Yum China Holdings, Inc. (YUMC) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Yum China 2017 Fourth Quarter and Fiscal Year Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, February 08, 2018. I'd now like to hand the conference over to your first speaker today, Ms. Michelle Shen. Thank you. Please go ahead.

Thank you, Kevin. Good morning and good evening, everyone. Thank you for joining us. On our call today are Micky Pant, our CEO; Joey Wat, our President and COO; and Jacky Lo, our CFO. Please note, a PowerPoint presentation and a live broadcast of this call are available through our IR website under the Events and Presentations section. Before we get started, I'd like to remind you that our earnings call and the investor presentations contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This presentation also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures and the reconciliation thereto. Now, let's start with the agenda on Page 3. Micky will start with our Q4 and full year 2017 highlights. Joey will review brand performance and Jacky will discuss the financial results. After opening remarks, we'll be happy to take questions from analysts and investors. Now, let me turn the call over to Mr. Micky Pant, CEO of Yum China.

Thank you, Michelle, and welcome everybody. I assume you have access to our presentation online. And if you do, I will start with Slide #4. So our fourth quarter results illustrates strong performance at Yum China, with total revenues reaching $2.2 billion, an increase of 9%, and overall same-store sales growth up plus 5%, both before Foreign exchange translation. KFC delivered an impressive performance with same-store sales up plus 7% for the quarter. And Pizza Hut also improved with same-store sales up plus 1% versus a year ago. In Q4, we reported a net loss of $90 million, due to a previously announced onetime tax charge, which came in at $164 million as a result of the U.S. tax reform. Excluding this impact, our Q4 adjusted net income was $74 million, an increase of 18% year on year, excluding ForEx. You'll get more details from Jacky Lo, our CFO regarding the tax charge. Adjusted diluted EPS was $0.19, up 18% year on year excluding ForEx. In the quarter, we opened 339 new restaurants and reached a total of 7,983 restaurants. We are now in more than 1,200 cities across China. We continue to make strong progress in digital and delivery. Delivery sales reached over 15% of our company sales in the quarter and mobile payment accounted for over half of our company sales. Our loyalty members for KFC surpassed 110 million and Pizza Hut exceeded 35 million. We paid a dividend of $0.10 per share in Q4 and we've announced a dividend of $0.10 per share we paid in Q1 2018. Now, let's take a look at the full year results for 2017, which is on Page 5. And with a strong Q4, I'm glad to report that we achieved solid performance in 2017, the first full year of Yum China operating as an independently listed company. Full year revenues exceeded $7 billion, an increase of 8% year on year, before foreign exchange translation with overall same-store sales up plus 4% for the year. KFC same-store sales were up plus 5% and Pizza Hut was up plus 1% for the year. Full year operating profit grew 23% to $785 million. Adjusted net income of $564 million represents an increase of 24% versus last year excluding ForEx. Adjusted diluted EPS was $1.42, which is an increase of 15% excluding special items in foreign exchange. Our adjusted EBITDA reached $1.25 billion, and cash and short-term investments stood at $1.26 billion at the end of 2017. We have exceeded our target by opening 691 new restaurants in 2017, including 101 new Little Sheep restaurants. We remodeled 788 stores led by KFC and at the moment over 75% of our stores are either new or have been remodeled in the past five years. Lastly, during the year we repurchased 3.4 million shares totaling $128 million at an average price of $38.18 per share. Moving to Slide 6, let's take a look at our annual sales performance and later on, Joey will walk us through the quarterly performance by brand. You can see we steadily improved our top-line performance and same-store sales were plus 4 after three years of decline and a flat 2016. This was driven by a strong momentum at KFC and improvement at Pizza Hut. While the trend is encouraging, two years of strong performance in 2016 and 2017 have set up for a tougher lap for 2018. Our system sales grew 8% year on year, backed by a strong same-store sales and new store openings. Let's move to Slide #7. Our restaurant margin continued to improve on the back of solid same-store sales and aided by the impact of retail tax structure, one which is commonly known as VAT. Restaurant margin reached 16.8% in 2017 and operating profit increased 23% to $785 million, building up on a 31% growth in 2016. We maintain our ongoing targets of approximately 17% restaurant margin and double-digit operating profit growth excluding ForEx. As mentioned previously, two years of strong growth created a tough challenging lap for 2018. Let's move to Slide #8, and you've seen the slide before, but we continue to focus on four key strategic priorities for our business. The first is to continue to invest for growth in China, a market that we understand and where we have a record of leadership. The second is to continually strengthen our core business in KFC and Pizza Hut. The third is to strive to maintain our leadership position in digital and delivery through continued investment, and stay at the forefront in these two areas. Our fourth priority is to drive future growth through innovation and products, store formats and day parts. I'll come back at the end, but for the moment that concludes my remarks and I'll now hand you over to Joey Wat. Joey is our President and Chief Operating Officer, and as you know from March 1 will take our as the CEO of Yum China. Joey, it's over to you.

