Earnings call transcript: Yum China Q3 2025 beats earnings expectations

Yum China Holdings Inc. (YUMC) reported its financial results for the third quarter of 2025, surpassing analysts’ earnings expectations. The company posted earnings per share (EPS) of $0.76, slightly above the forecasted $0.75, with a revenue surprise of $3.21 billion. Following the announcement, Yum China’s stock rose 3.25% in premarket trading to $45.41, reflecting positive investor sentiment.

Key Takeaways

• Yum China exceeded EPS expectations with a reported $0.76 against a forecast of $0.75.
• Revenue for the quarter stood at $3.21 billion, slightly above projections.
• The company’s stock increased by 3.25% in premarket trading.
• System sales grew by 4% year-over-year, with a 1% increase in same-store sales.
• Yum China plans to open 1,600-1,800 net new stores in 2025.

Company Performance

Yum China’s performance in the third quarter of 2025 demonstrated resilience amid a stabilizing Chinese restaurant industry. The company achieved a 4% growth in system sales and a 1% increase in same-store sales. Despite a 5% year-over-year decline in net income to $282 million, operating profit rose by 8% to $400 million, showcasing improved operational efficiency.

Financial Highlights

• Revenue: $3.21 billion, slightly above forecast
• Earnings per share: $0.76, a 1% decrease year-over-year
• Operating profit: $400 million, an 8% increase
• Restaurant margin: 17.3%
• Net income: $282 million, a 5% decline year-over-year

Earnings vs. Forecast

Yum China’s EPS of $0.76 exceeded the forecasted $0.75, marking a 1.33% surprise. This performance aligns with the company’s historical trend of modestly surpassing market expectations. The revenue of $3.21 billion also slightly outpaced the anticipated $3.20 billion, reflecting a 0.31% surprise.

Market Reaction

Yum China’s stock experienced a 3.25% increase in premarket trading, reaching $45.41. This movement reflects investor confidence following the earnings beat. The stock remains within its 52-week range, with a high of $53.99 and a low of $41, indicating room for further growth.

Outlook & Guidance

Looking ahead, Yum China aims to open 1,600-1,800 net new stores in 2025, maintaining a capital expenditure target of $600-$700 million. The company anticipates mid-single-digit system sales growth and moderately improved margins. An investor day is scheduled for November 17 in Shenzhen, where further strategic insights will be shared.

Executive Commentary

"Our dual focus on innovation and operational efficiency enabled us to deliver yet another quarter of solid results," stated Joey Wat, CEO. Florence Lip, Investor Relations, added, "We are excited about our growth potential and look forward to sharing more at our investor day."

Risks and Challenges

• Supply chain disruptions could impact operational efficiency.
• Market saturation in urban areas may hinder store expansion.
• Macroeconomic pressures could affect consumer spending.
• Fluctuating currency exchange rates may impact profitability.
• Increased competition from local and international brands.

Q&A

During the earnings call, analysts inquired about the impact of delivery platform subsidies, which were reported to have a limited effect. Questions also focused on the strategic review by Yum! Brands for Pizza Hut and the company’s strategies for new store formats and managing delivery costs.

This detailed overview of Yum China’s Q3 2025 earnings highlights the company’s ability to exceed expectations and outlines its strategic focus for future growth.

Full transcript - Yum China Holdings Inc (YUMC) Q3 2025:

Operator: Good day, and thank you for standing by. Welcome to Yum China’s third quarter 2025 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star 11 on your telephone. You’ll then hear an automated message advising your hand is raised. Please be advised that today’s conference is being recorded. I would now like to turn the call over to our first speaker today, Ms. Florence Lip. Please go ahead.

Florence Lip, Investor Relations, Yum China: Thank you, Operator. Hello everyone, and welcome to Yum China’s third quarter 2025 earnings conference call. With me on the call are our CEO, Ms. Joey Wat, and our CFO, Mr. Adrian Ding. Before we begin, I need to 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 consider these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filing. 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.yumchina.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 exclude the impact of foreign currency unless we mention otherwise. With that, I’ll now turn the call over to Joey Wat, CEO of Yum China. Joey.

Joey Wat, CEO, Yum China: Hello everyone, and thank you for joining us. Building on our first-half momentum, we achieved another solid quarter three, accelerating store openings, driving growth in both same-store and system sales, and expanding margins. Delivering growth across all three dimensions was no easy task, but we made it happen. System sales grew 4% year-over-year, outpacing the China restaurant industry. Same-store sales grew for the second consecutive quarter. Restaurant margin expanded to 17.3%. Together, these gains drove an 8% year-over-year increase in operating profit to $400 million. A quarter three record for adjusted operating profit. These results reflect the resilience of our established LGM strategy, which stands for Resilience, Growth, and Moat, and the steadfast execution of our teams in a dynamic market. Store expansion accelerated in quarter three, with 536 net new stores.

