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Yum China Holdings, Inc.  (NYSE:YUMC)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 7:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Yum China 2018 Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today. Friday the 1st of February 2019.

I would now like to hand the conference over to your first speaker today, Ms. Florence Lip. Thank you. Please go ahead.

Florence Lip -- Investor Relations Director

Thank you, operator. Hey, hello everyone, and thank you for joining Yum China's fourth quarter 2018 earnings conference call. Joining us on today's call are Ms. Joey Wat, CEO of Yum China and Mr. Jacky Lo, CFO of the Company.

Before we get started, I would like to remind you that our earnings call and investor presentation 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 and the reconciliation thereto. Today's call includes three sessions. First, Joey will cover Yum China's fourth quarter 2018 highlights, and Jacky will cover the financial results. We'll then open the call to questions. The webcast of this call will be available on our IR website. Our PowerPoint presentation which contains operational and financial information for the quarter is available for download.

At this time. I would like to turn the call over to Ms. Joey Wat, CEO of Yum China.

Joey Wat -- Chief Executive Officer

Thank you. Hello, everyone and thank you for joining us today. At the close of our seventh year as an independent leaderless Company, I'm pleased to report that we achieved profitable growth while continuing to build capabilities that will improve our long term competitiveness and drive sustainable growth. First I will give an overview of the quarter, before providing more detail on our operational initiatives for each of our core brands.

We delivered our ninth consecutive quarter of System sales growth since we are spun off from Yum! Brands driven by saturated new store openings and a strong performance from KFC. I'm also pleased to report that for 2018, we delivered record currency and license fee adjusted basis, we delivered record revenue and operating profit in 2018.

In 2018, we opened 819 stores. This is the second highest number of new store in our 30 years history in China, an average of more than two restaurants per day. This expand our footprint, extends our position as market leader and gives us a solid foundation for future growth. Thanks to a resilient business model, strong brand recognition and excellent execution KFC recorded healthy growth across all city tiers in the fourth quarter with system sales up 9%.

While we are not satisfied by our same store sales at Pizza Hut, we are pleased to see same store traffic growth in the quarter as well as positive trends in customer feedback. This shows that the initiatives we are implementing are gradually taking effect. Combined with ongoing margin management, Yum China delivered substantial growth in operating profit for the fourth quarter which Jacky will elaborate on further.

Now I will provide more color on the performance and strategy of our key brands. Starting with KFC. KFC is the primary growth engine and the number one quick service restaurant brand in China. The key to KFC's success is a relentless focus on innovation, first class execution and a commitment to consistently exceed customer expectations. In the fourth quarter, KFC continued to deliver strong growth on the back of excellent results in the same quarter last year. In the fourth quarter system sales grew 9% compared to 11% growth in the previous year, growth in constant currency terms.

As you know the expansion continues to be a key priority. In 2018, KFC stepped up new store openings to capture the opportunities for growth in underserved and attractive markets across China. In addition to store expansion, we drove same store sales by pulling multiple levers including launching Smart Value campaigns and growing independent trader dayparts and product categories.

First let me talk about our ongoing focus on Smart Value. As we noted previously, we successfully launched the Crazy Thursday promotion offers. We expanded the promotion into the fourth quarter introducing a new chicken snack, San Gu Chi (ph) at a very attractive price point and succeeded in driving strong incremental sales. Crazy Thursday is an excellent demonstration of our integrated approach to campaign planning and execution. Collaboration between our menu innovation sourcing and marketing teams we drove profitable growth of KFC while our customers enjoyed delicious food at very good price.

Second, we continued to enhance the breakfast coffee and dessert offerings to capture the significant opportunity we see in these segments, building on the popularity of a breakfast menu that includes Congee, Panini, Rice Rolls and Chinese pancake toppings. We launched a Christmas campaign and seasonal congee, it's called La Bajo (ph), it's a kind of sweet congee which was well received by customers during the festive period.

Coffee also continued to exceed expectations. In 2018, we recorded double digit growth, sold over 90 million cups and generated more than CNY1 billion in revenue. We will continue to drive growth of this high potential category by introducing innovative, high quality products at the price again, and leveraging our extensive store network and delivery capabilities.

In the dessert category, we continued to expand our network and introduced unique products to entice new customers. At the end of the year we reached 1,110 dessert kiosks across China, over 250 more than the same time last year and their sales increased by over 30% in the fourth quarter. We will continue to open more dessert kiosks and diversify the product range to drive growth.

