Yum China Holdings, Inc. Q1 FY2025 Earnings Call

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 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 the 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 the 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.

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. The 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 a fresh twist to our classic menu items to excite customers and fulfill 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 our Chinese New Year buckets grew over 50% year-over-year. Let's now move on to Pizza Hut. For four consecutive quarters, Pizza Hut has achieved significant progress, marked by sequential improvement in the same-store sales index and year-over-year margin expansion. Operating profit also grew 29% year-over-year in quarter one. In quarter one, system sales increased 2% year-over-year. The same-store sales index amounts to 100% of prior year level, also for the first time since the first quarter of 2024, up 2 percentage points versus quarter four last year. Same-store transactions grew substantially by 17% year-over-year, driven by rapid delivery growth, increased popularity of pizzas below RMB50, and the successful launch of our new menu. The ticket average was RMB78, 14% lower year-over-year, consistent with our strategy and driven mainly by better value-for-money offered by our new menu. Again, despite the lower TA, restaurant margins improved 190 basis points year-over-year. Our new menu allowed for simpler preparation at our stores. We also automated key kitchen processes. Additionally, Pizza Hut's all-you-can-eat campaign that took place in quarter one last year was shifted to quarter two this year, and this accounted for nearly half of the year-over-year margin improvements. Pizza Hut has expanded to 3,769 stores with a net addition of 45 stores in quarter one. This number is lower than last year due to the timing of store openings and closures. For the full year, we expect double-digit percent net-new store growth for Pizza Hut. The payback period for new stores remains healthy at two to three years. Pizza Hut has made tremendous efforts to improve its menu and widen its addressable market. The new menu launched in December 2024 bolstered Pizza Hut's value-for-money perception and significantly boosted consumer traffic. In March, we further upgraded the menu with new products such as expanded selection of pizza dough burgers and more one-person meal options. For a limited time, consumers enjoyed our Super Supreme pizza at just RMB39, half the regular price. Consumers love our flagship Super Supreme flavor, so we extended it from a pizza platform to other platforms such as burgers, pasta, and rice. Let me now go through our quarter one P&L. For quarter one, system sales grew 2% year-over-year, and same-store sales index was 100% of prior year level. System sales growth was moderate this quarter for three reasons. First, 2025 has one fewer business day as 2024 was a leap year, a 1% impact. Second, we had slightly more temporary closures during the Chinese New Year holiday this year compared with the prior year. We carefully evaluated holiday traffic patterns, and we adjusted our store operations. This enabled us to serve our consumers' needs better and more efficiently. In quarter one, net-new units contributed 4% to sales growth. We're opening more smaller stores and expanding into lower-tier cities. Also, we strategically closed more stores to enhance the strength of our store portfolio for better overall performance. This led to lower sales growth in quarter one, which will normalize as the year progresses. Our restaurant margin was 18.6%, 100 basis points higher year-over-year. Savings in cost of sales and occupancy, and other costs offset increases in the cost of labor. Cost of sales was 31.2%, 90 basis points lower year-over-year. Cost of sales improved through favorable commodity prices and continued benefits from Project Red Eye. We continue to pass these savings from these initiatives to our consumers, offering excellent value-for-money. The timing shift of Pizza Hut's all-you-can-eat campaign also positively impacted quarter one cost of sales. Cost of labor was 25.7%, 30 basis points higher year-over-year due to higher rider cost as a percentage of sales. While cost per delivery order lowered, increased delivery volume led to higher overall rider costs. Non-rider costs as a percent of sales remained stable year-over-year. Simplified operations helped offset low-single-digit wage inflation for our frontline staff. Occupancy and other costs were 24.5%, 40 basis points lower year-over-year as a result of cost optimizations in a number of areas, notably utilities and simplified operations. G&A expenses were 4.6% of revenue, and 10 basis points lower compared to 4.7% in the prior year. Closure and impairment expenses increased year-over-year due to our strategic store optimization. Our OP margin was 13.4%, 80 basis points higher year-over-year, mainly driven by improved restaurant margin. Operating profit was $399 million, growing 8% year-over-year. Core OP also grew 8% year-over-year. Effective tax rate was 27.8%, 90 basis points higher year-over-year. Net income was $292 million, growing 3% year-over-year. As a reminder, we recognized $12 million less interest income this year due to a lower cash balance as a result of the cash used for shareholder returns. Our mark-to-market equity investment also had a positive impact of $2 million in quarter one compared to a positive impact of $6 million in quarter one last year. Diluted EPS was $0.77, growing 10% year-over-year or 12% excluding the mark-to-market equity investment impact. Let's now move on to return capital to shareholders. We are on track to return $3 billion to shareholders in 2025 through 2026. This is on top of the $1.5 billion in cash we returned in 2024. The average annual amount of capital returned over the three years is around 8% to 9% of our current market cap. In quarter one, we returned $262 million with $172 million in share repurchases and $90 million in quarterly cash dividends. Our cash position remains healthy. We ended the quarter with $2.8 billion in net cash. Finally, moving on to our 2025 outlook. We're operating in a complex and evolving landscape. Consumer spending remains rational. Our strategy is to offer innovative food and great value to drive traffic to our stores. We're working hard to achieve 10 consecutive quarters of positive same-store transaction growth in quarter two. That said, we remain cautious about potential fluctuations in the same-store sales index. Even with many moving parts, we reiterate our 2025 full-year guidance of mid-single-digit system sales growth. We expect to ramp up net store openings as the year progresses. For the full year, we're on track to open 1,600 to 1,800 net-new stores. In quarter one, we opened 247 net new stores, with franchise stores accounting for 41% of KFC net new opens and 33% for Pizza Hut. Franchise net new store mix for the 2025 full year is expected to be lower. Mid-to-long-term, our outlook is unchanged. We expect the franchise net new store mix to reach 40% to 50% for KFC and 20% to 30% for Pizza Hut over the next few years. We also target to maintain or slightly improve core OP margins for the full year. On the cost-of-sales front, we anticipate modest year-over-year improvements compared to 2024, remaining between 31% and 32%. We expect no material impact from tariffs as over 90% of our procurement is sourced locally. The direct impact from U.S. imports on our cost is expected to be minimal. Additionally, we have evaluated the indirect impact of tariffs on upstream suppliers. Alternative raw material solutions are available on our supply chain. So we are protected at the moment, but we will monitor the situation closely. Moving on to the cost of labor, we continue to face pressure on total rider cost driven by rapid delivery growth. Our goal for non-rider cost is to keep them stable by offsetting the wage inflation of our frontline staff through more automation, simplification, and centralization. In terms of occupancy and other as a percentage of sales, these are likely to stay relatively stable year-over-year. We continue to explore optimization opportunities to offset cost increases. By brand, we expect restaurant margin at KFC to be healthy and stable year-over-year, and Pizza Hut's margin to improve in the mid to long run. Lastly, we expect our G&A expenses as a percentage of revenue to slightly decrease and the effective tax rate to be in the high 20s. In terms of quarterly phasing, we expect tougher year-over-year margin comparisons later in the year. More meaningful benefits started to trickle in from Project Fresh Eye in quarter two of 2024 and from Project Red Eye in the second half of 2024. Overall, we're working hard towards our full-year targets. Let me pass it back to Joey for her closing remarks.

