Yum China Holdings, Inc. Q4 FY2024 earnings call

• Strong Results: 2024 saw system sales grow 5%, opened 1,751 net new stores, adjusted operating profit $1.2 billion, core OP up 12%, diluted EPS up 22%.
• Brand Performances: KFC showed resiliency with delivery sales growth and store openings; Pizza Hut transformed with improved same-store sales and OP, opened record net new stores; Lavazza, Little Sheep, Huang Zhi Huang, and Taco Bell had respective progress.
• Innovation: K Coffee Cafe and Pizza Hut Wow showed promising results; KFC launched Handshaking Americano with Frozen Pear, Pizza Hut introduced festive pizza options.
• Capital Returns: On track to return $4.5 billion to shareholders from 2024-2026, stepped up quarterly dividend by 50% in 2024.

KFC: In 2024, system sales grew 6%, opened a record 1,352 net new stores, delivery sales grew 16%, coffee sales 30% growth. In Q4, system sales increased 5% y/y, same-store sales index improved to 99% of prior year levels, 3% same-store transaction growth. Pizza Hut: 2024 system sales grew 3% y/y, same-store sales index achieved 98% of prior year levels, same-store transactions grew 9% y/y. Core OP in Q4 more than tripled y/y, restaurant margin 12.3% (160 basis points higher y/y). Opened 412 net new stores in 2024. Lavazza: Retail sales grew over 30% and became profitable in 2024. Little Sheep and Huang Zhi Huang: Focused on menu improvement and store model refinement. Taco Bell: Pruned store portfolio to key markets.

• 2025 outlook: Expect to open 1,600-1,800 net new stores, capital expenditure $700-800 million. G&A expenses to slightly decrease. Core OP margin expected to be stable or slightly improve. Monitor post-holiday trading; confident same-store transaction index will be positive for ninth consecutive quarter in Q1 2025.

• External environment dynamics with consumers potentially becoming more cautious post-holidays.
• Wage inflation impacting labor costs.
• Increase in delivery mix affecting rider cost per ticket as a percentage of sales.

Q: Michelle Cheng asked about the competitive landscape and opportunities to accelerate market share.

A: Joey Wat noted rationalization of marketing promotion and price increases are healthy, highlighted Pizza Hut's inflection point with improved same-store sales and OP, and KFC's strong momentum in various areas with opportunities in lower-tier cities and franchise stores.

Q: Chen Luo asked about new store expansion and revenue contribution from new stores.

A: Joey Wat and Adrian Ding discussed aggressive new store opening in top and lower-tier cities, different store models for lower-tier cities, and the role of company-owned vs. franchise stores, noting company-owned stores still contribute the majority but franchise stores are incremental in strategic locations.

Q: Anne Ling asked about same-store sales TA turning positive.

A: Joey Wat stated TA trend aligns with strategy to drive traffic, quarter four TA for KFC was 38 RMB (stable vs. Q3), focus on value and widening price range, and balanced approach to maintain steady TA in longer term.

Q: Lillian Lou asked about margin savings in 2025.

A: Adrian Ding discussed COS expected to slightly improve, COL facing headwinds from wage inflation and delivery mix, O&O likely stable, G&A expected to slightly decrease, with core OP margin expected to be stable or slightly improve. Joey Wat added focus on simplification, automation, centralization, digitization to save labor cost.

Q: Christine Peng asked about Pizza Hut Wow store economics.

A: Adrian Ding said Pizza Hut Wow is a new model maturing, with early signs of outperformance in dine-in sales, margins improving since launch, and potential in lower-tier cities and competitive trade zones but taking time to mature.

Q: Vincent Wong followed up on labor cost headwind.

A: Adrian Ding explained non-rider COL likely stable, delivery COL part slightly increased due to delivery mix, but overall core OP margin expected to be stable or slightly increase in 2025.

Q: Laurent C. Jalene asked about Pizza Hut pricing strategy.

A: Joey Wat said Pizza Hut will continue to drive down TA, with room to go slightly further, and successful pricing and promotion with 40 new products launched, 30 iconic products price reduced while protecting margin.