Our total store count exceeded 17,500 stores, keeping us on track to reach 20,000 stores by the end of 2026, as we promised in our last investor day. Leveraging our portfolio of brands and flexible store formats, we are penetrating deeper into more cities while enhancing convenience in existing cities. By brand, KFC is as resilient as ever, with 2% same-store sales growth, strong and steady restaurant margins, and a year-to-date record pace of new store openings. Pizza Hut accelerated store openings from the first half of 2025, surpassing the 4,000-store milestone while expanding restaurant margins year-over-year for the sixth consecutive quarter. Our dual focus on innovation and operational efficiency underpins our success. Starting with our sales initiatives, we have delivered same-store transaction growth every quarter since 2023. Eleven in a row. Notably, Pizza Hut has achieved 17% same-store transaction growth for three consecutive quarters.

These results highlight the success of our pricing strategy, keeping KFC price points relatively steady and lowering them at Pizza Hut amid improving restaurant margins. By making our food more accessible to more consumers, we attract more traffic. At the same time, we have transformed our operations for better efficiency. Great value and great prices must be accompanied by innovative, good-tasting food. Our focus spans three key areas: hero products, limited-time offers, and new growth drivers. First, our hero products remain powerful growth drivers and inspire strong repeat purchases. At KFC, chicken wings have been one of our core categories, featuring our hero products, roasted wings and hot wings. We extended this core category with the launch of the latest Crackling Golden Chicken Wings, 薄脆金沙鸡翅. Extra crispy outside, juicy inside. This Chinese-style wing is packed with a sweet and spicy garlic punch.

During the promotion, sales of the new wings surged, matching the popularity of our roasted wings and showing great potential as a future growth engine. At Pizza Hut, pizzas account for over 40% of sales, with double-digit sales growth this quarter. We serve a broad range of pizzas, including pan and stuffed crust to satisfy diverse tastes. Most recently, our new handcrafted thin crust pizza, Suzhou Baodie Pizza, became our best-selling crust within just two months of launch, now making up one in every three pizzas sold. Perfectly crispy, with abundant toppings, it earned rave reviews and drove promising repeat purchases. Second is our LTOs, or limited-time offers. We keep our core menu focused to ensure operational efficiency while introducing highly selected products for limited-time periods to drive repeat visits. These offerings are not one-time wonders. They are designed for lasting appeal, in some cases enduring for decades.

是长红不是网红。 KFC has developed several classic LTOs with a proven sales record that return periodically, such as chicken taco and double-done. Each time we add fresh twists, like our spicy beef wrap with crunchy lotus root. 酸辣藕丁嫩牛五番 which became a best-selling beef wrap LTO in the last four years. Third, we are constantly exploring new growth drivers. New products such as KFC’s whole chicken, along with Pizza Hut’s burgers, are showing strong growth. We also see opportunities across our price ranges. Entry-level combos at KFC and entry-level pizzas at Pizza Hut achieved double-digit sales growth year-to-date. Taking it a step further, KFC is now exploring satisfying meals priced below CNY 20 to better reach customers with tighter budgets via select channels in some regions. These initiatives will also strengthen our relevance and appeal in lower-tier cities.

With our menu innovation and superb supply chain, we deliver outstanding value and drive traffic to our store at solid margins. While great-tasting food is fundamental, emotional value is just as important. We collaborate with leading IPs in animation, gaming, and sports on themed food, packaging, and gifts, attracting new and young customers. In quarter three, delivery sales accounted for 51% of total sales, up from 40% in the same quarter last year. While there have been increased promotions on delivery platforms, as we discussed before, our core brands maintain a balanced approach, driving top-line growth while protecting margins. K-Coffee Café took the opportunity to increase exposure and drive additional traffic, and Lavazza achieved double-digit same-store sales growth in quarter three. Let me now turn the call over to Adrian to discuss our results in detail. Afterward, I will share additional color on our strategy. Adrian?

Operator: Thank you, Joey. Let me now update key highlights by brand. Let me start with KFC. KFC opened a record of 402 net new stores in quarter three, expanding its portfolio to 12,640 stores. System sales grew 5%. Same-store sales grew 2%, led by same-store transaction growth of 3%. Ticket average was CNY 38, down 1%, primarily due to the rapid growth of smaller orders. Our side-by-side modules grew nicely and delivered incremental sales and profits. K-Coffee Café expanded to 1,800 locations, well ahead of our expectations. Daily cups sold per store increased 30% year-over-year in quarter three, driven by strong menu innovations and platform promotions. We saw strong repeat purchases, particularly for our most popular beverages, Sparkling Americano Series, riding on strong summer demand. Sales of this signature series grew over 50% quarter on quarter.

