Yum China Holdings, Inc. Q4 FY2023 Earnings Call

Thank you for joining us, and welcome to the Yum China Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. I will now turn the call over to Ms. Michelle Shen, Director of Investor Relations. Please proceed.

Thank you, Operator. Hello, everyone. Thank you for joining Yum China's fourth quarter 2023 earnings conference call. On today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. 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. You can find the webcast of this call and a PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency unless otherwise noted. Now, I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Thank you. Hello, everyone, and thank you for joining us today. As Chinese New Year is coming Saturday, I want to wish everyone a happy and healthy Year of the Dragon. I would like to kick off today's call by expressing my sincere appreciation to all our employees. Their incredible effort helps Yum China deliver exceptional growth in the fourth quarter and for the full year. 2023 was a pivotal time for our business. This transformation of our business fundamentals in the past few years has enabled us to seize opportunities emerging from China's reopening and evolving market conditions. In 2023, we hit record-breaking revenue of $11 billion and grew system sales 21% year-over-year, outperforming the industry. Operating profits soared to $1.1 billion, an all-time high excluding special items. Core operating profits grew 79%. We opened a record 1,697 net new stores, expanding our total store count to 14,644 stores. KFC reached 10,296 stores; Pizza Hut reached 3,312 stores. On today's call, I would like to walk you through the tremendous growth opportunities we see and discuss our strategies to capture them in 2024 and beyond. For the past 36 years, we have been the market leader in China. During this time, hundreds of restaurant operators have passed in and out of the market. Instead of being the flavor of the month, we want to be the flavor of the decade, or even the next several decades. In this developing market, where the restaurant industry is still growing double-digit, even during 2023, we see a long runway of growth for our brand. KFC still only serves one-third of the China population. Our next ambitious target is to extend our reach to half of the population by 2026. How? By being closer to our customer. That means adding store density in existing cities and entering new cities. KFC currently operates across 2,000 cities in China and is tracking an additional 1,000 cities. For Pizza Hut and our emerging brands, the whitespace is even larger. China is fast with significant regional and city tier differences. In lower tier cities, urbanization and long-term consumption upgrades are presenting attractive opportunities for us. With lower living costs, consumers in these cities have significant purchasing power for our products. So, as an example, premium beef burgers sell well in lower tier cities, just as in high tier cities. Over half of our new stores in recent years are in lower tier cities. These stores have performed well, benefiting from lower labor costs and rent, and the ticket average is as good as in higher tier cities. For now, we are mainly serving middle class consumers in these markets. As we expand, we see further opportunities in widening price points to broaden our addressable customer base. Our mission is to reach 20,000 stores by 2026. We will continue to protect our new store payback at 2 years for KFC and 3 years for Pizza Hut. Over the past years, we have been improving our fundamental capabilities to reach this target. This is the key reason we can expand at an accelerated speed. Some of these improvements include: first, flexible store formats with lower upfront investment, opening up more site potential across the market. Second, cost structure rebasing lowered our rent ratio in 2023 to 8.7% of sales, the lowest level in the past 10 years. The majority of our leases are based on variable costs. Third, improved operating capabilities. AI-enabled digital tools empower our capable restaurant managers to oversee multiple stores without compromising quality. This also solves the bottleneck of having enough qualified restaurant general managers as we expand rapidly. Finally, strategic franchise partnerships allow us to gain access to locations that were beyond our reach before, such as highway service centers. In addition to new store growth, our same-store sales grew 7% in 2023. It was fueled by a 12% increase in transactions indicating healthy growth. Our innovative menus, excellent value for money, and effective online channels captured over 1.7 billion transactions last year. Now, let's talk about food innovation. In 2023, we rolled out more than 500 new or upgraded products. That means we offered something new every week. Some examples include KFC's Beef Wrap with spicy blood and Chicken Taco with bull sauce and Pizza Hut's special pizza. This may sound a bit exotic, but I can assure you they're very popular in China. Over the years, many of