Welcome to Yum! Second Quarter 2017 Earnings Call. Please note a PowerPoint presentation and a live broadcast of this call are available through our IR website under the Events and Presentations section. Joining me today are our CEO, Mickey Pant President and COO, Joey Wat and Interim CFO, Jacky Lo. We will start with opening remarks from Mickey, Joey and Jackie and then open the floor for Q and A.
Please note our earnings call and investor presentation contains forward looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward looking statements and all forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. Let's start with page 3, that's agenda. Mickey will discuss Q2 highlights and the ZhaoJia acquisition. Zhou Yi will review brand performance and digital and delivery.
And then Jacky will summarize our financial results. After their opening remarks, we will be happy to take questions from analysts and investors. Now let me turn the call over to Mr. Mickey Pant, CEO of Yum China.
Thank you, Christy. I would like to add my welcome and greetings to you from our headquarters of Yum China here in Shanghai. If you have access to our presentation online, I will start with Slide number 4. Our Q2 results continue to illustrate strong performance at Yum! China with overall same store sales growth up plus 3% and system sales up +7 percent before foreign exchange translation.
KFC delivered strong performance with same store sales up plus 4% and Pizza Hut same store sales were flat with a year ago. Operating profit increased sharply plus 64% to $143,000,000 primarily aided by the benefit of retail tax reform and same store sales leverage. On a fully diluted basis, our EPS was $0.27 up 29% year on year. We opened 90 new restaurants and remodeled nearly 200 stores led by KFC. We had a total of 7,685 5 restaurants at the end of Q2.
On previous calls, we have highlighted our growing strength in digital and delivery and we have continued to make progress in this vital strategic frontier. With over 4,900 restaurants offering delivery service, total delivery sales in the quarter reached $200,000,000 which is about 13% of our total company sales. Mobile payment represented about 40% of our total company sales and cashless payment reached a record of $900,000,000 in Q2 alone. Our loyalty members for both brands surpassed $100,000,000 in total with 83,000,000 and 26,000,000 members at KFC and Pizza Hut respectively. Joey Waugh will share more details later.
Finally, 2 other highlights of the quarter. The first was our acquisition of Dowjia, an online delivery company. We acquired an 80% stake on a fully diluted basis for a total cash consideration of $61,700,000 including $36,700,000 to selling shareholders and $25,000,000 in a capital contribution. Lastly, we repurchased YumSee shares at $39,000,000 at an average price of $36.27 per share during the quarter. So overall, we are pleased with solid progress during the quarter.
And now let me give you some details of sales, margins and our Dowager acquisition. So I'll draw your attention now to Slide number 5. As you can see on this slide, our same store sales growth and system sales performance have been shown for the past 6 quarters. The chart on the left shows same store sales growth for the company and as you can see the trend is encouraging. In Q1, we were able to lap a very strong Chinese New Year and in Q2, the most recent quarter, we lapped a flat performance with plus 3%.
The chart on the right shows the corresponding numbers for system sales and here again the overall trend is in the right direction. At this time, I wish to reiterate that same store sales growth are always difficult to forecast. Our experience suggests that same store sales growth can sometimes be subject China as we view the near term with confidence. Now let's move to Slide number 6. As you may be aware, since May 1, 2016, the impact of the VAT reform has been contributing to growth in Yum!
China margins. Restaurant margin improved by 2.7 percentage points to 15.3% due to the VAT benefit and due to same store sales leverage, offset by some inflation in the quarter. Our operating profit grew 64% to 143,000,000 You will get more details of our financial performance from Jackie Lo later. Now if you move to Slide 7. I would like to make a few comments about our Dowgea acquisition.
We have acquired 2 brands, Dowgea and Sherpa's and both are online aggregated platforms focused on the higher end of the delivery market. Dowgea was founded in 2010 by Mr. Hank Sun, who will continue to be the General Manager of the acquired entity. Sherpa's has a significant presence in the for English speaking expatriates and has been operating for 18 years. Yum!
China has acquired 80% equity interest on a fully diluted basis for a consideration of about $61,700,000 Please note that of this amount $25,000,000 is a capital contribution which will be used to fund the operations of Dowager. The strategic rationale for this acquisition is threefold. 1st and most important, we have a rapidly growing delivery business in our existing brands and we wish to increase our know how and expertise in this important and growing market. Secondly, Dowgea is focused on the higher end of the market, and we would like to develop more expertise in this segment. Thirdly, there are rapid technological and operational changes ongoing in the entire restaurant industry, and we believe that the expertise we are acquiring from Dalgia will help us improve our logistics efficiency as we continue to grow our business.
Please note, as mentioned in our previous press release, we do not regard this acquisition as material to our operating performance given the size of our company. So that concludes the overall highlights of Q2 for Yum! China. I will now hand you over to Joey Watt, our President and Chief Operating Officer to take you through the performance of our brands. So Joey, with that, it's over to you.
