Good day, and thank you for standing by. Welcome to the Yum China First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Florence Lip, Senior Director of Investor Relations. Please go ahead.

Thank you, operator. Hello, everyone. Thank you for joining Yum China's first quarter 2025 earnings conference call. On today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Adrian Ding. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release, which is available to the public through our Investor Relations website located at ir.yumchina.com. You can also find a webcast of this call and a PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency, unless otherwise noted. Now, I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. In quarter one, we delivered another solid set of results. Our due focus on operational efficiency and innovation led to improvements in both our top and bottom lines. We achieved first-quarter record highs in revenue, net income, and diluted EPS. Our same-store sales index advanced to 100% of prior year level for the first time since the first quarter of 2024 for both KFC and Pizza Hut. Same-store transactions have grown for nine consecutive quarters, as our topline expanded, our margins also improved. Restaurant margin expanded by 100 basis points year-over-year. As a result, our operating profit grew by 8% and diluted EPS increased by 10%. This performance underscores our team's diligent efforts and the effectiveness of our strategy. Last quarter, I mentioned that I felt Pizza Hut had reached an inflection point. I'm pleased to report that we've been able to sustain the positive momentum. In quarter one, we achieved notable improvements in both same-store sales index and margins. Pizza Hut's 2025 new menu further enhanced its value-for-money proposition and mass-market positioning, driving significant traffic growth. It also enabled simpler operations, contributing to the restaurant margin improvement in Q1. KFC remains a resilient fortress, achieving solid growth and profitability through both good times and bad. In Q1, KFC system sales grew by 3% and its restaurant margin expanded to 19.8%. In Q1, we also opened 300 KCOFFEE cafes, reaching a total of 1,000 locations nationwide. Let me now turn the call over to Adrian to discuss our results in detail. Afterwards, I will share additional color on our strategies. Adrian?

Thank you, Joey. Let me start with KFC. In the first quarter, KFC delivered solid sales and profit growth. We added 295 net new stores, bringing our total to 11,943 stores. New store payback remained healthy at two years. System sales increased 3% year-over-year. Same-store sales index amounts to 100% of prior year level for the first time since the first quarter of 2024, fueled by same-store transaction growth of 4%. We observed strong growth in smaller orders, driven by wider price ranges, lower delivery fees, and rapid growth in coffee. The ticket average for quarter one was RMB40, 4% lower than the prior year period, similar to the trend in the second half of 2024. There may still be some short-term fluctuations, but we expect the TA to be relatively stable over the long run. Despite a lower TA, restaurant margin improved by 50 basis points year-over-year to 19.8%. Operating profit grew 5% year-over-year to $386 million. We innovated by adding fresh twist to our classic menu items to excite customers and fulfill the changing needs. KFC launched a spicy flavor of original recipe chicken for the first time since we entered China in 1987. The classic taste pairs well with an exotic spicy flavor. Sales mix of original recipe chicken increased 50% during the promotion period. We also introduced the spicy original recipe chicken burger, which of course comes with mashed potatoes. These innovative new products resonate well with our consumers, not just regionally but nationwide, attracting new traffic. Serving buckets has been a Chinese New Year tradition for KFC. This year, we enhanced the Golden Bucket by including our popular whole chicken, making it even more ideal for sharing. To address the trend of smaller gatherings, we also offered a variety of smaller buckets. Total sales of…

Thank you, Adrian. Now, let me spend some time on our strategy. Like everyone else, we are navigating choppy waters, but we have an excellent team capable of turning challenges into opportunities. We will stay alert and concentrate on what we can manage. Our customers continue to love our brands, our delicious innovative food, and our very affordable prices. Our widened price ranges fueled healthy transaction growth. We also offer abundant emotional value to customers. The 85th anniversary of KFC's Original Recipe Chicken, [Foreign Language] brought back childhood memories for our customers. Pizza Hut celebrated Chinese New Year by wishing them good fortune with the Fortune Crust Pizza [Foreign Language]. We also collaborate with top IPs to offer member-exclusive deals through our own online and offline channels. A notable example was our campaign with the popular Chinese mobile game Identity V [Foreign Language]. We include tangible and virtual accessories with our meals, successfully engaging many young customers. Besides our amazing food and value, we offer exceptional convenience. With over 16,000 stores in 2,300 cities across China, we are rapidly expanding our store portfolio and deepening our reach. Our innovative and flexible store models help us profitably expand our addressable market and capture additional dining opportunities. At KFC, KCOFFEE sustained strong growth in quarter one. With both cups and sales up around 20% year-over-year, we see huge growth potential by leveraging KFC's customers and membership base. In particular, a large majority of our members have yet to try KCOFFEE. By utilizing KFC footprint, KCOFFEE Cafe is expanding rapidly in this high-potential market. The incremental investment is light. Both equipment and resources can be shared. With 1,000 KCOFFEE Cafes now, we are aiming for 1,500 locations by end of 2025, which is 200 more than our original target. On the menu side,…

