Q4 2024 Yum China Holdings Inc Earnings Call
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Florence: Thank you operator, Hello, everyone. Thank you for joining Yum, China's fourth quarter 'twenty 'twenty four earnings conference call on today's call I'll always CEO, Ms Joey Wat and our acting CFO, Mr. Adrian day.
Speaker Change: 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.
Speaker Change: Actual results may differ materially from these forward looking statements.
Speaker Change: 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 S. E C.
Speaker Change: This call also includes certain non-GAAP financial measures you should carefully consider the comparable GAAP measures.
Speaker Change: Reconciliation of non-GAAP and GAAP measures is included in our earnings release, which is available to the public throughout Investor Relations website, located at IR Yum, China Dot com.
Speaker Change: You can also find a webcast of this call and a powerpoint presentation on our IR website.
Speaker Change: Please note that during today's call all year over year grocery felt the impact of foreign currency unless otherwise noted.
Joey Wat: Now I would like to turn the call over to Joey Wat.
Joey Wat: Feel off Yum, China Joey.
Joey Wat: Hello, everyone and thank you for joining us.
Joey Wat: We just celebrated Chinese new year last week, I want to wish everyone, a happy and healthy year of the snake.
Joey Wat: I'm excited to share that we achieved another quarter of strong results in quarter four.
Joey Wat: Capping a record breaking year.
Joey Wat: In the fourth quarter system sales grew 4% year over year.
Joey Wat: Outperforming the industry.
Joey Wat: Same store sales in that sequentially improved to 99% of prior year levels.
Joey Wat: Restaurant margin and op margin expanded significantly year over year.
Joey Wat: Core operating profit grew 35%.
Joey Wat: For the full year, we set multiple new records.
Joey Wat: We opened a record 1751 net new stores.
Joey Wat: Ending the year with 16395 stores.
Joey Wat: Adjusted operating profit reached one $2 billion.
Joey Wat: Core O P increased 12%.
Joey Wat: Diluted EPS grew 22%.
Joey Wat: Oh do you focus on operational efficiency and innovation led to improvements in both the top and bottom line.
Joey Wat: Despite a challenging environment and value minded consumers.
Joey Wat: Our efforts have led to eight consecutive quarters of positive transaction growth.
Joey Wat: We have sequentially improved same store sales in death and expanded margins since quarter two.
Speaker Change: Jesse has shown considerable resiliency and growth momentum.
Let's see accelerated store opening and reached.
Speaker Change: 2200, plus cities in China.
Speaker Change: Delivery sales grew 16% continuing our decade long double digit annual growth momentum.
Speaker Change: So when do you Tony for feels to me like an inflection point for Pizza hut.
Speaker Change: It has to make significant progress in transforming itself.
Speaker Change: By enhancing its mass market appeal and operational efficiency.
Speaker Change: <unk> more than tripled in quarter, four and grew 19% for the full year.
Speaker Change: Both brands have tapped into underserved markets.
Speaker Change: Expanding into adjacent categories to drive incremental traffic.
Speaker Change: Sales and profit.
Speaker Change: Breakthrough models take coffee Cafe, and Pizza hut Wow showed promising results and have significant potential for further growth.
Speaker Change: I wanted to send out an incredible team for delivering these strong results.
Speaker Change: Embracing our people first culture.
Speaker Change: We celebrated our achievements with over 11000 restaurant managers.
Speaker Change: Oh Gee am convention in Hong Kong.
Speaker Change: We continue to delight, our customers with great food and excellent value for money.
Speaker Change: And we are grateful to our shareholders.
Speaker Change: Your continued support.
Speaker Change: With that let me turn the call over to Adrian to discuss our results in detail after what I will share additional highlights on our cm, one activities and our strategy Adrian.
Adrian: Thank you Joey and happy new year everyone.
Adrian: In 2020 for all of our brands made notable progress.
Adrian: Let me share some color by brand.
Adrian: I'll start with KFC, which consistently delivered strong performance.
In 2020 for.
Speaker Change: <unk> grew system sales by 6% exceeding industry levels.
Speaker Change: We have developed innovative products for our flagship categories of original recipe chicken and juicy whole chicken.
Speaker Change: And double digit sales growth.
Speaker Change: We have also expanded our delivery market share our aggregator platforms my car.
Speaker Change: The more smaller orders.
Speaker Change: At the same time, we improved our efficiency and further enhance customer experience.
Speaker Change: KFC opened a record 30 152 net new stores in 2024.
Speaker Change: Bringing our total store count to 11648.
Speaker Change: Our flexible model enable us to broaden our reach with the mix of company owned and franchise stores.
Speaker Change: We added nearly 1000 company owned that used to work in 2024.
Speaker Change: The payback you rates from new stores remained healthy at two years.
Speaker Change: 30% of Cat six net new stores were franchised stores.
Speaker Change: They help us unlock incremental opportunities in lower tier cities remote areas in strategic locations, such as highways campuses and tourist areas.
Speaker Change: Kfc's growth potential in China is huge.
Coffee is a key growth driver for KFC.
Speaker Change: In quantifying for KFC, So 215 million cups of coffee.
Speaker Change: It's 30% growth.
Speaker Change: Our breakthrough K coffee cafe model expanded from around 50 cafes in 233 to 700 cafes in 2004.
Speaker Change: We plan to expand the model to 1300 locations by the end of 'twenty one five.
Speaker Change: KFC U K coffee coffee generate good synergies.
Speaker Change: Incremental sales and profit.
Speaker Change: In terms of product innovation.
Speaker Change: Aside from our signature <unk> sparkling coffee.
Speaker Change: This winter, we launched a handshake americano with frozen pair.
Speaker Change: The drink features a real frozen per <unk>.
Speaker Change: Traditional northern Chinese delicacy and has generated significant social bus.