Thanks, Mickey. Greetings, everyone. Now let me summarize the performance of KFC and Pizza Hut in the Q2 of 2017. Let's start with KFC. So if you look at Slide 9, we have some key highlights of KFC in the quarter.
KFC delivered plus 4% same store sales and system sales were up 8% year on year. In this quarter, we built 62 new stores and remodeled 180 units. Year to date, we have built 134 stores and remodeled 205 units. Our financial performance was equally strong, both operating profit and restaurant margin improved. Jacky will cover the numbers in more detail.
Slide 10, let's take a closer look at the same store sales and system sales for KFC. We have positive momentum at KFC in the past few quarters with improved growth in same store sales and system sales. Same store sales growth in Q2 was driven by transaction growth. In addition, system sales growth also improved to 8% due to new store openings. On Page 11, in the Q2, KFC conducted a series of marketing campaigns with innovative seasonal products and integrated marketing activities to contemporize the brand image.
For example, our avocado range was introduced with a focus on healthy eating, the Pink Cola and Matcha ice cream attract customers with their unique appearances and great taste. In Q2, we launched a new chicken bucket at a very attractive price of RMB39 leveraging the youthful and highly celebrity Lu Han with a mix of new Hong Kong flavor beefengtang chicken and original recipe chicken, the bucket was very well received. We also relaunched the wind bucket, which is a proven traffic driver for an attractive price of RMB39 for 10 wings. We have been selling at this price for many years. We also promote for the first time a jumbo wing bucket selling at RMB79 for 22 wings and also combo of wing buckets and drinks.
To celebrate the Labor Day holiday, KFC collaborated with Chinese National Geographic on Hello China or campaign. A series of designer webcast were introduced, each featuring a very different city in China. The campaign promoted the fascinating landscape of China and it resonates well with our customers. Dragon Ball Bowl Festival was another highlight in Q2. We introduced the Dragon Bowl Bucket, which offers a combination of rice dumplings or zongzi and our signature chicken products.
This creative product provides a unique connection between the East and the West, while offering good value to customers. Now let's move to Slide 12. Here's an update on KFC digital and delivery efforts. In the Q2, over 45% of KFC's company sales were made through mobile payment, more than doubled that of the same period last year and we really only introduced mobile payment back to 2015 July. These numbers indicate that digital and delivery continue to drive growth and then delivery contributed to over 10% of total sales and it was up over 40% year on year.
In Q2, we also collaborated with online aggregators on digital marketing to boost transactions. We worked with Alipay on May 20, Cyber Valentine's Day celebration or to help drive mobile payment penetration, for example. That concludes my comments on KFC. So you move to Slide 13. Let me share a few highlights on Pizza Hut Business.
As we have taken some steps to integrate Pizza Hut Casual Dining and Pizza Hut Home Service, we are reporting the performance of Pizza Hut in a consolidated format starting this quarter. In the second quarter, same store sales were flat from last year, while system sales increased 7% on a constant currency basis. With both 25 new stores and remodeled 17 stores. On the profitability front, Pizza Hut's restaurant margin improved to 13.9% with robust operating profit growth. On page 14, let's take a closer look at the same store sales and system sales on.
Letting a 10% decline in Q2 2016, Pizza Hut same store sales were flat in the 2nd quarter, which underscores the challenges we face in a Pizza Hut turnaround. As we will lap minus 4% and minus 7% same store sales growth in the second half of the year, we expect the challenges to drive sales growth will be even tougher. On the other hand, our system sales trend is encouraging. We delivered 7% growth year on year in Q2. Now let's review product innovation and marketing campaign on Slide 15.
As discussed before, we see product innovation as a core focus for Pizza Hut turnaround. Here are a few new items introduced in the Q2. First, a 750 ml jumbled fruit tea, a good combination of fruit cup and tea is priced at RMB 19. How big is RMB 750,000,000 is the standard size of a bottle of wine. It is Instagram worthy and provides good value for increasingly health conscious customers.
It became an instant hit as soon as it was introduced, especially among the younger customers. On the back of strong popularity of European style pizza, we launched a series of thin crust pizza in May. We conducted an interactive promotion campaign featuring a young and upcoming celebrity. Our promotional activities generated good social buzz among young adults and teens. Relevant posts and retweets generate over 100,000,000 reads.
The initial response to the thin crust pizza campaign was encouraging. In addition, we collaborated with Shanghai Fashion Week on fashion show to help rejuvenate our brand image. We work with young Chinese artists to create unique designer clothing for Pizza Hut employees as well. This novel campaign also attract young audience and generate a good social media buzz. These are just some initial steps we took on product innovation and marketing campaigns.
We are testing a number of new initiatives and we are learning a lot of consumer insights. I would like to emphasize that there is still a long way to go to turnaround Pizza Hut and we are working diligently to get things done. On Slide 16, here's our update on digital and delivery at Pizza Hut. Leveraging the expertise from KFC, Pizza Hut also collaborated with Alipay for the May 20, Cyber Valentine's Day. In Q2, mobile payment accounted for around 31% of Pizza Hut Company's sales.