Thanks, Joey. Now we will open the call for questions. [Operator Instructions] Operator, please start the Q&A.

[Operator Instructions] Our first question comes from the line of Lillian Liu from Morgan Stanley. Please go ahead. Your line is open.

Hello, can you hear me?

Yes.

This is Lillian. Okay. Thanks, Joey and Adrian and Florence. My question is more on the competition and the demand trend after first-Q. We've been seeing a bit general consumption slowdown post Chinese New Year. So I want to understand any kind of new update of our business trend. And in particular, since April, we all know that JD started to push on delivery with big subsidies and a lot of our competitors and the local players are joining. So any impact to our business so far and our strategy to this -- for the aggregator competition if such competition going to last for longer run? Thank you.

Thank you, Lillian. So far, our April performance is in line with our expectations and we have not observed any significant negative impact. But yet we continue to be watchful. Let me comment on the consumer trends and then touch upon the JD question. We -- as I mentioned, I -- we really have not observed any significant negative impact on our business. But of course, the situation remains fluid and we'll continue to be alert and monitor the trends with multiple scenario marketing planning. So with all these macro sort of challenging environment, I just want to point out that we have successfully navigated a wide range of market conditions in the last 30 some years. Even in the last few quarters, we have faced challenging market conditions for some time, but we have consistently demonstrated our ability to thrive in both good times and bad times. I would like to make three points about the consumer sentiment. And point one is, we are in China and dedicated to serving the Chinese people and both KFC and Pizza Hut have well-recognized brands beloved by Chinese consumer and we serve over 2 billion customers annually. We have earned very strong customer support and established deep connection with them. And in general, Chinese consumers have become more rational, sophisticated and very pragmatic. Point two is we are also well recognized for supporting millions of jobs in China and giving back to the community. You know some example like 18 years of One Yuan Donation and then food [banks] in over 1,000 stores, et cetera, et cetera. Third is our suppliers and franchisees and business partners are very supportive. So we have good momentum. In terms of competition, we -- in terms of the question regarding the JD, I would like to make two points a little. One is, we are open to work with all platforms. Our goal is always to serve customers where they are and attract new customers. With that said, we do things at our own pace. We always balance short-term and long-term considerations. And the second point is, even as we expand on aggregator platform, and by the way, we have continued to grow our delivery business for 11 years and we just deliver another double-digit or 13% increase in delivery business. We continue to maintain strong control over our business over 70% of our sales are outside the delivery aggregators. So these 70% business include Dine-in, takeaway and our own -- very own delivery channels. Our own APP exclusive further drive customers. So that's where we are. And I think as of yesterday or today, there's another company stepping up the delivery competition. So we will remain a watchful and then we'll balance the-- our strategy in the short-term, long-term. Thank you, Lillia.

Thanks a lot, Joey. That's very helpful.

Thank you. We'll now move on to our next question. Our next question comes from the line of Michelle from Goldman Sachs. Please go ahead, your line is open.

Hi, Joey, Adrian and Florence. Thanks for taking my question. My question is regarding Pizza Hut. The first quarter Pizza Hut's same-store sales and margins were really impressive. Especially, we know that actually first quarter last year, the same-store sales base was high given the all-you-can-eat campaign. So can you share with us how do we think about the same-store sales trajectory in the rest of the year? In second quarter, we know we launched the all-you-can-eat campaign again. So and -- but on top of that , we have easier base supposedly for second quarter last year. So should we have a better expectation on the same-store sales? And also on margins are with these all-you-can-eat campaign, how this will impact the near-term margin, while these wall efficiency gain and the same-store sales operating leverage is positive and this should be a positive driver for the rest of the year. So just wondering that for the rest of the quarter, how should we think about the good performance in first quarter to carry on the Pizza Hut. Thank you very much.