Speaker Change: Pizza Hut has made substantial progress in becoming more affordable for customers and profitable for our company.
Speaker Change: In 2020 for Pizza hut achieved the highest level of <unk> since our spin off.
Speaker Change: Same store transactions grew 5%.
Speaker Change: Restaurant margin expanded by 60 basis points on a comparable basis.
Speaker Change: Pizza Hut also opened a record of 412 net new stores.
Speaker Change: Bringing the total to 3724 stores.
Speaker Change: Pizza Hut's payback period for new stores improved from three years ago.
Speaker Change: Three to two to three years in 2024.
Speaker Change: We're transforming pizza hut into a more mass market brands by widening price range and enriching the menu.
Speaker Change: Sales of Pizza price under 51 increased 50% year over year.
Speaker Change: Pizza Burgers, a new category, we launched in April has already reached a low single digit percentage of our sales mix showing good potential.
Speaker Change: At Pizza hut expanded their addressable market, we also streamlined operations to improve efficiency.
Speaker Change: We managed to reduce our cost of labor by 110 basis points in 2024.
Speaker Change: Our breakthrough <unk> model, it's gradually maturing.
Speaker Change: Exceeding 200 stores in 2024.
Speaker Change: Starting with sales saw solid growth.
Speaker Change: While delivery sales also improved.
Whilst dwarfs attract younger customers and meet functional needs.
Expanding pizza huts addressable markets.
Speaker Change: Although the ticket average is lower by design due to smaller party sizes and lower <unk> spending.
Speaker Change: We successfully drove transaction growth.
Speaker Change: Margins have improved since launch.
Speaker Change: We'll continue to refine the wall model and expand to more locations in 2025.
Speaker Change: Lovaza continue to growth with new growth engines, our coffee shops and retail businesses.
Speaker Change: Store economics have meaningfully improved due to better operational efficiency and reduced new store capital expenditure.
Speaker Change: The retail segment saw sales growth of over 30% and became profitable in 2024.
Speaker Change: We've made good progress in building appreciation for Lavazza coffee expertise and enrich our food choices.
Such as Lovaza signature comp abuse considered the first coffee all of us.
Speaker Change: And our Michelin star chef themed food offerings.
Speaker Change: So a little sheep Huang <unk> Huang our focus has been on improving their menus refining store model and strengthening their supply chain.
Little shifts new Conveyer belt Hapai model is designed to appeal to solo diners are younger consumers.
Speaker Change: <unk> has demonstrated resilience.
Speaker Change: Operating profits for five consecutive years ever since our acquisition.
Speaker Change: For Taco Bell in 2024, we pruned our store portfolio to focus on our key markets Beijing and Shanghai.
Speaker Change: These efforts led to improved operating results.
Speaker Change: Let me now go through our quarter four P&L.
Speaker Change: As a reminder.
Speaker Change: Restaurant margin on a comparable basis excludes additional deductions as well as temporary relief from landlords and government agencies received in the prior year.
Speaker Change: Core op further exclude foreign exchange impact and special items.
Speaker Change: For quarter for system sales grew 4% year over year.
Speaker Change: Same store sales index sequentially improved to 99% of prior year levels.
Speaker Change: KFC system sales increased 5% year over year.
Speaker Change: Same store sales index improved sequentially, reaching 99% of prior year levels with a 3% same store transaction growth year over year.
Speaker Change: Our widened price range reduced delivery fees and smaller ticket items like coffee and breakfast successfully attracted consumers.
Speaker Change: Quarter four at ticket average was 38.
Speaker Change: 4% lower than prior year levels were stable with quarter three.
Speaker Change: Pizza hut system sales increased 3% year over year.
Speaker Change: Same store sales index achieved 98% of prior year levels, improving by four percentage points sequentially.
Speaker Change: Same store transactions grew 9% year over year, the highest growth quarter in 2024.
Speaker Change: The ticket average was 10% lower year over year, which is in line with our strategy to transform pizza hut into a more mass market brands.
Speaker Change: More importantly, pizza hut profitability continues to grow.
Speaker Change: Core Op, Inc quarter, four more than tripled year over year.
Speaker Change: Our restaurant margin was 12, 3% 160 basis points higher year over year.
Speaker Change: On a comparable basis restaurant margin was 180 basis points higher year over year.
Speaker Change: We achieved savings across all cost lines.
Speaker Change: Cost of sales was 31, 9%.
Speaker Change: 50 basis points lower year over year cost of sales improved through favorable commodity prices and our spending better than buying better initiatives under project Red Hot.
We continue to pass savings from these initiatives to our consumers offering excellent value for money.
Speaker Change: Cost of Labor was 28, 2%.
Speaker Change: 80 basis points lower year over year, or 90 basis points lower on a comparable basis.
Speaker Change: Improved operational efficiency more than offset wage increases for our frontline staff.
Occupancy and other was 27, 6%.
Speaker Change: 30 basis points lower year over year or.
Speaker Change: We're 40 basis points lower on a comparable basis.
Speaker Change: This came from cost optimizations, such as utility savings and simplified operations.
Speaker Change: Our op margin was five 8%.
Speaker Change: I went to 40 basis points higher year over year, driven by improved restaurant margin.
Speaker Change: Operating profit was $151 million growing 35% year over year.
Speaker Change: Core op also increased 35% year over year.
Speaker Change: Net income was $115 million.
Speaker Change: Growing 17% year over year.
Speaker Change: As a reminder, our mark to market equity investments had a negative impact of $9 million in quarter, four compared to a negative impact of $14 million in the same period last year.
Speaker Change: We recognized $16 million lower interest income this year from a lower cash balance.
Speaker Change: Diluted EPS was 30 films growing 27% year over year or 20%, excluding mark to market equity investment impact.
Speaker Change: For the full year system sales grew 5% and.
