Thank you for standing by, and welcome to the Yum China First Quarter 2023 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by 1 on your telephone keypad. I would now like to hand the conference over to Ms. Michelle Shen, IR Director. Please go ahead.
Thank you, Ashley. Hello, everyone. Thank you for joining Yum China's first quarter 2023 earnings conference call. On today's call are our CEO, Ms. Joey Wat, and our CFO, Mr. Andy Yeung. Before we get started, I'd like to remind you that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. You can find the webcast of this call in a PowerPoint presentation on our IR website.
Now I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?
Thank you, Michelle Shen. Hello, everyone, thank you for joining us today. We are pleased to have set new records for first quarter revenue and operating profit. It's a wonderful start to 2023. Like the Chinese saying, 开门红 (kāi mén hóng). I want to thank all of our 400,000+ employees. Without their hard work and dedication, our performance would not be possible. System sales grew 17% year-over-year. Back in early January, we had low visibility into how conditions would unfold after the realization of strict COVID-19 measures. Chinese New Year is a critical trading period for us. This year, an earlier Chinese New Year was particularly challenging due to shorter ramp-up period. We planned for multiple scenarios incorporating regional differences and focused on driving sales based on the more optimistic scenarios. Therefore, we were able to effectively deploy resources as opportunities emerged.
Operating profit more than doubled to $460 million. Our effort in enhancing operational efficiency and rephasing our cost structure in the past few years contribute to strong profitability in the quarter. Our system sales growth, compared to 2019, is +20%, Operating profit also, compared to 2019, is +37%. These results exemplify our ability to stay resilient in challenging times and seize opportunities when better times emerge. Our initiatives and investments, along with our resiliency growth mode strategy, have make us more agile and responsive. During the quarter, we were encouraged by early signs of recovery. Notably, dine-in, takeaway, delivery all grew year-over-year on a same-store sales basis. Delivery accounted for around 36% of sales, same as a year ago. Customers continue to love the convenience and delivery provides.
Off-premise was over 60% of sales. Same-store sales grew year-over-year across different regions and trade zones. We benefit from increasing mobility and saw a 40%+ growth at transportation and tourist locations. However, same-store sales at these locations in the first quarter were still 20%-30% below 2019 levels. Weekend sales growth slightly outpaced weekday sales. Apart from increased social gatherings, value programs since mid-2022 also contribute to growth. Let me share about how we grow sales. We focus on our core pillars, good food at great value and good customer experience to capture demand. Good food at great value is our hallmark. We refreshed several signature products and achieved great results. After doing it for more than a decade, people come to expect our Chinese New Year bucket at KFC.
To capture a home consumption around family reunions, we add the option to trade up for a juicy whole chicken, Quanjie. We sold 11 million whole chickens in the first quarter, more than doubled year-over-year. We gave our classic beef wrap a localized spicy twist. Mao Xue Wang Nen Niupu Fan. The innovation sparked social buzz, leading to a sellout in many markets in just six days. At Pizza Hut, the Supreme series is our most popular pizza lineup, accounting for nearly 30% of all the pizzas we sold in the first quarter. We introduced Wagyu beef and seafood Supreme. In Chinese New Year. By including premium ingredients like abalone, sea cucumber, and Wagyu beef, these pizzas became the perfect festive choice. We also created Double Durian Supreme, for durian fans.
Two types of durian, Sultan Wang and Ding Ding, were combined with grapefruit and pineapple to create an explosive tropical flavor. Durian lovers love it. We continue to make our good food available at great value. At KFC, Crazy Thursday and Sunday Buy More Save More promotions, continued to drive sales momentum and excitement. This year, we offered these great values even during Chinese New Year. We also revamped our weekday value combos, OK三件套, with more choices and lowered prices of select burger combos to just 19.9 CNY. These three-item combos attract new customers and grow frequency. We also expand our popular Buy One Get One Free campaign at Pizza Hut to include pizza and steak options. Customers can redeem the free item immediately or in the next visit within 30 days.
The campaign significantly increased sales by encouraging repeat purchases during the promotion period. Now let's talk about operating efficiency. Late last year, a significant portion of our employees and riders were infected with COVID. At the peak, over 4,000 of our stores were temporarily closed or offered only limited services. By early January, as people gradually recovered from COVID, we made every effort to keep our stores open and resume normal operations. We got ready for the Chinese New Year period. We planned for crews and inventory based on the more optimistic scenarios. We also account for regional differences and continuously fine-tuned our plans based on regional learnings. We further improved hiring and incentive program to manage staffing and minimize labor shortages. To enhance productivity, we expand our initiative to share store management teams across multiple stores. It also provides career development opportunities for our young talents.