Thank you, Michelle. Yes, if it is okay with you, let me take this chance to actually address the question for both Pizza and KFC and the Group as a whole. Obviously, in terms of SSSG because your question you know, brings down to two parts. One is top line, one is the margins. I'll speak of the top line first. In terms of SSSG, the market environment is still quite evolving and complex. Consumers stay rational. And as Joey mentioned, while we have not observed any significant negative impact on our business to date, we continue to be watchful for the development. And April trading is generally in line with our expectation. But it's worth noting that for the month of June, we have a tougher lapping for that month. So overall, for quarter two, we're striving to achieve 10 consecutive quarters of positive same-store transaction growth. But amid the uncertain market conditions, we remain cautious about the potential fluctuations in same-store sales index. And this comment is actually true for both KFC and Pizza Hut. And now, comes down to margin, right, specific to Pizza Hut, indeed, the Pizza Hut all-you-can-eat campaign that took place in quarter one last year was shifted to quarter two this year. So there is -- there is a quarterly shifting on the margins. But broadly speaking, in terms of the margin and outlook for the two brands respectively, and I would say there is no change to our 2025 full-year guidance on margin. We expect the core OP margin for the Group as a whole to stay either steady or slightly improve, right? That's our guidance provided three months ago. And by brand specifically, we expect the restaurant margin for KFC to be healthy and stable year-over-year in this year and also…

Yes. Thank you, Adrian for the very detailed line by line for the nation.

Thank you. We'll now move on to our next question. Our next question comes from the line of Brian Bittner from Oppenheimer & Co. Please go ahead. Your line is open.

Thank you. Hi. Just for your investors outside of China, can you just maybe talk more about the consumer environment in China and how it's evolving so far in 2025? Are you seeing any positive indicators of maybe a potential inflection moving forward in the consumer? And separately, just I want to address the transaction growth, particularly at KFC, it's been very solid, transaction growth up 4% in the first quarter. Can you help us understand how this compares to the industry? What is the industry transactions looking like, so we can understand how much market share KFC is taking recently. Thank you.

Thank you, Brian. Let me start with the consumer sentiment. We have not seen sort of very different consumer sentiment change so far. But if I could make some general comment of the consumer preference and that's sort of reflecting in our number is the preference towards sort of the wider price range and product with even better entry price and still very innovative food. So that is still working for us. And therefore, you can see our transactions growing very nicely, both in terms of our food business and drink business. So the food business is the preferred and then the delivery business as well we have captured very nice incremental sales from lower delivery order, particularly in lower-tier cities. So that helps a lot because the delivery transaction for KFC, the TC growth actually is 24%, while the delivery sales is 13%. A similar trend in Pizza Hut, while the Pizza Hut also achieved 13% growth in delivery, the transaction growth for the sort of lower TA, about 30 TA to 60 TA is actually over 50% growth. So that gives you a sense of where we are going. And also in terms of strength, I just want to quote you one number. Our KCOFFEE, so the coffee that we sell in all our cafe store, the increase of cups and sales is actually 20%. So that is sort of a overall direction. And I think, we see sort of similar trend in the industry, but I'm happy to report in both KFC and Pizza Hut based on our limited information because it's a very fragmented market in a way, we see some meaningful increase of our market share, particularly in the delivery business. So I hope that gives you a sense about where things are. And going forward, we still stick to our focus, dual focus. One is innovation that means innovations in food in everything we do, and then operational efficiency, and that's where we get our margin from and supporting the innovations. One last interesting introduction of the innovation. Look at our KCOFFEE business, not only coffee, we are actually moving to tea as well. So I hope that gives you a flavor of where things are, Brian. Thank you.

It does. Thank you, Joey.

Thank you.

|Thank you. We'll now move on to our next question. Our next question comes from the line of Chen Luo from Bank of America. Please go ahead. Your line is open.

Hello.

Hi, yes.