our most popular products have entered our 100 million club in U.S dollar sales and 2023 was no exception. Our Golden SPA chicken burger launched in quarter four of 2022 joined our 100 million Club in 2023 with very little spent on marketing. It offers amazing value for money using chicken breast meat and is very popular with younger customers. Chicken breast meat is very high-quality protein, but the cost of breast meat is much cheaper in China than that meat. Our juicy whole chicken, has also been a remarkable success story. We launched it in 2021 and by 2023, we sold over 50 million whole chickens. Whole chickens and beef burgers combined now contribute close to 6% of our sales, more than the original recipe chicken that we have been selling in the last 36 years. K-COFFEE also grew rapidly in 2023, driven by product innovation and improving accessibility. 190 million cups were sold last year, a 35% increase year-over-year. Our coffee offers great value for money at low RMB9.9 per cup. Great value for money remains a key factor to drive traffic. In addition to the great food that I just mentioned, we have strategically enriched our menus with entry price point products to attract incremental customers. Our supply chain empowers us to innovate and offer fantastic value while protecting margins. At KFC, apart from our long-lasting value platform Crazy Thursday, we identified entry price combos as huge underserved market segments. Last year, KFC expanded the choices of its RMB20 combo, including our recent Chinese burgers, which have been well received by customers. For Pizza Hut, the under-RMB50 segment represents a significant portion of the market, but it's underserved at Pizza Hut. In November last year, we launched four entry-priced pizzas, including the delicious Texas barbecue chicken pizza. We will continue to add more cost-conscious choices to our menu this year to capture incremental sales. We also see amazing potential to further grow delivery sales. We are adjusting our delivery pricing structure to be more aligned with market norms. This will help us capture incremental traffic, especially in the smaller ticket segment and from more price-sensitive customers. Our third traffic driver is the effective use of our own and third-party online channels. In 2023, our digital sales surpassed $9.2 billion, of that about one-third came from our own Super APP, one-third from many programs, and one-third from aggregators. Our own Super APP sales grew rapidly last year, up 35%. We continue to actively recruit and engage members. Our loyalty program exceeds 470 million members, who contributed a record 65% of our sales. The purchase frequency of our K-Friends, our most loyal customers, was more than 100 times a year. Our collaborations with major eCommerce and social media platforms extend our reach beyond physical stores. This allows us to attract new customers and promote new offers in a cost-effective manner. We consistently lead the industry in terms of sales generated on these platforms. A brand that is deeply ingrained in China, well-loved and trusted by consumers, we continued to deliver amazing growth despite operating in a challenging environment. KFC's pricing remains our key growth engine with a record operating profit of $1.2 billion in 2023. Pizza Hut is taking off, adding 409 stores in 2023 alone, compared to just 41 stores in 2019. Their 2023 core operating profit tripled year-over-year. Lavazza is on the right track with sales support and notable improvements in store economics. Taco Bell is making notable progress. Yet, there's more work in store model refinement and manual localization to be done. Little Sheep returned to profitability in 2023. Its innovative store model, which caters to smaller party sizes, has achieved initial success. We expect good momentum in opening stores, both in China and overseas. Huang Ji Huang continues to be resilient, maintaining profitability every year since we acquired it in 2020. In 2023, Huang Ji Huang tripled profit and opened 14 net new stores. We will continue expanding our store footprint in China and overseas this year. Moving into 2024, we are serving up a combination of exciting menu items, awesome choices, and gains for Chinese New Year. KFC's newest innovation, the fried egg in spicy sauce chicken burger is absolutely delicious. Its comfort food for your soul. We are also offering our widely popular Golden Bucket again this year. It has a very lucky and down to earth name, which means get rich soon. And the first letters also stand for KFC. So right now it's getting around, and getting more popular to reach each other KFC in China. Pizza Hut is launching key new products, including Wagyu beef pizza at just RMB69. The abundance of choices and value are amazing. Although consumers are more rational and price-sensitive in the current economy, there is a strong desire to indulge, especially during holidays. Our enticing offers are designed to generate excitement and attract traffic. I eagerly anticipate this vibrant trading period. With that, I will turn the call over to Andy. Andy?

