Yum China Holdings, Inc. (YUMC) Q2 2022 Earnings Report, Transcript and Summary

Thank you all for standing by, and welcome to the Yum China Second Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I'd now like to hand the conference over to Michelle Shen. Please go ahead.

Thank you, Melany. Hello, everyone and thank you for joining Yum China's second quarter 2022 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung. We are dialing-in from different locations today. If we experience a technical difficulty during the call, please remain on the line as we reconnect. Before we get started, I'd like to remind you that our earnings call and 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 call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. Today's call includes 3 sections. Joey will provide an update regarding our performance in the second quarter. Andy will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find the webcast of this call and a PowerPoint presentation, which contains operational and the financial information for the quarter on our IR website. Now I would like to turn the call over to Ms. Joey Wat, CEO of Yum China. Joey?

Thank you, Michelle. Hello everyone and thank you for joining us today. Second quarter was the most difficult quarter in the past two and a half years. With our main focus always on keeping our employees and customers safe. We also want to bring joy to our customers. We kept our morale high and came together to deliver better than expected results. I'm both glad and honored to fight the battle alongside a wonderful young China team. We operated with our Shanghai headquarters under lockdown for over two months and still managed to execute with extraordinary agility, quickly forming cross functional, and cross brand crisis management teams, while we developed flexible cares to tackle each problem as they arose. Through it all, we have stood firm and built the business stronger in so many ways. With innovative new manual offerings, delivery, and digital solutions, as well as cost optimization initiatives. These solve not just the imminent problem but can serve as our learning base to make us more agile and resilient for the longer term. During this trying time, we continued to execute our RGM strategic framework that is resiliency, growth, and moat. Let's start with resiliency. Our resiliency shines brightest in tough situations. Let me share with you some of the measures we implemented to overcome considerable operational difficulties. During the city lockdown in Shanghai with very limited restaurant, staff and riders, our goal was to sustain minimum level of restaurant operations and serve desired food to customers. With simplified menus, where you reduced complexity of operations and inventory management. At the extreme, we just have one bucket of fried chicken on the menu, one item on a menu and that's it. Fried chicken was perhaps one of the most desired food items in Shanghai during lockdown and brought our customers great happiness. We launched community purchasing pongo as early as in mid-March, including packaged food products, not just for KFC and Pizza Hut, but also for emerging brands, Lavazza, Taco Bell and Little Sheep. In the Q1 earning call, I share that with 10% to 15% of the store open in April, Shanghai achieved 40% to 50% of pre-lockdown sales. In May, with less than half of our stores open, we reached pre-lockdown sales level. This was a remarkable achievement. We were able to continue serving our customers, thanks to our in-house, and agile supply chain management system as well as dedicated last mile delivery riders. We obtained the necessary permits and managed the most -- the majority of Shanghai under severe mobility restrictions. Digitization also played a very critical role. In just a day's time, our was stellar IT team launched an AI-enabled delivery route planning tool for community purchasing in Shanghai. The tool optimized with a delivery route covering a wide geography well beyond our usual store base vicinity radius. Across the country, we always faced a challenging operating environment without advertising and promotions to save costs. Some of you may remember the Psyduck Koduck and other Pokeman meal companion toys we launched around Children's Day on June 1. The Psyduck toy instantly went viral, becoming a smash hit with children and adults alike. The sensational buzz from this campaign drove almost 20% of sales in the first two days of the promotion. Who would have thought that we chose Psyduck just to accommodate our reduced advertising budget? The results were phenomenal. We were thrilled to bring joy to our customer lives during an exceptionally hard time and to see their social media posts. We also focused on driving off premise sales. Delivery grew 7% year-over-year and reached a record sales mix of 38% in the second quarter. Combined with pick away off premise signing contribute to almost two thirds of sales. Also excitingly our new retail package with sales reached ¥200 million in the second quarter. This more than double the sales compared to last year. These initiatives partially offset the reduced dining services. Let's move on to growth. Even in conditions like this, we don't stop delighting our customers with innovative food and value campaigns. Our ability to innovate is an important pillar to capture growth opportunities. KFC diversified into adjacent categories to drive additional growth. With Wagyu and Angus beef burgers, as premium options will launch entry price choices at only around half of the price, which is ¥18 versus ¥33. On the weekend, we are now offering juicy whole chicken at ¥29.9 to thrive sales. This juicy whole