And sales from delivery grew about 40% year on year to about 20% of total company sales. Slide 17, I would like to discuss some initiatives we are working on to revitalize Pizza Hut. The first step of Pizza Hut turnaround is to start from fundamentals. These include food innovation, menu integration and revamped customer service to improve dining experience. 2nd, we are leveraging KFC's digital expertise to enhance our capabilities in consumer engagement to drive digital campaign and boost sales.
3rd, we believe there are opportunities to target different segments with diversified business models. Therefore, we are testing new store formats such as small stores to satisfy different customer needs. Last but not least, we are consolidating the delivery network under Pizza Hut to improve coverage and efficiency. On page 18, now I would like to shift gears from brand performance to a very important strategic initiative, digital and delivery. In the past few years, we have developed and executed a powerful plan towards becoming a leading restaurant brand of the future, creating an expanded runway for growth for Yum!
China. The themes we have invest in, our loyalty program, digital and delivery capabilities and the restaurant of the future format are shaping China's restaurant industry today. Let me provide an update on our digital and delivery initiatives for both KFC and Pizza Hut. Move to slide 19. We total members have surpassed 100,000,000 at the end of Q2.
KFC alone has 83,000,000 Wow members. As mentioned before, we are shifting priority from growing members to engaging our members better. KFC's 30 year anniversary celebration has helped to build an emotional connection with our customers. We launched a Member's Day program for KFC and Pizza Hut, providing members only special offers. We also started to customize product offerings such as birthday privileges.
While still in the early stage, we believe these initiatives will keep our members engaged and help to drive frequency of their visits. We believe we have strong brand equity and see our membership program as a vital asset. We will continue to explore ways to leverage our member base to build sales. Turn to slide 20. KFC has been the leading brand for our digitization.
Mobile pre order, mobile payment, delivery service and membership program help drive efficiency and enhance customer engagement. More importantly, the 83,000,000 members provide us a valuable database to understand customers and serve them better. We will continue to embrace new technologies and apply the successful experiences to other brands in our portfolio to drive further growth. Let's turn to Slide 21. Here are some examples of digital marketing campaigns in the Q2.
Pizza Hut started to use the digital platform to engage with customers. We launched a week long digital membership promotion in May with limited offering coupons available for members through the digital platform each day. As part of KFC's 30 years anniversary celebration, we brought back the highly popular beef rep, Lan Liu Wufan, including a member only privilege for 1st 3 days. This promotion ignites a huge buzz on social media. Our beef rep was ranked number 4 on Weibo Hot Topic.
The campaign was very successful in driving traffic. Another example was our collaboration with Sisiqian, a popular singer songwriter to promote our Born to be a Win Fan campaign on his concert tour. This event was very well received and create good social media buzz as well. We have been trying different kinds of digital membership engagement. Despite some initial success, we are learning a lot and that's still a long way for us to learn and release the power of our loyalty program.
We have built an extensive delivery network over the years. KFC started delivery service in 2000 and 7 and Pizza Hut started even earlier back to 2,001. Given the surging consumer demand and emergency of applicator delivery platforms, we have accelerated our delivery network expansion since 2016. At the end of Q2, over 4,900 of our stores across China offer delivery services. Integrated marketing is the key to the success of growth of delivery.
In Q2, we worked with aggregator to drive Pizza Hut sales. We also offer great deals at KFC to capture sharing occasions and trade up. Digital has been an enabler to make our products more accessible to consumers. We leverage our own digital platform and member base to drive frequency and penetration, such as own platform exclusive offers. While we have had some initial success in digital and CRM, we see abundant opportunities ahead and will strive to capture future growth opportunities.
Now that concludes my remarks. Let me turn over to Jacky.
Thank you, Joey. Good morning to those calling from Asia and good evening to those calling from the U. S. You may recall that during our previous calls, we identified several priorities for this year. 1st, we want to build on the positive momentum of KFC.
2nd, we intend to integrate the casual dining and home service businesses of Pizza Hut to drive greater brand focus. And finally, we plan to invest in long term growth and create shareholder value with an effective capital allocation strategy. This morning, I'll provide you with my thoughts on the progress we have made in the priority areas and a high level overview of our 2nd quarter results. Now let's turn to Slide 24. I'm pleased to report that we delivered solid profit growth in the 2nd quarter.
On the back of healthy revenue growth and margin expansion, our adjusted EBITDA increased 21% year on year and our operating profit increased 73% year on year, excluding the impact of foreign exchange. And turning to system sales growth. In the Q2, our system sales grew 7%, excluding the impact of foreign exchange. And during the quarter, we opened 90 new restaurants. The development was across all tiers, slightly skewed towards lower tier cities.
Additionally, to enhance our brand image and customer experience, we remodeled 197 units. So solid execution of our development plan, successful marketing campaigns and innovative product rollout contribute to our system sales growth momentum. Our restaurant margin reached 15.3% during the quarter, up 2.7 percentage points year on year. And I'll elaborate more on the drivers for restaurant margin expansion in the subsequent slides. Moving on to Slide 25.