In digital, we continued to focus on seamlessly integrating online platforms with offline stores to extend our digital ecosystem and maintain engagement throughout the customer journey. One of our key digital initiatives is the KFC Privilege Subscription program. Almost two million privileged members have been sold since it launched in July. The delivery privilege program has been particularly popular and effective in increasing order frequency and customer loyalty. To tap into the hype around double 11 and double 12 online sales that are similar to Cyber Monday in the US, we launched campaigns with online platforms.

We achieved outstanding results and we were the number one seller in terms of GMV in the food service category on Tmall, and drove incremental sales to our stores throughout the period. This initiative is a good example of the significant upside potential of online to offline marketing, and our ability to monetize our digital assets. With our massive membership base, extensive digital ecosystem and significant transaction data, we have in-depth understanding of our customers. We are continuing to find new ways to leverage those insights and believe they are significant opportunities to design more targeted marketing campaigns, partner with high traffic platforms and ultimately improve the dine in frequency and ticket average of our customers.

Delivery, similarly remains the key sales growth driver that caters to the evolving dining habits of Chinese consumers. We have adopted a hybrid delivery strategy that involves collaborating with aggregators and store (ph) traffic and fulfilling all orders with our dedicated KFC riders. This enable us to simultaneously drive volume and leverage our extensive network to control quality.

In the fourth quarter delivery represented 16% of sales, up three percentage points year-over-year. As a result of our digital initiatives, our own channel delivery sales enjoyed tremendous growth in the fourth quarter, well ahead of growth rate through aggregators.

Looking ahead, we remain very excited about KFC's long runway for growth in China. KFC's commitment to smart value, innovation in menu and daypart and leadership in digital and delivery have created a resilient business model, that's geared to growth. And while we have scale, there are plenty of opportunities to expand our footprint, with ongoing improvement in store development cost, we continue to see cash paybacks of around two years and see significant further scope for new store development. In 2019, we will invest in enhancing our core capabilities and continue to pursue an aggressive store building program.

Now I'll provide some color on Pizza Hut's performance. Pizza Hut is the leading western casual dining restaurant brand in China and represents around 20% of our revenue. As I mentioned earlier, we are pleased to see positive same store traffic growth in the fourth quarter. We are in the process of repositioning Pizza Hut as a modern, family oriented, value for money casual dining concept, and we are seeing notable improvement in feedback from our customers. We are confident in our strategy and expect to see higher consumer satisfaction translating to improving performance in due course.

Now I'll provide an update on the progress of our revitalization program, which is focused on four pillars, driving digital, optimizing delivery, fixing the fundamental and enhancing asset portfolio. First, let's look at digital. Pizza Hut has made rapid progress over last year by implementing learnings from KFC, which is a digital pioneer in the restaurant industry. Similar to KFC, Pizza Hut leveraged the Double 11 and Double 12 campaign by partnering with online platforms as well, and we ranked number one on Kobe in terms of GMV on November 11 and December 12, and drove meaningful incremental sales and new customers to our stores through these campaigns.

In the fourth quarter, we also launched a privileged membership program that is designed to attract families, which is one of Pizza Hut's core customer segments. After testing multiple pilot programs, we launched a family privilege membership program in December. For CNY98, our members receive a welcome gift, coupons and other discounts that are tailored for families. We observed a meaningful increasing in frequency during the pilot period and we will continue to monitor the impact of privileged membership.

Turning to delivery, in the fourth quarter, we continue to focus on integrating the dining and home service brand. This integration was completed in December 2018 and we are seeing the benefit with clear brand positioning and better marketing and operational efficiencies. Delivery continued to see double digit growth and it accounts for 25% of Pizza Hut sales, up 3 percentage point year-over-year in Q4. We also recorded over 20% growth in delivery sales from our own channel in the fourth quarter.

Our goal at Pizza Hut is to transition to the KFC delivery strategy of the hybrid model of leveraging aggregators to drive traffic, while using our own dedicated riders to deliver. We accelerated the roll out of our dedicated riders in the fourth quarter and by year end, all of our orders in stores were delivered by our own rider network, up from 55% in Q3. There was some impact to sales during the transition period, but in the long term we have confidence that we will have greater control over delivery quality and better availability during peak hours, especially during Chinese New Year. And again our growth from our own channel is ahead of the delivery growth from the aggregator, in Pizza Hut as well.

