

Joey Wat

Thanks, Chen. I will deal with on the same-store gross sales, however let me additionally emphasize for — our first quarter quantity can be equally to take a look at the system gross sales in comparison with 2019 as a result of there is a hole of same-store gross sales versus 2019. However the system gross sales progress, as I discussed from my opening remarks, is plus 20% versus 2019, and the OP is probably 37% versus 2019. So I believe we wish to deal with same-store gross sales, nevertheless it’s equally necessary to notice the affect of higher retailer portfolio and likewise the brand new shops opened within the final 3 years.

I will undergo a bit extra coloration of the same-store gross sales breakdown after which evaluate it to the dine-in remark. We see sturdy rebound from quarter 4 2022, and we develop year-over-year. First 2 months in Q1, we profit from the pent-up demand for Chinese language New Yr hassle. However greater than that, we’ve got a number of state of affairs planning, and we make investments closely in each elements and employees — staffing. Due to this fact, I consider we’ve got a better-than-industry-average outcomes.

After the Chinese language New Yr, the same-store gross sales proceed to develop year-over-year. However sure, it stays since under 2019. However the good momentum continues into quarter 2. So I believe you possibly can see from all the image of Might 1 vacation, the buying and selling was vibrant. Nonetheless low single digits under 2019, nevertheless it’s catching up fairly properly.

The encouraging signal is that the gross sales progress year-on-year is led by transaction progress in each KFC and Pizza Hut. And you understand in our enterprise, that is completely necessary. As I discussed already, system gross sales improved considerably with a lot bigger retailer community. But in addition, regardless of the same-store gross sales hole, the older shops are a lot more healthy as a result of we’ve got been pruning retailer portfolio. And the brand new shops are extra resilient as a result of by redesigning the shop community, as Andy talked about earlier than, and adjusting the shop format to seize off-premise demand with extra comfort, much less funding, accessible price construction. So net-net, it is extra resilient — the shop portfolio.

So let’s transfer on to the extra particular, by model, by area, by metropolis tier, et cetera. So by model, KFC and Pizza Hut same-store gross sales is analogous. However versus 2019, it is attention-grabbing. The Pizza Hut same-store gross sales versus 2019 is barely larger than KFC. It is — Pizza Hut is minus 4 versus 2019 and KFC is minus 8. So it is partly as a result of KFC has a better ratio of shops in transportation and vacationer places. But in addition it reveals that Pizza Hut had good enchancment since its revitalization program.

KFC system gross sales progress larger than Pizza Hut as a result of we have opened extra new shops for KFC previously few years. Due to this fact, it is plus 19% for KFC. By area, year-over-year, all markets grew for quarter 1, besides Beijing as a result of keep in mind, final yr, we’ve got Winter Olympics. However by March, subsequently, the quantity improved and turned optimistic. Versus 2019, KFC Japanese China outperformed different areas due to its very vibrant economic system. Pizza Hut Northern China outperformed as a result of it has much less competitors. Our enterprise of Pizza Hut in Northern China really is sort of sturdy. By metropolis tier, year-over-year, decrease tier cities carried out properly as individuals returned residence for Chinese language New Yr. Tier 2 cities additionally carried out properly as a result of final yr, the management — the strict management on COVID affect the tourism. And this yr, we’re getting the profit out of it as a result of home tourism in cities like [indiscernible] helps quite a bit.

Transportation hub. Yr-over-year, we see substantial enchancment with elevated mobility. The momentum, clearly, additional improved throughout the Might holidays. So I believe — I hope that provides you some coloration of the totally different angle of the same-store gross sales.

By way of dine-in, it improves. It continued to enhance as a result of we’ve got elevated mobility after the COVID coverage change. And it is necessary to see whether or not dine-in, supply or take away, all of the same-store gross sales improved. It is not solely simply centered on one. And naturally, it improved extra for Pizza Hut than for KFC as a result of we rely extra on dine-in enterprise for Pizza Hut.

However I wish to ask you to take a look at the opposite aspect of our enterprise, which is the resiliency. KFC, it took us lots of exhausting work and willpower to get the off-premise gross sales to as excessive as 60%, 70%. And meaning it is a very resilient enterprise mannequin as a result of even when dine-in had been considerably impacted, we’re in a position to nonetheless do the enterprise and herald gross sales.

While Pizza Hut additionally improved quite a bit as a result of the proportion of off-premise enterprise for Pizza Hut by 2019 was solely 30%. That is between takeaway and supply. By 2022, that ratio is 50%. However again to 2023, now the ratio is all the way down to 46%. However it will be superb for Pizza Hut if we proceed to enhance the ratio of takeaway and supply as a result of that improves the resiliency of the enterprise. It is a good factor. So I hope that provides you some coloration of our pondering of the dine-in enterprise versus the others.