Thank you, Micky. Greetings, everyone. Now, let me summarize the performance of KFC and Pizza Hut in Q4 as well as full year of 2017. Starting with KFC, Slide 10 highlights the key performance of KFC in 2017. KFC delivered solid top-line performance with same-store sales up 5% and system sales up 9% year on year. We built 408 new stores and remodeled 644 units. Our financial performance was also strong. Restaurant margin and operating profit continued to improve. Jacky will cover the numbers in more detail. On Slide 11, you will see that same-store sales grew 7% in Q4, making our fifth consecutive quarter of growth. It was up 5% for the full year and second year of positive growth, driven by 2% growth in transactions and 3% growth in ticket average. We are very pleased with our tier 1 cities' performance with Beijing and Shanghai leading the growth. While we are very encouraged by the recent solid momentum on KFC, we want to caution you that we will be facing tough challenges in 2018, lapping two years of very solid sales growth especially in Chinese New Year. Now, let's move on to system sales on Slide 12. We maintained double-digit system sales growth in Q4, resulting in a full year growth of 9%, driven by strong same-store sales and new store opening. Let's move to Slide 13. One of our biggest factors that contribute to the solid performance at KFC was our continuous focus on food. In Q4, KFC launched a series of innovative products, including Musang King Durian Pizza, Musang [and Durian Tanta] [ph]. The new egg tart was well received by consumers and created good source of buzz. KFC also launched other new products, such as Jumbo Chicken Leg and Chicken coated with Lay's Chips. Right now, our star product is Nomiji [ph]. It's in our stores. If you are coming to China, it will be sold also. It's very, very good. Second, KFC focused on creating abundant value to our customers during the festive season such as different sizes of buckets to fit customer needs. Third, Chinese consumers are continually upgrading their choices, and hence they are increasing need for more premium ingredients. We launched shrimp and scallop congee, [Toushan Campbay Tashiyajo] [ph] in Q4 to get it with new flavor for our milk, we further strengthened our breakfast day parts. Slide 14, going digital is an essential step to engage with our customers. We offered a member exclusive privileges such as value and trial of new product. Examples in Q4 include buy one, get one free for selected product, and exclusive trial of the crayfish burger before it's official launch, [Tialo Shian Humpa] [ph]. We started offering our members merchandize in our K-Mall and T-Mall. Members can use their combination of member points and cash to redeem the product. KFC loyalty members exceed 110 million, a considerable size even in China. Members sales represent a significant portion of our sales already reaching 38%. Mobile payment also continue first phase of development in which 57%. We will continue to build our capacity and capability to maintain our leadership in the digital front. Slide 15, delivery continued its growth. In 2017, delivery represents 11% of KFC company sales, up 47% year-on-year. We're now over 3,200 stores across 900 cities over delivery services. We continued attractive offer in delivery to complement our dine-in business such as discounted buckets free gift and free delivery of orders reaching certain order size. In November 2017, we launched KFC Delivery Prime, which offers a member unlimited free delivery of 30 days at the subscription fee of 18 yen. This program is limited to orders placed through our brand app or website only. Thus it helped drive our own channels. We believe our digital and delivery capabilities provide a strong foundation for future growth. Now, let's move to Slide 16. Let's review the performance of Pizza Hut. In 2017, same store sales grew 1% from last year, while our system sales increased 7%. With that, 180 new restaurants and remodeled 144 stores, a step change from last year as we started more flexible remodeling program in 2017 for Pizza Hut. Pizza