Yum China Holdings, Inc.

Good day and thank you for standing by. Welcome to Yum! China's fourth quarter and fiscal year 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 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 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 Watt, 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 these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC findings. 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.yamchina.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 the impact of foreign currency unless we mention otherwise. With that, I'll now turn the call over to Joey Watt, CEO of YamChina. 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 margins expand year over year in every quarter of 2025, reaching 10.9% for the full year. It is the highest level since our U.S. listing, excluding special items. Operating profit grew 11% to $1.3 billion for the full year and was up 23% year-over-year in Q4. By brand, both KFC and Pizza Hut exceeded our expectations in 2025. KFC's solid momentum continued, with system sales growth reaching 8% in Q4 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 with purchases. which is around 8% to 9% of our current market cap. Let me share a few key highlights from our core initiative, 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. At KFC, our hero-inspired innovations include spicy original recipe chicken, and crackling golden chicken wings. In 2025, Hero products accounted for one-third of KFC sales and together with their inspired innovations, they delivered high single-digit sales growth. At Pizza Hut, we sold over 200 million pizzas in 2025. the pizza category continued to grow strongly. Our newest thin crust pizza, So Zuo Bao Di, perfectly crispy with plenty of toppings, has earned top reviews and become our best-selling crust. It now accounts for one out of every three pizzas sold and is bringing more customers, especially younger ones, into our stores. Second, we focus on delivering great value for money and emotional value on top of serving good food. As we shared at our investor day, our pricing strategy has been crucial to our success and has helped us deliver 12 consecutive quarters of same-store transaction growth. Total transactions grew 8%, exceeding 2 billion transactions in 2025. Emotional value matters too. Last year, we partnered with 70 leading IPs in gaming, animation, and sports. Whether tied to the latest hits or tapping into childhood memories, these collaborations help us engage customers and capture additional traffic. Beyond themed toys and special packaging, We decorated select stores and pop-up stores to make the experience more fun for our customers. Third, we capture new opportunities through front-end segmentation and back-end consolidation. Our multi-brand portfolio, diverse modules, and food offerings help us reach more customer segments and serve a wide range of occasions. On the back-end, We foster synergies by sharing and centralizing resources in and across stores, regions, and even brands. Side-by-side modules, K-Coffee Cafe and K-Pro are scaling quickly, reaching 2,200 and 200 KFC locations, respectively. They drive incremental sales and profit with light investments. Last year, we also piloted the Gemini model, which places KFC and Pizza Hut stores side by side to support entry into lower tier cities. With a cap of 0.7 to 0.8 million yuan for a pair of stores, it's a very attractive model for franchisees. We opened around 40 pairs of Gemini stores last year and expect to ramp up openings in 2026. Fourth, we are adopting an equity and franchise hybrid model to drive faster and more efficient store openings. We see great potential for growth in China. Recently, I visited Chongqing, China's largest city by population, with over 30 million people. In this wide-brand market, I saw a strong appetite for affordable good food. KFC's density there is only four stores per million people, well below the average of 17 in tier one and two cities, or Shanghai's 28th. With manual innovation and multiple store formats, we are confident we can continue to expand our market share in China. to capture incremental opportunities in lower tier cities, remote areas, and strategic locations. We began accelerating franchise expansion in 2024. The franchise mix of net new openings for KFC and Pizza Hut increased from 25% in 2024 to 36% in 2025. Equity stores remain the core of our business, representing over 80% of our store portfolio. The payback period of our new stores remain healthy at around two years for KFC and two to three years for Pizza Hut. Last but not least, we are embracing GenAI across our business to drive growth and efficiency. In our restaurants, We are piloting Qsmart, an agent AI assistant that integrates operation data such as labor and inventory. It identifies potential issues, recommends actions, and implements. For example, Qsmart can detect staffing shortage, propose replacement staff, and initiate calls to them. This helps our RGM save time. make informed decisions, and run restaurants more smoothly. And in January, we rolled out SmartK, our AI ordering agent to all KFC super app users. SmartK helps customers place orders. This feature has already been used by 2 million members, especially those who order breakfast and coffee. customers respond positively to the ad convenience and customized suggestions. As our investor day in November last year, we introduced our RGM 3.0 strategy, which takes a balanced approach across all three aspects of resilience, growth, and modes. We also outlined our plans for our next phase of growth, including expanding to over 30,000 stores by 2030. We are confident that we can continue our rapid growth while improving profitability and returning capital to shareholders. Let me now turn the call over to Adrian.