Is there some other risk? Properly, there are all the time a lot uncertainty. Notably the macro surroundings, we won’t forecast, we won’t predict too properly. However what I wish to remind our analysts is we’ve got all the time have a number of state of affairs planning, and within the final 3 years, I hope we’ve got additionally demonstrated our capability to ship and to have the resilience in our enterprise throughout dangerous instances. And throughout the previous quarter, we even have demonstrated our capability to grab alternative throughout good instances.

Are too many new shops as properly? Probably not, from our viewpoint. Due to this fact, we’re nonetheless sticking to our new retailer opening steering as a result of, as Andy talked about many times, we’ve got very disciplined and systematic manner of opening new shops.

And one factor I’d additionally like to say is — and to emphasise is the agility and the pliability of the brand new retailer portfolio is essential going ahead as a result of as an alternative of investing an excessive amount of cash on large retailer, we’re investing in smaller, decrease funding shops, however with shorter distance between the shops, and to make it a extra handy community for the shopper but in addition a decrease price of supply community for the operation as a result of it is extra environment friendly and it is a decrease price to ship our product to a buyer when the shops enterprise is shorter and nearer to the shopper. Thanks, Lou Chen.

Andy Yeung

Joey, I simply wish to add a few 2 fast ones there. One is that once we have a look at — once we talked about like we see low teenagers stage in comparison with 2019 put up CNY. However like if you happen to have a look at CNY, we’re additionally on the stage under 2019. And I believe the principle factor is that what we’re making an attempt to say is that we noticed a really sharp restoration after the reopening and throughout the Chinese language New Yr interval then we see extra gradual type of like restoration — restoration retailer.

The opposite one is what we talked about is in SSG comparability. So our SSG calculation excludes the non permanent retailer closure. And so — however our system gross sales embrace same-store gross sales progress, non permanent retailer closure and likewise web new retailer progress. Appropriate. So when analysts and traders evaluate the SSG quantity, they should issue within the affect of non permanent retailer closure.

For instance, this quarter, we’ve got about 8% SSG. There’s a couple of level affect from non permanent retailer closure. So that you add that again there, then you will notice in all probability double-digit SSG enchancment. And so I simply wish to guarantee that individuals do not forget {that a} barely totally different manner of evaluating SSG between us and from our friends. And so like if you happen to have a look at the general {industry} progress, we’re in all probability going to and the general dine-in {industry}. Thanks.

Operator

Your subsequent query comes from Anne Ling with Jefferies.

Anne Ling

Wonderful outcomes. However I’ve some questions on the associated fee aspect. Concerning the VAT, possibly would you elaborate slightly bit extra the character of this VAT profit, which contributed $18 million for this quarter? And like what’s the nature? Like — and like, will the following few quarters can be seeing one thing related? What’s it primarily based on? Based mostly on price of products or specific like commodity or packaging product? So I wish to know slightly bit extra about that half.

And likewise, going again to the same-store gross sales quantity. So if we’re speaking about like same-store gross sales — or sorry, is it truthful to say that same-store gross sales progress restoration may really take a bit longer to get well again to yr 2019? Given the truth that particularly in Tier 1 cities, you might be growing your retailer density. So which means that we needs to be taking a look at like your new retailer — your retailer progress slightly than like fixate on the same-store gross sales quantity. Sure. So that is my second query.

And my third one is I am nonetheless slightly bit confused. You simply talked about in regards to the CapEx decline was about — on a per retailer foundation, about 20%. However throughout this era, as Lina talked about, the depreciation expense is definitely down 41%. However in fact, I have no idea like whether or not there’s any distinction in any combine when it comes to just like the back-end CapEx versus the shop entrance CapEx. So possibly you possibly can assist us perceive slightly bit extra of this like wonderful price financial savings in your aspect.

Joey Wat

I am going to make a fast touch upon the CapEx, Andy, after which you possibly can proceed. And the CapEx, the brand new — the CapEx for brand new retailer down 20%, however we additionally save some huge cash from pruning the unique retailer portfolio. And that is crucial. So each the outdated retailer and new retailer helped. Okay? Andy, again to you.

Andy Yeung

Okay. So let me attempt to deal with the VAT deduction discussions. In case you have a look at the Chinese language authorities coverage, the speed reductions, the coverage got here out in 2019 and it lined a number of the reductions for price enter. Nevertheless, due to the COVID-19, the coverage has continued to be expanded over the previous couple of years. And now the coverage goes to be prolonged this yr. And relying on varied conditions in how the enterprise operates, it might be advantages — it might be able to be a profit from the extra VAT deductions.