chicken is one of my personal favorites now and it's absolutely delicious. These two new categories have proven popular accounting for mid-single digit of menu mix combined in June. Our Food Innovation Team let their creativity fry when designing new products. As you can see we launched a super abundant chicken bucket [indiscernible] in select cities. This bucket features chicken feet, chicken wings, tips, neck and other parts traditionally favored by Chinese people. For some of the analysts who asked me before when we start to sell chicken feet we are officially selling chicken feet right now after 35 years. This follows on the heels of KFC’s launched last year of its super popular late night snack chicken bone [indiscernible]. In addition, the usage of all parts of chicken provides an intriguing variety to a customer at very good cost. These are hot new menu who received amazing customer feedback and generated a boost in sales. We launched the campaign on social media and sponsored TV shows instead of using celebrities with just 1/3 of the advertising costs. The menu achieved the same customer awareness as last year's menu. The new menu included 35 brand new or upgrade items such as stuffed crust pizza, with sausage, and meat floss real strong. While goose supreme pizza and deep fried cereal prawn, yes, we put the cereal around a prawn and it tastes wonderful. Taco Bell launched a rich burrito [indiscernible] with a lighter sauce and more vegetables tailored for Chinese customers. It gained great popularity and appeal to more health conscious customers. Value for money resonates well with customers under the current circumstances. As part of the 35th anniversary celebration in China, KFC offered its signature product at amazing prices. Original Recipe Chicken is ¥19.87 price and the family bucket at almost 60% off al carte price. This campaign brought back found memories and became a hit with customers. We rotate the offers weekly to have the flexibility to adjust according to the market conditions in different regions and customer response. Our ionic crazy first day value campaigns have won the hearts of our customers. Since we first launched it back to 2018. We have been constantly spoiling our customers with very attractive offers. The campaign now inspires scores of creative social media posts. Thursday’s also generate significant sales uplift compared to regular weekdays and sometimes even weekends. At Pizza Hut with proper signature buffets, and so all 400,000 buffet set in a pre-order promotion in just 15 days. We also launched a buy more save more combo, offering more abundant options. The new combo successfully lifted ticket average and lowered our costs. Let's move on to moat. Digital initiatives and supply chain infrastructure are the key enablers in our strategic moat. Leveraging our dynamic digital ecosystem we generated around 4 billion in digital sales in the first half of 2022. This represents 88% of ourselves. Our loyalty program exceeds 385 million members as of the end of the second quarter. We share the latest launches and engage with members through our super apps, mini program and social media groups. We also constantly upgrade these tools to improve our customer service. KFC super app now features a senior friendly interface option with simpler graphics, less promotion information, pickup forms for mature eyes and streamlined ordering functions. We tailored it to the needs of our older customers. Pizza Hut also upgraded their mobile ordering manual for more flexible buy more save more combos, and customized product displays. Our digital capabilities were crucial to streamline restaurant efficiency. Tools like our restaurant sales forecasting system and pocket manager gave us full visibility of the situation in each store. With these we can rapidly adapt to a changing scenarios. Our real-time inventory visibility from logistics center to stores help enable us to dispatch raw materials with greater precision. Restaurants could adjust orders daily based on their operating environment and share inventories across the stores when fulfilling community purchasing or other large orders. As an ongoing effort of delivery 3.0 which allows riders sharing across trade zones, we now offer the same flexibility to our restaurant staff. Staff now can schedule ship across town and even across cities. We continue to invest in building a world-class intelligent and digitized supply chain to improve operating resiliency and support business growth. Our first two greenfield logistics center in [indiscernible] in Chengdu, and now complete and operational. And a week ago we announced construction starting on our new [indiscernible] Supply Chain Management Center in Shanghai. This project is our largest greenfield project yet, and will serve as the headquarter for our 33 logistics centers across China. It will integrate the latest state-of-the-art digital technologies and support restaurants in eastern China. 2022 has indeed been extremely challenging. We learned many lessons and now emerge as a stronger and more resilient organization. And I'm not saying this just for KFC and Pizza Hut. Some of our emerging brands have also demonstrated great agility and potential during lockdown. I'm convinced that by executing our RGM framework, we are well positioned for sustainable, long-term growth. True to our hallmark DNA of resiliency, we are taking every action to quickly drive returning traffic to our stores by providing good food, great value and good customer experience. Going forward, we will continue to delight our customers and seize new opportunities to grow our business in China. With that, I'll turn the call over to Andy. Andy?