Similar to K-Coffee Café, K-Pro also enjoys synergy with KFC by sharing its store space, in-store resources, and membership programs, offering lighter options such as energy bowls and superfood smoothies. K-Pro is designed to capture the fast-growing light meal market. It stands out with its excellent value for money and KFC’s trusted quality standards. We have expanded K-Pro to 100 locations. Initial results have been encouraging. We’re continuing to refine the model and plan to scale it further, primarily across higher-tier cities. Our membership data indicates that a significant majority of our members have yet to try K-Coffee and K-Pro. As such, we see huge potential for growth. Now, turning to Pizza Hut. Pizza Hut surpassed the 4,000-store milestone in quarter three. Store openings accelerated, with 298 net new stores year-to-date, keeping us on track for double-digit percentage growth in total store count for 2025.

System sales growth sequentially improved from 2% in quarter one to 3% in quarter two and 4% in quarter three. Same-store sales growth was 1%, driven by 17% same-store transaction growth for the third consecutive quarter. Ticket average was CNY 70, down 13% year-over-year, in line with our strategic focus on the mass market segment. Alongside our investments in food and value-for-money offerings, we improved restaurant margins by 60 basis points by streamlining operations and enhancing supply chain efficiency. Pizza Hut’s Wow has expanded to 250 stores, adding nearly 50 stores year-to-date with its low-capex model and streamlined operations. These openings have taken us into 40 new cities with no prior Pizza Hut presence. We’ll continue to ramp up new Wow store openings, primarily focusing on lower-tier cities. Let me now go through our quarter three P&L.

System sales grew 4% year-over-year, and same-store sales grew 1%, both in line with our targets. Our restaurant margin was 17.3%, 30 basis points higher year-over-year. Savings in cost of sales and occupancy and other costs offset increases in cost of labor. Cost of sales was 31.3%, 40 basis points lower year-over-year. Our continued efforts to optimize supply chain efficiency and favorable commodity prices contributed to the improvement. This enabled us to pass some of the savings to customers, offering great value for money. Cost of labor was 26.2%, 110 basis points higher year-over-year. While non-rider costs as percentage of sales remained relatively stable year-over-year, the higher delivery mix led to higher rider costs overall. We continue to optimize store operations to partially offset wage inflation and the impact of higher delivery mix.

Occupancy and other was 25.2%, 100 basis points lower year-over-year, as a result of better rent and store capex optimizations. GMA expenses were 4.5% of revenue, even with the prior year period. Our OP margin was 12.5%, 40 basis points higher year-over-year, primarily driven by improved restaurant margin. Operating profit was $400 million, growing 8% year-over-year. Core OP also grew 8% year-over-year. Effective tax rate was 27.6%, 30 basis points higher year-over-year. Net income was $282 million, 5% lower year-over-year. Excluding our investment in Meituan, net income grew 7% year-over-year. Our investment in Meituan had a negative impact of $8 million in quarter three, compared to a positive impact of $26 million in quarter three last year.

As a reminder, we recognize $8 million less in interest income in quarter three this year due to a lower cash balance resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.76, 1% lower year-over-year, or up 11% year-over-year, excluding the impact from our Meituan investment. Let’s now move on to capital returns to shareholders. Year-to-date, we returned a total of $950 million to shareholders, including $682 million in share repurchases and $268 million in dividends. In September, we announced an additional $270 million share repurchase program on top of the $866 million previously announced for 2025, with a quarterly dividend of $0.24 per share. We’re on track to return a total of approximately $1.5 billion to shareholders in 2025.

From 2024 to 2026, we are committed to returning approximately $1.5 billion each year to shareholders, or annually around 8%-9% of our current market cap. Our cash position remains healthy, with $2.7 billion in net cash as of the end of quarter three. Turning to our outlook, we accelerated store openings in quarter three, bringing our year-to-date net new store counts to 1,119. This keeps us on track for 1,600-1,800 net new stores in 2025. Franchise mix of net new stores year-to-date was 41% for KFC and 27% for Pizza Hut. We expect similar ratios for the full year, in line with our target ranges of 40%-50% for KFC and 20%-30% for Pizza Hut. Our 2025 capex target of $600 million-$700 million remains unchanged. Per-store capex for new openings continues to decrease.