Speaker Change: Same store sales index reached 97% of prior year levels.
Speaker Change: Restaurant margin was 15, 7% steady year over year on a comparable basis.
Speaker Change: G&A expenses were five zero percent of revenue in line with our targets.
Speaker Change: And 80 basis points lower compared to five 8% in the prior year.
Speaker Change: This was due to operational efficiency gains.
Speaker Change: Lower performance based compensation in the year among other factors.
Speaker Change: Operating profit grew 8% to $1 2 billion.
Speaker Change: Core operating profit increased 12%.
Speaker Change: The effective tax rate was 26, 7% in line with our guidance and prior year.
Speaker Change: Net income was $911 million up 13% year over year.
Speaker Change: Diluted EPS was $2 33, or 22% year over year or 12%, excluding mark to market equity investment impact.
Speaker Change: Now, let's turn to capital returns to shareholders.
We're on track to return $4 $5 billion to shareholders from 224 through 2026 with a total of $3 billion allocated for 2025 and 2026.
Speaker Change: The average annual amount is equivalent to around 9% of our market cap.
Speaker Change: In 2024, we returned $1 $5 billion, including $248 million in quarterly cash dividends and $1 $24 billion in share repurchases.
Speaker Change: Total repurchases exceeded 31 million shares representing 8% of our total shares outstanding.
Speaker Change: We generated $714 million in free cash flow in 2024 and ended the year with $2 $8 billion in net cash.
Speaker Change: With our healthy cash position and robust cash generating capabilities, we're stepping up our quarterly dividend significantly by 50% from 16 cents to.
Speaker Change: 2000 Fourteens.
Speaker Change: Assuming 24 cents per quarter, our payout ratio will be equivalent to over 40% of our diluted EPS in 2024.
Speaker Change: Additionally, our $360 million of share repurchase plan for the first half of 2025 is being executed daily.
Speaker Change: We're committed to providing attractive capital returns to shareholders.
Speaker Change: Finally, moving on to our 2025 outlook.
Speaker Change: We continue to maintain our dual focus on system sales and same store sales growth.
Speaker Change: In terms of our footprint expansion, we're on track to reach 20000 stores by 21 six.
Speaker Change: 295, we expect to open between 60, and 180 500 net new stores.
Speaker Change: Capital expenditures in 2024 total $705 million.
Speaker Change: In 2025, we expect capital expenditure to be in the range of 700 million to $800 million.
Speaker Change: Turning to margins.
Speaker Change: While commodity prices remain largely favorable.
Speaker Change: We continue to expect wage inflation in 2025.
Speaker Change: With our ongoing efforts and operational efficiency, we expect G&A expenses as a percentage of revenue to slightly decrease for the year.
Speaker Change: For 2025, we expect to hold core op margin relatively stable or even slightly improve it year over year.
Speaker Change: By brand.
Speaker Change: We're committed to maintaining healthy restaurant margins for KFC and improving pizza huts in the mid to long run.
Speaker Change: As consumers celebrate the Chinese new year, we're offering them delicious food, great value and an enjoyable experience.
Speaker Change: While trading so far has met our expectations, we need to closely monitor our post holiday trading.
Speaker Change: The external environment remains dynamic.
Speaker Change: Consumers are willing to spend more during holidays and may become more cautious after award.
We remain hopeful that stimulus policies may positively impact consumption at the mid to long run.
Speaker Change: Quarter one.
Speaker Change: We're confident that same store transaction index will continue to be positive for the ninth consecutive quarter.
Speaker Change: And our goal is to outperform the industry.
Joey Wat: Let me pass it back to Joey for her comments on <unk> and our strategy.
Joey Wat: Thank you Adrian.
Joey Wat: Building on Adrian observations on Chinese new year trading I was delighted to see our stores bustling with customers.
Joey Wat: We all have a great foot.
Credible value and exciting campaigns, featuring Olympic champion and popular IP.
Joey Wat: At KFC.
Crayfish bet for the eighth consecutive year, we even combined it with our iconic beef rep shall not by shallow yes, Linda Wilson.
Joey Wat: It creates a new customer feedback.
The Chinese new year tradition is the Golden bucket list.
Joey Wat: This year for the first time it included a whole chicken, making.
Making it a great choice for sharing with family and friends.
Joey Wat: At Pizza Hut, we introduced festive trade up options for our pieces, such as pistachios stuffed crust. Unfortunately cat crest <unk>.
Joey Wat: Trust in the shape of fortune kicked in.
Joey Wat: In China.
Joey Wat: <unk> is symbolizes happiness and a fortune cap represents luck and prosperity.
Joey Wat: Customers Love these good wishes for starting the new year.
Joey Wat: As I reflect on our industry, leading results over the past few years.
Joey Wat: I'll come back to do focus on operational efficiency.
Joey Wat: Innovation.
Joey Wat: I think it's fair to say that most viewed leads to a trade off to get one.
Joey Wat: Compromise on the others.
Joey Wat: In China, we reject that as a false trade off we need both and both as the only outcome we will accept.
Joey Wat: Operational efficiency has been a hallmark of Yum, China from the beginning.
Joey Wat: Well, we have dialed up our ethos significantly in the last couple of years.
Joey Wat: Our project fresh eye.
Initiatives have given us new perspectives on our operations and transformed our organization.
Joey Wat: They have made us more efficient agile and competitive.
Joey Wat: From a restaurant and shared service centers to our supply chain.
Joey Wat: At the same time, we have doubled down on digitization, leveraging technology and generate the AI to enhance customer experience and efficiency.
Joey Wat: The gains we have realized from these initiatives and not merely incremental.
Joey Wat: Represent structural improvements in our business capabilities.
Joey Wat: Up for profitable growth into the future.
Joey Wat: Innovation color everything we do in every aspect of our business.