Hut reported operating profit growth of 8% from last year, Jacky will cover the numbers in more detail. Just take a look at the same-store sales growth on Slide 17. Pizza Hut same-store sales grew 1% in Q4, with 5% traffic increase, partially offset by 4% down in ticket average, mainly driven by increases in the delivery business and value offerings. We also ended the year with 1% same-store sales growth. The first year of positive growth since 2013, while the growth is encouraging they still a lot of work ahead of us. Turn to Slide 18. Our system sales growth stabilized at 6% year-on-year in Q4. Full year was up 7% an improvement over last year. Move to Slide 19, in October 2017, we launched our new menu featuring 15 new products. In 2017, there were 22 new and 28 upgraded products launched across all categories. We have invested and we will continue to invest in our food. In addition to the national campaign, we have been conducting pilot test for new ideas. One good example is the Italian themed pizza, product tested in Beijing and Shanghai in keeping with the changing taste. Successful pilots will be rolled out subsequently. We have engaged leading celebrities such as William Chan Wai-ting, as our brand ambassador will leverage that their popularity to introduce fun and interesting new products such as black pizza to the younger generation. Turning to Slide 20, a quick review on our digital efforts. Pizza Hut achieved over 35 million members by the end of 2017. We strengthened our member campaign increased member sales to 34%. By the end of November, we rollout super app version 2 with better look, now forget we rollout the version 1 only during the summer last year. More user friendly interface with fastest speed is available in the version 2. At new functions will be introduced in 2018 to enhanced customer experience. Pizza Hut mobile payment accounted for 45% of Pizza company sales in Q4 similar to the raising trend of KFC. Slide 21, as discussed last quarter, we have integrated our dine-in and delivery network on the one local and one brand. Delivery represented 20% of Pizza Hut sales in 2017, up 41% year-on-year. Over 2,100 stores now offer delivery services. We have good progress in integrating the system to support growth although not easy. For example, over 60% of menu has been integrated between dining and home service. We are also consolidating the store network and have identified certain stores for closure. The rationalization of our store network will help our future growth. In 2017 - now we are on Slide 22, Pizza Hut refined as multiple models strategy addressing the need of different customers and locations. In addition to our core model, we opened Pizza Hut Bistro, a smaller-sized faster casual concept. This service model is intent to reduce waiting time and improve efficiency. We are also testing other store formats to support further store expansion. In 2017, we launch a newly modeling program, which significantly lowered capital investments and sales loss. It's very important to keep our asset refreshed and relevant to our customers. Let's turn to Slide 23, we continue to revitalize Pizza Hut's in 2018 focusing on four key areas; first, it's a fix fundamentals from menu to store ambience; second, is to enhance digital capability through expanding our user base and engaging them; third, to optimize delivery using our brand app, while working closely with aggregators; last but not least, experiment new models to drive further growth. Slide 24, we opened two new Taco Bell restaurants in Shanghai, one is in a premium shopping mall in Wu Jiao Chang. The store serves thousands of students close by. The other one in Feng Sheng Li, which is a popular shopping and tourist spot in a heart of Shanghai. The two new restaurants feature a new menu exclusive to China, and a new service model of which orders are delivered to the tables. We are excited to welcome more customers to experience Taco Bell and look forward to growing this wide brand and global brand. That concludes my remarks. Let me turn you over to Jacky Lo, our CFO of Yum China.