Let me give you more color on our biggest brand, KFC. During the quarter, KFC's marketing campaigns and products clearly resonate well with consumers. The KFC team generate tremendous buzz around our products by leveraging on the 30th anniversary theme, our loyalty membership program and the social media. In addition, digital and delivery also contribute to the healthy same store sales growth momentum. We are pleased that restaurant margin increased 2.2 percentage points and operating profit increased 48% year on year excluding the impact of foreign exchange.
This was due to the favorable impact of the retail tax structure reform and also driven by same store sales leverage. These benefits offset wage inflation, commodity inflation and promotion impact and we'll elaborate more on the inflation later on. Turning to Slide 26. As we have previously announced, we want to sharpen our focus on the Pizza Hut brand and improve operational efficiency. So starting from the Q2, we have combined Pizza Hut Casual Dining and Pizza Hut Home Service into one reportable segment.
The new reporting structure reflects how we as management review and evaluate operating performance. Now let me touch on the factors that contribute to this quarter's results for Pizza Hut. Similar to KFC, Pizza Hut also benefit from the impact of the retail tax structure reform. This benefit offset higher labor costs and commodity inflation. As a result, our restaurant margin increased 3.5 percentage points year on year and operating profit increased 174% year on year, excluding the impact of foreign exchange.
As Jody mentioned earlier, we are still in the early stage of our integration project. And as we enter the second half of the year, the lapping of prior year same store sales growth will get tougher. And accordingly, operating profit growth may also be impacted. Integration of the brands will take time and we are aware of the challenges ahead of us. Now let's go to Slide 27.
There were several factors that impact our 2nd quarter financial results that will probably continue through the rest of the year. First is restaurant level inflation. Our wage inflation was 7% and commodity inflation was 4% during the 2nd quarter. While wage inflation is an inevitable challenge in the restaurant business, we'll continue to find better ways to schedule our crew and streamline operating efficiencies and processes. As for commodity inflation, we expect the rate to moderate through the balance of the year and we are maintaining our guidance of low single digit inflation for the full year.
I would like to remind you that the retail tax structure reform, which is an industry wide benefit, has contributed to our restaurant margin expansion since its implementation on May 1, 2016. As we head into the 3rd and 4th quarters, such year on year margin benefit will diminish and we'll be lapping a high restaurant margin. Anticipating continuous restaurant level inflation, as I've just mentioned, we will need same store sales growth and productivity gain to sustain restaurant margins for all our brands. But that being said, we are committed to our long term target of 17% restaurant margin for Yum! China as a whole.
2nd is G and A cost, which increased 9% in local currency and mainly driven by higher compensation costs and public company expenses. For the full year, we continue to expect G and A increase of high single digit percentage, excluding the impact of foreign exchange. And third is currency translation. Considering the renminbi U. S.
Dollar spot rate versus the 2016 average rate, the negative currency translation impact may continue in future quarters. Now let's move on to Slide 28. One of the key features of Yum China's business model is our robust unit economics, which translates into strong cash flow generation. Our average pre tax cash payback period for KFC new unit is below 3 years. For Pizza, it is below 4 years.
We are able to maintain healthy returns in a highly competitive market because of our best in class infrastructure, development capability, product innovation and branding. And year to date in 2017, we generated free cash flows of $296,000,000 and our balance sheet remains strong with over $1,200,000,000 in cash and short term investments. Now turn to Slide 29. Our top priority is to invest and grow our core brands over the long term, but at the same time, we are committed to creating value to our shareholders. There are 3 ways to deploy our cash in the best interest of shareholders: share repurchase, strategic acquisition and dividend payout.
And first on share repurchase, during the Q2 of 2017, we repurchased approximately 1,000,000 shares for US39 $1,000,000 at an average price of US36.27 dollars At quarter end, we have $261,000,000 remaining under our current share repurchase authorization, and we plan to execute the share repurchase program in the most effective way possible in future quarters. 2nd, as Mickey has already mentioned, we acquired Dowjia a strategic investment to deepen our expertise in digital and delivery. And now on dividend payout, we are reviewing this important aspect of our capital allocation strategy. As you have seen in our financial results, we have a solid balance sheet and we are able to generate sufficient operating cash flow to support new unit development and still have excess cash. So by the end of the year, we'll report back to shareholders on this front.
As a public company that has only been listed for less than a year, we have already commenced share repurchases and complete a strategic acquisition. So there's no question that we are committed to creating shareholder value. And we're building more know how and strengthening our foundation in strategic growth areas. And this wraps up my comments, and I'll turn it back to Mickey to give you a quick summary and outlook.
Thank you, Jackie. So before we open up for Q and A, let me summarize and make some quick comments about the rest of the year, and I'm referring here to Slide number 30. We delivered strong overall performance in the Q2 with 2 statistics of particular significance. Our loyalty membership program surpassed 100,000,000 members and over 40% of our total company sales were settled with mobile payment during the quarter. Based on our first half performance, we feel confident that we will be able to deliver 550 to 600 new units, coupled with double digit operating profit growth, excluding foreign exchange for the full year.