Joey Wat: We introduced around 600, new upgrade menu items in 2024.
Joey Wat: Exciting new food.
Joey Wat: Still in value for money to drive traffic to our stores.
Joey Wat: Innovative new store models, such as KFC small-time, many and pizza hut Wow.
Joey Wat: Tap into underserved customer settlements.
We have fund their operational efficiency and innovation.
Oh and reinforce one another.
Joey Wat: We have employed innovation to attack the problem of operational complexity.
Joey Wat: At KFC menu innovation focuses on infusion fresh energy into our flagship categories.
Joey Wat: Yes, there is potential.
Joey Wat: Our regional recipe chicken Burger <unk> J.
Joey Wat: <unk> a top two is that on top and crispy whole chicken.
Speaker Change: The attendee Gen.
Joey Wat: Generate a lot of excitement at.
Joey Wat: At the same time, we are simplifying operations to support these menu innovations.
Joey Wat: The same strategy of prior to Pizza hut.
Joey Wat: In December we launched a brand new menu with delicious new products.
Joey Wat: While streamlining operations for example, the Golden egg Chicken Pizza looking Kim Donavan Lindsay Pizza craft.
Joey Wat: Crafted with our existing ingredients.
Lee became a popular choice.
Joey Wat: We also lowered prices on several of our iconic products while protecting margins.
Joey Wat: Our value for money communication it was now more straightforward and compelling.
Joey Wat: Customers Love, our new menu in quarter for Pizza Hut achieved the best same store transaction growth in 'twenty 'twenty four.
Joey Wat: Before we turn to Q&A.
Joey Wat: Just to recap the three key takeaways from today.
Joey Wat: We achieved record breaking result in 2024 from top to bottom line.
Joey Wat: KFC remains a key growth engine and profit contributor.
Joey Wat: <unk> has made significant progress.
Joey Wat: Forming in every aspect and feels to me as though it has reached an inflection point.
Joey Wat: Second Oh do you focus on operational efficiency and continuous innovation has made our business more resilient and competitive.
Joey Wat: Positioning us for long term sustainable growth.
Joey Wat: Lastly, we remain committed to both sustainable growth and capital returns to shareholders.
Joey Wat: We are on track to return $4 $5 billion to shareholders from 'twenty to 'twenty four through 2026.
Joey Wat: Average annual Amman represent around 9% of our market cap.
Joey Wat: This quarter, we are stepping up dividends by 50% with that I will pass it back to authorities.
Speaker Change: Thanks, Joey now we will open the call for question in order to give more people the chance to ask questions. Please limit your questions to one at a time.
Peter: Peter Please start the Q&A.
Peter: Thank you.
Speaker Change: <unk> to ask a question. Please press star one and one on your telephone and wait for your name to be announced until we've got your question. Please press star one and one again once again, please press star one and one and wait for your name to be announced until we drill your question. Please press star one and one again.
Peter: Okay.
Peter: We are now going to proceed with our first question.
Peter: The question has come from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
Michelle Cheng: Hi, Joey and John Congrats again for the very solid results and we understand the consumption environment steel quite fluid.
Michelle Cheng: So I would like to take the chance to hear your observation on the competitive landscape.
Michelle Cheng: So we were in this year some companies are slowing down the expansion and even they are starting to with telecom of your promotion activities and we notice that KFC actually start to raise the price now already of the year. So are we seeing.
Michelle Cheng: The competitive landscape improving and.
Michelle Cheng: Also we see more opportunities to further accelerate penetrate expanding our market share. So it will be great greater CIBC.
Michelle Cheng: <unk>.
Michelle Cheng: Thank you Michelle.
Michelle Cheng: We do see some rationalization of.
Michelle Cheng: As a market of marketing promotion.
Michelle Cheng: And also a.
Michelle Cheng: A little bit of a price increase including ourselves.
Michelle Cheng: So I think that is healthy.
Michelle Cheng: Because.
Michelle Cheng: Very modest price increase and the rest of amortization of the promotion.
Michelle Cheng: They do help to manage the cost pressure.
Michelle Cheng: So so that is sort of the overall, what we are observing however, and most importantly, I think all for us.
Michelle Cheng: We know what all our focus and maybe I'll take this time to just.
Michelle Cheng: Really highlight.
Michelle Cheng: Things that Adrian and I were both.
Michelle Cheng: In our opening remarks earlier.
Michelle Cheng: You know, obviously, our heartworm in pizza hut for.
Michelle Cheng: <unk> changed let me start with Pizza hut.
Michelle Cheng:
Michelle Cheng: We have done something right, because though we actually used the word inflection point for this quarter.
Michelle Cheng: We really have seen every aspect of the business has been transformed.
Michelle Cheng: Transform.
Michelle Cheng: In a in a very positive way.
Michelle Cheng: Our results speak for itself very nice.
Michelle Cheng: The improvement of the same store sales, 4% and <unk>.
Michelle Cheng: Then the op improvement is solid and then.
Michelle Cheng: The net new store opening has fallen 12 ish this year 2024.
Michelle Cheng: It is the best net new store in the last 10 years really and still the breakeven is two to three years and the breakthrough of the two business of the business model.
Michelle Cheng: One is you know just to become even more mass market.
Michelle Cheng: As has been our goal in the last many years.
Michelle Cheng: With the introduction of additional product and lowering the price.
Michelle Cheng: And then a second breakthrough is the vowel. So so very nice result, with very clear.
Michelle Cheng: Growth drivers.
Michelle Cheng: So we are at the inflection point for Pizza Hut KFC is.
Michelle Cheng: It is a very big business already but yet we still see quarter four and ongoing.
Michelle Cheng: Strong.
Michelle Cheng: Mental and performance.
Michelle Cheng: In three ways. One is we continue to widen.
Michelle Cheng: The offering in terms of price point.