Thank you, Joey, and Happy Chinese New Year everyone. Today I will discuss our fourth quarter and full year 2023 financial results followed by our outlook for 2024 as well as our capital allocation strategy. We delivered robust results in the fourth quarter and reached significant milestones for the full year. In response to the current operating environment, we adopted our strategy and launched attractive campaigns. This allowed us to drive incremental traffic and sales. We maintained 21% system sales growth in the quarter, the same as the full year. Core operating profit in the fourth quarter quadrupled year-over-year and restaurant margin improved on a comparable basis. As you may have noticed, we have introduced core operating profit to enhance comparability of our results and provide additional transparency on how we evaluate the performance of our core operations. This metric excludes foreign exchange impact, special items, and other items affecting comparability. For further details, please refer to the reconciliation table in our earnings release and presentation. Let's now look at our fourth quarter performance in more detail. System sales increased 21% year-over-year, led by 12% net new unit contribution, 4% same-store sales growth, and lapping temporary closures from the pandemic in the prior year. By brand, KFC system sales increased 20% year-over-year. Same-store sales grew by 3%, mainly coming from 16% same-store traffic growth and 11% lower ticket average. To put it into perspective, ticket average in the fourth quarter was RMB 39, the same as last quarter and higher than 2019. Overall ticket averages remain stable in the past five years and our focus has been to grow our traffic. A strong rebound of dine-in sales, especially for breakfast daypart, and successful expansion of our entry price offerings contributed to lower ticket average. Pizza Hut system sales increased 24% year-over-year. Same-store sales growth of 6% was driven by strong traffic growth of 15% and a ticket average decrease of 8%. This was by design and consistent with our revitalization strategy since 2017. Our recent focus has been to expand pizza offerings below RMB 50 and smaller party size options. The strategy has proven effective in expanding our addressable market and capturing incremental traffic. Our restaurant margin was 10.7%, 30 basis points higher than last year. On a comparable basis, our restaurant margin grew by 170 basis points. The improvement was mainly from sales leveraging, lower rider costs, more favorable commodity prices, and lower advertising expenses. This more than offset increased marketing campaigns and wage inflation. Now, let's go through the key items. Cost of sales was 32.4%, 50 basis points higher year-over-year. During the quarter, commodity prices were favorable. We passed that to consumers by offering better value for money. Cost of labor was 29.0%, flat year-over-year, or improved 40 basis points on a comparable basis. Sales leveraging, lower rider costs, and efficiency gains more than offset ratio increases for frontline staff. Occupancy and other expenses were 27.9%, improved 100 basis points year-over-year or up 180 basis points on a comparable basis. This came from lower rent and depreciation expenses as well as more efficient management of marketing and advertising expenses. G&A expenses increased 6% year-over-year, with highly managed costs and headcount to keep G&A expenses below revenue growth. Operating profit was $110 million. Core operating profit quadrupled. Our effective tax rate was 24.2% in Q4 and 26.9% for the full year. The lower effective tax rate on a year-over-year basis was mainly due to more preferential tax benefits and higher pre-tax income. Diluted EPS was $0.23, excluding special items, foreign exchange, and major investments, the increase was 164%. Now let's turn to our outlook. We remain excited about the vast growth opportunities in China. In 2024, we anticipate opening 1,500 to 1,700 net new stores. After 36 years in China, it's amazing that we're still growing our store count at double digits. Our heavy new store payback gives us confidence to continue expansion and reach 20,000 stores by 2026. As we shared at our Investor Day last year, we aim to grow system sales and operating profit by high single-digit to double-digit compound annual growth rate, and EPS by double-digit compound annual growth rate from 2024 to 2026. We'll continue to capture our new opportunities by innovating new products, launching engaging campaigns, and widening price points. These help us to expand our addressable customer base and drive incremental sales. We're confident in executing our 3-year plan; cost structure rebasing continues to be a key focus. Our efficient cost management will enable us to pass the savings back to customers and drive traffic while protecting margin. Before I delve into the first quarter outlook, I would like to remind everyone that first quarter 2023 was a phenomenal quarter, during which we achieved record-setting profit. We captured robust demand from the reopening, delivering solid sales. On the cost side, we benefited from substantial temporary relief in VAT deduction benefits, which is not expected to recur this year. We also benefited from labor productivity gains from labor shortage in the first quarter of last year. Looking ahead to the first quarter this year, as Joey mentioned, we're now operating under a new normal. Consumers are more rational in spending, yet have great expectations and an appetite for new and exciting products that can offer great value for money. In response, we have statistically planned a very intensive number of new product launches and attractive promotions. We have also dedicated more resources to drive sales and capture the peak Chinese New Year traffic. In light of these challenges, we will work hard on productivity improvement and cost control, including G&A expenses. Our aim is to maintain our core operating profit markedly stable on a comparable year-over-year basis in the first quarter. This will exclude temporary relief, VAT deduction benefits, and changes in foreign exchange rates. Now, let's turn to capital allocation. There are no better investments than investing in our own organic growth while delivering excellent returns to our shareholders. With a strong focus on efficient capital return, CapEx in 2023 totaled $710 million at the low end of our original target. In 2024, CapEx is expected to be in the range of $700 million and $850 million. Since the spinoff, we have returned $3 billion to shareholders, and we plan to return another $3 billion in the next 3 years. We accelerated return to shareholders in 2023, returning a record $833 million in cash dividends and share repurchases. In 2024, we plan to further accelerate return to shareholders to around $1.5 billion. We raised our dividends by 23% from $0.13 to $0.16 cents, that would be roughly $250 million for the full year. As for share repurchases, we already have a $750 million program in place and plan to further increase repurchases by around $500 million. So, a total of $1.25 billion share repurchase in 2024. This is equivalent to around 9% of our market cap at the current share price. The setting up of returns demonstrates our confidence in our cash generating capability and commitment to return excess cash to our shareholders. Let me pass it back to Joey for closing remarks. Joey?