And so this coverage, presently, because it stands proper now, is prolonged to the identical half of the complete yr. However the stage of profit that we might be able to be part of might part out. You must do with how the enter prices and the way good the VAT worth is. So it is slightly bit difficult to speak about it on the convention name, however you possibly can examine the VAT coverage from the Chinese language authorities web site.

The opposite one in regards to the — about, I believe the depreciation and amortization price totally different. I believe the one factor that we wish to emphasize is that, there’s 2 elements to that. One is depreciation. The opposite one is amortization. The large drop there’s coming from amortization, as we’ve got talked about, previously years that once we acquired the controlling — taking Hangzhou, we even have a — we acquired franchise rights. And every quarter, it is roughly about like $15 million or so. And in order that’s one of many large components there. And that mainly expired on the finish of final yr. And in order that’s why we see that all of a sudden enhance depreciation and amortization.

By way of SSG restoration. I believe it is — we’re solely within the first quarter of restoration. So primarily based on what different nations skilled, total restoration to the pre-pandemic stage will possible be deliberate and it is possible going to be uneven. And positively, as we talked about, the tempo and trajectory of that may be gradual and unsure. And so if you happen to have a look at the — like I believe, we’ll be stunned to see the {industry} itself and likewise any giant restaurant chain will rebound instantly to the pre-pandemic stage within the first quarter after reopening.

However we’re assured, as we’ve got demonstrated within the first quarter, we’re in a position to seize the alternatives when it presents itself. In Chinese language New Yr, I believe regardless of lots of uncertainty at the moment, due to our planning, our crew’s agility and alternatives and our digital funding infrastructure, we’re in a position to seize these alternatives as we’ve got again then in 2021, when there is a market rebound.

Now clearly, we can not predict, as Joey talked about, what uncertainty out there, however we’re additionally assured that given our price construction and rebasing initiatives, we’re extra versatile and resilient enterprise mannequin. We are able to additionally cope with any potential throughout this restoration. So — however once more, the restoration, we should always count on to completely get well to pre-COVID stage will take a while, and can be some up and down, however I believe we’re assured that both manner, I am pondering we’re good. Thanks, Anne.

Operator

Your subsequent query comes from Christine Peng with UBS.

Yan Peng

I believe many of the questions have already been addressed by Joey and Andy. But when I can simply ask a follow-up query on the depreciation aspect. I believe many analysts have already requested this query, however I simply wish to perceive a bit extra why there’s such a giant drop when it comes to depreciation bills?

In case you calculate on a year-on-year foundation, it dropped by round USD 50 million. Andy, you talked about there was a $50 million affect from the Hangzhou franchise rights. So apart from that, are there any components that traders ought to concentrate on? Or ought to we think about this — about USD 110 million depreciation bills as recurring whereas we tackled within the full yr depreciation bills for the complete yr?

Andy Yeung

Christine, sure, let me deal with that. I am sorry, I reduce myself. We acquired franchise, proper? It is really $25 million per quarter, as we talked about earlier than. After which for the complete yr, it is nearly $100 million. And so the opposite one is, clearly, you bought to recollect our property in China relies in China. After which so it will likely be impacted with the worth and expiration quantity was impacted by foreign money trade. Within the quarter, RMB depreciated in opposition to the U.S. greenback by nearly 8%. And so that may have an effect on the steadiness sheet and likewise the depreciation due to foreign money translation as properly.

After which lastly, we — as we talked about earlier than, we’ve got additionally achieved some retailer optimizations throughout the pandemic, retailer designing and work. And clearly, we closed out a number of the more difficult retailer. And in order that additionally have an effect on the depreciation and amortization as properly.

So all in all, so you possibly can give it some thought by $25 million half-half, after which you’ve got additionally nearly like $15 million from overseas trade after which optimizations in our total retailer portfolio. And so all this affect [indiscernible] some $40 million discount in depreciation and amortization. We can have extra particulars in our 10-Q assertion. So if you happen to guys are interested by extra, that is 1 of the three key components that had been driving depreciation and amortizing price.

I simply wish to remind analysts and traders that do not overlook the affect of overseas trade. The overseas trade has been fairly unstable over the previous yr. And as I discussed, overseas trade had a unfavourable affect of 8% due to their RMB depreciation. So that may have an effect on P&L and likewise on the steadiness sheet. Thanks.

Operator

Thanks. That’s on a regular basis we’ve got for questions right now. I am going to now hand again to Ms. Michelle Shen for closing remarks.

Michelle Shen

Thanks for becoming a member of the decision right now. When you have additional questions, please attain out by the contact data in our earnings launch and on our web site. Thanks.

Operator

That does conclude our convention for right now. Thanks for collaborating. You might now disconnect.