Michelle Cheng: Increasing our.
Michelle Cheng: The entry price point, but also a higher ticket average such as chicken.
Michelle Cheng: And then also secondly is K coffee improvement is 30% growth for K coffee alone.
Michelle Cheng: That's very very nice and then the delivery to a deliberate it's not only one quarter is 10 years 10 year of double digit increase.
Michelle Cheng: Increased Ah.
Michelle Cheng: And net net for both business.
Michelle Cheng: Just to do it now that helps health chat is the same store transaction growth is the.
Michelle Cheng: It's nice and healthy on the eighth quarter of such a so so with all these happening.
Michelle Cheng: We are capturing.
Michelle Cheng: Incremental business and and hopefully a little bit of market share.
Michelle Cheng: But with that said Michelle Ah.
Michelle Cheng: It is still a very big market and a market share relatively speaking is still very small even though we are the biggest player in the market.
Michelle Cheng: And there's still a lot of the opportunity for us to to to expand that business have more market share by going to lower tier city and.
Michelle Cheng: Going forward, the incremental franchisee store et cetera et cetera.
Paul: Paul Thank you Michelle.
Paul: Thank you for joining for the explanation and congrats again.
Paul: Thank you.
Paul: Yes.
Speaker Change: We are now going to proceed with our next question.
Speaker Change: Two questions come from the line of <unk> Chandra from Bank of America. Please ask your question.
Hi, Julien Adrian Congrats again on the results. So my question is focused on new store expansion you also noticed that.
Speaker Change: Eight.
Speaker Change: We have opened more and more smaller stores and <unk>.
Speaker Change: We are also expanding to more and more to the lower tier cities.
Speaker Change: Number three we are now shifting from.
Speaker Change: Equity store focused model to a hybrid model with more and more franchise stores to be opened in next few years.
Speaker Change: The implication.
Speaker Change: <unk> bin.
Speaker Change: These changes for example, if you look at the second half numbers of last year. So our net store opening growth was around low teens.
Speaker Change: But then if you look at that.
Speaker Change: Revenue contribution from new stores.
Speaker Change: It should be around 5%.
Speaker Change: For Q4.
Speaker Change: About 6% for second half I.
Speaker Change: Meanwhile.
Speaker Change: Our franchise stores as a percentage of total net new stores.
Speaker Change: Increased to about 33% versus only teams in first half so with all these things in mind is it fair to say that the near term algo.
Speaker Change: In terms of the revenue contribution from new store openings in the coming few quarters could be just around five or 6%.
Speaker Change: Similar to second half of last year due to the U K.
Speaker Change: Yes.
Speaker Change: From the smaller stores and more and more expansion into the lower tier cities as well as the franchise stores.
Speaker Change: My answer is MACRA.
Speaker Change: Great. Thank you.
Speaker Change: Thank you Melissa.
Speaker Change: I'll address your question of the new store and franchisees, though in the AGM public can help a lot.
Speaker Change: But in terms of relationship it relationship.
Speaker Change: Number versus the revenue contribution.
So I mean, a lot of time.
Speaker Change: We are pursuing dual focus on both returning a lot of capital to the shareholder and at the same time pursuing high quality.
Speaker Change: So we have addressed our capital allocation are already in our opening remarks, so on the new store opening.
Speaker Change: Area, you can see that we just continue.
Speaker Change: To be very aggressive.
Speaker Change: With that because as I answer my question Michelle earlier, there's still a lot of opportunity for us to open store, both in the top tier city and electricity and the strategy needs to be slightly up.
Speaker Change: Different, but we see that opportunity.
Speaker Change: And then the lower tier city right now.
Speaker Change: It is a it is a big focus because it means we observe the trading.
Speaker Change: In the last year or even last quarter on lower tier cities still doing better.
Speaker Change: So we will continue to do that but it does require a different spread.
Speaker Change: Model for example, lower and Askmen smaller.
Speaker Change: Smaller menu simpler operation.
Speaker Change: But net net the criteria is we see one or two years payback or their stores across all city tier and for KFC in two to three years for pizza hut as far as we can achieve that we will continue our journey to open more stores and top tier city and electricity when it comes to the relationship between.
Speaker Change: Company owned store and franchisee.
Speaker Change: Our despite our accelerated.
Speaker Change: Franchisees still opening in a lot last year, and particularly the last quarter.
Speaker Change: The company owned stores still contract.
Speaker Change: The vast majority actually specifically, 85% of our entire portfolio.
Speaker Change: It's going to take a while for the franchise store to catch up and even though we are catching up.
Speaker Change: So for the company owned store.
Speaker Change: It does have very nice.
Speaker Change: Economics.
Speaker Change: However, why.
Speaker Change: Why are we accelerating new franchisee store because they're incremental.
Speaker Change: They're incremental in two areas one is strategic locations such as Highway service Center College campuses hospitals et cetera, et cetera, and secondly, they are in the lower tier city in remote areas as well.
Speaker Change: So both incremental.
Speaker Change: And operationally, we can do it our team can do it and operationally we have the appropriate store models, such as KFC small time, many okay I see and then right now the pizza hut ball is very promising for the lower tier city as well. So therefore, we are doing more so it is a natural development.
Of our company's capabilities.
Speaker Change: And now I'll pause here and let Adrian answer the relationship between the revenue and the store. Thank you. Thank you Joey.
Speaker Change: No.
Speaker Change: You're right that the size of the stores become smaller and smaller.
Speaker Change: And it's worth noting that even for the largest was in the first year. After opening the revenue tend to be smaller overall, our new store. That's opened this year enjoy a 50% to 60% of revenue compared to the mature stores. So that's the first point the second point as a store week also play a role here.
Speaker Change: Keeping all else equal and yet net new store growth rate the same.