Thank you, Andy. Before we turn to Q&A, I would like to just summarize. In 2023, we reached record top line and bottom line as well as net new store openings. And we returned record levels of cash to our shareholders through dividends and buybacks. These achievements were made possible by the transformation we implemented in our fundamental capabilities, ranging from flexible store format and product innovation at scale to support supply chain management and industry-leading AI application. We have showcased our expertise and agility to navigate diverse market conditions. Acknowledging the high expectations our shareholders hold for us, we in turn, set equally high standards for ourselves. We are fully committed to a 3-year growth target and generating long-term sustainable value for our shareholders. I would like to thank our shareholders for your continued support. With that, I will pass it back to Michelle.

Thank you, Joey. Now we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.

Your first question comes from Michelle Cheng with Goldman Sachs. Please go ahead.

Hi, Joey, Andy. Congrats on a very resilient result and also the interesting shareholder return. While we understand the company's strong long-term position, I still want to focus a bit on the short-term. So can you give us some color regarding the pre-Chinese New Year traffic and same-store sales trend? And also I think Andy mentioned that in the first quarter we are looking for more steady core operating profit. So can you kind of clarify if he refers to profit level or margin? Yes, so that's my question. Thank you.

Thank you, Michelle. So let me address your question about clarification on our statement on new store operating profit. In the first quarter, we are looking at the overall level, not margin side. I think it's important to keep in mind that in the first quarter last year was an exceptional, phenomenal quarter that we achieved record profit, which was driven by the sales leverage from the initial reopening demand surge and then also some significant temporary relief VAT reduction and labor gains from labor shortage. So, those factors we don't expect to repeat again this year. And so I hope I answered that question and clarification.

For the Chinese New Year trading, Andy has mentioned in his presentation earlier, it's very tough because last Chinese New Year we had phenomenal trading during the 2022 Chinese New Year. But we have prepared a very full and exciting calendar for the Chinese New Year, not only the excitement of the marketing campaign but product. This is the first time we launched five new burgers five weeks before going into the Chinese New Year. The excitement is there. So far, the trading has been solid. But it's still a bit early because we really need to wait until the first day of the Chinese New Year. And right now, the weather to a certain extent, the extreme weather is a bit of a wildcard. So that's where we are, and the focus going into the Chinese New Year after the first day of Chinese New Year is about our Golden Bucket. That was our total focus of all our operation teams. It's a very, very tough quarter. So we'll be happy if we actually can stay flat with the same-store sales. That's where we are right now.

Your next question comes from Brian Bittner with Oppenheimer. Please go ahead.

Hi, thank you. I understand that the first quarter is a challenging comparison compared to last year. However, I believe the goal is to maintain flat operating profits. What kind of sales trends or same-store sales are necessary to achieve that? Also, Andy, after this difficult first quarter comparison, how do you envision the remainder of the year unfolding? What are your thoughts on the second half of the year and the potential for sales growth then, especially compared to the more challenging first half?