Thank you, Joey. And hello, everyone. Let me share some color of our second quarter performance. The COVID situation has significantly impacted our second quarter results. In April and May, same-store sales declined by more than 20% year-over-year. On average, more than 2500 store were temporarily closed or provided only limited services. The situation gradually improved in June. We were able to capitalize on that improvement with same-store sales decline, narrow to high single digit year-over-year and a number of temporary store closure also reduced. We achieved operating profit of $81 million and restaurant margin of 12% in the second quarter. We were able to generate meaningful profit in the quarter, which exceeded our expectations not only by capturing sales when COVID situations improved in June, but also by taking swift and decisive actions. We adjusted offers and promotions spent tremendous efforts in driving productivity gains, secure one-time release and we base our cost structure. Let me go through the financials and our cost control initiatives. Unless otherwise, all percentage changes are before the effects of foreign exchange. Foreign exchange have a negative impact of approximate 3% in the quarter. Second quarter total revenue decreased 13% year-over-year, in reported currency to $2.1 billion due to the same-store sales decline and temporary store closures. This was partially offset by the contribution of new units and the consolidation of Hangzhou KFC. System sales were down 16% same-store sales were 84% of prior year’s level. By brand KFC same-store sales were 84% of prior’s year level with same-store traffic at 75%. Ticket average grew 12% mainly due to the increase in delivery mix and higher ticket average of community purchasing orders. Pizza Hut’s same-store sales were 85% of prior year’s level. Same-store traffic was at 80%. While ticket average increased by 6%. This was driven by the higher ticket average of community purchasing. Restaurant margin was 12.1% down 370 basis point compared to last year. This was mainly due to significant sales in leveraging impact, significant sales, cost inflation and high delivery costs. To take actions, we have taken actions to mitigate the impact. Let me next go to each expense line and the actions we have taken. Cost of sales was 30.9% almost flat year-over-year. We took firm actions to reduce promotional activities and discounts. To keep commodity price increase to low single digits and to optimize the distribution frequency from warehouse to store in order to reduce multiple costs. Cost of labor was 27.1%, 290 basis points higher than last year, mainly due to sales deleveraging. Wage inflation of 5% and more delivery rider costs resulting from higher delivery mix. This was partially offset by improved labor productivity as we simplify promotions and menu items, reduce operating hours as necessary, reduce hiring and privatize scheduling our full time employees. Occupancy and other was 29.9%, 60 basis point higher than last year. The modest increase was mainly attributable to sales deleveraging and rise in utility prices, which was partially offset by our cost initiatives. Over the past few years, we spend considerable efforts to reduce the fixed component of our rental expenses, shifting them more to wearable components. This effort continued to improve the flexibility of our operations. In addition, we negotiated meaningful rent relief some landlords. Apart from that, we fall back on marketing and advertising, and took on more energy savings initiatives. G&A expenses increased 6% year-over-year, mainly due to increased compensation and benefit expenses, as well as the consolidation of Hangzhou KFC. This was partially offset by lower share-based compensation expenses. Operating profit was $81 million. The net contribution from Hangzhou KFC consolidation was roughly 3% of operating profit in the quarter, it includes the amortization of intangible assets acquired, which is roughly $60 million per quarter, and that would run through the end of this year. Below the operating profit line, we incurred a $60 million mark-to-market net gain on our equity investment this quarter. It was $9 million more than the same period last year. The effective tax rate was 26.5, 170 basis points higher than last year, mainly due to how Hangzhou KFC consolidation and lower pre-tax income. Prior to consolidations, the equity income from JVs was not subject to tax. We saw them in lower tax rate. The effective tax rate in the first half of this year was 30.4%. We expect full year effective tax rate to be around low 30s. Net income was $83 million. Diluted EPS was $0.20. The mark-to-market gain in [indiscernible] positively impacted our EPS by $0.04. Despite the challenges in the second quarter, we returned $218 million to shareholders in cash dividends and share repurchases. In total, we returned $0.5 billion to shareholder in the first half of this year. We will continue to execute on our discipline and balanced capital allocation strategy. As always, our priorities are to have sufficient cash for daily operations, to deal with contingencies and to invest in capital expenditures to drive organic growth. Now, let us take a look at the third quarter outlook. We saw some gradual improvement in restaurant traffic in June, still, we remain cautious on same-store sales, the external environment remains very challenging, given that we are in current COVID outbreaks, weakening consumer sentiment, downward economic pressures and commodity price inflation. In July, the more infectious Omicron sub-variants appeared in Shanghai, Beijing and other cities. Nationwide, the number of cases has increased again after two months of sequential decline. Many cities including Xi'an, Chengdu and Lanzhou have spent in some time of lockdown conditions following the dynamics zero click policy. Therefore, we expect sales recovery to take time to be nonlinear and uneven and potentially volatile. Our focus is to drive sales recovery. We have planned a variety of new product launches, and marketing promotions. We are also working to ensure great value for money to attract consumer spending. In addition, our team's employ extensive scenario planning, with regional focus to stay agile in this everchanging environment. We're delighted with the better than planned cost savings in the second quarter. As we look into the third quarter, we're tying back some of these austerity measures to sustain long-term growth and operational excellence. For example, reduced promotions, simplified menus, shortened store offering hours and grant leaves are temporary. In addition, sales deleveraging impact is real and it will continue to impact our margins. Also, we continue to face headwinds from the inflationary environment. Crisis of commodity such as cooking oil and beef as well as utilities have weakened significantly this year. On the labor side, we expect labor inflation to soften given the downward economic pressure. However, the increased mix in delivery sales will likely increase labor costs. Despite challenges we face, our expansions strategy positions us well for long-term growth. In the second quarter, we slowed store opening in respond to the COVID outbreaks. Yes, we remain committed to open good offline stores that will grow for years to come. Over the past few years, we have been innovating store models to cater to different business needs, like delivery and take away services to enhance store densities in high tier cities and to extend into lower tier cities. This year, we expect more than half of our new store to be in smaller formats. We lowered upfront investment and streamline restaurant operations to be more efficient. The smaller format together with our reputations as a liable tenant opened up more potential sites for new store opening. Our new store remained healthy, the latest batch of new stores payback of two years at KFC and three year Pizza Hut. The majority of stores opened in the first quarter this year, we're able to achieve breakeven in three months. The healthy payback period, in fact, our disciplined approach to store opening. Reassured by a strong pipeline and healthy new store performance, we maintained the target of 1000 to 1200 net new store for this year. In the near term, we continue to expect volatility in our business due to the resurgence of COVID outbreaks, certain economic conditions and their impact on consumer sentiment. Nevertheless, we continued to focus on the elements of business that we can control. As demonstrated in the past two and half years, we are confident that our people, our execution and our strategy positions us well to deal with this very challenging environment, perhaps better than others. Also, our investment in new stores, supply chain and digital will bring global growth opportunity and make us even more resilient. With that, I will pass it back to Michelle to start the Q&A. Michelle?