Let me share with you about our digitization. We have built a powerful digital ecosystem that's instrumental to our innovations while also enhancing operational efficiency. We leverage AI to optimize demand forecasting, inventory management, crew scheduling, and production. Smart order system streamlined the food preparation for dine-in and off-premise orders. These capabilities are particularly important during the peak season like Chinese New Year. Migrating our key infrastructure to private Yum C cloud enhanced the reliability of our operations. It's especially important when we face significant traffic spikes during campaigns like Crazy Thursday. Smart delivery continue to improve delivery coverage and flexibility. Last year, we upgrade the system to dynamically adjust delivery coverage for each store by day part. These capabilities, along with our dedicated delivery riders, allow us to capture more sales and fulfill orders even during the Chinese New Year peak season.
We continued to improve digital touchpoints for better engagement with members. Digital orders account for around 89% of sales in the first quarter. Our loyalty programs exceed 430 million members. Members steadily contribute to about 60% sales. We actively engage members and drive frequency with privileged subscription plans. K Friends is an invitation-only program for top 1 million loyal customers. K Friends receive exclusive coupons and perks and a royal crown on the call screen when ordering in store. These help us gain valuable insights to improve service for our most loyal members and all customers. To sum up, we are extremely pleased to deliver strong first quarter performance.
Multiple scenario planning, innovative products, and value campaigns, along with our agile supply chain and digital capabilities enable us to capture market opportunities. As we progress through 2023, we plan to stay nimble to the evolving market conditions. Looking ahead, we will focus on building sales momentum, expanding our store network, and fortifying our competitive moat. With that, I will turn the call over to Andy. Andy?
Thank you, Joey, and hello, everyone. Let me now share with you our first quarter performance. First quarter sales rebounded significantly from the fourth quarter. We made tremendous efforts to drive sales since the reopening by offering innovative food and compelling value campaigns. Rest-restaurant margin reached 20.3%, the highest since 2017. Our margin expansion was driven by sales leveraging, effort to rebase our cost structure in recent years, investment in improving operating efficiency, and temporary COVID-related relief from government and landlords. Let's go through the financials. Foreign exchange had a negative impact of approximately 8% in the quarter. First quarter total revenues were $2.9 billion in reported currency, a 9% year-over-year increase. In constant currency, total revenue grew 18%. System sales increased 17% year-over-year in constant currency.
The robust growth was fueled by same-store sales growth of 8%. The contribution from new units and significantly fewer COVID-related temporary store closures. Both KFC and Pizza Hut achieved 17% system sales growth. By brand, KFC same-store sales grew 8% year-over-year. Same-store traffic grew 6% and ticket average grew 2%. Pizza Hut same-store sales grew 7% year-over-year. Same-store traffic grew 13% and ticket average decreased 5%. These results were largely due to the successful promotional activities, which drove strong traffic and lower ticket average. Restaurant margin was 20.3%, 650 basis points higher than the prior year. Sales leveraging contributed to approximately half of the margin expansion. Labor productivity gain and lower occupancy costs were other key factors.
We also enjoyed $18 million benefit from additional VAT deduction, as thanks to a government policy to help businesses dealing with the challenges posed by COVID-19. These are partially offset by cost inflations and increased promotion expense. Let me go through the key items. Cost of sales was 30.1%, 100 basis points lower than prior year. We kept commodity prices low through tremendous effort locking in prices and innovating the menu. We also reduced wastage and benefited from higher VAT deductions. Gains were offset by increased promotional activity to drive traffic. Cost of labor was 24.6%, 160 basis points lower than the prior year. Sales leveraging and better labor productivity more than offset headwinds from low single-digit wage inflation. We further improved labor productivity through store management team and crew sharing initiative.
Occupancy and others was 25.0%, 390 basis points lower than the prior year. This was mainly driven by sales leveraging, lower rental expense, as well as other cost-saving initiatives. Rental expense improved due to relatively more favorable rental terms for new stores and store portfolio optimization. We also recorded $8 million in rental relief related to COVID-19 surge last year. G&A expense increased 16% year-over-year in constant currency, mainly from performance-based bonus and merit increase, as well as additional travel expenses from the resumption of business activities. Operating profit was $460 million, increasing 118% in constant currency. Sorry, in reported currency. Our effective tax rate was 28.5%. We expect full year effective tax rate to be around 30%.