Thank you, Brian. Yes, there's a lot of questions about the first quarter outlook. Before diving into more details on the first quarter outlook, let me just point out a couple of things. Overall, consistent with our 3-year plan, we are confident that we will maintain stable operating margins in the long run. The emphasis here is the long run because in the near term, we are going to have certain factors that affect the near-term situation. In the long-term, we will also look into potential opportunities, as we have been doing so to restructure our cost base, looking to improve our occupancy and other costs, and then also leverage our digital capabilities to better manage and utilize more effective advertising and G&A expenses. Now, when we look at 2023, restaurant margins and operating profits improved quite meaningfully. That's driven by same-store sales growth, right, as well as cost restructuring. So, KFC, it's already offering a very high level in terms of margins, and then Pizza Hut has a little bit more room for improvement in the long term. If we look at the quality fluctuation, that's to be expected. This is the first year, so normalizing operating costs after the reopening. And in the first quarter, every quarter will be driven by some seasonality and then also will be driven by, obviously, the sales trends and other factors because sales is always a very important factor in determining margins for us. As you mentioned last year, it was the holidays. We achieved, again, a phenomenal quarter with record-setting operating profit. And there was also some one-off as we mentioned, you can look at the reconciled table, roughly $30 million of one-time that we saw last year. So that's set up a high base for us this year. Obviously, we're working hard to manage our costs and drive sales. In the first quarter, we are working under a new normal, and as we have mentioned in our prepared remarks, consumers are more rational in terms of their spending and eager for new and good value for money products. As I mentioned, we have set up a very intensive number of new product launches in our calendar, ensuring that we have robust campaigns to drive that sales and traffic, especially around Chinese New Year. So, it’s hard to give a very solid outlook because this year Chinese New Year is a bit later compared to last year. As we look for, under our plan and new normal, it is on track. However, as we mentioned, there are quite a few uncertainties with Chinese New Year because millions, hundreds of millions of people are traveling in a very short period of time. The weather conditions, as we have observed recently, may or may not have an impact there. So, we will continue to monitor the situation and adjust our plan as we always have been quickly to respond to any changes, if necessary. On the cost side, as mentioned, we are focused on productivity improvement, cost control, and the goal is really to maintain a stable core operating profit after adjusting for the noncurrent items and foreign exchanges. Thank you.

Your next question comes from Xiaopo Wei with Citi. Please go ahead.

Good morning. Thank you for taking my question. I just look at a bit longer term in terms of the business. And the first thing is, if you look at the financials, in 2023, actually a very good controlled G&A. If we look at the G&A to sales ratio, actually going down. If we look at '24, as Joey and Andy mentioned, there are some factors which you cannot control in short-term, like weather, like macro, so shall we be certain that the G&A to sales ratio will continue to go down in '24? Because that we have more control, a management or our admin costs at headquarter level? That is the first question. The second question is, Andy and Joey mentioned that the consumers are more rational this year. So, could you comment on your competitors? Well, competitors will be more rational as well with more rational consumers. Thank you.

Sure, I can talk a little bit about our cost effort in conjunction with G&A. You can see that over the past few years, especially last year, we have made a lot of efforts to restructure our cost base. Our overall target for fuel ads has been trying to be stable and we have kept it stable around 31% over the past few years, obviously, fuel ads move seasonally somewhat. We generally kept it around like 31% plus minus 1% for the full year. Our labor costs have obviously risen over the past year due to the pandemic, and we did see some impact on cost inflation and also delivery mix shift that drove up the labor costs, but we were able to more than offset that through reductions in occupancy and other costs. It was a significant improvement compared to the past, almost like 250 basis points. Our brand new ads are currently running at record low right now as a potential sales percentage. And so that’s the long-term trend, and our depreciation costs have come down because we have improved CapEx efficiency and also optimized our portfolio. So those are the longer-term trends. In terms of the margin lever for us is marketing and advertising because we have invested a lot in digital. Our member base right now is very large, around 470 million members, covering almost 65% of our sales. So, we think we'd be able to work on that in the future. In terms of G&A, G&A expenses as a percent of sales has improved this year to 5.8%. We continue to aim to sustain that trend by ensuring that G&A growth remains significantly lower than sales. Through that, obviously, we will continue to improve our efficiencies in-house, using new technologies and other automation tools to help automate some of those administrative tasks. Thank you.