Thank you, Joey. Good morning to those calling from Asia, and good evening to those calling from the U.S. So let me start with an overview of our fourth quarter and full year results. And then give you some color on our 2018 outlook. Let's take a look at our Q4 and full year 2017 results on Slide 26. Our system sales grew 9% in Q4 and 8% for the full year, excluding the impact of foreign exchange. This was led by our strong same-store sales growth and robust development plan. Full year restaurant margin reached 16.8%, up 1.5 percentage point year-on-year. I will elaborate on the drivers for restaurant margin expansion in the subsequent slides. On the back of strong revenue growth and margin expansion, I'm pleased to report that we delivered adjusted net income growth of 18% in the quarter, and 24% for the full year, excluding foreign exchange impact. As Mickey mentioned at the beginning of the call, our reported net income improved one-time tax charge of $164 million, as a result of the U.S. tax reform. And I'll explain more about this impact in the subsequent slide. Moving onto Slide 27, let's take a look at KFC, first. KFC had a strong fourth quarter. Restaurant margin increased 2 percentage points in Q4 and reached 18.1% for the full year. Full year margin improvement was primarily driven by same-store sales leverage and aided by VAT benefit the in the first half of the year. And it was partially offset by wage inflation and promotion costs. In Q4 KFC also benefit from the moderate commodity inflation. For the full year, operating profit increased 29% year-on-year. Turning to Slide 28, let's look a Pizza Hut. During the fourth quarter, Pizza Hut's restaurant margin declined by 4.2 percentage point year-on-year, mainly due to product update, promotion costs as well as wage inflation and was partially offset by labor efficiency and same-store sales leverage. For the full year, Pizza Hut's restaurant margin improved 50 basis points year-on-year. In addition to the fact as I just mentioned. VAT contributed to the margin expansion in the first half of the year. As we discussed on the Q3 earnings call, food investment is part of the brands revitalization strategy to fix the fundamentals. And it's vital in driving businesses. In Q4, we invest of our $20 million in product upgrade. And we also had store network integration in payment charge of $6 million. So as a result, operating loss was $20 million in Q4. Overall 2017, operating profit was $157 million and encouraging growth of 8% excluding the impact of foreign exchange. I would like to remind you that product investment will continue into 2018. And as a result, we expect that will continue to be impact on our margin and operating profit. Let's move onto Slide 29, and talk about our development effort. We a series of new restaurant openings to 691 stores reaching almost 8,000 stores across the country. And we maintain a steady phase of new builds across city tiers. KFC has relatively deeper penetration in lower Tier 3, while 57% of the KFC stores are in Tier 3 or below. On the other hand, Pizza Hut is more concentrated in higher tier cities of which 60% of the stores are in Tier 1 or 2 cities. And in terms of new unit return. The average pre-tax cash payback of KFC is similar across city tiers at around two years. While Pizza Hut enjoy a slightly faster payback in higher tier cities. We believe China continues to off of great opportunities for unit development and we will continue to capture this opportunities with discipline and focus. Let's go to Slide 30. There were several factors that impacted our 2017 financial results. As mentioned earlier, same-store sales leverage, VAT benefit and productivity increased of the key drivers to our profit growth. The VAT was no longer tailwind from Q3 onwards. Wage and commodity inflation have always been a pressure faced by our business. In 2017, wage inflation was 7% and commodity inflation was slightly above 1%. Since we are in our first year as a public company, we incurred additional G&A costs to meet the governance of reporting and compliance requirement. G&A cost, it was up 16% year-over-year in local currency. But this has the new base of our public company G&A costs beyond 2017. And we will continue to look always to optimize our G&A cost structure in 2018. Overall, our adjusted operating profit increased 23% year-on-year in 2017, excluding foreign exchange impact. Let's turn to Slide 31. As a result of the Tax Cuts and Jobs Act, the company incurred an estimated one-time tax charge of $164 million or $0.42 per diluted share. Of this $164 million, the net cash payment is estimated to be $83 million to be paid over eight years. And you can see the details on the slide. These are the fast estimates based on currently available information. And we further clarification on the U.S. tax reform, our current estimates maybe subject to change. With operations primarily in China, we continue to be subject to China enterprise income tax of 25% and an additional 10% withholding tax on earnings repatriated outside of China, levied by the China tax authority. The reported effective tax rate of 2017 was 47% or 26.9% excluding special items. Slide 32, highlights the powerful aspect of Yum China's business model, which is our ability to generate a substantial amount of cash. We generated free cash flow of $469 million and end of the year with $1.26 billion in cash and short-term investments. In 2017, we repurchased 3.4 million shares, totaling $128 million, and initiated a regular quarterly dividend at $0.10 per share. Given our strong cash flow generation capability, we'll continue to utilize cash to reinvest into our core business, enhance our strategic position and create value for shareholders. Now, let's turn to Slide 33. We'll make three key reporting changes in 2018. The first reporting change relates to the adoption of the new revenue recognition accounting standard, which has no significant impact to our income statements. You can refer to the details on the slide. The second and third reporting changes aim to provide better transparency and align with industry standard. First, we'll follow a calendar quarter end and classify our quarters into four three-month quarters. And we'll also fine-tune our same-store sales growth calculation by using a stable base of stores for the whole year as opposed to a rolling base of stores which changes month to month. There is no significant change to our historical same-store sales growth numbers. We'll provide recap 2016 and 2017 financial data through a SEC submission in April 2018 for better year-on-year comparison. Let's move to Slide 34. I want to provide you with the outlook for 2018. We have captured here for you the opportunities and risks. On the plus side, we expect the economy to grow steadily, robust demand in delivery and growing membership program will help to drive our businesses. Sales momentum at KFC will also contribute to our growth in 2018. However, we do see some challenges. As you have heard from Micky and Joey, two successful Chinese New Years in 2016 and 2017 will make the lapping in 2018 tough. While we're on track with Pizza Hut revitalization, we may still face roadblocks. We also expect to see commodity inflation of low single digit and labor inflation of high single digit. Lastly, we continue to face uncertainty in tax laws. On the development front, we are confident we will be able to deliver 550 to 600 new units for the full year. And digital and delivery will continue to be our growth engines. We maintain our ongoing financial targets of high single digit system sales growth, around 17% restaurant margin, and double-digit operating profit growth excluding foreign exchange impact. Although there will be fluctuations quarter on quarter and year on year. With that, I hand over to Micky for the summary.