Thank you, Andy. We will now open the call for questions. In order to give more people the chance to ask questions please limit your question to one at a time. Melany, please start the Q&A.

Thank you. [Operator Instructions] Your first question comes from Lillian Lou with Morgan Stanley.

Thank you. Thanks a lot Joey and Andy and also congratulation to the very solid results. My question is mainly on the margin side, because obviously, I think every cost line was controlled much better than expectation. Just want to understand with business gradually reopen, especially more stores are reopened, and they're running at normal hours. How do we see these cost line on a trend? Whether some of the -- because I think Andy and Joey mentioned some of relatively temporary measures for cost savings. So want to understand will same-store sales growth continue to be negative? How are we going to project this, I will say cost changes, especially on the margin side on the year-on-year basis? Thank you.

Thank you, Lillian, so let me answer your question. I think, first of all, I think as mentioned, the second quarter margins and profit exceeded our expectations. I think to make all possible, I think, first of all, is that all thanks to the very incredible efforts, feel and dedication of our team, especially, our restaurant employee, who did everything humanly possible and endure a lot of hardships during the lockdown and the pandemic to continue to serve customers in need and keeping our store open running as normal as possible. So I think those efforts, the Herculean effort, I don't think is possible on a sustainable basis. In terms of, obviously, the performance was dependent as to some the improvement in June in terms of the COVID situation, and our ability to actually capitalize on that improvement. And so, as we mentioned, our same-store sales declined now to high single digit in June. But in terms cost funds, we mentioned, already, some of these initiatives are temporary. So, for example like we have, so I'll cut back quite significantly on marketing and promotional activity. I think as you know we tried to drive sales, I think we stopped that. We also mentioned that in terms of managing the cost inflation in the first quarter was phenomenal, but I think, if we look at the commodity price is still in elevated level and we expect that to continue to creep up. In terms of labor, I think, obviously, we have simplified menus items, we have shortened our opening hours during the second quarter and then we also reduced hiring. And so, some of these is going to have impacts, especially, as we sort of tried to return to a more normal operations, so we will have more normal manuals and normal opening hours. In terms of, again, like going back to, we don't do advertising spending would have, I think, would be payback, I think we are trying to do more proactive advertising to drive spending. And then, we have to mention also to, that was someone off in terms of the way we eat and government relief and some of these our way to COVID and some of these are not. And so we have about roughly close to $20 million of that in the quarter. And when the uncertain wave required, we are certain about, if we can receive the amount in the third quarter. So I think when we looking into the third quarter, as I mentioned, the key things obviously, is that, right, deleveraging is real. And as we see the COVID remains one of the biggest uncertainty going forward. And we see some resurgence in cases in July, nationwide. And then, we see some cities for example, Chengdu, Lanzhou and also Xi’an were under some lockdown measures. And so this is -- that's why we say recovery of that would take time and will be nonlinear and potentially volatile. Now, obviously, we will continue to set up like, focus on cost control, really try to have new planning, and try to stay nimble. But I think we need to be realistic about the uncertainty that we face and then the deleveraging and also global inflationary pressure there. Thank you, Lillian.

Lillian, I just want to give some color about these numbers -- behind these numbers, let's say [indiscernible], some of the day they will not continue, some of it will continue. For those who continue such as the sharing of staff across the store. Some of them will not continue, such as the extreme situation during April and a bit about May. These stores are run by very few number of employees. Typically they stay in a store for one week, they literally live in a store for one week and work on the store. And then, a week after, second shift of staff moving. However, for some monitoring, the most extreme case is one of my staff stayed there for 33 days, the other ones stayed there for 44 days. I have the fortune to invite some of them to have lunch with me recently to send them. It's truly heartwarming behind is numbers to really grateful that we have such amazing operation team. They work this hard so that they can protect their job, and they can serve the customer and that they can protect the company. But this kind of extreme arrangement, of course cannot be sustainable. But if we have gone this far other innovation and creative arrangement, our team become even more open minded to embrace any sort of innovation in terms of rebasing the cost structure. Thank you, Lillian.

Thank you. Your next question comes from Michelle Cheng with Goldman Sachs.

Hi, Joey and Andy. Thanks for taking my question. My question is about the incremental opportunity we observed during the tough time. So you mentioned that there are some new business, we are driving the community go purchase. And on top of that retail products are selling pretty well during a tough time. So are we going to be more aggressive exploring these new business line? And in addition to that, from the way we do the business, Joey, earlier, you mentioned that we have these AI enabled route to improve the delivery efficiency, et cetera. So just wondering that those opportunity we observed during a tough time, how we should think about the sustainability and how we are going to grow these opportunities even further in the future. Thank you.