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 brought back childhood memories for our customers. Pizza Hut celebrated Chinese New Year by wishing them good fortune with the Fortune Crust Pizza. 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. We included 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 aim for 1,500 locations by the end of 2025, which is 200 more than our original target. On the menu side, in addition to our signature Sparkling Americano, we introduced premium Geisha beans for coffee lovers at just RMB12.9. We also launched our Macha Mocha lineup for tea drinkers, boosting afternoon sales. Having coffee in the morning and tea in the afternoon is a great way to stay energized. At Pizza Hut, WOW is a simpler and more efficient model. Compared to the regular Pizza Hut, WOW's per person spending is lower. Its simpler menu, entry price point products, and sharp value-for-money appeal to young people and solo diners. As we fine-tuned the model, restaurant margin has expanded year-over-year. Building on the successful conversion of some Pizza Hut stores to the WOW model, we have started opening new WOW stores. A brand new WOW store's CapEx can be as low as half of a regular Pizza Hut store. With reduced CapEx, lower per-person spending, and simplified operations, WOW seems suitable for lower-tier cities, thereby expanding Pizza Hut's addressable market. Turning to our due focus on operational efficiency and innovation, our approach is to rethink our operations from fresh perspectives. Over the past two years, we launched Project Fresh Eye and Project Red Eye. These initiatives will continue to benefit us far into the future. We have streamlined our menu, simplified food preparation, centralized certain processes, and deployed more automation. Our innovative approach enables us to maintain consistent standards for quality and service. Technology and innovation play a crucial role in boosting efficiency. Our end-to-end digitization covers key operational processes, from customer service and quality control to staffing and inventory management. We leverage AI to analyze customer feedback from various platforms. This means we can swiftly adjust our operations after a new product launch, often within just a day or two. In our digital customer service center, generative AI helps customers resolve around 90% of issues before they reach our team. We are also exploring the use of robotics to further advance our operational capabilities. Before we turn to Q&A, I would like to recap the three key takeaways from today. First, KFC continues to be a resilient fortress, performing well through both good times and bad. Pizza Hut has maintained its positive momentum following last year's inflection point. Second, we are broadening our addressable markets with expanded menus, widened price ranges, and innovative models. These include our KCOFFEE Cafes, as well as KFC Small Town Mini and Pizza Hut WOW models. Lastly, we remain committed to our focused strategy of enhancing operational efficiency and fostering innovation to capture the amazing opportunities in China and create long-term value for our shareholders. And with that, I will pass it back to Florence.