KFC per-store capex has decreased from RMB 1.5 million in 2024 to RMB 1.3 million-RMB 1.4 million currently, while Pizza Hut has fallen from RMB 1.2 million in 2024 to RMB 1.0 million-RMB 1.1 million. For quarter four. With solid new store openings, we remain on track for mid-single-digit system sales growth. Predicting same-store sales growth is always challenging, but our goal is to keep quarter four same-store sales growth at similar levels as quarter three. We’re also working hard toward achieving our 12th consecutive quarter of positive same-store transaction growth. On margins, we continue to expect core operating profit margins for the second half to be slightly higher year-over-year, with quarter four broadly in line with last year due to tougher year-over-year comparisons. Last year’s base benefited from Project Fresh Eye and Red Eye, while high rider costs from a larger delivery mix remain a headwind.

We’ll focus on enhancing efficiency to mitigate these headwinds. As a reminder, quarter four is traditionally our low season, with smaller sales and profits. Overall, we remain committed to meeting our full-year targets of mid-single-digit system sales growth and moderately improved margins. With that, let me pass it back to Joey for her closing remarks.

Florence Lip, Investor Relations, Yum China: Thank you, Adrian. Let me share a few thoughts on our strategy. On the front end, our multi-brand portfolio, diverse modules, and offerings cater to a wide range of customer segments and occasions. Through continuous innovation, we unlock new opportunities that drive incremental sales. On the back end, we are fostering even greater synergies. We expect more sharing, centralization, and consolidation of resources in and across stores, regions, and even brands. This will enable deeper market penetration and faster, more efficient expansion. For example, Meta and LGM manage multiple stores and support rapid store portfolio expansion. Side-by-side modules share KFC’s in-store resources and membership programs to drive additional sales and profits with lighter investments and upgrading courses. We see tremendous opportunity ahead of us as we leverage synergies to grow our businesses while protecting margins.

We are excited about our growth potential and look forward to sharing more at our investor day. Before we turn to Q&A, let me recap the three key takeaways from today. First, our dual focus on innovation and operational efficiency enabled us to deliver yet another quarter of solid results. We accelerated store openings, recorded 1% same-store sales growth, and expanded margins, delivering growth across all three dimensions. Second, we grew our businesses by leveraging synergies while protecting margins. KFC’s K-Coffee Café expansion is ahead of plan, and both Ka Yeung and Pizza Hut Wow are building encouraging momentum. Lastly, our established LGM strategy, resilience, growth, and moat, and our team’s strong execution, we are on track to meet our 2025 targets while setting the stage for future growth. With that, I’ll pass it back to Florence.

Joey Wat, CEO, Yum China: Thanks, Joey. Now, let me share a quick preview of our upcoming investor day, which will be held in Shenzhen on November 17. Joey, Adrian, along with our leadership team, will share updates on our LGM strategy and three-year growth algorithm. A live webcast of the presentations will be available on our IR website. For those visiting in person, we’ve planned visits to a range of store formats and locations. Investors will be able to gain first-hand insights into the local market, see our operations in action, as well as sample our signature and innovative menu items. With that, we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.

Operator: Thank you. The first question comes from the line of Michelle Cheng from Goldman Sachs. Please go ahead.

Hey, Joey, Adrian. Congrats again for these very resilient results. We understand that the environment has been very challenging. My question is about the delivery. You have been mentioning that you will be disciplined in managing this delivery platform subsidy campaign. Can you share with us more on your observation on the subsidy impact on the company and the whole market in the near term and in the long term? Particularly, I think there is another round of concerns on this deflation. How should we think about the pricing trend and also the competitive landscape impact? That is my question. Actually, I just saw a news coming out regarding Yum! Brands. They mentioned something about Pizza Hut. I am wondering whether Joey can also comment that it looks like there is a review of the strategic options for Pizza Hut.

I am wondering whether there is any impact on the Yum China Pizza Hut business as well. Thank you very much.

Joey Wat, CEO, Yum China: Thank you, Michelle. I would like to make three comments on the delivery and subsidies, and then Adrian can address the Pizza Hut questions. Three comments here. One is we have observed a more pronounced decrease in the subsidies in, while the delivery platforms in coffee and tea, but only a slight decrease in QSL. Point two is overall, we still expect the impact on us to be limited. As we have been, we’ll continue to maintain our strategic focus and balanced approach with our core brand. That means we are driving sales growth while protecting margins at the same time. We will be capturing sales while ensuring long-term brand positioning. Point three, in the longer term, we do see and we’ve learned from the, I think 2017 last time, similar scenario, that subsidies will eventually normalize.

Therefore, it’s important that we have the discipline as a company, as a brand, to focus on menu innovation, food quality, customer service, and protect the price perception, particularly for well-established brands like ourselves. So these are all fundamentals to the competitiveness of the business in the long term. Thank you, Michelle. Adrian?