Thank you, Jacky, and thank you, Joey. We'll open the Q&A in just a minute. But on Slide 35, we have a very short summary. First is we are very pleased overall with the strong performance of KFC and with the pace of Pizza Hut's revitalization in 2017. Our new store builds exceeded our targets. We also delivered strong sales and profit and maintained a healthy cash position. We've mentioned a couple of times already that we've had two consecutive years - especially two consecutive Chinese New Years that have been very strong. So 2018, we'll have to lap that. And Chinese New Year is a critical period. We'll focus all our efforts to make that successful in coming weeks. In 2018, we'll also have continue focus on three key priorities, first is to maintain KFC sales momentum, continued revitalization of Pizza Hut and drive our digital strategy. So that's a quick summary. And with that, I'll return you to Michelle, so that we can commence our Q&A.

Thanks, Micky. We'll now open the call for Q&A. In order to give as many people as possible the chance to ask questions, we would appreciate if everyone can limit to two questions each. Operator, please provide the instruction for Q&A.

Thank you, ladies and gentlemen. We now begin the Q&A session. [Operator Instructions] Thank you. And we have our first question here from John Glass from Morgan Stanley. Please ask your question, John.

Thanks very much. First, Micky or Joey, just on your comments about a more cautionary stance in the first-half, when I look at it, you had four years prior to the last two of negative same store sales, so laps are tough, you're coming off a low base versus prior years. So if you could just put that in context about the prior four years and now your two successful years, and why that's tougher? And is your comment really around - specifically around the Chinese New Year holiday and the volumes you experienced then? Or was your comment more broadly about the first half is more difficult? And I have a follow-up after that, please.

Thank you, John. I'll start quick and then hand over to Joey. I think you said it exactly right. It's an opportunity and a threat. The opportunity side is as we pointed that there seems to be a good sales momentum. We were negative. We turned flat in 2016. In 2017, we grew plus 4. So that's one indicator. However, it cannot avoided that plus 4 was lapping a flat sales performance in 2016. Normally, in our business you know very well that sequentially building same store sales growth is more difficult than when you're lapping a relatively easy year. Now, also we have to balance these factors out. As far as the timing et cetera is concerned, look, I think we first you should take from us that we are very optimistic about the business longer-term. But Chinese New Year this year is later than last year. They have to start. So we have no idea how it will go. Not that we don't have no idea. We have plans, very detail plans. But all of it will depend on the performance in the next month, so it's impossible to say right now what Q1 will look like. But be caution that the last two years have been really, really strong so we have to be open to the possibility of redoing it or missing it. We'll have to see how it goes. Joey?

Thank you. Thank you, Micky. John, I think I will probably refer back to the Page on 11. If we see the quarter number 2017 we were very nervous about whether we can lap the Chinese New Year, because 2016, you look at the first quarter, it was just 12. It's double-digit. And Chinese New Year is one of the two peak trading season for us. So we - in our business in China we have two peak trading to it, the Chinese New Year and summer. So 2016 was so strong, it sees - our expectation in terms of sales and profit. So we are very pleased that we can lap in 2017. So 2018 is another challenge. And not to mention, because it's a relatively short period of time, it's like three to four weeks' time. And sales intensity has gone up so much, there's sudden capacity hindrance in our store, how many people can we serve. Not to mention on the Labor's Day it's harder and harder to make sure we have enough labor to tray every day on Chinese New Year. I mean, we literally tray through every day, even on the first day of Chinese New Year, which typically is a day that everything shuts down, but we don't. So therefore, we are cautious about the 2018 Chinese New Year. We definitely try our best. But anything like from big snow or something happens, it would impact our sales, because it's very concentrated, very high intense, intensity itself during very short period of time, and hence the caution, John.

That's helpful. And just on the Pizza Hut margins, was there anything in the fourth quarter that was onetime in nature? Are there - I think there was an impairment or some sort of charge, but in the food or labor that was onetime due to the new menu rollout, I'm trying to assess, I guess, is this what the new - I know there's seasonality in your margins, but is this the new run rate that you're going to be, I don't know, 400 basis points below at a full year 2018 versus 2017, now that the new menus in place, the new labor standards? Is there any way you can help frame the margin impact for this new menu into 2018?

Sure, John. This is, Jacky. So - so as part of the Pizza Hut revitalization plan, so as you pointed out, we make investment in product upgrades. And also we have promotion cost for our CRM and delivery. So all in all as I mentioned in my prepared remarks, the impact was about US$20 million. So that's about 4% or 3.5% on our margin. So - and we have full intention to make similar investment in Q1 and Q2 2018. So that will continue to be similar pressure on margin and operating profit. Yeah, in terms of onetime, as you pointed out, it's the network integration impairment charge of six million, that's one time. But we're still assessing the integration. It is still ongoing, so, yeah there may be potentially some additional impairment charge in 2018.

Yeah, I think, John, well, you will have to watch the next couple of quarters, because as we said Pizza Hut is work in progress. We're not declaring that the turnaround has happened. The turnaround is started. We are very encouraged by experimentation, new formats. I think Joey has done the right about upgrading products that has taken a toll on our margins. These are all steps in the right direction to improve the value offering. Let's watch the next couple of quarters and then maybe we can give you more assessed guidance or where we think. The good thing at least is the sales are looking reasonable and the traffic is healthy so.