Xiaopo, I think, I'm going to address your question by taking a step back and looking at the trends, the industry trends, competitive trends, consumer trends, and then our own observation of our trading trends. Hopefully, that will give you a holistic sense of our long-term view. First, industry. As widely reported, the Chinese economy is growing at mid-single digit. However, it's rarely reported that in 2023, our industry actually grew at double-digit, specifically 20%. The restaurant industry's recovery was very vibrant for 2023, and we are doing slightly better than the industry average. However, for 2023, it was not easy to disaggregate many factors, including the growth or the recovery. One reason is that the headlines could be misleading. For example, in quarter three, Yum China's performance, the headline reported we grew sales revenue by 9%, least expectation by 5.7%. In reality, that is due to the foreign exchange difference; in our operating currency, the renminbi, we saw growth of 15%. But as reported in U.S dollars, it comes out to 9%. So if we aggregate the foreign exchange from the operating currency, we see the difference. But fundamentally, our industry is growing strongly. And, of course, in quarter two, the actual recovery in system sales was as much as 32%. So, net-net, the industry recovered by 20% for 2023. This explains why many competitors have been so aggressive to open new locations—because the opportunities are there. Is that competitive? Yes, absolutely. But fortunately, let’s not forget that it has always been competitive in the last 36 years, and we have always been able to stay as a market leader in that time. That's point one. Point two, regarding consumption trends. What I'm going to share is not the mainstream thinking, so we can agree to disagree. The mainstream thinking is that China is undergoing a consumption downgrade with many challenges. To a certain extent, it's true, but to a certain extent, consumers are just becoming more rational. However, what isn't often mentioned is that even with slight GDP growth, consumption upgrades are still happening. Urbanization in China is still ongoing. We don't even need to look at the restaurant industry; we can look at China's top 6,000 shopping malls, where we have opened many stores. In 2023 alone, there were 400 new shopping malls opened, not a small number, and two-thirds of them opened during the second half of the year. We are happy to report to our shareholders that these shopping mall location stores are performing better than the rest, well, apart from tourist and transportation locations. When a shopping mall opens near a high traffic area, you can imagine the increase in business. This also contributes to consumption upgrades. Coming back to the rationalization of customers, how do we respond to it? We are the market leader. Our focus, both in the last 36 years and ongoing, is on building a brand with a combination of good value, amazing product, and opening up the price point range. Good food is always number one, and you can see why we continue to roll out so many good food options while being cautious about price points.

Thank you for the detailed answers on the consumer trend. Just a quick follow-up question regarding product pricing strategies. Is this rational consumer purchasing behavior gradually translating into lower average selling prices across the board? In particular, how are you addressing price competition without undermining your brand value?

We have maintained our ticket average relatively stable, and even grown a little bit over the years. The ticket average before the pandemic was RMB 37, and it is currently RMB 41 for 2023. Our strategy includes introducing entry-price products while also launching higher-priced products, such as the beef burger priced at RMB 50. This creates a balance that appeals to a wider range of customers. When we launch promotional campaigns, we aim to help customers trade up to higher ticket averages, while also ensuring the successful implementation of entry-price products. The key point is that entry-price products are not taking away from our higher-margin offerings. They serve to attract incremental traffic, allowing us to cater to a broader segment of consumers. We remain focused on providing great value while protecting our margins.

Your next question comes from Sijie Lin with CI CC. Please go ahead.

Thank you, Joey and Andy. So we have talked a lot about competition. I want to ask one question about Pizza Hut. Do we see that Pizza Hut had quite a good performance on margin in Q4, driven partially by the labor productivity gain and lower rider costs? And we also mentioned before that Pizza Hut's margins are still lower than KFC and there's room for improvement. So, what else can we do to further reduce costs and improve efficiency? Thank you.

Thank you, Sijie. When we look at our costs and focus, as we have said many times, we generally try to aim for record sales to maintain remarkably stable margins over the long-term on a year-over-year basis. This is because we have a very excellent supply chain team, very disciplined with our pricing. Additionally, our commitment to continuous innovation and introduction of new products yearly allows us to manage costs effectively. It’s also important to utilize every part of our ingredients to enhance resource usage and minimize costs. There will be seasonal variations, but if you look at our track record, we have been able to keep our restaurant's cost of sales around 31% plus or minus 1% for the past few years. In terms of labor costs, considering the soft capital economy, we expect modest increases. Over the years, we have utilized digital and automation technology to enhance labor productivity and manage costs effectively. We aim to keep labor costs stable in the long run while continuously making efforts to optimize our operational efficiency. For Pizza Hut specifically, we believe there’s still improvement opportunity in the occupancy costs, particularly as we continue to expand into lower tier cities where rentals are typically lower.