Sure, Joey. Hi, Michelle. I have a question regarding Pizza Hut and Yum! Brands’ announcement earlier today. We are aware of the development, and we understand Yum! Brands will be initiating a formal review of a range of strategic options. Obviously, Yum China and Yum! Brands are two independent companies, so we’re not in a position to comment on their process of strategic review. Regardless of the outcome, we are confident in the strength of the Pizza Hut brand in China, and our ongoing operations and significant growth potential of Pizza Hut here in China remain unchanged. Also, I would like to say that Yum! Brands and ourselves have been close and long-time partners, and it will continue to be the case. I guess part of the question is the impact to Yum China, right?

I’m not sure if you are implying whether we’ll be participating in some way or form into this strategic review process. Our policy is not to comment on any specific transactions. With that said, we have always taken a prudent approach, as Michelle, as you appreciate, to evaluate potential investment opportunities, and we’ll continue to do so. We set a very high bar. We’ll conduct M&As only when a transaction is strategically sound and expected to create great value to our shareholders. Additionally, all M&A matters are subject to rigorous evaluation and discussions with our board. Thank you, Michelle.

Florence Lip, Investor Relations, Yum China: Thank you, Joey.

Operator: Thank you for the question. Next question comes from Brian Bittner from Oppenheimer & Co. Please go ahead.

Thanks. Can you give us a refreshed overview of what you are seeing from a macro perspective as it relates to the restaurant industry in China and consumer spending by the China consumer? It seems like visibility is improving relative to past quarters and years, maybe the opposite of what you’re seeing with the U.S. consumer. Any color there? I think, Adrian, you said that you expect 4Q same-store sales to look similar to 3Q. Just want to confirm you said that. Any additional color on that dynamic would be helpful. Thanks.

Joey Wat, CEO, Yum China: Thank you, Brian. In terms of the macro. As we have observed in quarter three and then probably even a little bit on the October holiday. The performance, as we can see the result and also as we can see a little bit now, it was good, and it’s in line with expectations. The traffic is good. As people are traveling around, particularly during the holidays. Consumers still remain value-cautious. For us, if we look into the details of the performance across regions, it’s similar. Lower-tier cities do perform slightly better due to greater domestic travel here. Again, the consumers feel value-cautious. For us, we are purely aware that it’s not just about having good price. It’s about pricing right, providing value for money together with good quality, food, and emotional value. We continue to provide our customers with innovative products and together with breakthrough business models.

Our focus still focuses on delivering the same-store transaction growth. Although it’s nice to have the same-store sales growth as well, particularly for KFC with 2% same-store sales growth. Along the way, we continue to focus on the operational efficiency and innovation at the same time. Thank you, Brian.

Operator: Thank you for the question. Our next question comes from Chen Luo of Bank of America. Please go ahead.

Hi, Joey and Adrian. Congrats again on the solid Q3 result. My question is again on our expansion strategy to focus on smaller formats and franchise stores. If we do the math, approximately 10% expansion in Q3 leads to around 4% sales growth. Can we say that this kind of 40% ratio can be maintained in the coming few quarters as we continue to pursue a shift to the smaller format? Meanwhile, if you look at the franchise stores, I understand that we try to improve the economics to P&L in the future. Where are we now? Is there any progress at the moment? Thank you.

Thank you, Luoteng. Firstly, I think the observation of system sales growth at around 40% of the store account growth, that will not necessarily be true down the road because there are a few dynamics and nuances. Firstly, as I mentioned in the prepared remark both this quarter and the previous quarter, this year, we have some strategic optimization of the store portfolio with closure of some of the large stores with higher sales and opening of some of the smaller stores with slightly lower sales. And as you correctly pointed out, new store sales in the initial year are at a discount to the material store. And as I previously provided the figure, the ratio is roughly 50-60% for the new stores in the initial year. Obviously, in the first three years, it will ramp up. That is the first factor, right? The strategic optimization.

All else equal, even if the net new store is still 10% growth, if we do not have this factor, the system sales growth would have been a bit higher. Secondly, the timing of opening and closure within the quarter affected the total operating weeks. For this quarter, as you can do the math very nicely, the timing of openings, particularly for KFC, there is a shift towards September, the third month of the quarter. Thereby, even with the similar net new openings, that will impact the store week and thus the system sales growth. For Pizza Hut, we are catching up in the store openings this quarter as well as the store week. I would say that is more evenly spread across the quarter, across the three months. You can see with similar net new store openings, the system sales did sequentially improve.