Net income was $289 million, increasing 189% year-over-year in reported currency. Diluted EPS was $0.68, an increase of 196% year-over-year. In the first quarter, we generated $507 million in operating cash flow and $328 million in free cash flow. We returned $160 million to shareholder in cash dividends and share repurchases. At the end of the first quarter, we had around $3 billion in cash and short-term investment and another $1 billion in long-term deposits, which would benefit from better interest rates. We expanded our store network and remain committed to capturing future growth opportunities.
In the first quarter, we opened 233 net new stores. In the first quarter, we faced an earlier Chinese New Year and labor shortage, as well as delays in contract signing and building permit process due to the widespread infections in the fourth quarter. However, we have a strong pipeline and are confident in reaching our goal of opening 1,100-1,300 net new store this year. Our new store continue to perform well. We've paid a period of two years at KFC and three years at Pizza Hut. We'll continue to focus on expanding our store network in a systematic and disciplined manner. Let's turn to our outlook. We're encouraged by first quarter performance. Sales during the Chinese New Year trading period were buoyed by pent-up demand to travel.
Same-store sales post Chinese New Year have remained at teens level below 2019. We are still in the early stages of the recovery. The pace and the trajectory of the recovery are likely to be gradual and uncertain. Overall, global macroeconomic conditions remain challenging, and the pandemic is still lingering. The top priority for us this year is still driving sales. Consumers are value conscious, so our investment in promotions to attract more traffic and sales are crucial. In the coming quarters, we expect gradual inflationary pressure, and we anticipate the benefits from additional VAT deductions and rental relief to face off. We have demonstrated our ability to capture opportunities in good times and manage the downsides in bad times. We will continue to utilize extensive scenario planning, flexible cost structures, and operational agilities to navigate uncertain environment.
We remain committed to seeking long-term growth opportunities in China, investing in strengthen our strategic mode, and creating value for our shareholders. With that, I will pass you back to Michelle. Michelle?
Thanks, Andy. Before starting the Q&A, we'd like to share a heads up that we have scheduled our 2023 Investor Day, September 14th to 15th. The event will take place in Xi'an, China, and it will also be webcast for those who can't join us in person. We will provide more details soon. Now we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Ashley, please start the Q&A.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michelle Cheng with Goldman Sachs. Please go ahead.
Hi, Joey, Andy, congrats for the very strong results. My question is about the value content you mentioned on the call just now. Since we have been going through this reopening of volatilities for the past few months, and given we see the trend is still quite challenging, can you share with us what is your thinking about the consumers' spending power and strategies on the product mix? Related to this question is about the food cost. We see a pretty decent improvement on the food paper cost saving.
If we look into KFC versus Pizza Hut, it looks like KFC benefited quite a lot on this food cost saving, while Pizza Hut didn't see that much benefit. Can you also share with us how these value campaign and the product mix adjustment impact the two brands food cost? Thank you very much.
Thank you. Thank you, Michelle. Let me comment on the value campaigns, and then Andy can follow up with the cost comment. There are economic challenges right now, and therefore consumers are quite value cautious. The key question here is what are our strategy? There are three prong, three pillars of our strategy. One is menu. We really focus on good food, good tasting and innovative food on top of value campaigns, because the pure value campaign is not enough. The value campaign must come with good food in order to get the benefit. You will see, you know, the manual fund, but most one, and that is right after Chinese New Year value campaign product. That was doing very well. The good value, of course, is important.
You can see we have KFC, we have the Crazy Thursday and we add weekday value combos right now. On top of that, we introduced the solar wind campaign, the Sunday value campaign since middle of last year. All of these work quite well. So we'll continue to work on that because let's not forget, from Crazy Thursday has been working since 2018. So it takes many years hard work to build that as a platform. With Pizza Hut, with this Green Wednesday, which has been working quite well. On top of good food, good value, we have good fun. We even right now delight customers with some fun toys or even lucky draw to a trip to Maldives, et cetera. That's the first pillar of the strategy. Second is pricing.
When we raise price, we always do it very, very carefully and prudently, and we also carefully design trade-up options to protect the ticket average and margin. While we are going heavy with the value campaign, you can see management team has been able to protect the margin for the shareholder. On top of that, we introduced good selection of for each price range, including entry price point products, and let the customer choose. The third pillar of the strategy is to keep the cost competitive in inflationary environment. Our supply chain has been doing amazing work to secure supply and product innovation at scale. While these value campaigns seem amazing marketing campaign, well they are amazing, but these are not possible without the very strong supply chain behind that.