Let me give a brief summary. We've been very consistent with the Pizza Hut strategy since 2017 when we embarked on the pizza turnaround. It's sales first, profit later, and then resilience comes after that. Once we turn around the same-store sales within 18 months after we make that promise, we narrow down our focus to profit because sometimes you have to make trade-offs, especially at the beginning of the turnaround or building a brand. The trade-off is always sales first, profit later. We will continue to improve the cost structure focusing on operational efficiency, and we aim to open more stores, particularly across all city tiers to achieve better scalability and operational cost management.

Your next question comes from Kevin Yin with J.P. Morgan. Please go ahead.

Thank you, Joey and Andy. My question is on the ASP. Okay, so good to see the ticket size went up from RMB 39 to RMB 42, which is very encouraging. However, we would like to better understand if the fourth quarter '23 gave a bit of a different dynamic versus before. So, for example, on a like-for-like basis, KFC average ticket size down by what percentage and traffic coming by what percentage points. So just try to quantify if in the fourth quarter ASP went down and the traffic came back. Secondly, I would also like to know your thoughts for 2024, particularly your conviction level to maintain flat same-store sales growth in 2024. If we consider the contribution from G&A cost cutting, what’s the minimum same-store sales growth level for you to maintain the restaurant margin in 2024? Thank you very much.

Sure, Kevin. So, a little bit of clarification on the ticket average and differences in 4Q. For KFC, we had same-store sales growth of about 2% and transactions increased by 16%. The average ticket size was down around 11%. For Pizza Hut, the same-store sales growth was about 6%, while traffic grew by 15%, with the average ticket decreasing by around 8%. But as I mentioned before, the trend for ticket average is consistent with our overall strategy and is important for our market reach. As Joey mentioned, our strategy is focused on expanding the store footprint, especially in smaller cities and expanding our pricing options to offer consumers a wider variety of product options, driving incremental traffic and sales. Overall, consistent with our three-year plan, we are confident that we will maintain stable operating margins in the long run. Monitoring sales trends will be critical as they affect our margins.

To wrap this question up, Kevin, the ticket average for quarter four is not particularly unusual. The prior year, quarter four was affected heavily due to the pandemic and had a ticket average of RMB 42. It's important to remember that if we revert back to 2019, the quarter four ticket average was RMB 37, similar to our ticket average of RMB 39 in quarter four of 2023. The average ticket sizes have been generally quite stable across the years, reflecting our consistent approach to promotional strategy and customer offerings while protecting the ticket average across multiple years.

Your next question comes from Chen Luo with Bank of America. Please go ahead.

Thank you, Joey and Andy. Sorry, actually my line got disconnected just now, although I dialed in to the call at 6:30 am in the morning. So forgive me if I ask some questions that have already been addressed. My questions are mainly on margins. I noticed that our restaurant margins for 2023 have already recovered to a level slightly higher than 2019, making it the third highest margin since our spinoff. However, compared with five years ago, our margin structure has significantly changed. Our labor costs as a percentage of revenue have risen significantly, while our occupancy and other costs have reduced sharply. Going forward, do you think there's room for us to maintain a stable labor-to-sales ratio, especially given that we've taken measures to control rider costs, such as the introduction of new vendors and continual rollout of cost-management programs? Do you think it's possible to see a largely stable labor cost relative to the rising labor costs trend over the past few years? And lastly, just as a follow-up, if you look at the risks tied to margins, could you provide your view on FX, especially considering the one-off gain we booked last year? Is it fair to say on a reported level that operating profit could possibly decline around 10%?

Thank you, Chen Luo. Before addressing your question regarding the operating margins and costs, let me clarify that approximately 60% of our store portfolio was built after 2019. This solid foundation supports our ability to drive same-store sales effectively. On the cost side, we continue to abide by the principle that we always aim to pass savings to our customers. Examining our cost of sales over the last few years has shown remarkable stability. For instance, even throughout fluctuating market conditions, the cost of sales has consistently hovered around 31%. For labor costs, as you’ve observed, while also increasing due to various factors, our overarching principle remains to strive for productivity improvements. Considering the extra efficient operational measures, we remain optimistic about stabilizing labor costs in the future. As for the operating profits—given all these factors and expected foreign exchange impacts, we will do all we can to generate positive sales and manage costs effectively.

Thank you, everyone. That concludes the Q&A session. If you have further questions, please feel free to reach out through the contact information available in our earnings release and on our website. Have a great day.

Thank you. Bye-bye.

Thank you.

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