Okay. Hi, Joy and Adrian. This is Luo Chen from Bank of America. First, congrats on the same-store sales growth turning flattish in Q1. And just now also here you mentioned and it happens that my daughter is a big fan of [indiscernible]. Does that actually mean? Yes, my question is regarding the new store expansion. And in our earnings announcement, I noticed that new store contribute around 4% revenue growth, despite around 11% something new store year-on-year growth. And last quarter, in Q4 last year, the new unit growth also contributed only roughly around 5% revenue growth. So if you do the math, if we compare the revenue growth from new stores divided by the new store expansion pace, so this gives you roughly around 40% something ratio. I understand that we tend to open smaller and smaller stores and I guess this could represent the long-term trend in the future. Is it fair to say that in the foreseeable future, because of our mix shift towards the smaller stores, for around 10% to 11% new store expansion, we can only expect around 4% or at best 5% something revenue growth from new stores because of the dilutions of the smaller new stores opened. That's my question. Thank you.

Thank you, Luo Chen. Yes, let me address the question quite directly. I think for this year, as we mentioned in the prepared remarks in terms of the growth rate in our top line, we do expect the system sales growth to be in the mid-single-digit range. So that's a reaffirmation of our guidance. And we target to open 1,600 to 1,800 net new stores. And obviously, there's some timing -- quarterly timing shifts for the net-new open this quarter versus the rest of the quarter of the year. And then specific to your question on the 4% of net-new units contribution to the top line. You mentioned the 10% of net-new store increase as a percentage. But obviously, that's end of the quarter store count. And even with all at the end of store -- end-of-quarter store count growth rate the same, the store week when we open or close the store within the quarter is actually a very important factor as well. So the end of the quarter store count only tells one side of the story. And then obviously on the 4% net unit contribution, we are opening smaller stores as we expand into lower-tier cities, around 70% to 80% of our new stores in this quarter are smaller stores, that's opening this quarter are smaller stores. And as we guided to the market previously, in the previous earnings release, new-store sales are around 50% to 60% of our mature stores in terms of the weekly sales and there's a ramp-up period for the new-store sales too. We mentioned previously that's normally three years of ramp-up period when the new-store gets to a mature store. And importantly, our new-store remain very healthy and maintain very healthy payback periods and profitability. And specific to this quarter, right, in addition to the smaller store factor, this quarter, we strategically closed more stores to enhance the strength of our overall store portfolio as we mentioned in the prepared remarks and the net-new store -- net-new store open figure will normalize as the year progresses. So that's more of this year, right? But speaking of mid to long-run, if we open, let's say, 10%, 11%, 12% of net-new stores in the quarter-end figure, what's the system sales growth rate? Will that be mid-single digit or low-single digit or high-single-digit?

I guess the store week and the smaller store is one-side -- one aspect of the algorithm. The other aspect, important aspect is the same-store sales growth. And as we mentioned just now, we remain cautious on the near-term, especially this year same-store sales index. There may be some fluctuations there. In the mid to long-run, obviously, we don't have the crystal ball. We will control things within our control and continue to deliver excellent value-for-money for consumers. And then if we can have some benefits in the mid to long-run same-store sales growth, that will benefit the top-line system sales as well, hopefully that address your question. Thank you.

Thank you. That's very helpful. I also look forward for your more cooperation with more IPs because my daughter is really a big fan of four different kinds of IP. Thank you.

The IPs are super to offer emotional values for young people which is as important as the value sort of in a physical world, the virtual world, physical world, we have to take care of both these days.

Yes, totally agree. Absolutely. That's-- trying to say. Thank you.

Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Christine Peng from UBS. Please go ahead. Your line is open.

Hello, thank you for the opportunity to have the question. So my question is about the KCOFFEE. So Joey, you mentioned that the -- this year you plan to open 200 more KCOFFEE stores than your initial target. So can you share us more long-term view towards this KCOFFEE? And I was also wondering what's the impact on the KFC store economics by opening KCOFFEE side-by-side.