For the rest of 2017, we remain focused on 3 priorities. The first remains to build same store sales with innovative products and creative marketing campaigns. 2nd, we are embarking on a comprehensive strategic plan for Pizza Hut. This covers revitalizing our dine in business, integrating our growing delivery business across all channels and maximizing growth opportunities. We're encouraged by our digital and delivery capabilities to drive long term growth and shareholder return.
And lastly, as Jackie mentioned, we're analyzing cash deployment opportunities to enhance value to shareholders. I will announce more details of this in subsequent quarters. So that concludes our prepared remarks. And now I will turn you over to Christi to commence the Q and A.
Thank you, Mickey. Before we start the Q and A, let me just highlight we have an upcoming Investor Day event in Shanghai. Yum China will host our 2017 Investor Day October 17 to 19. In addition to senior management presentation, we will also have logistics center tour, new product testing at our test kitchen, store visit in Shanghai, Hangzhou and lower tier cities. And you will also have a chance to meet Dowjia management for cocktail and industry experts including Ant Financial for lunch.
Some of you already registered, but if you haven't done so please contact us after the call. Now moving on to the Q and A session please. We would like to take as many questions as possible and would appreciate if you can limit your question to 2 each and you can go back to the queue for additional questions if you need it. Joe, we will be ready for the first question please.
Thank you, Our first question comes from the line of John Glass from Morgan Stanley. Please ask your question.
Thanks very much. Mickey, thanks for the detail on the loyalty membership and the growth in that. What percentage of your transactions are tender on that loyalty program? Do you have a number for that?
Yes, we've not published those numbers yet, John. This whole thing has developed very rapidly. And I think as Joey said, the impressive thing has been the rapid buildup across 80,000,000 members of KFC alone. We are seeing encouraging signs. She referred to like the 30th anniversary campaigns where we were actually able to drive sales using the loyalty program.
But as she said, I think it's still early days in determining what the impact of it is going to be on sales long term. We regard it as a very promising area. So Joey, any further comments? No. Okay.
Thank you, John.
Our next question comes from the line of Christine Peng from UBS. Please ask your question.
Hi, management. I have two questions. One is for KC. Hi, Joey. Can you give us a breakdown for KFC same store sales growth between transaction and ticket value.
I think I remember you mentioned that transaction growth is the primary driver behind this 4% same store sales growth. But I would like to get a detailed breakdown in terms of the transaction and ticket value. And also mentioned delivery grow by 40% for KFC. Given the 4% same store sales growth, does that mean the KFC in store, I. E, 2019 value has turned flattish this previous declines for KFC.
Okay. You is it your first question or other question? Yes. All right. Okay.
For the transaction, the breakdown is 3% of transaction, 1% on ticket average. The transaction mainly are coming from breakfast and our kiosk. So I'd just like to remind while we always traditionally emphasize on substantial growth, but for us, the most important thing is the total sales, because when we grow our delivery business, our transaction growth will go down as well because the ticket average will go up. So there's always a balance between the 2. The second question is on delivery, and I think we have that question before in previous meetings, and my response remains the same.
We don't look at the business that way because we play on our advantage, which is the fact that we have a very good number of stores, physical stores and we drive the sales from each of the stores. It doesn't matter whether the sales is from delivery or takeaway or dying. As long as the store is growing, the RGM is responsible for all the business.
Thank you, Christine. Operator, can we have the next question please?
Our next question comes from the line of Sara Senatore from Bernstein. Please ask your question.
Hi, yes. Thank you very much. I wanted to ask about PSAT, if I could. Just when we were looking at the historical data, it didn't look like maybe there was quite as much difference between dine in and delivery in terms of same store sales trajectory as we might have expected. So I guess the first question is, could you give some color on how delivery performance might compare with dine in for that business?
Because I think the perception is that the issue may be with the in restaurant demand? And then I guess on as a same note, could you maybe talk about relative profitability with those two businesses, delivery, higher check, but maybe more labor associated with it? And just in that context, to what extent do you think the issues at Pizza Hut are about the competitive environment, overall demand or still something specific to maybe the execution around value or some of the other things you mentioned, if you reflect by your strategic plan? Thanks.
Sarah, this is Mickey. I'll just start the answer to your question and ask Joey to fill in the gaps. Firstly, if you take the first half, that's Q1 and Q2 gone by. And as you know, with Q2 we started reporting consolidated. There is no material difference between whether we report Pizza Hut dine in separately or delivery separately.
So it's approximately similar. I think the important differentiation is that within the dine in business, there is a delivery component and that's relatively recent. So we started delivering our dine in restaurants more recently. Our business is growing very nicely. So overall on delivery profitability, we will not be commenting at this time.
I think we previously said that we regard both segments as profitable for us and we see that no reason to grow that differentially in any way. So overall, I think that delivery does offer an opportunity for Pizza Hut just as it does for KFC. You see that the growth has been quite rapid there. On your question of value, I think we are fairly positioned. I think that Joey is looking at the business with de novo.