Thirdly, as always, we have some little rounding differences. In a nutshell, the system sales growth as a percentage compared to the net new build percentage, the discount will not stay the same down the road. I guess your natural question would be, what is the system sales growth down the road in the coming quarters and years? That exactly leads to our kind of guidance and outlook in our investor day in two weeks’ time. Please bear with us and look forward to the investor day. I think he has the second part of the question.

Franchise.

Economics. Okay. Franchise improvement economics, yes. We made some progress in improving the economics for our franchise business. As I mentioned in previous quarters, currently, it is still slightly lower than our equity business, right? Our operating margin for equity business is anywhere between 10%-11%. For franchise business, without G&A, the operating margin is also around 10%, right? It is basically 4%-5% out of 40%-50% of system sales, so around 10%. If we do a proper G&A allocation, the franchise operating margin will be high single-digit percentage of sales of our revenue. We did have some progress in the quarter. Obviously, I think some of the analysts, including yourself, already noticed that we have some slight revision in our pricing mechanism for our franchisees, basically sharing some of the savings from our Project Fresh and Red Eye between franchisees and ourselves. That is a little progress.

When we have more savings from these efficiency projects, we will do a bit more of that. Hopefully, in the mid to long run, the operating margin for franchise business will be in line with the equity business. Overall, in conclusion, I would say in the short run, there will be no margin dilution from our franchise initiative because the mix is still small and the margin is actually very similar already. In the mid to long run, not only will there be no margin dilution, but more importantly, there will be ROIC improvement over the mid to long run given the efficiency and capital for the franchise business. Thank you, Luoteng.

Thank you for the questions. One moment for the next question. Our next question comes from Lilian Luo of Morgan Stanley. Please go ahead.

Thanks a lot, Joey and Adrian. My question is on the delivery as well, but it’s more a little bit of short term. I would like to understand in terms of the delivery order mix for the aggregators and also from our own system. I think in this quarter, the contribution of membership sales kind of dropped sequentially and also on a year-over-year basis. Are we seeing more orders from aggregators for the time being given the subsidy program, etc.? What kind of business initiatives or efforts are we making trying to get the customer back in terms of order generation into our own system? Related to that, I want to understand whether there’s any cost-saving initiatives in terms of the rider’s costs in the future. Thank you.

Thank you, Lilian. First of all, as you pointed out, the membership sales contribution to the overall sales has slightly decreased for the quarter. I would say this is more of a mechanical or mathematical result because when we account for membership sales contribution, we exclude our members who spend on the aggregators because actually, we know who are spending on the aggregators if they are members, but we exclude those parts. When aggregator mix goes up, our membership in a disclosed metric, membership contribution will slightly go down. That is a mechanical result. If we take into account our members who spend on the aggregators and take everything into account, the overall so-called adjusted member sales contribution is actually very stable quarter over quarter, year over year. That is the first part of the question.

The second part of the question is the increase in delivery mix and the rider cost. Yes, we are actually not only working on the rider cost per ticket, which is indeed going down, but the delivery mix is going up. That impact of the delivery mix going up has a higher overall impact, thus causing a headwind in our COL. By the way, this is exactly as we cautioned the market back in February, right? Before even the delivery aggregator war started, we faced headwind of delivery costs. We are optimizing the delivery efficiency. In addition to that, on COL, for the non-delivery part, we are doing a lot to improve the efficiency, in terms of streamlining, automating, and centralizing processes so that the operation efficiency hopefully offsets not only the wage inflation, but also partially offsets the impact of the delivery mix increase.

All in all, we would say the COL continues to face a headwind. That has actually been very consistent ever since we started to give the guidance back in February. We will make all efforts to try to achieve slightly improvement in both the UC margin and a moderate improvement in OP margin for the year for Yum China. Also, as we commented on the mid to long run for both brands, we said KFC’s reference margin will be stable. Pizza Hut, there is a good potential for margin improvement. Those comments actually do take into account different scenarios of delivery aggregator subsidy and delivery mix. Hopefully, that addressed your question, Lilian.

Joey Wat, CEO, Yum China: I’ll just make two quick comments, Lilian. Adrian talked about all the software technical measures we are doing to protect our P&L. At the same time, as you can see, we are also pushing for innovations and operational efficiency at the same time in the slightly longer term to protect the P&L. One example is our continued acceleration of K-Pro and K-Coffee. When we pursue the front-end segmentation of sales and then back-end consolidation of the operating cost, in the longer term, in a more holistic situation, we manage the cost structure and protect it, if that makes sense. Thank you, Lilian.

Operator: Thank you for the questions. Our next question comes from Suchie Lin from CICC. Please go ahead.