Following our success of KFC, Pizza Hut also rolled out delivery privilege. Initial results show that the order frequency has meaningfully increased from our privileged member during the subscription period.

Next let's look at the fundamentals. As we have previously stated, a key component of our revitalization program is to improve our food. Following our earlier efforts to simplify and revamp the menu, we continue to innovate and improve our food based on consumer feedback. We systematically, add the best perform, limited time over (ph) to the permanent menu and continue to evolve it, to adapt to changing consumer taste.

Following the success of KFC, the Crazy Thursday promotion in mid-December, we launched Green Wednesday for members in Pizza Hut, as an investment in value to drive traffic and build consumer habits. Selected items were offered at CNY29 and CNY39 every Wednesday, generating a segment and driving incremental traffic to our stores during the promotion. Building on this initial success, we will continue the promotion, extend it to all customers in 2019, making it one of our signature campaigns for the near future.

Lastly, we continue to enhance our asset portfolio through accelerated remodels and multiple store format, to provide a more comfortable and stylish dining environment and also to upgrade the brand image. We refurbished 225 stores in 2018, we plan to ramp up the speed of remodeling further in 2019 and to complete the refresh for our entire portfolio by 2021. We have developed multiple store formats to cater to diversified dining occasions, including delivery at various locations. Our focus is on smaller assets and faster service with better support for delivery needs.

All these initiatives are starting to translate into an improved perception of Pizza Hut. Our latest brand tracking shows that the scores for good taste, value for money and young and energetic have been improving, particularly in Tier 1 cities. We are confident that improvements in customer satisfaction, will support the ongoing revitalization of the brand.

A few words on our other brands. Little Sheep opened 78 new store in 2018, with total stores exceeding 300 across 10 countries. We will continue to expand this brand in China and overseas. Taco Bell opened a fourth store in Shanghai, Lujiazui. We will focus on reaching critical mass and fine tuning the model, before rolling out further. After several years of scaling back, we repositioned the East Dawning brand and opened 4 new stores in 2018. We will continue to test and expand selectively with a focus on transportation hub, and the brand positioning for East Dawning is to focus on a food from the south of Yenisei River for the travelers, in Chinese, we call it (Foreign Language).

Our new stand-alone, in fact, concept COFFii & JOY also add 7 stores during the quarter, taking us to 13 stores in four cities in Eastern China. We are continuing to test different formats and remain excited about the potential of this category.

With that I will hand over the call to our CFO, Jacky, who will cover our financial performance in more detail.

Jacky Lo -- Chief Financial Officer and Treasurer

Thank you, Joey. Good morning to those calling from Asia, and good evening to those calling from the US. First, let me quickly go over our fourth quarter and full year 2018 financial results.

Total revenues reached $1.91 billion in the quarter, up 7% year-over-year, excluding foreign exchange translation. Total system sales grew 6% year-over-year in the fourth quarter of 2018, excluding FX, primarily due to robust same store sales growth at KFC and accelerated new store openings. We opened 257 new stores during the quarter, an average of well over two stores per day, of which the majority were KFC stores. Our portfolio was nearly 8,500 restaurants as of the end of 2018.

During the quarter, KFC year-over-year system sales grew by 9%, while Pizza Hut system sales declined by 2%, both excluding FX. Yum China's same store sales increased by 2% in the fourth quarter of 2018. KFC same store sales grew by 3%, despite lapping 6% same store sales growth in the prior year. Pizza Hut same store sales declined by 4% year-over-year, a slight improvement from the third quarter. The decline was largely attributable to soft trading conditions and underperformance in the dining segment.

During the quarter, KFC traffic increased by 3% year-over-year, a bounce back compared to the third quarter. Ticket average was flat year-over-year, due to increased promotions. Pizza Hut traffic increased by 1% year-over-year. This is a significant improvement from the previous three quarters. Ticket average decreased by 5% year-over-year, due to value campaigns. KFC restaurant margin improved year-over-year in the fourth quarter to 14.3% versus 13.9% in 2017, primarily due to positive sales leverage and store cost savings, possibly offset by inflation, store upgrades and promotions.

Pizza Hut restaurant margins was 4.9% in the fourth quarter compared to 6.4% in the same period last year. The planned stepped up promotional activities, given the soft trading condition, which was partly offset by improved labor efficiencies and effective management of other store cost. Overall, Yum China restaurant margin was 11.5%, almost flat compared to the same period last year.

