Lillian Lou

Lillian Lu from Morgan Stanley questioned Pizza Hut's sales momentum, noting KFC's stronger performance in Q4, despite previous expectations for Pizza Hut to grow faster than KFC from 2026 onwards. She asked for details on incremental measures management plans to implement to accelerate Pizza Hut's revenue and system sales momentum in 2026.

Answer

CEO Joey Wat highlighted Pizza Hut's core business growth, including entering over 200 new cities in 2025 (100+ with the WOW model), which helped overcome previous city penetration stagnation. She emphasized the success of the Handcrafted Thin Crust Pizza, now accounting for one-third of pizza sales, and the introduction of burgers, which contribute mid-single-digit sales mix and cater to the rapidly growing single-person meal segment (up 50% in 2025). These initiatives are expected to drive growth into 2026.

Lillian Lou questioned the sales momentum of Pizza Hut, noting that KFC delivered stronger momentum in Q4. She asked what incremental measures management plans to implement in 2026 to accelerate Pizza Hut's revenue or system sales growth to surpass KFC's rate, aligning with previous investor day expectations.

Answer

CEO Joey Wat highlighted Pizza Hut's core business growth, including entering over 200 new cities in 2025, significantly expanding its city penetration with the help of the WOW model. She also emphasized product innovations like the Handcrafted Thin Crust Pizza, which now accounts for one-third of pizza sales, and the successful introduction of burgers, contributing mid-single-digit sales mix and driving growth in single-person meals.

Lilian Lou inquired about the delivery order mix between aggregators and Yum China's own system, the sequential and year-over-year drop in membership sales contribution, initiatives to drive orders to their own system, and future cost-saving initiatives for rider costs.

Answer

CFO Adrian Ding explained that the reported membership sales contribution decreased mechanically because it excludes members spending on aggregators, while the adjusted member sales contribution remains stable. He acknowledged that increased delivery mix leads to higher overall rider costs despite per-ticket cost reductions, causing a headwind in cost of labor. CEO Joey Wat added that innovations like KPRO and K-Coffee acceleration, along with front-end segmentation and back-end consolidation, help manage the cost structure holistically.

Lillian Lou from Morgan Stanley questioned the delivery order mix between aggregators and Yum China's own system, noting a sequential and year-over-year drop in membership sales contribution. She asked about initiatives to drive customer orders back to Yum China's system and future cost-saving efforts for rider costs.

Answer

CFO Adrian Ding clarified that the decrease in reported membership sales contribution is a mechanical result of increased aggregator mix, as members spending on aggregators are excluded from the disclosed metric; adjusted member sales contribution remains stable. He acknowledged rider costs as a headwind due to increased delivery mix but noted efforts to optimize delivery efficiency and streamline non-delivery operations to offset wage inflation and delivery mix impact, aiming for stable KFC restaurant margins and potential Pizza Hut margin improvement. CEO Joey Wat added that innovations like K-Pro and K-Coffee, combined with back-end consolidation, help manage cost structure holistically.

Lillian Lou of Morgan Stanley asked for details on the new Pizza Hut 'Wow' store format, including opening targets, margin levels, and the pace of growth, given its reported performance improvements.

Answer

CEO Joey Wat highlighted that the 'Wow' model is successfully helping Pizza Hut penetrate new, lower-tier cities. CFO Adrian Ding stated that specific opening guidance is not yet available as the model is still being refined. He confirmed 'meaningful improvement' in profitability and noted the new stores have a lower CapEx of RMB 650k-850k and encouraging initial sales, though converted store profitability is still slightly below the main Pizza Hut model.

Lillian Lou of Morgan Stanley inquired about the new Pizza Hut Wow! store format, asking for specific opening targets, details on its operational performance, current margin levels, and growth pace.

Answer

CEO Joey Wat expressed excitement for the Pizza Hut Wow! model, highlighting its success in penetrating over 10 new lower-tier cities. CFO Adrian Ding stated that while specific opening guidance is not yet provided, the model has shown meaningful, sequential profitability improvements and encouraging initial sales with a lower CapEx of RMB 650k-850k, though they continue to monitor its performance.

Lillian Lou asked about post-Q1 demand trends, the competitive impact from delivery aggregators offering significant subsidies, and Yum China's strategic response.

Answer

CEO Joey Wat stated that April performance was in line with expectations and no significant negative impact had been observed, though the company remains watchful. She emphasized Yum China's deep connection with consumers and its ability to navigate challenging markets. Wat noted that while they work with all platforms, over 70% of sales come from their own channels (dine-in, takeaway, proprietary delivery), which provides a strong degree of control over their business.

Lillian Lou from Morgan Stanley asked about the margin outlook for 2025, seeking to understand which cost lines offer potential for further savings following the significant payroll efficiencies seen in Q4.

Answer

Acting CFO Adrian Ding guided that the full-year 2025 core OP margin is expected to be relatively stable or slightly improved. He broke down the components, expecting slight improvement in Cost of Sales (COS) and a slight decrease in G&A as a percentage of sales. However, Cost of Labor (COL) will face headwinds from wage inflation and a higher delivery mix, while Occupancy & Other (O&O) costs are likely to be stable. CEO Joey Wat added that labor efficiencies are driven by ongoing initiatives in simplification, automation, centralization, and digitization, such as using generative AI in hiring.

Lillian Lou from Morgan Stanley asked about the near-term pricing strategy for KFC, noting a nice recovery in Q3. She sought to understand the drivers, such as competitive pressures, and the outlook for pricing in the coming quarters.

Answer

CEO Joey Wat explained that while the restaurant industry remains competitive, some players have rationalized promotional intensity. She clarified that KFC's strategy is to maintain stable pricing, with the Q3 ticket average of RMB 38 being relatively consistent. Conversely, Pizza Hut's strategy continues to focus on lowering its ticket average to broaden its mass-market appeal.