We also drive operational efficiency, including staff sharing, lowering the food waste, and then also save a lot of money from rent in order to pass these savings back to the customer. I'll pause here. I pass to Andy for comments related to cost.
Thanks, Joey. Yes. Also, I think, you know, when you look at Pizza Hut, we're very encouraged and very happy with the results. If you look at, you know, the same-store growth for Pizza Hut, you know, we saw 7%, you know, same-store growth. If you look at our system growth, you know, and it grew 70%. Pizza also have seen, you know, acceleration in store opening. At the same time, you know, we also see very strong margin expansions. We saw almost 350 basis on restaurant margin expansion. If you look at the operating profit itself, it's almost double, like 85% increase on a yearly basis, which is, you know, slightly less than KFC, which is 90%, but you know, still very, very respectable.
I think, when we look at the cost structure on line item basis, obviously the two business are slightly different, you know, in the way they operate and also, you know, the material that they use. When you look at, you know, the food costs, you know, KFC obviously, you know, have more import product, you know, components, beef, cheese, dairy product, et cetera. Then, also, you know, for the two brands, they also have different, you know, sort of like pace of promotional activities. If you look at, Pizza Hut, you know, you have very strong value campaign, and it drove very strong, store traffic growth.
I think, you know, the strategy, although slightly different, for the two brands, are working quite well both at Pizza Hut and KFC. Thanks.
Thank you. Your next question comes from Lillian Lou with Morgan Stanley. Please go ahead.
Thank you. Congratulations again, Joey and Andy, for the strong results. My question is actually on the cost side, because I think Joey and Andy did mention that there are some benefits from a cost rebase in the first quarter, significant margin improvement aside from the sales leveraging. Especially I think, if we look into the details, there has been significant savings on the depreciation and amortization compared to last year. So my understand, going forward, what's the margin look on the full year basis? Can we expect a similar pattern of cost saving from our patient put aside the phasing out and of relief?
Also with your guidance on the depreciation cost for the full year, given the significant decrease in the first quarter. Thank you.
It seems like another question for me, so I will take this question. In term margins, I think, you know, when we look at, you know, first quarter margin improvement, we're very encouraged obviously, as we have expected. You know, with increasing sales, we're gonna see sales leveraging, so approximately almost half the improvement are coming from, you know, the sales leveraging. Now, in term of the overall cost structure, you know, we can see that, you know, labor productivity, you know, some of the effort that we're putting to rebasing our cost structure there, you know, benefiting, you know, the FL as well. You can see that, you know, the optimizing, you know, labor scheduling and labor mix.
We also have their initiative, as we mentioned on the prepared remarks, restaurant management team and crew sharing initiative. On the operating efficiency side, I think, you know, you would all see that benefit from less wastage, because we have better sales forecast and real-time inventory visibility. That's the, you know, benefit of investing in technology, in digitalization. We also, you know, have installed some, you know, smart utilization, smart utility devices in the restaurant, so we also see a better utility usage. In terms of what you mentioned in terms of our O&O expenses and depreciation, I think, you know, one is that, you know, the rental expense, as I mentioned before, we have, you know, relatively more favorable rental terms for our new store.
Also, we have a store portfolio optimization that should also help us in term of, you know, our depreciation. Then if you look at our overall investment for a newer store, we also have to bring the upfront investment down and, you know, that will also benefit in the long term our depreciation expense as well. Now, in the first quarter, we also benefited from, you know, from temporary relief, as you mentioned, $8 million, from rental relief that we had from last year COVID search, and then also about $80 million from additional VAT deduction, which is a, you know, a government policy that help business to deal with COVID challenges. We'll see how long that policy would continue.
In terms of outlook, I think one thing that I want to, you know, emphasize on is that, as I mentioned, sales is a very important factor in determining our overall margins. You know, with sales improving year-over-year, we should see sales leveraging. However, I wanna point out that, you know, we do have seasonality with our sales. Same quarter generally is a slower quarter for sales and therefore, you know, margin. The other one is that, you know, our when we look at, you know, the the pace of recovery, I think as I mentioned, post CMI, we see, you know, a more gradual pace of recovery.
Still, like, you know, if you look at the cost of the sale, you know, we'll have a relatively stable cost of sales with the commodity prices. We already seen, you know, from the spot market that, you know, some of the inflation pressure are building, although much more gradual compared to overseas. We're also likely to see wage inflation through the year. You know, normally, we see mid to high single digits. Currently we're at low single digits, so I think we're gonna trend back to normal, you know, as the recovery continues. That's sort of like the way we look at it. You know, for margin improvement, I think to a large degree it's driven by sales leveraging.