For the fourth quarter of 2018, wage inflation was up 6%, while commodity inflation was up 3% as compared to the same period last year. For the third consecutive quarter, we record a year-over-year decrease of G&A expenses, ex-FX. The decrease came from a mix of one-off benefit and ongoing cost control with a portion of savings we invest in technology and other key initiatives. On a full year basis, G&A expenses reduced by 9% year-over-year in constant currency. Our long term goal remains to maintain G&A growth rate, lower than the revenue growth rate.

Operating profit for the fourth quarter of 2018, increased by 84% year-over-year, ex-FX. Factors such as same store sales leverage, net new unit growth and G&A expense improvement, make a positive impact on operating profit, partially offsetting the negative impact of inflation, increased promotional activities and the 12 million impairment on intangible assets acquired from Daojia. Excluding the Daojia impairment, adjusted operating profit for the fourth quarter of 2018 was $96 million an increase from $47 million in the prior year period.

For the fourth quarter of 2018, KFC operating profit improved by 19% year-over-year ex-FX, while Pizza Hut record an operating loss -- the loss narrowed compared with the period a year ago due to one-off integration impairment charge last year. We record a tax benefit of $36 million in the fourth quarter, as a result of adjusting the provisional amount of transition tax related to the tax -- US Tax Reform previously record in fourth quarter 2017. On a full year basis, the effective tax rate, excluding the special items was 26.5%.

In 2019, due to the progress made on the application of reduced withholding tax rate on cash repatriated out of China, our best estimate of the effective tax rate is below 28%. Finally, diluted EPS was $0.19 in the fourth quarter of 2018 compared to a loss of $0.28 in the same period last year. Adjusted diluted EPS was $0.12 compared to $0.14 in the same period last year. The decline in adjusted diluted EPS was due to a $27 million mark-to-market loss on our equity investment in Meituan, which impact EPS by $0.07. Our Meituan shareholding is an investment made as part of our overall delivery strategy.

Next, let me cover our capital allocation strategy. In 2018, we generate net cash from operations of $1.33 billion and free cash flow of $863 million after subtracting $470 million in capital expenditures. Our balance sheet remained strong with over $1.39 billion in cash and short term investment. With our healthy cash positions, we returned $191 million to our shareholders in the fourth quarter, including a cash dividend of $46 million and share repurchases of $145 million. There's approximately $960 million remaining under the new share repurchase authorization as of the end of 2018. Our recently increased dividend and share buyback authorization reflect our confidence in our business model and ability in generating cash.

Now I'll share outlook for 2019. On the plus side, robust demand in delivery will help to drive our business. We expect continuous sales momentum at KFC will contribute to our growth in 2019. However, we do see some challenges ahead as trading conditions remain soft and Pizza Hut's revitalization is still in progress. In addition, as we have -- as we have 3 very, very successful Chinese New Year's since 2016 it will be a tough lap in the first quarter of 2019.

On the development front, we'll continue to roll out more new stores. We expect to build 600 to 650 new units. We expect wage inflation to maintain at high-single digit and commodity inflation to be at low-single digits for the full year but higher in the first half of 2019, largely due to increases in poultry prices. Value campaigns such as Crazy Thursday and Scream Wednesday will continue, as they were instrumental in driving sales and profits in the fourth quarter of 2018.

With a series of store openings, particularly in 2018, there will also be short term pressure on the restaurant margin, as these stores move up the maturity curve. We'll look to mitigate with ongoing operational efficiency improvements to digital and diligent cost management. I'm confident that these investments will pay off as the business continues to grow. Also note that Pizza Hut margin will remain under pressure as we continue to reinvigorate the brand.

We'll implement a new lease standard, ASC 842, effective January 1, 2019. This will affect approximately 60% of our leases, which are on a fixed payment basis and with a term greater than 12 months. We estimate adoption of the standard will result in recognition of value of used asset and lease liabilities of approximately $2 billion and $2.2 billion respectively as of January 1, 2019. In the absence of any impairment, there will be no material change on the rent recognized in the income statement.

However given the materially higher value of used asset on our balance sheet, any lease impairments may also be higher, negatively impacting operating profit in the year of the impairment. Please note that prior results have not been restated for the impact of this accounting change and therefore comparative periods remain as reported historically. Upon adoption of the new standard an additional impairment test for all qualified stores will be conduct in the first quarter. Changes to the lease impairment charges described above is expected to negatively impact our operating profit growth in 2019.