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

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. Thank you, Joey, Adrian, and Florence. My question is regarding the competition and the demand trend after the first quarter. We have noticed a general slowdown in consumption following the Chinese New Year. I would like to know if there are any updates on our business trends. Specifically, since April, we have observed that JD has been aggressively promoting delivery with significant subsidies, and many competitors and local players are joining in. Have there been any impacts on our business so far, and what is our strategy regarding this aggregator competition if it continues for the long term? 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 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 something years. Even in the last few quarters, we have faced challenging market conditions but we have consistently demonstrated our ability to thrive in both good times and bad times. I would like to make three points about consumer sentiment. First, we are in China and dedicated to serving the Chinese people, and both KFC and Pizza Hut have well-recognized brands beloved by the Chinese consumer, serving over 2 billion customers annually. We have earned very strong customer support and established a deep connection with them. In general, Chinese consumers have become more rational, sophisticated, and very pragmatic. Second, we are also well recognized for supporting millions of jobs in China and giving back to the community with examples like 18 years of One Yuan Donation and food banks in over 1,000 stores. Third, our suppliers, franchisees, and business partners are very supportive. So we have good momentum. In terms of competition, regarding the JD question, I would like to make two points. One, 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. Two, even as we expand on aggregator platforms, we have continued to grow our delivery business for 11 years and we just delivered 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. These 70% of business include dine-in, takeaway, and our own very own delivery channels. Our own app exclusive further drives customers. So that's where we are. I think as of yesterday or today, there's another company stepping up the delivery competition. So we will remain watchful and then we'll balance our strategy in the short-term, and long-term. Thank you, Lillian.