Speaker Change: At the time at which we opened us to us within the quarter will play a role in the system sales growth. So that I think that these two points combined will address your question on the mathematical relationship there.
Speaker Change: And lastly, I think you asked the question on over the next few quarters, what is our system sales growth guidance I think overall.
Speaker Change: Overall macro situation is stable as it is right now.
Speaker Change: We would as you pointed out enjoy a mid single digit growth of system sales. This year and <unk> 25, obviously, new store only play a portion of their bulkier. It's important to know that SSG is also important.
Speaker Change: Deciding what is the ultimate system sales calls.
Speaker Change: So these two combined will contribute to the final figure of system sales growth by at this point in time, we do expect a mid single digit ROE for this year at <unk> 25, Thank you Morten.
Thank you that's very clear congrats again and also happy tension.
Speaker Change: Thank you.
Speaker Change: We are now going to proceed with our next question.
Speaker Change: The question has come from the line of Anne Ling from Jefferies. Please ask your question.
Anne Ling: Hello. Thank you very much for taking my question just one question regarding the Ta.
Anne Ling: So I understand that the same store sales growth with all of the decline actually narrowed.
Anne Ling: That's right.
Anne Ling: If we take a look at the breakdown.
Anne Ling: It's still negative, but however, we have a very strong.
Anne Ling: TC to offset this so my question is when do you think that this T ta will start to turn positive.
Anne Ling: Yes. So so I think that's the key question that I have especially if a KFC. Thanks.
Anne Ling: Thank you and so so our ta trend is basically consistent with our intended strategy to drive traffic.
Anne Ling: And as you point out we will continue to drive same store transaction growth.
Anne Ling: Is the eight consecutive quarter and that allow us to grow our business in underserved market sentiment, which is working.
Anne Ling: And at the same time is important to note that while we are doing that we are able at the same time protect the margin.
Anne Ling: It showed in the quarter full margin restaurant margin or op margin, both actually improve because of our <unk> strategy is also.
Anne Ling: Aligned with our dual focus on operational efficiency and innovation.
Anne Ling: And then answering your question about our plan going forward or in the long term longer term, we took a balanced approach to maintain a steady ta.
For example, you know our quota for Ta, which is KFC, which would be a 38 b is still higher than the ta pre pandemic.
Anne Ling: In the short term.
Anne Ling: Our goal.
Anne Ling: G H.
Anne Ling: Is to remain relatively stable quarter for Ta a 38 year old gang is stable versus quarter, three and our focus is on value and then.
Also widening the price range and also to drive the traffic and it is working and we don't have we don't have any material.
Anne Ling: Plan to change our approach even after the.
Anne Ling: The modest price increase.
Anne Ling: The December 2024 and for Pizza hut.
Anne Ling: You know our our strategy is to continue to drive the Ta Don.
Speaker Change: To make it more mass market, while improving the sales and the profit. Thank you Ann.
Anne Ling: Thank you.
Anne Ling: Okay.
Speaker Change: We are not going to proceed with our next question.
Anne Ling: Yeah.
Speaker Change: Two questions come from the line of Lillian Lou from Morgan Stanley. Please ask your question.
Anne Ling: Alright, Thanks, a lot.
Speaker Change: And Adrian Congrats again my question is more on margin, obviously I think the fourth quarter. It's another evidence of a very strong execution efficiency and all around the operation management and in.
Anne Ling: Any color I think.
Anne Ling: The payroll.
Anne Ling: The labor cost savings that was quite significant so trying to understand going forward in 2025 with the projects or initiatives continuing.
Anne Ling: What line items in particular always seen much heads savings further and what kind of.
Anne Ling: Overall margin improvement trend, we can expect for 2025.
Lillian: Thank you Lillian So let me try to address this question.
Speaker Change: Firstly, Sir what is the important factor to determine the margin for 2025.
Speaker Change: Oh actually the conclusion first on the overall margin trend and then break it down for you.
Speaker Change: Download of different drivers.
Speaker Change: After the conclusion as I mentioned in the prepared remarks.
Speaker Change: Look to keep a coffee margin for the full year are relatively stable or even slightly improve it year over year.
Speaker Change: And by brand.
Speaker Change: To maintain a healthy restaurant margin for KFC and improving pizza hut restaurant margin in the mid to long run.
Speaker Change: And then now I'll break it down into different drivers.
Speaker Change: Firstly I'll discuss about the U S.
Speaker Change: So we're continuing to invest in value for money to drive incremental traffic.
Commodity price remained favorable as I mentioned in prepared remarks in the near term and we continue improvement.
Speaker Change: To seek improvement through project Red eye initiatives redesigning our product approach to optimize equally didn't use.
Speaker Change: Because of our long term guidance, we still aim to keep our <unk> at 31% plus or minus 1%.
But for the year of <unk> 25, this ratio is likely to fall in the upper half of our guided range with some slight improvement year over year from 24, <unk> as a percentage of sales was slightly improved year over year, but it will fall in the upper half of our guided range. So thats all in.
Speaker Change: In terms of steel L. We will face some headwinds.
Speaker Change: So we are facing ongoing cost pressure from wage inflation, which.
Speaker Change: Over the years tend to be low single digit to mid single digits.
Speaker Change: We're increasing our rider cost is also a challenge because the delivery mix will increase.
Speaker Change: But to clarify the rider cost, particularly it will go down.
Speaker Change: Previously discussed about.
Speaker Change: The increase in deliberate mix will make the rider cost as a percentage of our sales increase.
Speaker Change: Continue to make every effort to drive operational efficiencies to partially offset those cost pressure on fuel L. But overall, we do expect to face some headwinds.
Speaker Change: As a percentage of sales.
Speaker Change: And then thirdly coming to <unk>.
Speaker Change: We do see much improvement from <unk> or from the past few years.