So obviously, a lot of things are being tested right now. So I hope that answers part of your question.
Sarah, to address your question on the competitive environment, the overall business, the competitive environment is quite competitive actually. I mean, depending how do you look at it, one way you look at it is in casual dining, Western casual dining, we are very big compared to the rest of competitors. However, the other way to look at it is to look at the ticket average. The ticket average of Pizza Hut is higher than KFC. And our ticket average, there are a lot of smaller competitors, whether it's Western or Chinese, they're all competitors.
So that's just another way to look at it. And for casual dine in these days in China, I would say it's probably slightly more competitive than even QSR. In terms of your question about execution of value, what I would like to emphasize is, we really are looking at the business in a holistic approach because I mean, of course, it will be very, very good to pinpoint 1 or 2 aspects, but the reality is the business has been on decline for 3 years. So there are quite a few key aspects of the fundamentals of the business that we need to fix. As I mentioned in the presentation earlier, one is the product, the new product, the existing product, the service, the value for money.
So all these, we have to do it diligently 1 by 1, 1 category by 1 category, 1 day part by 1 day by the pay part and we are right now on good track.
Thank you very much.
Thank you, Joe. Thank you.
Our next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
Hi, management. Thanks for taking my questions. I have two questions here. Firstly, on Pizza Hut, since we are integrating the business of Pizza Hut Casualty and Home Service, and can you please give us some color on the cost saving in the near term and in the longer term? Trying to understand that whether there is some like low hanging fruit cost saving we can see to drive the margin in the next few quarters on top of those ongoing strategic initiatives?
And that's my first question. And secondly, on cost, can you also give us some color on variable and fixed components? Thank you.
Okay. Thank you. Well,
I think let me just take a top line view, Vishal, to your 2 On the integration of dine in and home service, obviously, there will be synergies because they are appealing to the same customer at the end of the day. And instead of just 330 or so home service units, now we can look at the entire estate of 2,000 units and see whether we can deliver. And we are actively growing that base, So that will continue. And as delivery grows overall, you get cost efficiencies as well. So at the moment, we haven't given any parsed out data on the impact of margins of our delivery integration, and we will report that as we go along in the future.
As far as rental, there is no significant change. I think as you know, we have a very significant mix of our estate is based on sales. As a percentage of sales, there's been no significant change in that regard.
Michelle, for the Pizza Hut integration, as Mickey mentioned, we'll go through it diligently. But one thing I just want to add is while we would like to realize some savings or benefit, we will also reinvest the savings and benefits as if when appropriate to build the sales for our future. So that's the additional point.
Okay. Thank you, Julie. Thank you, Michelle.
Thank you.
Our next question comes from the line of Matt McGinley from Evercore ISI. Please ask your question.
Thank you. My first question is for probably Jackie on the overall movement in the restaurant level margins. Know you only had 2 months of the full lap of the VAT benefit in this quarter. But the food benefit that you got in this quarter was considerably less than what you got in prior quarters and I assume that's probably chicken inflation. And yet the benefit to occupancy and other expense was considerably more than in prior quarters.
So can you give me some context and as to what the overall movement drivers were of that margin in the quarter? And I guess, explicitly why the occupancy was so different in this quarter versus prior quarters? And then the second question is probably for Mickey or Joey on cashless payment. I just want to make sure I understand the increase in mobile payment from quarter to quarter. I know you partnered with the aggregators, but when you look at KFC, year over year it only went from 8% to 10% of sales were delivery and yet you had a sequential increase in mobile payment went from, I think, 31% to 45%.
So I'm not sure what that 2 point increase on delivery and how that translates to a 14 point increase on total mobile payment?
Okay. Just the last one very quickly, Matt, and I'll hand you to Jackie for the question on the margin. I think it's 40% of our total revenues, total China revenues are now coming through mobile payments. So very significant of what's happening at in store is also mobile. And actually the experience is changing very rapidly at mobile.
If you now come to China and visit a KFC, you'll be surprised at the number of people who are not standing in line, but actually ordering on their phone, just like you would at an airport where you check-in at a machine. And also Alipay and WeChat have been very good at extending their networks and promoting it well. As a result of that, we believe China is far ahead of anybody else in terms of mobile payment. Obviously, when you pay through mobile, you capture data, there's all that convenience. So the delivery is has always been significantly mobile led, but now large part of the retail dining experience has also been through mobile.
So exactly on the margin?
Okay. Well, Matt, on your first question on margin, I mean, when it comes to our margin, we really try to view our business holistically in its entirety. So I mean, we closely monitor what's happening in the competitive environment. We evaluate what our competitors are doing and we try to make sure we get the best outcome for our customers and for our brands, so that we can grow ourselves and sustain our margins. So as mentioned in my comments, our restaurant margin expansion was primarily due to the VAT benefit.