Thank you, Michelle. Let me take a step back and then comment on your question about the incremental opportunities. Overall, quarter two, we delivered substantial operating profit versus expected load. The absolute number is not the highest quarter 80 some million, but my God, the quality, the amount of effort go into it and the resiliency our team has demonstrated is phenomenal. And we can see the result. April is tough, May improved a little bit, June came back quite a bit. The core of the core are the questions that you just asked, what did we do? How did we manage to do it? Well, I mean, it wouldn't go back to our strategic framework, which hopefully make it much easier for our key stakeholders to understand the management is going back to RGM, the resiliency, the growth and the moat. In terms of resiliency, the two example that you mentioned, Michelle, the new retail, the community purchasing and AI, these are great example about our resiliency, we will get very, very quickly. We are talking about putting together the community purchase program, starting with a hotline and later on with the many program. Within a week, across the brand, and we got the entire process team program down the middle of March. And then we roll it out and wait for two or three days and then the demand came in. And that's the kind of speed, agility and determination, the ability to execute innovative solutions that earned us the resiliency and thus the result. So the community projects happened. And then when they happen, of course, we are selling what we can sell at that time, which is fried chicken. But that's not enough. Because of all kinds of limitation, and also a home consumption, you can imagine, increased dramatically. So we put in the new retail, the package food. At the height of the new retail Pizza Hut, I believe it's May 50% of the Pizza Hut sales in Shanghai is from the new retail. Well, now time has moved on. Later on, by June, it became 20%. And then now the percentage is smaller. But to go back to your question, Michelle, we doubled the new retail business during the fourth quarter compared to year-on-year last year. And for first half of the year, with the [indiscernible] number 450 million sales for new retail. And now you can do the math is that to -- start to be some decent number. And for the entire year of this year, 2022, we're looking at reaching 1 billion sales for new retail alone. In China, if you compare ourselves to many others in the retail business, this is not small, I mean it is relatively small percentage compared to Yum kind of business. But as a new retail business alone, it's not. It's a wonderful complement to our business, because you can imagine that we have our scale in terms of supply chain. We have our network of distribution, which is 1000 stores and our online channels that are little brands so far has started from 2018 and we have our riders to deliver these new retail to customer directly without incremental delivery costs charged to the customer. So this will continue and very good complement to our business and even emerging brands achieve breakthroughs with the new retail about Taco Bell leadership. I mean during May, again sales exceed pre-lockdown level because of the packaged product that they have been trying to put together within a very short time. And then the next thing you talk about mentioned is AI the digital model surprising et cetera. Absolutely, that's the absolute right thing for us to do and we have been doing it for 35 years. We are one of the few, if not the only one at our scale we have dedicated supply chain tailored made. So that we can continue and keep the surprising logistics going even during quarter two such difficult time. And now we are building our greenfield logistics center with digitize and AI-enabled supply chain to provide us the refill image and visibility of the supply chain process and the traceability of upstream so that we can move things around and we can be very efficient in terms of code of doing business. So these incremental opportunity will certainly continue. Therefore, despite such typical quarter, the morale is best ever. Because as 450,000 people company, we worked so well together, the execution ability agility is second to none. The team is very proud that we protect the business, protect their job. We look at every single cost opportunity possible except the promise and the sense of security that we are not doing any layoff for staff for 2022. So our staff know that their jobs are protected. And they're all in it doing everything we could possibly to protect the customer and to protect the shareholder. I hope it helps, Michelle.

Thank you, Joey. That's very clear. Thank you.

Thank you. Your next question comes from Brian Wong with CMS.

Hi. So basically actually, I have one question. So I will talk to understand your number.

Brian, would you mind speaking up a little bit? We have very difficult time hearing you Brian.

Well, sure, thank you. Yes. Can you hear me now?

Yes.

Yes, sure. Thank you. So basically, I like to understand, your number of stores and the increase, how do you plan to increase your number of stores in the second half? Say for example, how to break them down by different brands, say, for example, like your plan of increasing your store counts in KFC and also Pizza Hut. And there will be a breakdown by tier of cities? And that's my question. Thank you so much.

Hi, Brian. Our new store opening, I think, as we mentioned, we have always deployed a disciplined process, and different methodologies to evaluate our opening. And usually, some sort of bottom up from the market where they propose appropriate site, one to the financial models, one to the committees to think about the financial return and the special implications, and overall market conditions, to approve those site. So I think we'll -- I don't think there's any change to that process. And so in terms of like by brand because KFC continue to be obviously, the largest brand within our portfolio, and will continue likely to be to account for the majority of the new store opening. Pizza Hut, as you can see, the new store performance is also very good, especially with our lifestyle, and you have seen the store opening accelerated last year and then this year, as well. So, I think, you can also expect that. In terms of other brands, I think, we can expect coffee, for example, Lavazza, will continue to and also Taco Bell too, will continue to expand in second half, although they're still a smaller portfolio of store. But in terms of percentage wise, I think it will be best. But in absolute numbers, they will be small. And then, regarding Chinese cooking business, there's some cyclicality to start opening there, they are opened by franchisee so, genuinely there will be more store opening before the Chinese New Year, for example. And so, that's potentially more, but again, like this year, because the COVID situations, it's a little bit more challenging for restaurant operator. And so franchisee, so we will continue to monitor the situations in the market, especially given our Chinese cuisine business [indiscernible] business concentrated in northwestern part of China, we'll have to see how localization was enhanced. But that's like, by brand. In terms of our key area, as we have seen over the past couple years, we are beginning to see more opportunities in multi-cities and concentrations or the number of new store opening in more these cities will have now accountable, the majority of this store open. Now, obviously, we continue to see the opportunity to increase the densities of our store network in the tier one, tier two cities. And I think that's the general trend and that trend will continue. So that's how we genuinely look at the store opening. Again, like this year, we have a target of about 1000 to 1200 net new store and as we mentioned, given the strong lines that we have, can often give them this strong economics that we have seen in our new store that have opened over the past couple of years and also recently. We're pretty confident that, we will have good opportunity to open more good profitable store that can help us grow our facility in the long-term. Thank you, Brian.

Thank you so much. Thank you, Andy. So I think this is very clear. So actually, I have one more question. So the competitive landscape, so because I heard that, in tier two and tier three cities, and then there are some kind of low price tiers, they are similar to KFC, so they are kind of like the Chinese version, cheap version, say someone like [indiscernible]. So how do you think, your strengths compared to them is because I've seen the manual and their manual is actually quite cheap. So how do you plan to compete with them in these lower tier cities?