We'll maintain our long term financial targets of high single digit system sales growth, ex-FX, around 17% restaurant margin and double-digit operating profit growth, excluding foreign exchange impact, although there will be fluctuations quarter-on-quarter and year-on-year.

Let me turn it back to Joey briefly before we open up the call to questions.

Joey Wat -- Chief Executive Officer

Thank you, Jacky. To sum up 2018 marked another year of profitable growth for Yum China thanks to the collective efforts and hard work of our 450,000 employees. Looking ahead, we are well positioned and prepared for uncertainties in the market and will continue to focus relentlessly on driving profitable growth through innovation, first class execution and consistently exceeding customer expectations.

KFC continues to perform well. We are excited about the special offers we have prepared for Chinese New Year and opportunities to add new units across the country. While we are not satisfied with the same store sales at Pizza Hut, we are encouraged by the growth in same store traffic in the fourth quarter, as well as positive trends in customer feedback. We remain committed to the revitalization plan for Pizza Hut.

We will continue to invest in profitable growth for our core brands to strengthen our leadership in China's restaurant industry. We look forward to welcoming investors to our Investor Day on March 12, 2019, where we will have the opportunity to provide a detailed update of our performance and strategy. Those of you not able to join us in Shanghai can access via webcast.

With that I'll pass you back to Florence to start the Q&A. Florence?

Florence Lip -- Investor Relations Director

Thanks, Joey. We will now open the call for questions. In order to give as many people as possible the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.

Questions and Answers:

Operator

Certainly, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Xiaopo Wei from Citigroup. Please ask your question.

Xiaopo Wei -- Citigroup -- Analyst

Hi Joey. Good morning. Congratulation on a strong result at KFC. My question is regarding the new openings. Absolutely, KFC new openings is well ahead of expectation. But in terms of the competition, what do you see the competitors penetration into the low tier cities and their opening pace? Do you see any competition pressure of the new openings from your competitor? Thank you.

Joey Wat -- Chief Executive Officer

Thank you, Xiaopo. For the KFC, we certainly exceed our own expectation as well. We opened 566 stores for KFC Wow. We have also remodeled over 700 store at the same time. But even for the additional stores we opened, it is important to note that we maintained our disciplined approach to ensure good payback.

So for KFC we still are able to achieve two years payback across all city tiers in China. So right now, we are in 1,200 cities. Of course we still have another 1,000 city that we don't have any KFC that we can tap into. And for all these new stores opening or accelerated growth, we help our strategic partners to spend (ph) for as well. And these are very good strategic partner who we have been working with for over a decade.

In terms of competition my overall view is -- well I mentioned it before, it's not something new to us, and we always stay agile, facing a competition. And we are also mindful of the increased competition for best locations, especially in lower tier cities. However we do have rather significant competitive advantage in the area such as very strong development team across China. We have strong local knowledge. We have our own supply chain pretty much to support stores in any part of China. And we have a very strong brand, especially in the lower tier cities thanks to early mover advantage in the last three decades.

So as a result, we are competitive. While we accelerate our growth of 2018 without sacrificing the quality of the return, we will remain rather aggressive in 2019 with our new store openings. Thank you Xiaopo.

Xiaopo Wei -- Citigroup -- Analyst

Thank you, Joey.

Operator

Your next question comes from the line of Sara Senatore from Bernstein. Please ask your question.

Leo Li -- Sanford C. Bernstein -- Analyst

Hi, this is Leo (ph) for Sara. So I have a question on the G&A expenses. Could you give some color on the one-off that you've called out for this quarter and how should we think about it in 2019?

Jacky Lo -- Chief Financial Officer and Treasurer

Leo, thank you for the questions. So first, as I mentioned for the third consecutive quarter we record year-over-year decrease of G&A expenses. So our 21% year-over-year reduction in G&A expenses in Q4 came from a mix of one-off benefits such as government incentives, also performance-based compensation and also from our ongoing cost control. So we have been actively controlling our G&A cost by simplifying the organizational structure, optimizing our procurement for different services and tightening expense policies, so which all started to pay off in the last few quarters.