I think, you know, the cost structure cost rebasing initiative will continue to take hold. You know, some of the temporary relief will go away for the rest of the year. Thanks.
Andy, thank you, Lillian. I just want to add few comment on the question. The current cost base is certainly more resilient than three years ago. You know, last three years have been difficult, challenging, particularly 2022. Therefore, we really have been pushing a lot to rebase the cost and the result is showing right now. Let me give you some specific example. For the rent, it is better. It's actually the best rent in the last decade for two reasons. One is our store portfolio is better because we have been able to prune some low performing store while build new stores with much better rent structure. I think about over 40% of our stores were built in the last three years.
For depreciation, roughly even for just 2022, our CapEx for new store is down by 25%-35% just for 2022. If we add up the improvement in the last three years, the improvement is more. Well, the WPSA, the sales per week is also coming down. The profit margin maintain or even improve. The benefit of lower CapEx is not only benefiting depreciation. Think about the sales side, Lillian. It also benefit the new store opening. With the lower CapEx for new store, we are able to open stores in trade zone that we were not able to open in the past. Lower CapEx allow us to have more flexibility to open stores and still maintain the profitability. Third one is the labor cost. I think this is a ongoing challenge.
As Andy mentioned, we have initiative working on crew sharing, starting with the delivery rider and now moving to store staff as well. That is something that we'll continue to work on, and it's still quite early in the process, but we'll continue that. Thank you, Lillian.
Your next question comes from Lina Yan with HSBC. Please go ahead.
Hi. Thanks for taking my question. I want to compare the recovery pattern on same-store sales basis, first quarter 2023 versus first quarter 2021. As you mentioned in your presentation, with offline traffic recovered, you still see positive growth in delivery. This was actually different from what happened in first quarter 2021. My question is, was this due to a structural shift in the spending pattern of consumers? Like, Dan might never come like near to like a 2019 level or it means, with delivery still growing in the post-pandemic age, we actually have more room to grow our offline traffic and the dine-in service. Actually, we have like a bigger potential versus 2019 to grow our single store sales. That's my question.
Hope I explained it well. Thank you.
Lina.
Hi, Lina.
I understand your question, maybe Andy. Andy, you go ahead.
Thanks Joey. I think, you know, obviously the, you know, in 2021 and today, is quite different, macro environment and also in term of the overall, COVID recovery. You know, different time, different place, I'm not quite sure it's comparable, you know, looking at 2023 versus 2021. What I can say is that, you know, if you look at delivery were... Off-premise in general have been growing, before the pandemic, and continue to grow, through the pandemic. As we have mentioned, you know, in, you know, last quarter and, with reopening, we do expect dine-in, traffic to rebound, in data. We also, you know, see that, you know, delivery remain very robust.
You know, I think, we're looking at, you know, delivery sales overall. Last year, at the end of last year because of pandemic, it spiked to about 39% of all sales. Now is roughly about 36% of our sales. I think, you know, within that, you know, 35% up and down a few %, couple percentage point, is within our expectation. Now we also benefit not just because the overall obvious consumer continued, you know, to get the favors and the benefit from, you know, enjoying that benefit of off-premise dining, the convenience and whatnot. Also, you know, we also benefit from our store network restructuring. You can think about that.
We have mentioned, over the past couple years, we continue to build more densities within the city that we have already stalled. With store that format that are more catering toward delivery and takeaway business. We are seeing some network effect there, right? We benefit from that. Also, if you look at our delivery business model, is very unique in a way that we deliver, we have dedicated riders delivering our food to consumer for the last mile.
That allow us to ensure good service quality, good food, timely manner, more importantly, when, you know, the labor shortage in rider were particularly acute like Chinese New Year or what we have in, you know, Good Thursday or rainy day or whatever, we do have, you know, ability to, you know, provide that delivery services when others perhaps, you know, may not. So overall, I know we also have continued to improve our trade zone.
As we mentioned, we have invested in technology to help us to more effectively manage our trade zone for delivery and also the efficiency, you know, in term of our delivery services, both in term of food production process, queuing and also logistic side on the routing for, you know, our riders. I think, you know, digital delivery will continue to be a very important growth driver for us going forward. Obviously, you know, with the rebound, you know, in store traffic, we may see a percentage change and fluctuate. I think, you know, on long term, we're pretty confident in the off-premise dining. Thanks. Joey, do you have anything to add?
That's it. Thank you, Andy.
Thank you. Your next question comes from Chen Luo with Bank of America. Please go ahead.
