Michelle Cheng

Michelle Cheng from Goldman Sachs inquired about Yum China's recent delivery menu price adjustments, the broader market pricing trends, and their expected impact on same-store sales growth, particularly given the easier Q1 base. She also asked for details on the 2026 delivery mix outlook and its effect on margins, noting Pizza Hut's payroll cost reduction despite higher delivery.

Answer

CEO Joey Wat clarified that the KFC price increase was a mild adjustment only for delivery, not dine-in or takeaway, and aimed to absorb rider costs while maintaining value and driving traffic. CFO Adrian Ding projected a further increase in delivery mix for 2026, expecting full-year restaurant and operating margins to slightly improve, with KFC's restaurant margin remaining stable and Pizza Hut's slightly improving. He detailed cost of sales, labor, and occupancy expectations, highlighting Q1's tough year-over-year comparison due to higher delivery mix, reduced commodity price tailwinds, and a high base from the previous year.

Michelle Cheng inquired about Yum China's recent delivery menu price adjustments, the broader market pricing trends, and how these factors, along with promotional activities, might influence same-store sales growth, particularly given the easy Q1 base. She also asked for insights into the expected 2026 delivery mix and its impact on margins, noting Pizza Hut's improved payroll cost in Q4 despite higher delivery volumes.

Answer

CEO Joey Wat explained that KFC's mild delivery menu price adjustment was to absorb rider costs, emphasizing a continued commitment to value and traffic growth, targeting positive same-store transaction and sales growth in Q1. CFO Adrian Ding projected a further increase in delivery mix for 2026, anticipating a slight improvement in full-year restaurant and operating margins for Yum China, with KFC's restaurant margin remaining stable and Pizza Hut's slightly improving. He detailed expectations for stable cost of sales, higher rider costs offset by non-rider cost stability, and continued improvement in occupancy and other costs.

Michelle Cheng asked about the observed impact of delivery platform subsidies on Yum China and the broader market, long-term pricing trends, competitive landscape, and any potential impact on Yum China's Pizza Hut business from Yum! Brands' strategic review.

Answer

CEO Joey Wat noted a more pronounced decrease in subsidies in coffee/tea but only a slight decrease in QSR, expecting limited overall impact on Yum China due to a balanced approach. She emphasized that subsidies will normalize, requiring discipline in menu innovation, food quality, and customer service. CFO Adrian Ding addressed the Yum! Brands' Pizza Hut review, stating Yum China is independent but confident in Pizza Hut China's strength and growth potential, and that Yum China maintains a prudent approach to M&A.

Michelle Cheng from Goldman Sachs inquired about the near-term and long-term impact of delivery platform subsidies on Yum China and the broader market, including pricing trends and the competitive landscape. She also asked about the potential impact of Yum! Brands' strategic review of Pizza Hut on Yum China's Pizza Hut business.

Answer

CEO Joey Wat stated that while coffee and tea saw a more pronounced decrease in subsidies, QSL experienced only a slight decrease, with overall impact expected to be limited due to Yum China's balanced approach to sales growth and margin protection. She emphasized the importance of menu innovation, food quality, and customer service for long-term competitiveness as subsidies normalize. CFO Adrian Ding clarified that Yum China and Yum! Brands are independent entities, and Yum China is confident in Pizza Hut's strength and growth potential in China, maintaining a prudent approach to evaluating potential investment opportunities.

Michelle Cheng from Goldman Sachs inquired about the impact of intense delivery platform promotions on Q3 same-store sales growth and unit economics, particularly margins and rider costs.

Answer

CEO Joey Wat explained that Yum China is focused on core competencies rather than 'buying sales,' noting 70% of sales are outside third-party aggregators. CFO Adrian Ding added that while predicting same-store sales is difficult, they aim for steady levels in H2 2025. He acknowledged higher rider costs as a headwind from the increased delivery mix but stated the company's margin guidance already incorporates these dynamics.

Michelle Cheng from Goldman Sachs asked about the impact of intense delivery platform promotions on Q3 same-store sales growth and unit economics, particularly concerning margins and higher rider costs.

Answer

CEO Joey Wat explained that Yum China has learned from past experiences in 2017 and focuses on core competencies rather than 'buying sales,' maintaining a balanced approach to protect brand price integrity. CFO Adrian Ding added that for the second half, the company aims for steady same-store sales levels year-over-year and expects higher rider costs due to an increased delivery mix, but plans to maintain stable restaurant margins for KFC and achieve slight improvement for Pizza Hut.