And the next…

Thank you, John.

Sorry, and the next question comes from Christine Peng from UBS. Please ask.

Hi, management. My question is really about the food inflation. As you may have noticed that fully inflation is actually coming back to China. And I was just wondering, what is management view towards the pricing strategies for KFC and Pizza Hut respectively in 2018. Will there be any plans to hike the prices for these two brands, especially for KFC, given the very strong growth momentum for the brand since the Q4 of last year? Thank you.

Christine, thank you. We will be prudent of our pricing for both brands. As we mentioned in the presentation, we've got smart value and abundant value. So where we have newer innovative products, we charged higher. We also charged higher at higher traffic stores like you might or might not notice. If you buy KFC at [indiscernible] high-speed railway station you will be paying slightly higher price. But we maintained competitive pricing with our customers to protect the value for money for our customers. And on top of that we also use the mix of product and mix of tier to have different price tier to protect the ticket average as well. So we will continue that.

The next question comes from Matt McGinley from Evercore. Please ask your question.

Okay. Thank you. Question on the context of lapping the compares. At KFC, you seemed to have nailed a bit flex the labor dollars with the growth in the comp throughout last year, despite the wage inflation. I understand Joey's comment, before on how near it's become difficult to flex the labor model with that. But on the difficult compares you have throughout the entire first half. Are you implying that's something different with the labor model that makes it harder to maintain the margins through the first part of the year on those more difficult comparisons?

No differentially in 2018 compared to 2017 there is no fundamental change in the model or anything. I think, Joey's point while the Chinese New Year is so critical, selling volume are so much dramatically higher that you really have to perform everything to perfection. There is no particular change in the business model, obviously labor is getting more difficult every time, everyone knows to all the Chinese New Year.

Matt, if I try to understand your question. What I really mean is Chinese New year is the availability of labor, because by law, for the few days of Chinese New Year, we pay three-eighths of the normal salary. In order to have to stop serving during those few days, we typically started the planning for the six months in events. It's never easy, it will never be easy, but we'll continue to work on that. But we just want to point out that is a very tough trading period that we have to be very, very detail and careful, particularly on the labor availability side. I hope that answer your question, Matt.

Excellent. More of a first quarter comment and then the full year comment, that's helpful. And on the G&A, it's - I'm having a hard time understand with the basis that we should build 2018 and you had such a large increase in the back half of the year with the explanation being it's the cost of earnings of public company, but it's well over the rate of sales and the back half growth was significant larger than front half growth. So can you help us understand, what it should look like on the dollar basis or what the growth we should expect to see in 2018 relative to the kind of lumpy nature of that G&A in 2017?

Yeah, Matt. Thank you for your question. So as you understand we are in a full year as a public company. So we are incurring some additional cost to meet that different requirements like governance reports and compliance. So it does a lot of learning experience where in our first full year as about the company. So right now, we believe we have seven base G&A costs for a public company. And so we were actively managed the G&A costs and identify cost savings opportunities. So right now, we are actually a cost function to analyze that optimizes our structure. But in the longer term, our goal is to keep G&A increased below our revenue growth.

And then next question comes from Xiaopo Wei from Citigroup.

Hi, the first question is for Joey, regarding Pizza Hut revitalization program, we noted that you said that you are continued to investment in the product. What we say that after seeing continued recovery of Pizza Hut same-store sales. Will you reduce such investment in the second half of 2018? That is my number one question. And number two question is about, as Joey's mentioned, we noted that the company has been opening a lot of new unit and also remodel all our stores. Will we fact a slowdown in closed stores in 2018, meaning, the net increase of store will be higher in 2018 versus 2017. Thank you.

Thank you, Xiaopo. For the food investment, we will continue the food investment, because there are many that we can compromise, but from customer point of view quality and value for money is not an area that we should compromise. Not only we should improve our food, we should improve our food to great extent to bring the customer back while maintaining the investment. Because I think as Micky mentioned before, in part I think our cost of sales improve, ingredient is a bit low. So we are just really bringing it to the normal and reasonable level. For the second half, I think in sales, so sort of like you've actually reduced the investment or increased price per se. I think we'll pursue a more diverse strategy to look at the mix of our product, because typically as you might be aware already, the cost of sales is already higher than drink. So that's something we probably can do in drinks to balance. So the mix of food, the mix of the pricing tier across the country et cetera. So that's the area we can work on. For the new units, I remain cautious, because the new unit, how many we opened, it has certain relationships with how well the business is recovering. In terms of closure, as Jacky mentioned earlier, particularly we have quite - we are I would say, 60%, 70% there with the integration of Pizza Hut home service business. but the process continues. So we are still in a process of consolidating the store network and assessing what store to close or not. So that is an ongoing process and I won't be able to give very clear guidance, would be more or less. I think our number one criteria is do the right thing, make sure the stores we keep up healthy. And if we have to close out a store, because the right thing to do, we'll do it. I hope that answers your question, Xiaopo.