Thank you, Christine. In the long term, we are committed to the KCOFFEE business and particularly the KCOFFEE business because we see very promising growth momentum of this particular business. Right now, our target is 1,500 Cafe by end of 2025, 200 more. And we only started last year, and the most promising bit is huge percentage of our members have yet tried the KCOFFEE and that is fantastic base. And in terms of the top line and bottom line, the top line is very nice addition -- additional same-store sales growth for the stores with the KCOFFEE Cafe. And I mean it's still sort of low-single digit, but it's very nice to that particular store. And then in terms of bottom line, because we share the equipment, we share the location, we share the cost of labor. So the bottom line is very protective as well. So these two are both very important to our business as well. And if I could comment on the third--, which is the business that the menu, the ambience and the men include the food and drink. And we are making very good progress. And although we only start to open the KCOFFEE Cafe last year. But in 2024 alone, we launched 52 coffee drink or food item and we already have some very nice signature product like the sparkling coffee, like the gigantic Egg Tart and some really cookie, the cookie is the right way to describe this product original recipe chicken latte is a bit challenging in terms of name but I can assure you that the taste is really quite good. And then this year, we are moving on to introduce a more premium Daojia beans for just RMB12.9. So the product itself are getting into the mindset of the customer. And as I mentioned earlier, we even start to launch the [indiscernible]. And as of right now, we sell launching at the tea leaf launching with Latte as well. So we are committed and we are very positive about this KCOFFEE Cafe, not only it drives the uplift in top line, but it also drive incremental profit. Thank you, Christine.

Thank you, Joey. Thank you. We'll now move on to our next question. Our next question comes from the line of Sijie Lin from CICC. Please go ahead. Your line is open.

Hi, thank you, Joey and Adrian. I have one question. So we are doing good on new products, new model, high operational efficiency and we're also doing good on brand marketing. But regarding the brand marketing, maybe there are some new trends in the market. For example, some are focusing on healthiness, some are focusing on the emotional value, we just talked about that. For example, choosing like brand ambassadors, joint brands, IP toys that are popular among consumers and maybe some are connecting the brand promotion with product and innovation. So do we have any new observations and involving plans regarding these aspects regarding the brand marketing? Could you talk more about this? Thank you.

Thank you Sijie Lin. I'll try to respond to your question in two ways. One is, our strength in brand marketing certainly is shown through our ability to market fried chicken or pizza brand almost as a bit of fashionable brands. We always stay in touch with our consumers in terms of their preferred IP and something relevant to them and we would like to believe that we grow with them. We grow up with them or we grow some period. So we'll continue to do that and it seems that we've been doing it reasonably successfully. And then you also asked about other trends in terms of healthy food, et cetera, et cetera. Well, I mean, we plan to introduce this concept to our investor and all of you guys in our Investor Day. So please -- so I'll just take a chance to make an advertisement for that. Is the -- is the module, it's a module called KPRO and some of you guys have already tried a product. So what is KPRO? It's a module. Again, we continue to share the KFC store space and membership and equipment, everything, why sharing because the incremental investment is very light. And we have some of these stores in Beijing and Shanghai in particular and the menu is very different and they are sort of very focused, it means very short menu there, particularly focus on energy bowls and smoothies. So what we call this is the lighter meals. And these consumers, our customers, they are -- they're also our KFC members, but we just serve them with slightly different food. And so far, we really like what we have seen in both Shanghai and Beijing. Actually, there are some stores in Shenzhen as well. So if you cross the border from Hong Kong. In Shenzhen, you can try the product. I mean, I like it myself very much and so as our KFC members. So we do try to offer a slightly different food to our customers. And it's hard to just talk about the new concept without trying the food and without you guys seeing how it works. So we are looking forward to build more of these stores, particularly in Tier-1 and Tier-2 cities. And then hopefully, we'll have a chance to introduce a full menu -- not full menu, a wider range of menu to you guys when you come to the Investor Day later on the year. I'll pause here. Thank you.

Thank you, Joey. Looking forward to the Investor Day, new product, new concept. Thank you.

Yes. And if I can add on the Pizza Hub, we have amazing innovation as well. And last year, we have tried a Pizza WOW menu and we'll continue to streamline the menu and we continue to work on the menu. Obviously, we will include that in the Investor Day as well. Thank you.

Thank you. Due to time constraints, this concludes our question-and-answer session. So I'll hand the call back to Florence for closing remarks.

Thank you. And thank you, Joey and Adrian. This concludes our Q&A session. Before we end the call, as Joey mentioned, we're going to host our Investor Day later this year. It will be in November in Shenzhen, Tier-1 city in China. We will provide more details in due calls. Thank you for joining the call today. Thank you.

Thank you.

Thank you. Bye, bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.