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-sales mix, which carries a relatively higher ticket average. KFC's 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 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 its future expansion. K-Pro added more than 200 locations in just one year. This light meal concept offers grain and pasta bowls and superfood smoothies, backed by KFC's trusted quality and strong value for money. K-Pro has resonated well with consumers and generated a double digit sales uplift in its parent KFC stores. We aim to double K-Pro's footprint to more than 400 locations in 2026, focusing on higher tier cities. Now, moving on to Pizza Hut. In 2025, Pizza Hut opened a record 444 new stores. Raising its total to 4,168 stores. Restaurant margins improved by 80 basis points to 12.8%. bringing its OP margin to 7.9%, the highest level since our 2016 listing. In quarter four, system sales grew 6% year over year, up from 4% in quarter three. Same-store sales grew 1%, positive for the third consecutive quarter. Same-store transactions increased 13%, growing double digits for the fourth consecutive quarter, Ticket average was 69 yuan, down 11% year over year, reflecting our mass market strategy. Last year, Pizza Hut entered more than 200 new cities. About half of these, around 100 new cities, adopted the WOW format. We continue to refine the store format and test different service models. The capex for a standalone new WOW store is around 0.65 to 0.85 million yuan. With lower capex, streamlined operations, and a simplified menu, WOW enables us to penetrate previously untapped locations, especially in lower tier cities. We saw improving restaurant margins and a solid estimate payback period of two to three years for the new WOW stores, in line with the average new stores for Pizza Hut. Our emerging brands are also making steady progress. Lavazza opened 34 net new stores, including its first store in Hong Kong, taking its total store count to 146. Same-store sales growth turned positive in 2025, and overall store economics improved meaningfully. Its latest light model requires only 0.5 million yuan in capex, roughly half the cost of the previous formats. Its retail business of packaged coffee products, the other growth engine, delivered over 40% sales growth and more than doubled operating profit year over year in 2025. Let me now go through our quarter four P&L. System sales grew 7% year over year, and same-store sales grew 3%. Our restaurant margin was 13.0%, 70 basis points higher year-over-year, mainly due to improvements in cost of sales and occupancy and other cost ratios. Cost of sales was 31.6%, 30 basis points lower year-over-year, mainly due to the favorable commodity prices and supply chain efficiency gains. we shared some of these savings with our consumers in the form of great value for money. Cost of labor was 29.4 percent, 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 percent of sales at relatively stable levels through operational efficiency gains despite wage inflation. Occupancy and other was 26.0%, 160 basis points lower year-over-year, mainly due to sales leverage, store capex optimization, 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 $0.5 million in Q4 compared to a negative impact of $9 million in Q4 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 cents, 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. GMA 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. Let's now turn to capital returns to shareholders. We're on track to return a total of $4.5 billion to shareholders from 2024 through 2026. That is $1.5 billion each year. In 2025, we return $353 million in cash dividends and $1.14 billion in share repurchases. In 2026, we remain committed to returning $1.5 billion to shareholders. We're raising our quarterly dividend by 21%, from $0.24 to $0.29. At $0.29 per quarter, the payout ratio will exceed 45% of our 2025 diluted EPS. with an annual dividend totaling around $400 million. We have also initiated a $460 million share repurchase plan for the first half of 2026. With these arrangements, we are well positioned to deliver on our commitment for the year. Starting in 2027, as outlined at our 2025 investor day, We plan to return approximately 100% of annual free cash flow after subsidiary dividend payments to non-controlling interests. And this is expected to translate into an average annual return of $900 million to $1 billion plus in 2027 and 2028, and exceed $1 billion in 2028 and onward. These commitments are supported by our healthy cash position and robust cash generation. In 2025, we generated $840 million in free cash flow, an increase of 18% year-over-year, and ended the year with $2.0 billion in net cash. Now, moving on to our 2026 outlook. We're confident we will reach more than 20,000 stores in 2026. This means opening over 1,900 annual stores, with 40% to 50% coming from franchisees for both KFC and Pizza Hut. We will continue to deepen our presence across China, especially in lower tier cities and strategic locations using a variety of store formats. With lower capex per store and a higher franchise mix, we expect the total CapEx to stay in the range of $600 million to $700 million this year. As for other financial metrics, we expect our growth in 2026 to be consistent with our three-year guidance shared at our Investor Day. That is, same-store sales index of 100 to 102, mid to high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth, and a slight improvement in restaurant margin and OP margin for Yum China. As activity on delivery platforms remain dynamic, we have factored in different scenarios and are confident that the impact on our businesses will be limited due to our balanced and disciplined approach. Our four-year projections are based on our current plans and have not assumed any changes in macro. Any improvement would represent potential upside. We will continue to track the progress of our new store opening, module development and rollouts, and other core initiatives, and provide updates as we go. For quarter one, we're working hard to deliver our fourth consecutive quarter of positive same-store sales growth and 13 consecutive quarter of positive same-store transaction growth. On margins, we face a tough year-over-year comparison. First, riser costs are the biggest headwind, driven by a higher delivery sales mix. Delivery mix increased from 42% in quarter one to 53% in quarter four last year, and is expected to grow further. Second, the benefit from lower commodity prices will be smaller than before. Additionally, last year's base already reflected significant benefits from Project Fresh Eye and Red Eye. KFC's restaurant margin was already 19.8%, and Pizza Hut's restaurant margin improved 190 basis points year-over-year in quarter one last year, setting a high base for quarter one this year. We'll focus on efficiency and sales leverage and strive to maintain Yum! China restaurant margin and OP margin roughly in line with the prior year period in quarter one. With that, let me pass it back to Joey for her remarks on the Chinese New Year.