Yeah, thank you very much.

Yeah, I think, Xiaopo, - this is Micky. Just one more, I think this came up before. As we opened 691 units, just cautioning you, there is a 100 of those that were Little Sheep restaurants and they were all opened by franchises, that was not our own capital. So just keep that in mind, Little Sheep did have a fantastic year in the year. We're very pleased we've gone into many countries and doing well. But that's a different business right there.

Thank you, Micky. Next question please.

And the next question comes from Sara Senatore from Bernstein. Please ask your question, Sara.

Oh, thank you. Just actually two follow-ups if I may on topics that have already been addressed. The first is about the Pizza Hut margins. I just want to make I didn't miss something. I know there are some investments that are you seeing margin impact from a mix shift towards delivery aside from just there being lower average check? Are delivery orders just lower margin in general? And to the point about beverages, is that a part of it? So that was my first question. And then, my second question is actually about the store base rationalization. Is it in it that you're seeing cannibalization in some dense markets? Is it that some of the newer markets with the lower returns maybe not working quite as well as expected? Can you give a sense of where that's happening?

Thank you, Sara. For the Pizza margins, the delivery business, we maintain very healthy margin and pricing for the delivery business and charge the customer the delivery fee as well. From here and there we might run some additional promotion on the delivery, depending on occasion, but we don't see a big cannibalization of the margin from the delivery side. So we are comfortable to grow our delivery business as aggressive as we could. For your second question, store based rationalization. Because historically, Pizza Hut dine-in and home service, they were run as separate business. So therefore, it was quite normal that in a good trade zone, probably both business out there. Now, when we put it under one brand, we looked at it, we do our numbers and we asked ourself, in certain stations, do we really need two stores or one store. Sometime we need to maintain two stores, if there is enough volume. And in some other case, we might have to pick out one, which will help the other one, but also there is no enough capacity yet for now. So because of the integration, so therefore there is an equal rationalization instead of some regional difference et cetera, the same. So hope I get the…

Thank you.

Thank you, Sara.

Yeah, next question please.

And the next question comes from Brian Bittner from Oppenheimer. Please ask your question, Brian.

Hi, thank you. I got two questions. First, I'm just still slightly confused on the caution regarding the laps on the first part of the year. Is there something very specific in the Chinese New Year this year that makes it just clearly more difficult for you to execute, or you're kind of lagging or are you seeing a more skittish consumer as you head into this year's New Year? That's my first question. Second question is, just with all the investments you're making in 2018, what overall comp or same-store sales growth do you need to see to hold margins flat in 2018. Thanks a lot.

I think I will take the first question and then, Jacky, you can take the second question. For the Chinese New Year, it's a bit like a being a retailer during the Christmas, every year is a difficult and nervous year, because the sales is so high. So - and then in our case, as I mentioned it earlier, when John asked the question, 2016 the number was so, so high moving on the sales and profit that we are cautioned about it. And if I'm pushed to say what is the biggest difference, I think 2016 was very unusual, because that's the year of monkey, and we somehow in our Chinese traditional kids' culture as you will see the monkey king is just such a popular iconic icons for Chinese at all ages that we manage the leverage. And then, of course, last year was the year of chicken and we sell chicken. So that's something that we - in terms of margin-wise, we can engage our customer very well. Now, 2018 is not an easy task, although as Micky mentioned, we have very solid plan. But it's the year of dog. It's very difficult to have very positive spin of the word. So, but that is more the internal, some of the casual view, not causal - like we teach ourself for the challenge for 2018. But with that said, the campaign every year, we just have to come up with very new, very innovative to make sure we continue to engage our customer within such periods, shorter time. It's just very - it's another period of time there. And we put it that way. For the second question, Jacky.

Okay. Well, Brian, well, first of all, we are very committed to achieving the ongoing financing target of 17% restaurant margin. But that that's our long-term goal. So, like I said, there will be fluctuations quarter on quarter or year on year. Well, as you can appreciate, about 90% of our restaurants are actually equity-owned. So the first priority and the most important priority is to maintain healthy same store sales growth and also focus on driving traffic growth. So we have some very exciting marketing campaigns and innovative products coming out for Chinese and for the rest of the year. So as you can appreciate, this will bring huge flow through, impact our margin. But we are also facing commodity inflation of low-single-digit and labor inflation of high-single-digit. So we're also focused on improving our installed efficiency as well, just to offset these inflations. But overall, Pizza Hut we believe is the right place to keep investing in our COS product upgrade. And so, the impact will similar to your - or the magnitude will be similar to Q4 in 2017. So obviously, they will create some pressure on our margins, but our focus right now is just to continue to drive our same-store sales growth.