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 the second quarter, we know we launched the all-you-can-eat campaign again. So, on top of that, we have a supposedly easier base for the second quarter last year. Should we have a better expectation on the same-store sales? Also on margins, with these all-you-can-eat campaigns, how will this impact the near-term margin while these wall efficiency gains 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 how we should think about the good performance in the first quarter to carry on with 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 Hut and KFC and the Group as a whole. Obviously, in terms of SSSG, your question brings down to two parts. One is top line, and one is 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. 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. April trading is generally in line with our expectations, 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 the same-store sales index. This comment is true for both KFC and Pizza Hut. Now, comes down to margin, 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 a quarterly shifting on the margins. But broadly speaking, in terms of the margin and outlook for the two brands respectively, 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. By brand specifically, we expect the restaurant margin for KFC to be healthy and stable year-over-year this year and also over the mid to long run. For Pizza Hut margin, we expect to slightly improve this year and for the mid to long run, hopefully, the restaurant margin will improve in a bigger magnitude compared to this year. On the top line, the top line is a very important factor deciding on the restaurant margin. We reaffirm our guidance for the top-line growth, which is mid-single-digit growth in system sales. I also like to provide some more color on the line-by-line margin outlook. For COS, as I mentioned, there is a quarterly shifting for the Pizza Hut all-you-can-eat campaign. Broadly speaking, for COS as a whole, we expect modest improvement year-over-year this year over last year, mainly driven by the benefits of Project Red Eye and deflation. We continue to look to return much of the benefits to our consumers to continue offering great value-for-money to them. Breaking down to these two brands, we expect COS for KFC to remain in the range of 31% to 32% for the full year, and for Pizza Hut to be in the range of 32% to 33% for the full year. Again, both percentages will have modest improvement year-over-year this year over last year. For COL, we faced some headwinds on the COL front, particularly because of the increase in delivery mix. Although the delivery cost per order decreased this year, the increase in delivery mix resulted in higher overall rider costs as a percent of sales for the group and for the two brands this year. We'll make every effort to try to offset the wage inflation, which is kind of the non-delivery part by the efficiency gain, simplification, automation, and centralization. We aim to keep the non-delivery part of labor costs stable year-over-year. Then, comes to occupancy and other costs. As a percent of sales, that line item is likely to stay stable, and we continue to explore optimization opportunities to offset cost increases within that line item. It's very important to note, as you also alluded to in the question, that there is a quarterly phasing for the margin. We expect tougher year-over-year comparisons on both the restaurant margin and operating profit margin later in the year. More meaningful benefits started to trickle in from Project Fresh Eye from the second quarter of last year and from Project Red Eye from the second half of last year. The tailwinds from the favorable commodity prices will also be narrowing in the second half of this year. Lastly, a couple of items: interest income will be lower as a result of the lower cash balance given our significant step-up in shareholder return, and there may also be some headwinds on foreign exchange rates. One last item is the mark-to-market equity investment impact, which is a bit volatile quarter-over-quarter and year-over-year. Overall, we maintain our annual guidance on margin and our top line, and in terms of the line-by-line color, that's as I describe.

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

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? 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 transaction 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 any significant changes in consumer sentiment so far this year. However, if I could make some general comments on consumer preferences, this is reflected in our numbers. There is a preference towards wider price ranges and products with even better entry prices while still featuring very innovative food. This is still favorable for us. As a result, you can see our transactions growing very nicely both in our food business and drink business. The food business remains preferred, and we have captured significant incremental sales from lower delivery orders, particularly in lower-tier cities. The delivery transaction for KFC shows that transaction growth is 24%, while the delivery sales growth is 13%. A similar trend is observed at Pizza Hut, where Pizza Hut achieved a 13% growth in delivery, while the transaction growth for orders with a ticket average of RMB30 to RMB60 actually increased over 50%. This gives you insight into where we are going. In terms of strength, our KCOFFEE business saw both cup sales and revenue increase by 20%. So that reflects the overall direction for us. We see a similar trend in the industry, but I am happy to report that for both KFC and Pizza Hut, based on our limited information, we are gaining some meaningful market share, particularly in the delivery business. I hope this provides insight into where we stand. Going forward, we will continue to adhere to our dual focus: one is innovation, which encompasses innovative food offerings in everything we do, and the other is operational efficiency, which supports our margin. An interesting innovation introduced is our KCOFFEE business, which now moves to feature tea as well. So I hope that gives you a flavor of where we are, Brian. Thank you.

It does. Thank you, Joey.

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, Joey and Adrian. This is Luo Chen from Bank of America. First, congrats on the same-store sales growth turning flattish in Q1. My question is regarding the new store expansion. In our earnings announcement, I noticed that new stores contributed around 4% revenue growth, despite around an 11% new store year-on-year growth. Last quarter, in Q4 last year, the new unit growth also contributed only roughly around 5% revenue growth. If you do the math, comparing the revenue growth from new stores divided by the new store expansion pace gives you a roughly 40% rate. I understand that there is a trend towards opening smaller stores, which could represent a long-term shift. Is it fair to say that in the foreseeable future, because of our shift towards smaller stores, with around 10% to 11% new store expansion, we can only expect around 4% to 5% revenue growth from new stores due to the dilution from the smaller new stores opened? That's my question. Thank you.

