Yum China Holdings, Inc. Q4 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to Yum China Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Ms. Florence Lip, Senior Director, Investor Relations of Yum China. Please go ahead. Thank you, operator. Hello, everyone. And welcome to Yum China's Fourth Quarter 2025 Earnings Conference Call. With me on the call are our CEO, Ms. Joey Wat, and our CFO, Mr. Adrian Ding. Before we begin, I'll remind everyone that our remarks and investor materials contain forward-looking statements. These are subject to future events and uncertainties, and actual results may differ materially. Please refer to these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filings. We'll also be talking about non-GAAP financial measures. We encourage you to review the comparable GAAP measures along with the reconciliation of non-GAAP and GAAP measures provided in our earnings release, which is available on our Investor Relations website at ir.yumchina.com. You can also find both the webcast replay and a PowerPoint presentation on our IR website. Please note that all year-over-year growth rates discussed today exclude the impact of foreign currency unless we mention otherwise. With that, I'll now turn the call over to Joey Wat, CEO of Yum China. Joey?

Thank you. Hello, everyone, and thank you for joining us. I would like to start by saying thank you to our team for delivering strong results this year, especially in such a dynamic market. In 2025, we opened more than 1,700 net new stores, taking our total to over 18,000 stores across more than 2,500 cities. Our focus on both system sales growth and same-store sales growth is paying off. Same-store sales growth has been positive for three consecutive quarters. System sales growth improved sequentially in quarter four, reaching 7%. Our dual focus on innovation and operational efficiency also boosts our healthy margins. OP margin expanded year over year in every quarter of 2025, reaching 10.9% for the full year. It is the highest level since our US listing. Excluding special items, operating profit grew 11% to $1.3 billion for the full year and was up 23% year over year in quarter four. By brand, both KFC and Pizza Hut exceeded our expectations in 2025. KFC's solid momentum continued with system sales growth reaching 8% in quarter four and 5% for the full year. Pizza Hut transformed its menu and operations resulting in 16% same-store transaction growth and 20% operating profit growth in 2025. While we accelerated growth, we also returned $1.5 billion to shareholders in 2025 through dividends and share repurchases, which is around 8% to 9% of our current market cap. Let me share a few key highlights from our core initiatives, and then I'll hand it over to Adrian to go through our results in more detail. First, we continue to delight our customers with year-round innovation, launching about 600 new or upgraded items annually. At the same time, we stay laser-focused on our hero products, which are significant drivers of sales and repeat purchases. These items have a loyal fan base that is also highly receptive to the new innovations they inspire.

Thank you, Joey. Let me now update key highlights by brand. Starting with KFC, in 2025, KFC opened 1,349 new stores, bringing its total to nearly 13,000 locations. System sales grew 5%, and restaurant margins expanded 50 basis points to 17.4%. Same-store sales growth turned positive for three consecutive quarters. In quarter four, system sales growth sequentially improved to 8% year over year. Same-store sales grew 3%, and same-store transactions increased by 3% year over year. Ticket average was flat, as growth in smaller orders was offset by the increase in delivery source mix, which carries a relatively higher ticket average. KFC side-by-side modules are rolling out rapidly. K Coffee Cafe tripled its footprint from 700 locations in 2024 to 2,200 locations in 2025. While expanding to more locations, we'll also increase per store daily cup sold by 25% year over year. Menu innovation has been key in driving repeat purchases. Last year, we launched a new product every week on average. K Coffee Cafes generated a mid-single-digit sales uplift for their parent KFC stores, and we're confident in this future expansion.

Cost of labor was 29.4%.

120 basis points higher year over year. While overall rider costs were higher due to a higher delivery mix, we maintained non-rider costs as a percent of sales at relatively stable levels through operational efficiency gains despite wage inflation. Occupancy and other was 26%, 160 basis points lower year over year, mainly due to sales leverage, store CapEx optimizations, and better rent. Our OP margin was 6.6%, 80 basis points higher year over year. Operating profit was $187 million, growing 23% year over year. Net income was $140 million, 22% higher year over year. Excluding our investment in Meituan, net income grew 14% year over year. Our investment in Meituan had a negative impact of $500,000 in quarter four, compared to a negative impact of $9 million in quarter four last year. As a reminder, we recognized $11 million less in interest income in quarter four this year due to a lower cash balance, resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was 40¢, 29% higher year over year, or up 21% year over year excluding our investment in Meituan. For the full year, system sales grew 4% and same-store sales grew 1%. Restaurant margin was 16.3%, 60 basis points higher year over year. Both KFC and Pizza Hut's restaurant margins improved year over year. G&A expenses were 4.9% of revenue, 10 basis points lower year over year. Operational efficiency gains more than offset higher performance-based compensation in the year. Operating profit grew 11% to $1.3 billion. Diluted EPS was $2.51, growing 8% year over year, or 14% excluding our investment in Meituan. Total CapEx was $626 million. Capital efficiency improved, ROIC reached 17.3%, up from 16.9% in 2024.

Thank you, Michelle. Let me take the pricing part, and Adrian can answer the second one. The price increase for KFC was a mild adjustment. It only affects the delivery menu, and it has no change to dine-in and takeaway. And we also did not make any change to the signature campaign, such as the Crazy Thursday or the Weekend Buy More, Save More. And the price increase helped absorb some rider cost increase because of the higher delivery mix. With that said, we remain committed to offering great value for money, something we have done for a long time. And therefore, we are very committed to it. And that was thoroughly discussed in our Investor Day. Together, with our good food and emotional value, the primary goal of our business, of our commitment, is still to drive traffic. So we are still targeting the thirteenth consecutive quarter of same-store transaction growth and fourth quarter of same-store sales growth in quarter one. And so far, the trading has been in line with our expectation. So overall, in the short term and long term, I hope this demonstrates our confidence in our business model.

