4/30/2025

speaker
Operator
Conference Call Operator

Good day and thank you for standing by. Welcome to the Yum China First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, Florence Lipp, Senior Director of Investment Relations. Please go ahead.

speaker
Florence Lipp
Senior Director of Investor Relations

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 Watt, and our CFO, Mr. Adrian Dink. 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 gap measures. Reconciliation of long gap and gap measures is included in our earnings relief, which is available to the public through our investor relations website located at ir.yamchina.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 Watt, CEO of Yum China. Joey?

speaker
Joey Watt
CEO, Yum China

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 top line 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 dilute EPS increased by 10%. This performance underscores our team's diligent effort and effectiveness of our strategy. Last quarter, I mentioned that I felt Pizza Hut had reached an inflation 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 is 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 In Q1, KFC's system sales grew by 3%, and its restaurant margin expanded to 19.8%. In Q1, we also opened 300 K-Coffee cafes, reaching a total of 1,000 locations nationwide. Let me now turn the call over to Adrian to discuss our results in detail. Afterward, I will share additional color on our strategies. Adrian?

speaker
Adrian Dink
CFO, Yum China

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 40 yuan, 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 their 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 the 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 the 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. Same for sales index, amongst 100% of prior year level, also for the first time since the first quarter of 2024, up two 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 50 yuan, and the successful launch of our new menu. The ticket average was 78 yuan, 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 altered 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 39 yuan, 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 in various trade zones and dynamically adjusted our store operations. This served 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 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 has 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 percentage of sales. While cost per delivery order lowered, increased deliver volume led to higher overall rider costs. Non-rider costs as percent of sales remain stable year over year. Simplified operations help offset low single-digit wage inflation for our frontline staff. Occupancy and other was 24.5%, 40 basis points lower year over year, as a result of the cost optimizations in a number of areas, notably utilities and simplified operations. G&A expenses were 4.6% of the 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. Poor 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 77 cents, growing 10% year-over-year, or 12%, excluding the mark-to-market equity investment impact. Let's now move on to capital return to shareholders. We're 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 return 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 concept quarters of positive same-store transaction growth in quarter two. That said, we remain cautious about potential fluctuations in same-store sales index. Even with many moving parts, we reiterate our 2025 four-year guidance of mixed 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 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 costs 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 cost of labor. We continue to face pressure on the total rider costs driven by rapid delivery growth. Our goal for non-rider costs is to keep them stable by offsetting the weight 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 retro 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 four-year targets. Let me pass it back to Joey for her closing remarks.

speaker
Joey Watt
CEO, Yum China

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, Yuan Wei Ji Ba Si Wu Zhou Nian, brought back childhood memories for our customers. Pizza Hut celebrated Chinese New Year by wishing them good fortune with the Fortune Cat Crush Pizza, Zao Cai Mao Bing Bing. 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 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, K-Coffee 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 K-Coffee. By utilizing KFC footprint, K-Coffee Cafe is expanding rapidly in this high potential market. The incremental investment is light. Both equipment and resources can be shared. With 1,000 K-Coffee Cafes now, we're aiming for 1,500 locations by 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 12.9 RMB. We also launched a matcha 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, VAL is a simpler and more efficient model. Compared to the regular Pizza Hut, VAL'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-tune the model, restaurant margin has expanded year over year. Building on the successful conversion of some Pizza Hut stores to the VAL model, we have started opening new VAL stores. A brand new VAL store's capacity can be as low as half of a regular Pizza Hut store. with reduced capacity, lower per person spending, and simplified operations, WOW seems suitable for lower tier cities, thereby expanding Pizza Hut's addressable market. Turning to our dual 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. There are numerous examples. Just to name a few, 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 just 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 inflation points. Second, we are broadening our addressable markets with expanded menus, widened price ranges, and innovative models. These include our K-Coffee Cafe, as well as KFC Small Time Mini and Pizza Hut Wild Models. Lastly, we remain committed to our dual focus strategy of enhancing operational efficiency and fostering innovation to capture the amazing opportunities in China and create long-term value for our shareholders. With that, I will pass it back to Florence.

speaker
Florence Lipp
Senior Director of Investor Relations

Thanks, Joey. 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. Operator, please start the Q&A.

speaker
Operator
Conference Call Operator

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Please stand by while we compile the Q&A queue. Our first question comes from the line of Lillian Lu from Morgan Stanley. Please go ahead. Your line is open.

speaker
Lillian Lu
Analyst, Morgan Stanley

Hello, can you hear me? Yep. This is Lillian. Oh, 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 of 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 for the aggregator competition if such competition is going to last for a longer run? Thank you.

speaker
Joey Watt
CEO, Yum China

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. As I mentioned, we really have not observe 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. Point one is we are in China and dedicated to serving the Chinese people. And both KFC and Pizza Hut are well-recognized brands, beloved by Chinese consumer. And we serve over 2 billion customers annually. We have 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. Some example, like 18 years of one-year donation, and then food bank 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, in terms of the question regarding the JD, I would like to make two points. One is we're 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. 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 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. So these 70% business include dying, take away, and our own very own delivery channels, our own APP exclusive purpose, 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'll remain watchful, and then we'll balance our strategy in the short term and long term. Thank you, Lilia.