Right. I think, we always see competitions, both cities and high tier cities, until we think the best thing that we can do is not to be just been cheap, but we were focusing on having quick value for consumer with value that that means, they are cheap or lower price, or means give the food at good values, good price to consumer, and so that they can enjoy it. We have a fantastic brand, our customer very loyal to our brand, we have great quality of products, delicious -- a very comfortable fun environment, that put in mind our brand identity. So, as you mentioned, if you look at during the epidemic and the lockdown in Shanghai, for example, I think by some indication, KFC fried chicken was mostly fast food, during that period of time. And so I think, our brand, working very well with consumer, our food and culture in a way, you can see, after you mentioned, each brand, continue to innovate with new products, with great fun food for consumer. And we continue to deliver great values. As mentioned, we are the reason why we focus so much on costs, and controlling costs is that in order to compete in value propositions, the most important thing is to have a low cost structure advantage. And that's what we try and do really quick and value the consumer.

To be more specific, at least in three way, we would do it slightly differently in lower tier cities, compared to tier 1 cities. Well, we have slightly different manual, the fried chicken, we felt that we could have like entity or something like that, which is targeting for lower tier cities to start with. We might sell in other top tier cities later on, but we do have different slightly different menu and the pricing is differential. So we incorporate it and then also promotion. We give our store manager flexibility to run certain promotions, that certainly the different model. So Andy mentioned investment is the cause of building up these stores in lower tier city could be slightly lower, and we have a slightly different way of doing it. So the operating model, the kitchen, blah, blah, blah, will be slightly different. So we are very, very focusing on children in lower tier cities, which is something very, very unique to us in the last 35 years. To give you an example in northern part of China, which is the most difficult part of our business even in the last two or three years, despite the impact of the pandemic, in eastern part of China, northern part of China, the business is still the more challenging ones. For this summer alone, we have run more than 10,000 children's summer events. So they're still manageable organizing events for kids during the summer. So you can see we do have different sites, different model. Of course, sites can take this opportunity to remind and analyze the other the lower tier cities, we have so many different business models of catering and customized more slightly different customer groups in different region in different consumption, occasions like a transportation hub, the highway station, and university these days, you name it. Okay, I'll pause here. Let's move on to the next question.

Thank you. A reminder to please limit your questions to one per person. Your next question comes from Xiaopo Wei with Citi. Please go ahead.

Good morning, Joey and Andy, congratulations for another resilient quarter result. I think in the past few years, Yum China have assumed great agility of being defensive. But being defensive about being ideal operation also means that you can switch back to offensive mode when opportunity arises. If China reopening continues, which I presume you share the same view, how could you be offensive again in operation. Joey had touched base on the new brand, new retail opportunity, et cetera. But if we only talk about the cooperation of KFC, Pizza Hut in the reopening scenario, how could you do differently versus a pre-COVID kind of operation with what you learned in [indiscernible] in the past two years? Thank you.

Thank you, Xiaopo. Let me share my thoughts here. Indeed, the business has become more agile, we just looked at the number for quarter two, our same-store sales at 84% and same is about system sales so 16%. However, we still deliver 4% profit. So technically, we reduced the break even point to about 80%. And roughly in our business, I guess, pretty normal to have the break even point at about mid-80s. So our ability to reduce to the 80s it is phenomenal, it gives us this agility to do things. Going forward, I think even for quarter two, you can see when our fundamentals are intact, and when things are a bit more stable, even though COVID situation is relatively more stable, we are able to bounce back rather quickly. That's what we can say even for quarter two. So we hope although for quarter three, as Andy mentioned, there's still a lot of uncertainties even as of right now, still landlords, still in a challenging situation. But in the long-term, we are optimistic and we're still very committed to this market and that we're still growing the store. But when things become better, how can we grow faster? If that's your question, the strategy is, is there, it's not going to be any different from what we have shared since 2019 is RGM is the resiliency, growth and the strategic moat. We might do it certainly faster, but the strategy is the same. It might be a bit difficult to say that in the last few years but right now, I think we can see that sometimes resiliency is even more important than both. We have the resiliency. And we'll continue that with our digital capability, with our innovative product, with our great value for money, with our ability to control costs. And then we'll grow more stores. And the growth here come from KFC, Pizza Hut and other emerging brands. We will continue to do what we are very good at for opening the stores and also increasing the sales from off premise. You can see our number, right now our off-premise sales is about 65% for KFC and 55% for Pizza Hut. And all these numbers move quite a bit in the last few years. And that gave us both the growth and agility because without this high percentage of off-premise sales, we won't be able to deliver the number that we delivered in the last quarter -- in the last 2.5 years. So the growth will continue. And then, we'll continue to build strategic moat. On a daily basis, firm and steady, so the supply chain will continue with 33 logistics center right now. We'll continue to do more greenfield logistics center. We will continue to invest in our automation from the front all the way to the back. We'll continue to work on our sustainability commitment, the science base, the target that we have commit to. So I hope that give you a sense that the directions are clear, we might pick up a little bit faster whenever we could but nice and steady. Thank you.

Thank you. Your next question comes from CJ Lin with CICC.