So for the full year 2018, if we exclude all these one-off benefits, the underlying G&A expenses will have increased by about 1%, excluding FX. But our long term goal remains just to keep G&A expense growth rate lower than revenue growth rate. But for 2019 due to the lapping of all these one-off benefits in 2018, the G&A growth rate may be higher. But as mentioned before, we intend to just continue to optimize our cost structure to manage G&A expenses.

Joey Wat -- Chief Executive Officer

Maybe I'll just one -- add one comment on the G&A. We have full support from our own team, particularly our headquarters staff to support the G&A initiatives, because in the long term we want to commit to our shareholders that we will grow G&A below the revenue growth. I think that's a very good discipline, and in a short term, we also have a commitment from our staff that we will save the G&A. And we use part of the saving back to employee benefits or accrued (ph) to customers.

So for example, we utilize part of the saving for 2018 to buy health insurance for the parents of our store managers. So that has very, good impact as you can imagine from our frontline staff. And within headquarters, we are very proud that our G&A saving, the money is being used very well at the end as well. So it's not only about saving. It's about using the money in an even better way. Thank you Leo.

Leo Li -- Sanford C. Bernstein -- Analyst

Thank you.

Operator

Your next question comes from the line of Chen Luo from Merrill Lynch. Please ask your question.

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Good morning, management. I've got one question on the chicken cost. We noticed that the chicken cost has increased quite a lot in China. And we also heard that recently one of our key supplier has raised the supply price twice. Can you actually give us an update on how much -- what percentage of our food and people cost actually goes to the chicken cost and what is our estimated chicken cost increase on a full year basis for 2019. And what kind of measures are we going to take to mitigate the cost pressure? Thank you.

Joey Wat -- Chief Executive Officer

Chen Luo, let me give some color about the chicken cost. In terms of chicken cost, you're right, in Q4, in particular, the cost has gone up quite a bit. And we expect that trend will continue through early part of Q1 this year. But you can see the total cost of sales for KFC for Q4 is slightly higher but not completely out of proportion.

So I think the key question is how do we handle it. I think that's a really good question not only for Q3 and Q4, but in general, particularly for 2019, when value is such important factor in our business. And the way that we have been doing it since Q3, Q4 in particular is, we leverage our scale and we also become innovative. For example the single bone spiced chicken, in Chinese we call (Foreign Language) is a part of the chicken that was never being used in our business before.

We just became more innovative and tried to find, it's still chicken but slightly different part of chicken and we cook it in a way that we are very good at, and we sell it at very, very good price, despite the increased chicken cost overall. So there are ways to do it but it would require innovation in the food team, creative marketing team and a very flexible supply chain team and a very strong operational team. And I think for -- particularly for Q4 this year, we have proved that we can do it and we certainly would take the learning for 2019 and going forward as well.

Thank you, Chen Luo.

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Okay, thank you, Joey.

Operator

Your next question comes from the line of Brian Bittner from Oppenheimer. Please ask your question.

Brian Bittner -- Oppenheimer -- Analyst

Thanks. Good morning. You guys mentioned a couple of times that you're well positioned to face potential market softness. Are you starting to see the macro change in 2019 thus far. Are you starting to see a softer backdrop. Just trying to triangulate to why you mentioned that a couple times?

Joey Wat -- Chief Executive Officer

Sure, Brian. Let me share my view of 2019 and then share some learning of both business from 2018 and then our view going forward. We see 2019 as a year of uncertainties but we also understand customers actually look for value with great product. And for both brands -- I mean at the same time to be honest 2018 was not easy either. So how did we do it? And what have we learned in 2018? I mean for 2018, let's say KFC, we accelerated store expansion, focused on key regions such as East China enabling us to achieve dominant market share in those regions. And for Northeast part of China, actually we achieved (inaudible) because Northeast part of China has always been under challenge over few years due to even more challenging situation. And they are what they are, and we achieved positive same store sales growth for Northeast part of China for 2018 as well.

And of course we leveraged digital initiatives, we launched a trendsetting new product like what I mentioned earlier, the spicy single bone chicken, and then we have the Crazy Thursday. And we have a good result.

And then for 2018, for Pizza Hut, Pizza was a transition year. But we are happy to see, despite the challenge in 2018 the early indication is that the plan is gaining traction with positive traffic growth and we scaled back our new store opening with complete remodeling of 225 new stores. And we also complete the transformation of the delivery business. And we launched a Screaming Wednesday to rebuild the permanent menu et cetera, et cetera. So for both business, while KFC is proven to be a resilient business, Pizza Hut we managed to go through those transformation. So for 2019, we will take these learnings and apply them in 2019 as well.