speaker
Lillian Lu
Analyst, Morgan Stanley

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

speaker
Operator
Conference Call Operator

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.

speaker
Michelle
Analyst, Goldman Sachs

Hi, Joy, 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 OUKE campaign. So can you share with us, how do you think about the same-store sales trajectory in the rest of the year? In second quarter, we know we launched the OUKE campaign again. But on top of that, we had easier base supposedly from second quarter last year. So should we have a better expectation on the same store sales? And also on margins, with this OECD campaign, how this will impact the near-term margin, while these low efficiency gains and the same source sales operating leverage is positive side, and this should be a positive driver for the rest of the year. So just wondering, for the rest of the quarter, how should we think about the good performance in first quarter to carry out on the Pizza Hut? Thank you very much.

speaker
Adrian Dink
CFO, Yum China

Thank you, Michelle. Yeah, if it is OK 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 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 a 10 consecutive quarters of positive things for 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 it 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 a quarterly shifting on the margins But, you know, broadly speaking, in terms of the margin outlook for the two brands respectively, I would say there was no change to our 2025 four-year guidance on margin. You know, we expect the core P margin for the group as a whole to stay either steady or slightly improved, right? That's how 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 over the mid to long run. And for Pizza Hut's margin to slightly improve this year. And for mid to long run, hopefully the restaurant margin for Pizza Hut will improve in a bigger magnitude compared to this year. And on the top line, you know, the top line is obviously a very important factor, you know, deciding on the restaurant margin. we reaffirm our guidance for the top-line growth, which is the mid-single-digit growth in the system sales. And then, I would also like to take this opportunity to provide some more color on the line-by-line margin outlook. For COS, as I mentioned, there is a quarterly shifting for people who have an OECD campaign. But more 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. And we continue to look to return much of the benefits to our consumers to continue offering great value for money to our consumers. And breaking down into these two brands specifically, we expect the 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. And again, both this percentage will have a modest improvement year over year this year over last year. For COL, as mentioned in the previous earnings release, 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, driven by the increase in delivery mix, The overall rider cost as a percentage of sales will increase for the group and for the two brands this year. And we'll make all efforts to try to offset the wage inflation, which is kind of the non-delivery part, by the efficiency gain, by the simplification, automation, and centralization. So try to keep the non-delivery part of cost of labor to be stable year over year. And then comes to occupancy and other costs. As president of sales, that line item is likely to be stable, and we continue to explore optimization opportunities to offset the cost increases within that line item. And I think it's very important to note, and as you also alluded to in the question, there is a quarterly facing for the margin. We expect tougher year-over-year comparison on both the restaurant margin and operating profit margin. later in the year, and this is because more meaningful benefits started to trickle in for Project Fresh Eye from quarter two of last year and from Project Red Eye from second half of last year. And obviously the tailwinds from the favorable commodity prices will be narrowing in the second half of this year as well. And lastly, a couple of items. The interest income will obviously be lower as a result of the lower cash balance, given we significantly step up our shareholder return. And also, there may be some headwind on foreign exchange rate. And I guess one last item is the market equity investment impact on May 2. And that's the volatile quarter over quarter and year over year. So overall, we maintain and reaffirm our annual guidance on margin on our top line. And then in terms of the line-by-line color, that's as I described. Thank you, Michelle.

speaker
Michelle
Analyst, Goldman Sachs

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

speaker
Operator
Conference Call Operator

Thank you. We'll now move on to our next question. My next question comes from the line of Brian Bittner from Oppenheimer and Co. Thank you.

speaker
Brian Bittner
Analyst, Oppenheimer & Co.

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.

speaker
Joey Watt
CEO, Yum China

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 AR 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 are growing very nicely, both in terms of our food business and drink business. So the food business is the first 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%. Similar trend in Pizza Hut, while the Pizza Hut also achieved 13% growth in delivery, the transaction growth for the lower TA, about 30 to 60 TA, is actually over 52% growth. So that gives you a sense of where we are going. And also in terms of strengths, I just want to quote you one number. Our K coffee, so the coffee that we sell in all our KFC store, the increase of cups and sales is actually 20%. So that is sort of 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, you know, 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. 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. That's where we get our margin from and supporting the innovations. One last interesting introduction of the innovation, look at our tea coffee business. Not only coffee, we're actually moving to tea as well. So I hope that gives you a flavor of where things are, Brian. Thank you.

speaker
Brian Bittner
Analyst, Oppenheimer & Co.