Thank you, Joey and Andy. Congrats again for such a strong and resilient performance. I have one follow up question on the margin side. So, we are showing a very resilient restaurant margin in Q2 through the extraordinary effort, since we have adjustments and [indiscernible]. And meanwhile, Andy mentioned that in the future, we are getting back some trade cost control measures to sustain a long-term growth. So how should we expect our restaurant margin in the long-term under the new normal? Would this still be like, around 17% targets? Thank you.

Thank you, CJ. So, obviously, as we talked a bit about short-term and long-term, as we mentioned, in the second quarter, some of these cost saving initiatives or efforts will last and what is more temporary in nature. And then, in the short-term, the biggest driver for restaurant margin right now is self-leverage and deleveraging that to quite extend depending on COVID situations. But in terms of longer term, I think, our goal is obviously, [indiscernible], community drive and grow over the top-line. And also, we turn profit in more normal level, as we have mentioned, in our last year's Investor Day, our longer-term goal is really to drive sales growth by high single-digit and to drive our profit growth by, high single digit too. And so, I think those empower, that's what we was trying to achieve in the long-term. One thing I think, the question was saying, in the new normal, or when things return to normal, we have confidence in capturing that opportunity, both in sales, and also potentially in margin. I always say, like, although history is not -- always the predictor of future, but it's probably the best predictor of future and show us some lessons. If you take a look at the period, the full year period between third quarter 2020 and the second quarter 2021, when you look at your situation was markedly more stable, you would see that, we were able to drive our sales growth. We're able to see significant margin improvement. And that's going back to what Joey have a lot of times emphasized on resiliency, and also, in terms of our excellent execution. And so, our planning help us to design our operations, in case things get worse, but also in case things get better, how we can capitalize on that opportunity and drive sales growth and then also drive sales in margin recovery. So hopefully, that gives you some perspective in terms of how we look at the shorter term and also the longer term margin perspective.

Thank you. Your next question comes from Anne Ling with Jefferies.

Thank you. Hi, management team, thank you for taking my call. My question is on the coffee business, I know it's still very -- it's a very small at this space. But at the same time, I understand that, this will be one of our potential growth moving forward, more like, mixes on top. And if I look at, like your store opening plan, versus like the peer, it seems that it's still a little bit slower. So, maybe, would you share with us that, your pace of your coffee like that will rollout, like are we -- are we still in the process of testing our model or we already like find the right models to roll it out. And once we roll it out, normally, this is the type of business that we need to sell and with back-end support and meaning that, if we have like 200 stores, we possibly might have to bet like some investment initially. So, I don't think that any of us as an analyst will factor in any investment in our model. So just want to check right, if the company -- if management can share with us like, some of your initial plan or what will be the investment in the powder coffee business, that would be great. Thanks.

Anne, thank you for your question. So, I think, first of all having -- we were very pleased to see the progress. And the progress may not be the same as how they measured by our company. Our company may measure by x hundreds of store open in quarter and whatnot. As we have mentioned, some of our investment, including [indiscernible] expansions, as with any other investment, in fact there are some pauses. Although, like all the newer brands like coffee building a brand, you don’t expect them to be profitable immediately on short-term. With a genuine expect that, they will figure out the right business model before they scale up, because otherwise, you're going to scale a big problem, right. So the way so far, we're very pleased with the progress so far, the store network right now has expanded quite significantly from last year. We have 74 store right now in four tier one cities, and plus a number of third tier cities as well. In household sales, we have more than doubled year-over-year, and then even in very challenging time, as Joey mentioned the team have done a very tremendous job in sort of like putting together a package, a product to sell in retail, whichever it would be almost better than last year same-store sales, last year, we had very small number of stores mainly in Shanghai. In terms of our customer base, right now, we continue to see growing customer loyalty. If you look at member now, member for Lavazza have grown four times year-over-year. And then, its number contributions continue to grow, very significant number now. So, obviously, the coffee business, this new brand, has also been impacted significantly by COVID, as in [indiscernible], a large number of their store, on top of that [indiscernible]. We have locked out and so was impacted. As I mentioned, they were able to fairly quickly pivot into community purchasing, your package coffee, retail, product like pastry and whatnot. And, this product really help us in certainly us reach to a bigger audience, maybe have not changed our product, but we are able to do it through community purchasing, and then some of the new initiative. Now, obviously, we cannot say, we have everything all figured out and perfect model. I think you would take some work to sort of streamline the restaurant operation there to strengthen some of the fundamental, it will take a while for KFC and Pizza Hut to figure out the rice bowl format, and in some of this product manuals, and also improving efficiency. I think we should still need to be a little bit more patient with that. And so, yes, so I think we're happy with the progress so far. But still a lot more work to do. But nonetheless, we're very confident and we think it's very important vertical for us. And we have a big partnership with Lavazza to do that in the coming years. Thank you.

Thank you. Your next question comes from Christine Peng with UBS.

Hi, management thank you for taking my call -- taking my question. So I actually have a similar question, which I am sure some of the analysts like to shovel and have asked previously, but I just want to ask management providing some updates about the new initiatives that you previously mentioned, as we are in looking for a post the COVID full recovery in China possibly in 2023. So I think the two key initiatives management previously mentioned, one is the integration of Hangzhou and leadership, can you provide us more updates as regards to this initiative? And in relation to that, maybe can you provide us more updates in terms of your maybe 2023 plans, or in terms of the extent of the Chinese cuisine business. I know that business has been struggling with COVID in the past three years, but when we think about 2023, what are your initial thinking behind the store extension plan, et cetera? So I think that's the first initiative I want you to check out. And the second initiative is regarding, introducing more franchise stores. Is this something management is thinking right now, given that management -- I remember previously, you mentioned about your initiative to emphasize the supply chain resiliency to provide more possibility of franchising. So, I just want to check out what are the latest thinking behind those long-term initiatives when we're going into 2023? Thank you.