Speaker Change: Compared to 2024 from <unk> 2019, before the Covid times, there was a significant improvement in rental but then the rental was around 10% of sales now.
Speaker Change: You'll know it's below 9%, although we don't disclose the exact figures.
Speaker Change: Depreciation also immediately improved as a result of our capital expenditure improvement and also we see a higher return on investment and advertising expenses, so advertising A&P expense.
Speaker Change: Proving over the past five years.
Speaker Change: And then speaking of 10 25, we will continue to look for opportunities.
Speaker Change: <unk>.
Speaker Change: Generally some savings in Ohio.
Speaker Change: The oil price.
Speaker Change: So as a percentage of revenue is likely to be stable year over year from 24 to 25.
Speaker Change: The opportunities that I mentioned include the A&P opportunities, particularly for pizza hut because.
Speaker Change: NPS progenitor cells for pizza hut still slightly higher than KFC. So we do see some oxygen opportunities there.
Speaker Change: But for other some other line items within the oil we also feel some pressure so overall, while occupancy and other cost is likely to be stable.
Speaker Change: Lastly, coming through.
As I mentioned in the prepared remark, we target the full year G&A expense as a percentage of sales to slightly decrease but we do expect some quarterly fluctuations.
Speaker Change: But I'll give you some more color on our margin.
Speaker Change: The conclusion is the coffee margin will remain relatively stable or slightly improve year over year. Thank you Lillian thank.
Speaker Change: Thank you agent, maybe obviously, it's a large event.
Speaker Change: One.
Speaker Change: Short comment regarding the cost of labor.
Speaker Change: And just the approach.
Speaker Change: Specifically what is that have we been doing mainly focusing on fewer things simplification automation and centralization digitization.
Speaker Change: All of these.
Speaker Change: <unk> in the stores are going through these feel.
Speaker Change: Our approach to improve the efficiency of C. O L. A so exactly what are we doing well for example generation AI would be using gen radii can screen millions of resume.
Speaker Change: And then also forecasting et cetera, and that certainly helped save the labor cost and we also outsourcing some activities in the stores to the central kitchen and not.
Speaker Change: Not only save the C O L also.
Speaker Change: Changed the profile of the staff.
Number four which will go to share more in the annual report later on.
Speaker Change: So specifically that that's what we have been doing and it's been ongoing and particularly a focus since project a fresh eye last year as well, but it will be ongoing thank you Lillian.
Yeah.
Speaker Change: Central artery in Asia, and that's very detailed and very helpful. Thank you again.
Speaker Change: Thank you.
Speaker Change: We're now going to proceed with our next question.
Speaker Change: Okay.
Speaker Change: Quick questions come from the line of Christine Peng from UBS. Please ask your question.
Christine Peng: Thank you management for the opportunity to raise the question. So I have a very quick question Bonnie wall.
Speaker Change: Adrian probably mentioned earlier that pizza hut wall.
Christine Peng: The capital return.
Christine Peng: This is actually a pretty good compared with the traditional pizza hut.
Christine Peng: But I just want to get more clarity in terms of the store economics.
Christine Peng: Such as Youll near revenue margin is that just so that we can.
Christine Peng: But I understand.
Christine Peng: The potential of this.
Christine Peng: This new format going forward. Thank you.
Christine Peng: Oh.
Christine Peng: Okay.
Christine Peng: Yeah. So thank you Christine.
Speaker Change: Indeed, as I mentioned in the prepared remarks pizza hut, while we do observe some pretty encouraging progress.
Christine Peng: But I need to caution that.
Speaker Change: It's a new model, that's only like seven months out.
Christine Peng: It takes time for any new model to become mature.
Christine Peng: On the right, where we are using that we were using the prepared remark was modest maturity is in the process of maturing.
Christine Peng: So we do observe some early signs of significant outperformance on time part of the sales and the delivery part of it.
Christine Peng: Improving since the first piece of how volatile opened in May.
Christine Peng: But you know still there is a slight gap versus the regular pizza hut model in terms of delivery sales.
Speaker Change: First comfort margin.
It's always our philosophy around the transaction comes first and then sales and the margin so margin and we're still in the process of taking the margin.
Speaker Change: Currently in terms of the 200 wireless dwarfs the C O S and C O L for many of those stores become broadly on par versus versus the regular pizza hut model as a percentage of sales, but the overall margin there is still a slight gap versus.
Speaker Change: The main model. So we asked you in the process of fixing those so for the year for 295. The focus here on wall model is ready to go.
Speaker Change: Firstly, a further improved the delivery sales and secondly to fix the margins obviously over the past several months over 200 wireless doors.
Speaker Change: Vast majority or almost almost all of those stores are flipping from the regular pizza hut mouse models. We only opened the first new <unk> store in December this year, we're past the opening new pizza hut wireless doors, especially we do see some good potential in lower tier cities and the highly competitive appraisals.
Speaker Change: Whereas consumer do see value for money so.
Speaker Change: It's a new model, Okay, and then it takes time for the model to mature, but we do have high hopes that excitement on this model.
Christine Peng: Thank you Christine.
Speaker Change: Okay.
Speaker Change: Thank you Adrian.
Speaker Change: We are not going to proceed with our next question.
Speaker Change: Our question comes from the line of <unk> Wang from CLSA. Please ask your question.
Speaker Change: Thank you and good evening.
Speaker Change: And how do you think that's about right.
Speaker Change: A follow up question.
Speaker Change: Can you guys comment on that.
Speaker Change: Labor costs.
Speaker Change: As I mentioned.
Speaker Change: The labor costs.
Speaker Change: Delivery.
Speaker Change: But we really are.
Speaker Change: And of course, it sounds growing up by the headwinds I just wanted to understand more.
Speaker Change: Absent numerous cells.
Speaker Change: Kind of the total revenue has been going up last year, but.
Speaker Change: We are able to achieve lower.