It does. Thank you, Joey.

speaker
Operator
Conference Call Operator

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.

speaker
Chen Luo
Analyst, Bank of America

Hello. Hi.

speaker
Joey Watt
CEO, Yum China

Yes.

speaker
Chen Luo
Analyst, Bank of America

Hi. Hi, Joanne. Adrian, this is watching from Bank of America. First, congrats on the same success growth turning flattish in Q1. And just now also here, you mentioned the wrinkle and happens that my daughter is a big fan of the wrinkle. That actually means Yeah, so my question is regarding the new store expansion and In our earnings announcement, I noticed that new store contributed 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 roughly around 5% revenue growth, So if we 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 next 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.

speaker
Adrian Dink
CFO, Yum China

Thank you, Luo Chen. Yeah, let me address the question quite directly. I think for this year, as we mentioned in the prepared remark, 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 quarter of the year. And then specific to a question on the 4% of net new unit contribution to the top line. You know, you mentioned the 10% of net new store increase as percentage, but obviously that's the end of the quarter store count. And, you know, even with all the end of quarter store count, Both way the same the store week when we open or close the store within the quarter is actually a very important factor as well So, you know the end of the quarter store count only tells one, you know side of the story And then, you know, obviously on a 4% net unit contribution You know, we are opening smaller stores as we expand into lower tier cities Around 70 to 80 percent of our new stores in this quarter are smaller stores that's opening this quarter are smaller stores and And as we got it 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 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. 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 open figure will normalize as the year progresses. So that's more of this year, right, but speaking of mid to long run, you know, if we open, let's say, 10, 11, 12% of net new stores, you know, 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, it's one aspect of the algorithm. The other aspect, important aspect, is the same for sales growth. And as we mentioned just now, We remain cautious on the near term, especially this year, same-store sales index. You know, there may be some fluctuations there in the mid-to-long run. Obviously, we don't have the crystal ball. We'll 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. Duocheng, hopefully that addresses your question. Thank you.

speaker
Chen Luo
Analyst, Bank of America

Thank you.

speaker
Adrian Dink
CFO, Yum China

That's very helpful.

speaker
Chen Luo
Analyst, Bank of America

I also look forward for your more cooperation with more IPs because my daughter is really a big fan of all different kinds of IPs. Thank you.

speaker
Joey Watt
CEO, Yum China

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

speaker
Chen Luo
Analyst, Bank of America

Yes, totally agree. Thank you.

speaker
Operator
Conference Call Operator

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.

speaker
Christine Peng
Analyst, UBS

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

speaker
Joey Watt
CEO, Yum China

Thank you, Christine. In the long term, we are committed to the K coffee business, and particularly the cake cafe 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 huge percentage of our members have yet tried the K-Coffee. 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 K-Coffee Cafe. 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 protected as well. So these two are both very important to our business as well. And if I could comment on the third day, which is the business day, the menu, the ambience, and the main include the food and drink, we are making very good progress. And although we only start to open the K-Coffee Cafe last year, but in 2024 alone, we launched 52 coffee, drink, or food item. And we already have some very nice signature items product like the sparkling coffee, like the gigantic egg tart, and some really cookie. The cookie is the right word to describe this product or original recipe, chicken latte. It's 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 gauge of beans for just 12.9 RMB. So the product itself is getting into the mindset of the customer. And as I mentioned earlier, we even started to launch the matcha drink. And as of right now, we sell Longjing, the tea leaf Longjing, with latte as well. So we are committed and we are very positive about this K-Coffee Cafe, not only It drives the uplift in top line, but it also drives incremental profit. Thank you, Christine. Thank you, Joy.

speaker
Operator
Conference Call Operator

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

speaker
C.G. Lin
Analyst, CICC

Hi. Thank you, Joy and Adrian. I have one question. So we are doing good on new product, new store 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.

speaker
Joey Watt
CEO, Yum China

I'll try to respond to your question in two ways. One is our strengths in brand marketing certainly is shown through our ability to market fried chicken or pizza brand almost as a bit of fashion of the whole brand. You know, 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 with them, 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 I'll just take a chance to make an advertisement for that. It's a module called K-Pro. And some of you guys have already tried the product. So what is KPro? It's a module. Again, we continue to share the KFC store space and membership and equipment and 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. So very focused means very short menu there, particularly focused on energy bowls and smoothies. So what we call this is the lighter meals. And these consumers or customers, 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 slightly different food to our customers. It's hard to just talk about the new concept without trying the food and without you guys seeing how it works. So we're looking forward to build more of these tools, particularly in Tier 1 and Tier 2 cities. And then hopefully we'll have a chance to introduce a wide range of management to you guys when you come to the investor day later on in the year. I'll pause here. Thank you.

speaker
C.G. Lin
Analyst, CICC

Thank you, Joy. Looking forward to the investor day. A new product, a new concept. Thank you.

speaker
Joey Watt
CEO, Yum China

Yeah. And if I can add on, the PISA hub, we have amazing innovation as well. And last year, we have tried the PISA VAL menu, and we'll continue to streamline the menu, and we'll continue to work on the menu. Obviously, we will include that in the investor day as well. Thank you.

speaker
Operator
Conference Call Operator

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.

speaker
Florence Lipp
Senior Director of Investor Relations

Thank you. 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, a tier one city in China. We'll provide more details in due course. Thank you for joining the call today. Thank you.

speaker
Adrian Dink
CFO, Yum China

Thank you. Bye-bye.

speaker
Operator
Conference Call Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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