And as you point out, in May, we began to lap the benefit. So it is no longer a tailwind. As we head into the 3rd and 4th quarters, the year on year margin benefit will diminish and we'll be lapping a higher restaurant margin. So if you consider the commodity and labor inflations that I mentioned earlier, the margin expansion is going to have to come from our same store sales growth. And as management, we have made this also top priority.
And we have a number of initiatives and strategies around digital and delivery and as well as product innovation and value. We also feel that our brands have pricing power should we need to take pricing. So that being said, we are committed to our long term target of 17 percent restaurant margin for Yum China as a whole.
Okay. Thank you very much.
Our next question comes from the line of Ann Ling from Deutsche Bank. Please ask your question.
Hi, management team. First, just follow-up on regarding the same store sales growth. You mentioned about like a question for Jackie. You mentioned about like the price the wage increase and all this commodity price increase. So what sort of like same store sales growth we need offset this cost increase?
Is it possible to give us a figure or ballpark figure for both for KFC? And the second question is on the share buyback. What is like what are the criteria in considering share buyback at like let's say $36 or $40 Is there any particular criteria you're looking at earnings yield or anything on that part? Thanks.
Okay, Ed. Thank you for your questions. So on your first question on the level of same store sales growth required to maintain margin. So I mean, we expect our labor inflation to continue in the high single digit range and commodity inflation to be in the low single digit. And as you know, I already point out a couple of times, in May, we began to lap the VAT benefit.
So it's no longer a tailwind. But if you look at a combination of all this, in order to cover our inflation and maintain our margin, we need solid same store sales growth. We have not set a specific target for that because again, we view our business holistically and in its entirety. Once again, keep in mind, we have had relatively modest pricing due to the VAT benefits. So we do feel that we are competitively priced today, but we also feel that our brands have the pricing power if we want to take pricing.
And on your second question on share buybacks. As I mentioned earlier, I mean during this quarter, we repurchased approximately 1,000,000 shares for $39,000,000 or an average price slightly above $36 And I mean, we still have $261,000,000 remaining under our share repurchase authorization. But our plan I mean, there's no fixed rule. I mean, our plan is just to execute the program in the most effective way possible in future quarters.
And just a couple of color to just add to what Jackie has said to you. Remember, it's not as though VAT is going away. It's just that we start lapping it, right. So the benefit continues. And obviously, in a competitive market, some of it will need because our competitors get the same benefit.
I think from the comments that Joey made earlier and Jackie made just now, you saw we had positive transaction growth. So it appears that the business is growing in a healthy fashion. And we have not taken pricing for a long while. I think Joey referred to the wing bucket being selling at the same price for 4 years, etcetera. Pizza Hut is a slightly different story, but on KFC, we believe there could be pricing power if needed.
So overall, I think that we feel quite confident about being able to grow our profit overall. But like Jackie said rightly, it's a moving thing. We don't really fix so much on it. We approach it quarter by quarter to take pricing decisions accordingly.
One last point to add, I guess, on the wage increase is if you look at KFC's number, the wage percentage, while we experienced wage increase, but we managed to find ways either through more efficient procedure and process or technologies to maintain the cost of labor sales ratio in the last few years. It has been relatively stable. So that will help and we certainly will look at every line to find opportunities in order to maintain the margin. Thank you. Thank
you. Let's take the next question please.
Our next question comes from the line of Brian Bittner from Oppenheimer. Please ask your question.
Thanks for taking the question. I have 2 margin questions and then I'm going to ask a follow-up on cash. On the margins questions, the first question back to Matt and McGinley's question, I don't think you guys really directly answered it. What was the driver of the year over year improvement in the occupancy and other operating expense margin this quarter? Because I don't think any of the retail tax went to that line item.
That's the first margin question. 2nd margin question is, you reiterated the goal to get to 17% margins, but if you hold margins flat from here for the rest of the year, you already be at 17% margin. So the question is, are you saying that your goal going forward is to just hold margins flat on a year over year basis kind of from here going forward?
Brian, firstly, VAT impacts every line. So it's not just related to food, it's related to occupancy, it's related to utilities, it's related to everything. It's a comprehensive tax reform in China. Anybody gives us a VAT reform, we can afford a qualified invoice, we can deduct for it. So that's a significant feature.
It's had an impact on all the lines. It's not your understanding that occupancy is not impacted by VAT is not really true. On the margin, Jack, do you want to take the second part of the question?
Yes. The second question is on the long term, the market restaurant margin target. So I mean, again, I mean, going into the second half of the year, the year on year revenue margin benefit will diminish, as I pointed out a couple of times. So we'll be lapping a high restaurant margin going forward. But I mean, like I said earlier, the VAT benefit is not going away.
I mean, we have already reached this around 16% range for the restaurant margin, but our long term target is still 17%. So I mean, going forward, we still have to work on our same store sales growth to get to that point.
I think overall margins have been very healthy since right since May of last year. So as we go into this year, we've got the Assure. Continued growth in margin becomes more challenging because you don't have the lapping VAT benefit. But we have it's just suddenly at a higher level. And now we have to see where we're going to start up with.