Thank you, Luo Chen. Yes, let me address the question directly. For this year, as we mentioned in the prepared remarks, we expect system sales growth to be in the mid-single-digit range. We are targeting to open 1,600 to 1,800 net new stores. Of course, there are some quarterly timing shifts for the net-new openings this quarter versus the rest of the year. Specific to your question about the 4% contribution of net-new units to the top line, you mentioned the 10% of net-new store increase. But obviously, that's end-of-the-quarter store count. Even with all end-of-quarter store count growth remaining constant, the timing of when we open or close stores within the quarter is essential as well. The end-of-the-quarter store count tells only one side of the story. And regarding 4% net unit contributions, we are indeed opening smaller stores as we expand into lower-tier cities, with around 70% to 80% of our new stores this quarter being smaller stores. We mentioned previously that new-store sales are typically around 50% to 60% of our mature stores in terms of weekly sales, and there's a ramp-up period once a new store is established, which we indicated typically takes about three years to reach mature store performance. Furthermore, with the strategy mentioned, we have also strategically closed more stores to strengthen our store portfolio for better overall performance. So while there may be lower revenue growth in quarter one, this will normalize as the year progresses. In the mid to long run, if we maintain 10 to 11% of net-new stores, how does that correlate to mid-single-digit or low-single digits' system sales growth? While we do not have a crystal ball, we will control the factors within our control and strive to deliver excellent value for consumers, which will benefit our top-line system sales growth. I hope that addresses your question. Thank you.

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

The IPs are valuable for offering emotional connections for young people, which is just as important as value in the physical world.

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 KCOFFEE. Joey, you mentioned that this year you plan to open 200 more KCOFFEE stores than your initial target. Can you share us more long-term views 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 see promising growth momentum in this particular sector. Right now, our target is to reach 1,500 cafes by the end of 2025, which is 200 more than the original target. We only started last year, and the most promising aspect is a high percentage of our members who have yet to try the KCOFFEE, which is a fantastic base. In terms of top-line and bottom-line, KCOFFEE cafes contribute nice additional same-store sales growth for those stores hosting KCOFFEE, although it's still low-single digit, it's a very nice addition to those particular stores. In terms of the bottom line, we share equipment and labor, which helps maintain stable economics. The third aspect is our menu and ambiance. We're making good progress—although we only started opening KCOFFEE cafes last year—52 coffee and food items have already been launched in 2024 and some of our signature products have gained popularity such as the sparkling coffee, gigantic egg tart, and the original recipe chicken latte. This year, we plan to introduce more premium products. We’re also launching tea products to complement our menu. We are committed and very optimistic about the KCOFFEE cafe concept, as it drives uplift in top-line revenue while also benefiting profitability.

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. We are doing good on new products, new models, high operational efficiency, and brand marketing. Regarding brand marketing, there are some new trends in the market. For instance, some focus on healthiness while others focus on emotional value. Some are using brand ambassadors and joint brands, IP toys popular among consumers, and some connect brand promotion with product innovation. Do we have any new observations or evolving plans regarding these aspects?

Thank you, Sijie Lin. I will respond to your question in two ways. Our strength in brand marketing is shown through our ability to market Fried Chicken or Pizza as fashionable brands. We always stay in touch with our consumers about their preferred IP and something relevant to them, and we believe we grow alongside them. We will continue this approach, and it seems we’ve been doing it reasonably successfully. You also asked about health food trends. We plan to introduce this concept to our investors during our Investor Day, so please look forward to that. Our KPRO concept continues to share equipment, membership, and space with KFC, leading to a minimal incremental investment. We have KPRO stores primarily in Beijing and Shanghai focused on energy bowls and smoothies—what we call lighter meals. Our customers, who are also KFC members, enjoy these foods. We anticipate building more of these stores in Tier-1 and Tier-2 cities. Our aim is to introduce a broader menu at our Investor Day later this year. I'll pause here.

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

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

Thank you. 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, a Tier-1 city in China. We will provide more details in due time. Thank you for joining the call today.

Thank you.

Thank you. Bye-bye.

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