Next question, please.

Thanks. And the next question comes from Michelle Cheng from Goldman Sachs. Please ask your question.

Hi, management, thank you. I have two questions here. Number one is regarding the members contribution. We see very encouraging contribution for both KFC and Pizza Hut. Can you give us some comparison based in 2016 member contribution? And also, the ticket size difference between the members and also the average customer. That's my first question. And secondly, still want to clarify a little bit on the new unit Joey just mentioned. I understand that we will be cautious on the Pizza Hut is still in the integration process. But how about KFC, given we have seen previous strong same store sales growth and also the margin expansion. If that is likely we can accelerate the KFC expansion in the next few years? Thank you.

Okay, thank you, Michelle. For the members contribution, I think for the detail our IR team can get back to you. But we certainly can say that we have grown our members very significantly in terms of absolute number because we are right now over 110 million for KFC and 35 million for Pizza Hut. And then the member sales is very, very significant compared to 2016. And then both - for both business, we are quite delighted to see both the - certainly a better traffic frequency and ticket average for our customers. So that's a good thing and we certainly will continue to engage and invest in our membership program. Second question is on KFC store restoration, I think it's a very good question. We certainly keep revising our pipeline. And as I mentioned earlier, the new store opening, it has certainly relationship with the improvement of same-store sales, because the better the sales, the more pipeline that's available and more location that we can afford the rent. So, we will continue to modify and revise our store pipeline, if we see the right site that we can open, open more stores, we'd certainly go for it, why not?

Thank you.

Next question, please.

And the final question today comes from Chen Luo from Bank of America Merrill Lynch. Please ask your question.

Thank you, management. I got two questions. The first question I got from the occupancy cost. So that cost at percentage of sales has declined quite dramatically. Apart from the smaller unit size and the same store sales growth leverage is there any other reason behind that decline? Do we expect a continued decline or meaningful decline in that ration in heading to 2018, which can help to offset the pressure from food inflation and wage inflation? And the second question is on the delivery business. Also, that business is doing fantastically these days. And can you give us an update on the percentage of delivery orders, which are coming from the online aggregators. And also the economics behind that, how much will they charge us for this kind of deliveries. And are we concerned that in the future they are going to erase that fees that they charge us? Thank you.

Michelle, I'll take the first question first. On our occupancy improvements that mainly came from sales leverage, but also for Pizza Hut we shift the advertising and media cost to a product upgrade, so - and also in the first half there were some VAT benefit as well. So that's why you see occupancy improvement year on year.

And also, I think if I add, for the occupancy cost a very significant of our stores, the rent is based on percentage of sales, so which protect our business model. And of course, as you can imagine, negotiation with our landlord is core strength, that we'll continue work very hard on that one. When it comes to delivery, the percentage of order from aggregator, I believe I mentioned it before, not in today's call, in Investor Day. For KFC business, about roughly half of our traffic is from aggregators, but let's not forget, we do the - we do all the delivery, the vehicle delivery of ourself. And we have captured all the traffic data in our system. And then, the traffic of delivery business, for Pizza Hut, the percentage is slightly higher from the aggregator. So our own channel ability to drive traffic is the area that we are working very hard on. Now, in terms of the commercial arrangement with the aggregators, unfortunately, we will not be able to provide you with such information, because we are bound by confidentiality agreement with the aggregators. Thank you.

Okay. Well, thank you very much for your questions. This is back to Micky. And I just want to express my personal gratitude. It's been a joy and a great privilege to lead Yum China over the last couple of years. And as a shareholder, I'm very confident and very pleased to hand over the reins to Joey Wat as our new CEO. As you know she's had - demonstrated track record. She's been excellent. She's the right person to lead this company as we head into 2018. So thank you very much.

Thank you. Thank you, Micky. All of us at Yum China, we are committed to building leading brands for the long-term through innovation in all aspects of our business. We will focus on our strategic priorities on digital and delivery, while continuing to improve our food and in-store experience. While we finished 2017 with solid sales momentum, we continue to face challenges of the revitalization of Pizza Hut and lapping of two very successful Chinese New Year. However, I remain confident in the growth opportunities and long-term prospect of Yum China.

Thank you, Joey, and thank you, Micky. With that, we conclude today's call. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. Thank you for all participating. You may all disconnect and goodbye.