Speaker Change: Cost per school.
Speaker Change: That's quite impressive.
Speaker Change: Why is that.
Speaker Change: Paul.
Speaker Change: Bob.
Speaker Change: At this point.
Speaker Change: Yes.
Ethan: Thank you Ethan so just to offer some more color here.
Ethan: You are right in pointing out that the 'twenty 'twenty four we successfully managed to improve our operational efficiency significantly to offset the impact of delivery sales mix increase on the C O L.
Ethan: As a natural consequence that will be a high base for us that will be a tough lapping for us.
Ethan: As you know the product fresh I actually kicked off in late <unk> 'twenty three so the full year. There was the impact on <unk> four and the C. O L is one of our key areas.
Ethan: Project fresh eye.
Ethan: In terms of efficiency enhancement and productivity improvement so with this top lapping tough base.
Ethan: <unk> five I just get some.
Ethan: Pretty transparent guidance on how does the all Lf presents though it may evolve.
Ethan: First I'll break down into two parts. So it does offer some more color.
Ethan: First part of the non radar parts right. The downward part obviously, we do face a low to mid single digit wage inflation, but we will make every effort to try to further enhance our operational efficiency to hopefully offset that wage inflation. So we do look another way. They are part of <unk> to be broadly stable as a percentage of sales for the full year 2025.
Ethan: And then the second part is obviously the delivery part in terms of the delivery cost per ticket it will be lower year over year or 21, 4% to 105.
There are a lot of efficiency measures there.
Ethan: Notably the platform riders, which.
Ethan: This is one of the key initiatives.
Ethan: Improve the cost and I don't spend time, the quality of our service do you know.
Ethan: Proving our as.
Ethan: As we mentioned in one of our previous earning release.
Ethan: FC currently already enjoyed around half of the stores with the platinum riders doing the delivery Pizza hut is having a lower percentage and obviously there is a room to improve on both this.
Ethan: Penetration for platinum riders on those stores. So that's.
Ethan: The drivers to drive down to ticket costs on deliveries, but the increase in delivery mix.
Ethan: Sent a sale.
It's probably more than the savings we can generate from there. So all in all the delivery part of the C. O X percent of sales may likely slightly increase year over year. So overall you feel at least two together one is broadly stable with the other one is slightly increase we do face some headwinds there on <unk>.
Ethan: But you know as I mentioned, we do have some other margin initiatives for instance.
Speaker Change: Hopefully it will be slightly better year on year over year for both the brands for Yum, China, and all will be broadly stable.
Speaker Change: All in all as a result, the restaurant margin for KFC, we hope to maintain a healthy level of restaurant margin year over year for Pizza Hut, we'll look to improve it over the mid to long run and I hopefully slightly improve it for this year as well.
Speaker Change: I'm trying to as a whole for 'twenty five the core op margin, we expect that to be stable or slightly increasing year over year.
Thank you.
Speaker Change: Okay.
Got it okay, that's great and congratulations.
Speaker Change: And remember they're on it's growing now, especially with margins. Thank you.
Speaker Change: Thank you.
Speaker Change: We are now going to proceed with the last question.
Speaker Change: And the question comes from Anna <unk> from <unk>. Please ask your question.
Speaker Change: Thank you for the chance for the last question. Thank you Joanne Asia haven't.
Speaker Change: Chinese new year and I have one question. So our pricing strategy is very clear bodes for KFC and pizza hut. So just want to further evaluate its our actual.
Speaker Change: So forces all hubs what has been going through promotional activities from December last year to February this year. So how does this affect same store sales and margin and also we see that the Ta for Pizza Hut has already reached 78 in Q4. So do you think this level has already raised our expectations.
Speaker Change: <unk> or <unk>.
Speaker Change: We still have some room to trade down in the future. Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Pizza hut.
Speaker Change: Our goal actually.
Speaker Change: We'll continue to drive that and.
For that piece of our model.
Speaker Change: It is a it's very impressive the brand team has done to to move it to 78, but.
Speaker Change: But we see room to grow that slightly further but above KFC, obviously and also about pizza hut ball.
Speaker Change: And I think it will be we'll be happy.
Speaker Change: In terms of the pizza uprising and promotion, let's take the new menu that we just launch when we launch.
Speaker Change: 40, 40, new products in the December 2024, new menu and that will lower the list price of about 30 iconic products.
Speaker Change: For the for the Pizza hut.
Speaker Change: Our model.
Speaker Change: Starting from $9 nine yen for the drawings and these are very attractive and they end up.
Speaker Change: Price reduction.
Speaker Change: Item very iconic voice that waste on the for example, the one U S goggle, we have to price.
Speaker Change: However, here's the here's the little very important point, we kept our margin neutral.
Speaker Change: Through the innovation.
Speaker Change: So so.
Speaker Change: We are very happy that we find ways to deliver our iconic product, which with much better value for money for the customer and also protect the margin and the communication become very straightforward as well.
Speaker Change: You know no need to go through the the very sophisticated.
Speaker Change: Promotional pricing will just go straight to the very attractive menu price and we still at the margin.
Speaker Change: So therefore, we have been doing and customer resonate very well with that and and thus we have observed a.
Very nice transaction growth. So we'll continue to do that.
Speaker Change: So so I'm glad the way our team.
Speaker Change: <unk>.
A very bold move with that Jody iconic product price reduction and you protect the margins. So we'll continue to find new ways to serve our customers even better going forward. Thank you.
Speaker Change: Thank you Joanna and congrats again.
Speaker Change: Thank you. Thank you yeah. Thanks, Joey Thanks, Adrienne. Thank you everyone for joining the call today for further questions. Please reach out through the contact information in our earnings release and on our website. Thank.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: This concludes today's conference call. Thank you all for participating you may now disconnect your lines. Thank you.
Speaker Change: Okay.
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