Yeah. Sure. Michelle, on your second question regarding margin outlook and also the delivery mix, I guess very briefly on delivery mix outlook for 2026. We do expect further increase in mix for delivery. For full year 2026, I mean, our delivery growth has been pretty solid for the past more than ten years. And for the past one year, given the dynamics in delivery aggregators, our growth has been particularly high, which has proven a pretty big surge in the delivery mix. I think from 42% last year to around 48% for the full year 2025. So it's a pretty significant increase. For the full year 2026, we do believe regardless of the delivery aggregator subsidy dynamics, we do expect that the delivery mix will surge further. And in terms of the margin impact on Yum China and the two brands, as we mentioned in the prepared remarks, we expect the full-year restaurant margin and OP margin to slightly improve year on year, and we are confident to achieve and deliver that.

Thank you, Adrian. Let me share a few thoughts on the Chinese New Year, our key trading window of the year. Chinese New Year falls on February 17, considerably later than in most years. Our teams have prepared comprehensive scenario plans by the week and even daily. People will soon be traveling and gathering for the holiday season. Our brands are focusing on their signature products to capture the heavy traffic during Chinese New Year while maintaining strong operational efficiency. At KFC, buckets have long been our Chinese New Year signature, offering exciting food and abundant value. This year, in addition to our classic golden bucket and wing bucket, we are introducing for the first time peanuts and sunflower seed mini buckets. These packaged snacks honor Chinese tradition and help create a festive Chinese New Year atmosphere. At Pizza Hut, we are focusing on one of our hero products, the super supreme pizza. This time, we are adding new choices by pairing it with our classic Bolognese and trendy salted egg yolk toppings. Customers can also top up the pizza with a mountain of crunchy potato chips and rich sauce. These offerings are available in combos designed for family and friend gatherings and to drive ticket average. Overall, for this Chinese New Year, we are executing according to our plans. Trading year to date has been in line with our expectations. With that, I would like to wish everyone a happy and prosperous year of the horse.

Thanks, Joey. Now we will open the call for questions. In order to give more people the chance to ask questions, limit your questions to one at a time. Thank you. We will now begin the question and answer session. On your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Michelle Cheng from Goldman Sachs. Please go ahead, Michelle.

Hi, Joey, Adrian, Florence. Congrats for the very strong results and ending 2025 with these impressive numbers. My question is about pricing. We noticed that you raised the delivery price recently, and earlier, we also heard some other brands are raising the price. So can you comment on your expectation on the pricing trend, including any changes in your end market promotion activities? And how this will be reflected in the same-store sales growth, especially since we should have a pretty easy base for the first quarter on both same-store sales growth and overall sales last year first quarter. And separately, if I may, regarding delivery mix, we noticed that delivery mix increased quite a lot, but the margin is still pretty good. So unlike other kinds of catering businesses, which have been suffering from higher delivery mix and lower margin, and for Pizza Hut, we even see payroll cost is down in the fourth quarter. So can you still elaborate a little bit more on how we should think about 2026 delivery mix and impact on the margin? Thank you very much.

Thank you, Michelle. Let me take the pricing part, and Adrian can answer the second one. The price increase for KFC was a mild adjustment. It only affects the delivery menu, and it has no change to dine-in and takeaway. And we also did not make any change to the signature campaign, such as the Crazy Thursday or the Weekend Buy More, Save More. And the price increase helped absorb some rider cost increase because of the higher delivery mix. With that said, we remain committed to offering great value for money, something we have done for a long time. And therefore, we are very committed to it. And that was thoroughly discussed in our Investor Day. Together, with our good food and emotional value, the primary goal of our business, of our commitment, is still to drive traffic. So we are still targeting the thirteenth consecutive quarter of same-store transaction growth and fourth quarter of same-store sales growth in quarter one. And so far, the trading has been in line with our expectation. So overall, in the short term and long term, I hope this demonstrates our confidence in our business model. Adrian?

Yeah. Sure. Michelle, on your second question regarding margin outlook and also the delivery mix, I guess very briefly on delivery mix outlook for 2026. We do expect further increase in mix for delivery. For full year 2026. I mean, our delivery growth has been pretty solid for the past more than ten years. And for the past one year, given the dynamics in delivery aggregators, our growth has been particularly high, which has proven a pretty big surge in the delivery mix. I think from 42% last year to around 48% for the full year 2025. So it's a pretty significant increase. For the full year 2026, we do believe regardless of the delivery aggregator subsidy dynamics, we do expect that the delivery mix will surge further. And in terms of the margin impact on Yum China and the two brands, as we mentioned in the prepared remarks, we expect the full-year restaurant margin and OP margin to slightly improve year on year, and we are confident to achieve and deliver that.

Thank you, Michelle. Let me take the pricing part, and Adrian can answer the second one. The price increase for KFC was a mild adjustment. It only affects the delivery menu, and it has no change to dine-in and takeaway. And we also did not make any change to the signature campaign, such as the Crazy Thursday or the Weekend Buy More, Save More. And the price increase helped absorb some rider cost increase because of the higher delivery mix.

Just to clarify, that is not a particular store model. It's like, basically means the acceleration of franchising initiative for Yum China. So, you know, in the future, we'll become a business, shifting from an equity-focused business only to a hybrid of equity franchise business. So that's not a store model. Just to clarify on that one.

Thank you, Joey and Adrian. We wish you a great Chinese New Year.

Thank you, Sijie. So on delivery subsidy dynamics, as we mentioned in the prepared remarks, we have different scenario planning for the subsidy, how that evolves. And regardless of the scenario would be, we believe and we're confident that the impact on our business will be limited. Because of our disciplined approach to drive sales, at the same time to protect margin and price integrity.