Hi, Joey and Andy. Congratulations again on the solid results. My question is also related to same-store sales growth as I like to get more detailed color on the Q1 same-store sales. First of all, our result announcement mentioned that off CMY, our same-store sales actually was below the 2019 level by King's level. It seems that there could be some sequential weakness. On the other hand, is it fair to say that on the year-on-year basis or if we compare with 2022 level, actually in March we are seeing even better year-on-year same-store sales growth as the Shanghai lockdown actually started from the middle of March in Pudong. Secondly, by city tier and regions, which parts have actually registered even better growth?
Are we seeing better growth in Tier 1, Tier 2 cities or lower tier cities? Or in which regions such as in Eastern China or Southern China, which part of the regions actually have seen even better growth? Lastly, when it comes to dining, which was also the focus of the previous question by Lina, apart from the fact that we mentioned that our stores in transportation hubs and tourist locations still saw 20%-30% same-store sales decline versus 2019, are there any other drags that we have observed in terms of the same-store sales at the dining level. Is it because of too many new stores in our mature markets which may cause cannibalization or are there any other drags?
How are we going to do to address these issues so that we can see further improvement of the dining traffic? Thank you.
Thank you, Wilson. I'm going to address on the same-store sales, but let me also emphasize for our first quarter number is also equally to look at the system sales compared to 2019. because there's a gap of same-store sales versus 2019, but the system sales growth, as I mentioned from my opening remark, is +20% versus 2019, and our OP is +37% versus 2019. I think we like to focus on same-store sales, but it's equally important to note the impact of better store portfolio and also the new store open in the last three years. I'm gonna go through a bit more color of the same-store sales breakdown and then come back to the dining comment. We see strong rebound from Q4 2022, and we grow year-over-year.
First two months in Q1, we benefit from the pent-up demand for Chinese New Year travel. More than that, we have multiple scenario planning, and we invest heavily in both ingredients and staffing. Therefore, I believe we have a better than industry average result. After the Chinese New Year, the same-store sales continue to grow year-over-year. Yes, it remains since below 2019, but the good momentum continues into quarter two. I think you can see from all the picture, May 1st holiday, the trading was vibrant. It's still low single digit below 2019, but it's catching up quite nicely. The encouraging sign is that the sales growth year-on-year is led by transaction growth in both KFC and Pizza Hut. You know, in our business, this is absolutely important.
As I mentioned already, system sales improved significantly with much larger store network. Also despite, you know, the same-store sales gap, the older stores are much healthier because we have been pruning store portfolio. The new stores are more resilient because by redesigning the store network, as Andy Yeung mentioned before, and adjusting the store format to capture off-premise demand, with more convenience, less investment, flexible cost structure. Net-net, you know, it's more resilient, the store portfolio. Let's move on to the more specific, by brand, by region, by city tier, et cetera. By brand, KFC and Pizza Hut same-store sales is similar. Versus 2019, it's interesting, the Pizza Hut same-store sales versus 2019 is slightly higher than KFC. It's Pizza Hut is -4% versus 2019, and KFC is -8%.
It's partly because KFC has a higher ratio of stores in transportation and tourist location. Also it shows that Pizza Hut had good improvement since its revitalization program. KFC system sales growth higher than Pizza Hut because we opened more new stores for KFC in the past few years. Therefore, it's, you know, plus 19% for KFC. By region, year-over-year, all markets grew for quarter one, except Beijing, because remember last year we had Winter Olympics. By March, subsequently, the number improved and turned positive. Versus 2019, KFC Eastern China outperformed other regions because of its very vibrant economy. Pizza Hut, Northern China outperformed because it has less competition. Our business of Pizza in Northern China actually is quite strong. By city tier, year-over-year, lower tier cities performed well as people return home for Chinese New Year.
Tier 2 cities also performed well because last year, the strict control on COVID impact the tourism. This year we are getting the benefit out of it because domestic tourism in cities like Changsha, Xi'an, Hangzhou helped a lot. Transportation helped. Year-over-year, we see substantial improvement with increased mobility. you know, the momentum obviously further improved during the May holidays. I think, I hope that give you some color of the different angle of the same-store sales. In term of dine-in, it improved. It continued to improve because, you know, we have increased mobility after the COVID policies changed. It's important to see whether dine-in, delivery or takeaway, all the same-store sales improve. It's not only just focused on one.