In the long term, China is still a very attractive market with over 6% GDP growth and we are committed to China, and we do have confidence that we are well positioned to stay competitive and maintain the leadership position in China. I mean, I just want to mention one more thing. As you know Pizza Hut obviously with -- so the value protection because of higher ticket average would be more challenged. However, for 2018 we've also achieved good value perception from customer now. So even for Pizza Hut we believe that we are finding that value perception improvement measures that we can continue into 2019 as well. So I hope that addressed your question, Brian. Thank you.

Brian Bittner -- Oppenheimer -- Analyst

Thank you, Joey.

Joey Wat -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.

Michelle Cheng -- Goldman Sachs -- Analyst

Hi, good morning, Joey, Jacky. My question is about rental negotiation. We see KFC has successfully accelerated store expansion, and we also hear a lot of leading brands, they are very aggressive on store expansion as well. With this kind of economy slowdown, can you share with us any changes or dynamics on the bargaining power over the landlords and possible to see any cost saving on the rental side in the future? Thank you.

Jacky Lo -- Chief Financial Officer and Treasurer

Michelle. Yeah, I mean we work very closely with a lot of strategic alliance like real estate developers, and right now about 80% of our lease contain some sort of variable elements that's tied to ourselves. So that give us a lot of flexibility in terms of managing our rental cost. And so I guess, yeah, just because we have been in China for over 30 years, we've established a great network with all these developers and we have the size and scale. So that actually gives us a lot of room in terms of managing our rental costs and also just opening, selecting good sites, opening store locations. Yeah.

Joey Wat -- Chief Executive Officer

Maybe I'll just add two comments to the rent. First of Michelle, it's an ongoing effort. It's always difficult to negotiate rent with landlord but we've been doing it for 30 years and we'll continue to do that and we have been pretty good with that. Secondly, in terms of negotiation power, it's related to brand positioning, brand power and also sales. Because as such high percentage of rent tied to the sales, they have to see a benefit. One is, it goes with the sales and then to the landlord with our robust sales right now, they get more rent as well. So that helps our ability to secure best sites and negotiation power.

On top of that, in lower tier city, we have, as I mentioned earlier very strong competitive advantage compared to our competitors in terms of brand, in terms of the rental negotiation. So we remain reasonably confident to manage our rental cost going forward for both business. Thank you Michelle.

Michelle Cheng -- Goldman Sachs -- Analyst

Thank you.

Operator

Your next question comes from the line of Matt McGinley of Evercore ISI. Please ask your question.

Matt McGinley -- Evercore ISI -- Analyst

Thank you. My question is on the new unit growth. Your gross openings from a unit standpoint of 800, far exceeded the high end of your plan to do 650. My question is compared to the existing store base, were these smaller units, or any different than the existing store base that you're able to put out more of them later in the year? And the second question is on the closure rates. Overall they remain high, even at KFC. Was there any increase in the number of units that relocated during the year or is this just normal management of underperforming locations, that's normal course of business?

Joey Wat -- Chief Executive Officer

So Matt, it's Joey. For the new stores, overall on average they are smaller for both business. And for KFC, as you are aware, we've been doing it for a few years now. So it's nothing new. For Pizza Hut, for the new stores that we've opened, we also tend to open smaller store. But on top of that actually, we also have two things that we are pushing for, a smaller store, faster service and more delivery planning.

So these are all important elements for the new store. Or even remodeling, when we do remodeling for both business, we make sure we have an area called dedicated delivery room or delivery area to support the delivery. For the closure, I'll let Jacky respond to your question. Jacky?

Jacky Lo -- Chief Financial Officer and Treasurer

Matt, in terms of the closure. I mean if you look at the number this year, we closed 318 stores. That's about 4% of our total portfolio. But I think we always said in our business it's normal, it's healthy to close about 2% to 3% of our stores. So if you look at the breakdown 144 is actually KFC. So that's 2% of our portfolio. That's very normal. And for Pizza, it was 112 stores. That's 5%. But the reason of the increase is due to more closure from the integration of dining and home service which we complete by the end of this year. And also we were closing some non-performing stores.

The remaining was our leadership stores because there's just strategic reasons. We are trying to strategically upgrade the location and also we are upgrading the franchise operators to improve the quality of the overall brand. So that give you an idea in terms of like the breakdown of the closure.