Hey, Christine. Yes, so for Hangzhou and leadership as you mentioned, obviously, you have been impacted by the outbreak, because it's tight in nature, and then a lot of locations are in northern -- western part of China. Now, so I think, obviously, the number one priority for them is really to try address sales, recovery, and then also have the franchisees to strengthen the operations, particularly in the delivery business. So in the sense, they probably have not been -- have a big part of the business in delivery. So, I think this is something that we can help, the franchisee to do, given our four corporate building. Leadership also during the pandemic, also being quite creative and innovative, and make pretty good progress including goods and services. And also, the overall cost management and especially in Shanghai in June lockdown, they were able to sell, like -- capture a lot of opportunities in both delivery and also our community purchasing and retail business. So I think, priority for the Chinese cuisine business next year is really just trying to drive sales recovery, help the franchisees to win their business and then also continue to work on the fundamentals and integrations. So, Joey, do you want to comment on the franchise questions?

Christine, will continue to be the driving force for our business going forward. However, we do have the 35 franchise strategy. So right now, in markets that have a bit of long and thin market, like the [indiscernible] and these very good franchisee market and then also for some emerging new business models, such as the stores along the highway, station, we have established strategic partnership already to put the store. So the franchisee strategy, it's not going to be general, it will have its own strategic purpose. And given the time today, I think I'll just pause here. We could have more detail exchange our thoughts later on. Okay. Thank you.

Thank you. Your next question comes from Lucy Yu with Bank of America.

Hi, Joey. Hi, Andy. Thank you for taking my question. My question is more on the JV margin side. So how should we think about the promotion and discounting plan in the second half? Especially we are fighting against the commodity headwinds and a COVID uncertainty, while at the same time and we're trying to stimulate ourselves. So, how should we think about the promotion and discounting in second half? Thank you.

Thank you. Lucy. As we mentioned in the second quarter, obviously, we saw cut back on marketing and also in promotional activities. And then as we move into the second half and the third quarter with the coefficient improve a bit, even though with some volatility. I think the key focus for us is really driving sales recovery and so, we likely going to see greater marketing and promotional activities there. And then also have more value campaigns -- value for money campaign, because as you mentioned consumer sentiment is rapidly weak, because after prolonged COVID situations, and then some of these macro economic pressure. And so, value for money is very important and so that's how we see in second half this year. But as always, like, we were always trying to be very cautious about using price increase sort of like to offset inflationary pressure. We always try to first ask, it's a way for us to run our business better and lower the cost, before we say like, we have increased prices. But we do increase price anyway, by a small amount but usually below the inflation rate. Thank you, Lucy.

Thank you. Our final question today is from Walter Woo with CMB International.

Hi, hello, Andy and Joey, congratulation for your highly resilient results. My question was asked by another analysts previously, so perhaps I can ask about your members sales. So while the number of members continue to grow very healthily, but it seems the members sales as percentage of total system sales has declined a year-on-year. So do you mind explaining the reason behind? And is that a concern for you guys, and how do you see the growth potentials and those strategy over the members and member sales going forward? Thank you.

We equate, the member sales is around 60%-ish, it is not a more concern for us because the total members are still growing, which is very nicely actually, I mean, our member sales is 255 million roughly for KFC and then 150 million for Pizza Hut. And when it comes to member and non-member sales, the member cells 60 something is already high enough. And then the next target for us is to other than quantity is to work on the quality, the stickiness of the member, the overall experience of the member, etcetera, etcetera. So I guess, we cannot just increase the members for every, it does not make much strategic sense. For us is quantity first and quality. But it's a really, really important part of our business, and there's still so much that we can do to improve and to get something out of it. Just to give an example, what about the cross brands sales? KFC and Pizza Hut, how can we do better? And how can we serve the same customer better with KFC, Pizza Hut, Little Sheep and et cetera. So a lot to do here. But the focus is more on the quality of our experience for now. Thank you, Walter.

Thank you, Joey. And just a little bit follow-up. So if the members, growth is still very healthy, and the member sales mix has declined. So is that means, we have more new customers being affected in the second quarter or in the past few months. So do you see that trend? We have more new customers or new clients here?

I mean, the China population -- go on Andy.

Yes. So I think as Joey mentions, like, we have a very large commercial base. We already have like 280 million member. And we have large population urban area already. This is not always higher the member sales percentage of member sales are better, but you have 100% member sales. I mean, I have no new customers. So there's always a balance between, a mix of member sales and the new members. And so, there will be some fluctuations from time-to-time, depending on the marketing campaigns and depend on the condition. But I think 64% is really helpful level, and so that in terms of -- for us really as Joey mentioned, which is how to drive that quality of member sales, driving costs out among our customers, and then, continue to increase their stickiness and frequency over the long-term. So that, the payback for our marketing and new customer improvement continue to improve. So those are the number of matrixes. I think member sales is one of them, and is not always, the higher, the better.

I totally understood. Thank you.

Thank you.

Thank you.

Thank you. That concludes the call today and we look forward to speaking with you on the next earnings call. Have a great day. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.