Of course, it improved more for Pizza Hut than for KFC because we rely more on dine-in business for Pizza Hut. I would like to ask you to look at the other side of our business, which is the resiliency. KFC, it took us a lot of hard work and determination to get the off-premise sales to as high as 60%, 70%. That means it's a very resilient business model. Because even with dine-in were significantly impacted, we are able to still do the business and bringing sales. With Pizza Hut also improved a lot because the percentage of off-premise business for Pizza Hut back to 2019 was only 30%. That's between takeaway and delivery. By 2022, that ratio is 50%. Back to 2023, now the ratio is down to 46%.
It would be very good for Pizza Hut if we continue to improve the ratio of takeaway and delivery, because that improves the resiliency of the business. It's a good thing. I hope that give you some color of our thinking of the dine-in business versus the others. Is there any other threat? There are always much uncertainty, particularly the macro environment. We can't forecast. We can't predict too well. What I would like to remind our analysts is we have always have multiple scenario planning. In the last three years, I hope we have also demonstrate our ability to deliver and to have the resilience in our business during bad time. During the past quarter, we also have demonstrate our ability to seize opportunity during good time. Are too many new store a threat?
Not really from our point of view. Therefore, we are still sticking to our new store opening guidance because as Andy mentioned again and again, we have very disciplined and systematic way of opening new stores. One thing I would also like to mention is, and to emphasize, is the agility and the flexibility of the new store portfolio is very important going forward because instead of investing too much money on big store, we are investing in smaller, lower investment store, but with shorter distance between the stores. To make it a more convenient network for the customer, but also a lower cost of delivery network for the operation, because it's more efficient, and it's lower cost to deliver our products to a customer when the store distance is shorter and closer to the customer. Thank you, Roger.
Joey, I just want to add a couple of two quick point there. One is that, you know, when we mentioned, you know, like we see low teens level compared to 2019 post CMY. You know, like, if you look at CMY, we're also at the teens level below 2019. I think the main thing is that what we're trying to say is that we saw a very sharp recovery, you know, after the reopening and during the Chinese New Year period, then we see more gradual, you know, sort of like recovery. It's not to say like the recovery stall. The other one is that I will mention is, you know, in SSG co-comparison.
Our SSG calculation exclude the temporary store closure. Our system sales, you know, include, you know, same store sales growth, you know, temporary store closure, and also, you know, net new store growth. Right. When analysts and investors compare the SSG number, they need to factor in the impact of temporary store closure. For example, this quarter we have about 8%, you know, SSG. There's a few point impact from, you know, temporary store closure. You add that back there, then you will see, you know, a probably double-digit, you know, SSG improvement.
I just want to make sure that, you know, people don't forget, you know, that's a slightly different way of calculating SSG than, you know, from our view. Like, if you look at the overall industry growth, we're probably going top end of overall same store dining industry. Thanks.
Your next question comes from Anne Ling with Jefferies. Please go ahead.
Thank you. Thank you management team. Excellent results. I also have some questions on the cost side. Regarding the VAT benefit, maybe like, you know, would you elaborate a little bit more the nature of this VAT benefit, which contribute $80 million for this quarter? What is the nature like, you know, and like, you know, will the next few quarters will be seeing something similar? You know, what is it based on? Is it based on cost of goods sold or particular, like, you know, commodity or packaging product? We would like to know a little bit more about that part. Also, going back to the same-store-sales number.
If we are talking about like, you know, same-store-sales, or sorry, is it fair to say that, you know, same-store-sales growth recovery might actually take a bit longer to recover back to year 2019, given the fact that especially in Tier 1 cities, you are increasing your store density. Meaning that, you know, we should be looking at like, you know, your new store, your store growth, rather than like, you know, fixate on the same-store-sales number. Yeah, this is my second question. My third one is like, you know, I'm still a little bit confused, like, you know, you just mentioned about the CapEx decline was about on a per store basis, about 20%.
During this period, as Linda mentioned, you know, the depreciation expense actually down 41%. Of course, I do not know, like, you know, whether there's any difference in any mix in terms of like the back-end CapEx versus like the store front CapEx. Maybe you can help us, you know, understand a little bit more of this, like, you know, excellent cost savings on your side.
Hi.
I'll make a quick comment on the CapEx, Andy, and then you can continue. The CapEx, the CapEx for new store down 20%, but we also save a lot of money from pruning the original store portfolio. That's very important. Both the old store and new store help. Okay? Andy, back to you.
Let me try to address, you know, the VAT deductions questions. You know, if you look at, you know, the Chinese government policy, the VAT deductions policy came out, you know, in 2019, and it cover, you know, some of their accelerated deductions for VAT input. However, because of the COVID-19, the policy has continued to be extended over the past couple years, and now, you know, the policy have continued extended this year. Depend on various situations in how the business operates, it may be benefit, it may be able to get benefit, you know, from the additional VAT deductions.