Matt McGinley -- Evercore ISI -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of Lillian Lou from Morgan Stanley. Please ask your question.

Lillian Lou -- Morgan Stanley -- Analyst

Hey Joey. Could you give us a little bit more color about recent Chinese New Year at first, because it's probably one of the most important season for the full year and set the tone for 2019? Thank you.

Joey Wat -- Chief Executive Officer

Thank you, Lillian. Chinese New Year is always important, challenging and very exciting. Because everything happens within very short time. For us the focus is on both food and labor on top of the marketing campaign. For both business, let me talk about food an then labor. Food, we right now tend to focus on signature products with mass appeal and feel very good value and the whole preparation process need to be less complex. The whole focus for operation is to increase the speed of services.

For Labor, the most important bit here is a robust plan. We have very, very good data with good level of detail to do forecast even better than before. Why such forecast is important, because they help the scheduling, as you are aware, for the Chinese New Year, the salary for the three Chinese New Day is triple. So the accuracy of forecasting thing is absolutely important to get the right scheduling and then to make sure we have enough staff for the Chinese New Year, which we have started the preparation very, very early.

On top of that, we need to make sure we have enough dedicated riders for the peak trading hours and trading days. And thanks to a lot of good effort in this transformation, for Pizza Hut side, we have dedicated riders for both business, for Chinese New Year. So fingers crossed, we have prepare well for this Chinese New Year. So we always pray that the weather is good as well which always helps. Thank you, Lillian.

Lillian Lou -- Morgan Stanley -- Analyst

Thanks, Joey.

Operator

Your next question comes from the line of Anne Ling from Deutsche Bank. Please ask your question.

Anne Ling -- Deutsche Bank. -- Analyst

Hey, hi. I have a question on the accounting side for Jacky. So Jacky, you mentioned about the US GAAP, the change in terms of your operating lease. I just want to check did you mention that for year 2019 there will be no material changes on the P&L? And you also mentioned about the higher impairment costs potentially. So if I look at, for example in year 2018, if you use the new accounting treatment, what will be the impact. Just to get some idea. And in that sense, does it mean that, in the future we should look at your EBITDA, which -- based on the new accounting changes there won't be that much of the impact. Thank you.

Jacky Lo -- Chief Financial Officer and Treasurer

Yeah, Anne. So in terms of the income statement in the absence of any impairment, so there will be no change, in terms of the rent being recognized. But that's impairment on the store than part of the corresponding right of use asset will be impaired as well. I just mentioned the revenues (ph), I said we estimate to be about $2 billion. And we have to conduct an additional impairment test in Q1 this year. So in total we'll be conducting three asset impairment tests in Q1, Q2 and in Q4.

So as far as how much of the right of use asset will be impaired in 2019, it is very difficult to estimate because there may be a lot variance depending on the impaired stores. But if you look at the asset values at year end and also the size of the right of use asset, they are about the same amount. So we anticipate impairment charges across the three impairment test in 2019 will increase roughly proportionate to the increase in the asset on the balance sheet from the ROU assets.

In terms of EBITDA, I don't think there'll be any impact.

Anne Ling -- Deutsche Bank. -- Analyst

Yeah, OK.

Jacky Lo -- Chief Financial Officer and Treasurer

There is no impairment there.

Anne Ling -- Deutsche Bank. -- Analyst

Yeah.

Operator

There are no further question at this time. I would now like to hand conference back to today's presenter. Please continue.

Joey Wat -- Chief Executive Officer

Thank you for joining the call today. We look forward to speaking with you on the next earnings call. That concludes today's call. Have a great day. (Foreign Language) Happy New Year. Happy Chinese New Year.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may all disconnect.

Duration: 54 minutes

Call participants:

Florence Lip -- Investor Relations Director

Joey Wat -- Chief Executive Officer

Jacky Lo -- Chief Financial Officer and Treasurer

Xiaopo Wei -- Citigroup -- Analyst

Leo Li -- Sanford C. Bernstein -- Analyst

Chen Luo -- Bank of America Merrill Lynch -- Analyst

Brian Bittner -- Oppenheimer -- Analyst

Michelle Cheng -- Goldman Sachs -- Analyst

Matt McGinley -- Evercore ISI -- Analyst

Lillian Lou -- Morgan Stanley -- Analyst

Anne Ling -- Deutsche Bank. -- Analyst

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