Thank you, Joey and Adrian. I have one question. We see more and more attempts at expanding new store formats and new categories. For example, besides K-Coffee and besides Wow, there are also K-Pro, Fried Chicken Brothers, etc. I am trying to learn more about our strategic planning and methodologies for these. Whether we have identified a few promising categories and concentrate our efforts, or we just try out various options and they may work as a total. Also, what are the key considerations when we decide to develop a new model or new category? Maybe some competitors have proved it is a promising category, or it can create synergy with our other business. Thank you.

Joey Wat, CEO, Yum China: Suchie, I think we will have a more holistic, robust discussion with this particular topic in investor day for sure. It’s a focus. However, right here, right now, I would like to make a few points here. We are very focused on the growth initiative to focus both on the same sales and system sales. K-Pro is one example. K-Coffee is another one. K-Coffee, actually we’re ahead of schedule. We originally tried to get to like 1,500 or 1,600 locations. I think right now we’re there already. We’ll continue to pursue it when we could. I think K-Coffee needs no further introduction. K-Pro, it’s a concept we developed actually nine years ago. We keep working on it. This year, we certainly see the acceleration of the concept.

The thinking behind is, as I mentioned in my prepared remark and also earlier, we understand we can pursue more growth with front-end segmentation of the customer and location. Who can spend time to do our own? At the back end, we just utilize our equipment, resources, labor on the back end to deliver the operational efficiency. That’s one way to do it. It works. I mean, otherwise, it’s very hard to grow a new business to deliver incremental sales and incremental profit. Secondly is a promising category. Yeah, of course. We are focusing on fried chicken. At the same time, K-Pro is a concept that we deliver alternatives for customers. As we can see from the membership or the customer of K-Pro, a very high percentage of K-Pro customers are actually KFC customers, but they need a choice once or twice during the week. We provide a choice.

It’s close enough. The category is niche. We also have the food safety that customer trust. We’ll just continue to explore. For new category or new concept, of course, the success rate is not 100%. There’s always some trial and then figure out how the new model, new margin will work. KFC Fried Chicken Brothers, whatever, is one of those trials. It’s very, very early days. We keep trying different things. Thank you, Suchie.

Operator: Thank you for the questions. Our next question comes from Xiaobo Wei from CT. Please go ahead.

Hi, good evening. I’m Joey and Adrian. I have a question on KFC business. If we look at the three-tier result, 2% same-store sales goals with 5% system sales goals, very impressive. However, if we look at the restaurant profit goals, which was at 5%, and the OP goals was only at 6%, we did not see a lot of positive operating leverage. Shall we say that the delivery-driven strong goals will not have a lot of positive operating leverage in your business? If that is the case, will you work on something trying to improve that part of business to expand the OP margin of KFC looking forward? Thank you.

Thank you, Xiaobo. KFC is a very resilient business. As we actually guided in the previous quarter’s earning release, we do expect the second half, we did expect the second half KFC restaurant margin to be broadly stable year over year. That is kind of consistent to the real results that we see in the quarter. One key philosophy we have always been mentioning throughout, actually ever since 2019, over the past six years, is we expect KFC’s restaurant margin to be stable into mid to long run. Because it is actually at a very healthy level today, about 17% year basis. It is one of the highest, if not the highest, in the restaurant industry. To extend, we have some leverage. Sales leverage that we generate from KFC today and in the future.

We do look to share that margin upside with multiple partners, including our suppliers, landlords, firm line staff, and also retain a small portion within the group and share with the shareholders. That is quite consistent with our philosophy there. Tactically, for the quarter, for quarter three, we do see a significant increase in the delivery mix, to 51%. Last year, quarter three was around 40% or so. The significant increase in the mix caused a significant headwind in the COL as we cautioned the market. You can see the COL for KFC surge around 160 basis points for KFC as a brand. For the group, it is 110 basis points. That is all because of the delivery mix increase. We were successful in more than offsetting that increase with the benefits in COS and O&O. Technically, there is that driver there.

Philosophically, in the mid to long run, we do stick to our philosophy of keeping KFC restaurant margin broadly stable at a very healthy level. Thank you, Xiaobo.

Thank you for the question. Our next question comes from Christine Peng from UBS. Please go ahead. Christine, your line is open. You may unmute locally.

Sorry, I was muted. Hi. I have a quick question regarding the same-store sales growth of KFC. Obviously, the 2% same-store sales growth was an upside surprise given Arjun previously mentioned about 0-1% same-store sales growth. I was just wondering how sustainable you think this level of same-store sales will be going forward. The reason I ask is because, obviously, in the third quarter, there are some benefits from the subsidy provided by delivery platform. On the other hand, we also noticed that your management has been very diligent to launch new formats such as the K-Coffee, K-Pro. I was just wondering whether management can provide us some color in terms of the contributions from delivery subsidy and the new formats launching to this 2% same-store sales growth.