This policy, you know, currently as it stand right now, it's extended, you know, to the same half of the full year. The level of benefit that we may be able to join, may plays out. You know, it have to do with how, you know, the input, cost and, and output, you know, VAT, value is. It's a little bit complicated to talk about it on a conference call, but, you know, you can study the VAT policy, from the Chinese government website. The other one about, you know, about, I think, the depreciation and amortization costs, you know, difference.
I think, the one thing that, you know, we want to emphasize is that there's two components to that. One is depreciation, the other one is amortization. The big drop there is coming from amortization, as we have mentioned, you know, in the past years, that, you know, when we, you know, acquire the controlling stake in Huang Ji Huang, we also have a, we acquire franchise rights. Each quarter is roughly about like, you know, $15 million of stock. So that's, that also, that's the one of the big factors there. That basically, so like expire at the end of last year.
You know, so that's why we see that significantly improved, you know, depreciation and amortization. In term of SSG, you know, recovery, I think, you know, it's, we're only in the first quarter of recovery. Based on, you know, what other country experience, overall recovery to the pre-pandemic level will likely take time, and it's likely gonna be uneven. Certainly, you know, as have been mentioned, the pace and the trajectory of that will be gradual and uncertain.
If you look at the, like, you know, I think we'll be hard pressed to see the industry itself and also, you know, any large restaurant chain will rebound immediately to, you know, the pre-pandemic level in the first quarter after reopening. We're confident, you know, as we have demonstrated in the first quarter, we're able to capture the opportunities when it present itself. Chinese New Year, you know, I think despite a lot of uncertainty at that time, because our, you know, our planning, our teams, you know, agilities and operational agilities and our digital investment infrastructure, we're able to capture those opportunities, as we have, you know, back then in 2021, when there's a market rebound.
Obviously, we cannot predict, as Joey mentioned, you know, what's the uncertainty in the market. We are also confident that, you know, given our cost structure rebasing initiative are more flexible and resilient business model can also deal with, you know, any potential downtime, you know, during this recovery. Again, you know, the recovery we should expect, you know, it to fully recover to pre-pandemic level will take some time, and will be some, you know, up and down but, I think we're confident that either way, we can deal with it.
Thanks, Dan.
Your next question comes from Yan Peng with UBS. Please go ahead.
Thank you, management, for taking my questions. I think most of the questions I have have already been addressed by Joey and Andy. If I can just ask a follow-up question on the depreciation side. I think many analysts have already asked this question, but I just want to understand a bit more why there is such a big drop in terms of depreciation expenses. If you calculate on a year-on-year basis, it dropped by around $50 million. Andy mentioned there was a $50 million impact from the Hangzhou franchise rights.
Other than that, are there any factors that investors should be aware of or should we consider this about $110 million depreciation expenses as recurring when we calculate the full year depreciation expenses for the full year? Thank you.
Yan Peng. Let me address that. I quote myself there. We acquire franchise rights is actually $25 million per quarter, as we mentioned before, full year is almost $100 million. The other one is, you know, obviously we gotta remember, you know, our assets in China is based in China. You know, you will be impacted like the value and depreciation amount will impacted by currency exchange, you know, in the quarter, you know, RMB depreciate against the US dollar by almost 8%. That would have an impact on the balance sheet and also the depreciation in because of currency translation as well.
Finally, as we mentioned before, you know, we have also done some, you know, store optimizations, you know, during, you know, the pandemic. You know, when we're deciding how our network and obviously we close down some of the more challenging stuff. That also have an impact on the depreciation and amortization as well. All in all, you can think about it's like $25 million from, you know, Op-ops, and then you have also almost like, you know, $15 million from, you know, foreign exchange and then, you know, the optimizations in, you know, our overall stock portfolio. All these impacts added together is some $40 million reductions in depreciation amortization.
We will have more details, obviously in our 10-Q statements. If you guys are, you know, interested in more, that's sort of the three key factors that were driving depreciation and amortization costs. I just wanna remind analysts investors that don't forget the impact of foreign exchange. You know, the foreign exchange have been pretty volatile over the past year. As I mentioned, foreign exchange have a negative impact of 8% because of their RMB depreciation. That will have an impact on P&L and also on the balance sheet. Thanks.
Thank you. That is all the time we have for questions today. I'll now hand back to Ms. Michelle Shen for closing remarks.
Thank you for joining the call today. If you have further questions, please reach out through the contact information in our earnings release and on our website. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.