Michelle Cheng inquired about Pizza Hut's impressive Q1 same-store sales and margin performance, its trajectory for the rest of the year, and the margin impact of the WOW campaign shifting to Q2.

Answer

CFO Adrian Ding addressed the outlook for the group, reaffirming the full-year guidance for mid-single-digit system sales growth and a steady to slightly improved core OP margin. He noted tougher margin comparisons are expected later in the year. For Pizza Hut specifically, he anticipates margins will slightly improve for the full year 2025, with more significant improvement expected in the mid-to-long run, supported by efficiency gains despite the quarterly shift of the WOW campaign.

Michelle Cheng from Goldman Sachs asked about the competitive landscape, noting observations of competitors slowing expansion and promotions, and inquired if Yum China sees an improving environment and opportunities to accelerate market share gains.

Answer

CEO Joey Wat acknowledged some rationalization in industry promotions and pricing, which she views as healthy. She emphasized Yum China's own focus, highlighting that Pizza Hut has reached an "inflection point" with transformed business aspects, strong same-store sales growth, and record new store openings. For KFC, she pointed to continued momentum from wider price offerings, 30% growth in KCOFFEE, and a decade of double-digit delivery growth. Wat concluded that despite being the largest player, Yum China's market share is still relatively small, with significant runway for expansion, particularly in lower-tier cities.

Michelle Cheng from Goldman Sachs asked about the short-term outlook, wondering if sequential improvement is expected in Q4 given the easier comparison base. She also inquired if Pizza Hut's pricing would stabilize while KFC's could see improvement.

Answer

CFO Adrian Ding noted that consumer sentiment remained cautious post-Golden Week and expects continued top-line pressure, but he is confident in achieving positive same-store transaction growth in Q4. He reiterated that KFC's pricing is expected to be steady, while Pizza Hut will continue its strategy of lowering ticket averages to drive traffic. CEO Joey Wat added that the Pizza Hut WOW model is showing encouraging dine-in sales growth.

Michelle Cheng inquired about the drivers behind the recent same-store sales improvement in Mainland China, the payback period for franchisees, the U.S. market strategy amidst tariff uncertainty, and the expected P&L impact from the YH investment.

Answer

Eason Zhang, an executive, detailed that the same-store sales improvement in China was significant, narrowing from a mid-single-digit decline in Q1 to a low-single-digit decline by the call date, with strength in Tier 1/2 cities. He confirmed franchisee ROI is improving with new store formats. For the U.S., Zhang outlined a strategy of pre-building inventory, diversifying the supply chain away from China, and increasing local sourcing. Regarding YH, he stated it will be consolidated from Q2, with a focus on loss reduction, and noted that the performance of already retrofitted stores is meeting expectations.

Michelle Cheng asked about the drivers for China's same-store sales performance, the strategy for different store formats, the profit outlook for the U.S. market, and potential gross margin improvements for overseas directly-operated stores.

Answer

Executive Guofu Ye explained that larger stores (>300 sqm) are recovering better and the company is focusing on the new, successful 'IP Land' format. For the U.S., the strategy involves targeted expansion in 24 key states to improve efficiency and logistics. Ye acknowledged that while overseas directly-operated stores currently have the lowest margin, they hold significant long-term potential, with a target operating profit of 20%.

Michelle Cheng of Goldman Sachs inquired about the strategic impact of U.S. market volatility on expansion and store formats, and requested an update on progress in the European market, focusing on partnerships and operational developments.

Answer

Executive Eason Zhang, translating for Guofu Ye, stated that U.S. growth is driven by network expansion, with H1 same-store sales up 14%. Future U.S. plans involve product localization and operational upgrades. For Europe, Zhang highlighted a strategy focused on upgrading store formats, as seen in the U.K.'s 50% same-store sales growth, and leveraging a strong IP product mix, which now constitutes 49% of European sales.

Michelle Cheng of China Renaissance inquired about domestic same-store sales trends by city tier, the progress of store optimization, the latest store economics and strategic developments for the U.S. market, and the reason for a perceived decline in the China business's gross profit margin.

Answer

Executive Eason Zhang explained that Tier 1 and Tier 2 cities are outperforming lower-tier cities in same-store sales recovery. For the U.S., he highlighted a 30-40% same-store sales growth in the quarter and an annual target of 80-100 net new stores. Regarding the gross margin, Zhang clarified that the chart's negative contribution for China was a weighted-average effect and that the actual gross margin for the region had improved year-over-year. Executive Guofu Ye also commented on flagship store strategy, noting it is still in an early optimization phase.