In addition to that, if you could talk a bit about the K-Pro economics just briefly, I think that would be very helpful for us to understand the economic benefits of this new format. Thank you.

Thank you, Christine. First of all, SSG for KFC 2% is actually slightly above our own expectation as well. It is also similar for K-Coffee Café, right? Our own expectation, as Joey mentioned, was like 1,700 or so. Now, in quarter three, we already achieved 1,800 locations for K-Coffee Café. Those are actually encouraging results. We are happy to be wrong. We are happy to be wrong there. It is slightly above our 0-1% target. As to whether that level is sustainable, obviously, predicting SSG is always difficult. The market is still quite dynamic, and consumers stay quite rational. As we mentioned in the prepared remark, we are working very hard to keep the quarter four SSG at similar levels as quarter three and achieve 12 consecutive quarters of same-store transaction growth. I think transaction growth is, I guess, slightly more within our control.

For SSG overall, it will be subject to different situations, including different factors, including competitive dynamics, including macro, etc., etc. I will not be able to give outlook or guidance on whether this level of SSG will be sustainable. On your second part of the question on K-Pro economics, obviously, similar to K-Coffee Café, K-Pro is a module. It is a side-by-side module to our KFC mother store, and it contributes incremental sales and incremental profits. As one can reasonably expect, the incremental sales contributed by K-Pro will be larger than the incremental sales contributed by K-Coffee Café because it is a restaurant concept, right? Restaurant module. We have not given any guidance on the exact economics for K-Pro because it is still in the early stage. We only have slightly more than 100 modules for K-Pro, but the initial progress we made is encouraging.

We will be ready to share more color on the economics and growth potential for K-Pro as well as other modules or other initiatives as some of the analysts are still in the early part of the quarter, in due course, when we think we are ready. Hopefully, that addressed your question, Christine.

Joey Wat, CEO, Yum China: I’ll add some colors to the K-Pro, Christine. The resource of K-Pro we share, we really utilize the synergy with KFC brand. We leverage KFC store space, the membership program, the kitchen, the COL. This is incredibly important because then the incremental investment is much smaller than a standalone store, which you are familiar with from the K-Coffee. Because of so much synergy that we’re pursuing, the concept, it is delivery incremental sales, incremental profit. At the same time, as you know us well after all these years, whenever we do something new, a new concept, new product, we always look at sales first and profit later, step by step. Thank you.

Operator: Thank you for the question. In the interest of time, we’ll now take the last questions from Linda Huang from McQuarrie. Please go ahead.

Thank you very much for this opportunity. My question is regarding the sales because we are pleased to see that in the third quarter, right, our sales are 4% faster than industry. Looking ahead, do you think that we have a chance to accelerate the growth to high single digit? If we can achieve this growth rate, will it come from the macro factor, or is there any company-specific strategy that we can buck the trend to go faster? That is my simple question.

Thank you, Linda. Actually, you asked a question that will share exactly the same topic in the investor day in a couple of weeks’ time. I will try to keep some secret there to the investor day in two weeks. Overall speaking, as you correctly point out, from a company-specific perspective, we are ready in terms of lots of fundamental improvement. Lots of new modules are ready. New initiatives are being tested. The innovation is spread across all different parts of business, name it, right? Menu innovation, store model innovation, emotional value, the new emotional value, exciting ones that also involve innovation, etc., etc. I would say we are very well positioned to capture future opportunities. Obviously, we will not be settled with the mid-single digit top-line growth, system sales growth.

As to the exact growth algorithm over the next three years, that will be some topic we will share in two weeks’ time. Yes. Please stay tuned. Thank you, Linda.

Joey Wat, CEO, Yum China: Linda, I think I just have one quick comment here. Although K-Pro or K-Pro stands really exciting because it’s new, the biggest growth driver will still be from the core brand itself. For example, KFC, the small-time mini, the different modules. Then Pizza Hut, the Wow that very well to enter new cities, which we are very excited. The hero product, in the prepared remark, we talked about hero product. It’s incredibly exciting to, again, focus on surprise, surprise, surprise chicken for KFC and then for Pizza, surprise, surprise, the pizza, the new single pizza. We will go through the building blocks or the key modules of these key drivers of the business in the investor day. Look forward to it.

Thanks, Joey. Adrian, and also thanks, Linda. This concludes our Q&A session. Thank you for joining the call today.

Operator: That does conclude today’s conference call. Thank you for your participation. You may now disconnect your lines.

Joey Wat, CEO, Yum China: Thank you.

Thank you.

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