No, I understand VAT does not go away. I fully comprehend that. Are you expecting the margins to decline in the second half? Because what I'm trying to say is if the margins are flat in the second half, you have 17% margins this year if they're flat. So I guess because I think it's good to have the expectation out there so everybody understands.
Are we expecting margins to decline year over year now that we're not getting that tailwind in the second half? Because if they don't, then we'll have 17% margins this year already and you'll be at your target is kind of what I'm saying.
Brian, it's Christy here. I understand your question. We are definitely not guiding the near term margins from quarter to quarter or half to half. The 17% is our longer term target for restaurant margin. And just to be fair, compared with across the industry, we believe 17%, Once we achieve it, it will be a very healthy target already.
We are not providing additional guidance in terms of the margins. All we are saying is we are confident with the double digit operating profit growth. I think that once we achieve that 17% longer term target, obviously, we want it to be we won't be able to achieve it sooner rather than later. We think we can look at it or go and make additional adjustment. But what's important at this point of time as we highlighted by the management is that keep in mind Pizza Hut is still in a turnaround period.
At this time, I think what we are focusing on is really to drive sales. And we will we have all the confidence that once the sales is revitalized, the margin will follow. So again, just to be very clear, we are not providing second half margin guidance at this time. And we are confident that as long as we continue to push forward as the priorities, the margin will follow.
Got it.
Can we take the next one please?
Our next question is a follow-up question from Christine Peng from UBS. Please ask your question.
Hi, management. I have two quick questions. One is for Pizza Hut. Can you provide us a breakdown of same store sales growth between traffic and ticket value? And second question is for Jackie.
The cost pressures you mentioned in the Q2 is actually not very different from the Q1. However, if we look at the spot market prices for a lot of commodities, especially like chicken, actually, in the second quarter, chicken prices have fallen quite dramatically compared with Q1. The reason the cost pressure consisted keeps almost the same level in the Q2, is that because of inventory? And looking in second half of the year, what is the expectation towards chicken price on a year on year basis for Yum! China?
Thank you.
Okay. So Julie can answer Pizza Hut's traffic question and Jackie can address the commodity issue.
Christine, for Pizza Hut, right now, we are running at 1% increase on transaction and 1% decline in ticket average. As we are going through the product review, we certainly focus on good new products and good value for money. So going forward, the focus will still be more on getting more customer into the store. I guess that's it. And then go to Jack.
So Jacky, before you start, just quickly, Christine, since you follow the company so closely, you picked up from Joey, right, that the traffic growth in KFC was plus 3 and Pizza Hut was plus 1. And now I think Joey is absolutely right in cautioning that while that's good and we're happy with those numbers, just remember that as delivery grows, it puts pressure on traffic because on transactions rather. Total number of customers may increase, but the average ticket per transaction grows a lot. Plus as we sell buckets during holidays, etcetera, and the bucket mix is increasing, that also has an impact. So it's kind of a parsed out number, but overall numbers were plus 3 and plus 1.
Thank you, Mickey. Actually, the dynamic is different for 2 business. So I just want to take the opportunity maybe to talk a little bit about it. For KFC, the more delivery we do, the lower ticket average sorry, the higher ticket average we have, the lower ticket TC we have because the average TA for ticket average for KFC is much higher delivery than Dine. However, for Pizza Hut, it's the reverse.
So just bear in mind when you look at the business because the more delivery we drive in Pizza Hut, actually the lower ticket average we have.
Okay. And Christine, on your second question on the commodity price or specifically chicken price, commodity inflation was 4% during the 2nd quarter and the rate peaked at 4.5% in the Q1, it came down to 4% in the second quarter and we expect it to continue to moderate throughout the rest of the year. So we have finalized purchasing contracts for roughly about 90% of our full year spend. And at this time, we expect commodity inflation to be low single digit percentage for the
full year. Thank you. Can we take the last question, please?
Our next question is a follow-up question from Annie Ling from Deutsche Bank. Please ask your question.
Hi. It's regarding on the effective tax rate. I've noticed that there's some volatility in by quarter. And just want to check what is our full year guidance. I think around listing time, we mentioned about the effective tax rate around 27% or 28% to 40%, correct me if I'm wrong.
And so what is is there any guidance for the full year? And for this guidance, does that include also the potential like withholding tax if we're paying dividend this is actually excluding that?
Okay. And on your question, so for Q2, yes, the effective tax rate was a little bit higher than last quarter last year's Q2. And keep in mind, we were still part of Yum! This time last year. So our tax rate in Q2 2016 was related to Yum!
Global tax strategy. So but for the full year in 2017, we maintained our guidance of an effective tax rate in the high 20s. And that will reflect all the withholding tax that you just mentioned.
Okay, thanks. Okay.
There are no further questions at this time. I would now like to hand the conference back to today's presenters for some closing remarks.
Okay. I think thank you everyone for participating to the call. I also thank the team and for a lot of interesting questions. If you have any follow-up, feel free to contact us. That's it for now.
Thank you very much.
Okay. Thank you,
everyone. Bye bye.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may all disconnect.