Yum China : 2Q 2025 Earnings Conference Call Transcript

YUM CHINA 2Q25 FINANCIAL RESULTS

EARNINGS CALL TRANSCRIPT

August 5, 2025

SPEAKERS

Joey Wat Yum China Holdings Inc - Chief Executive Officer Adrian Ding Yum China Holdings Inc - Chief Financial Officer Florence Lip Yum China Holdings Inc - Senior Director, Investor Relations

CONFERENCE CALL PARTICIPANTS

Anne Ling Jefferies LLC - Analyst Brian Bittner Oppenheimer & Co. - Managing Director Chen Luo Bank of America Merrill Lynch Asset Holdings - Analyst Christine Peng UBS AG - Head of Greater China Consumer Sector Ethan Wang CLSA - Analyst Lillian Lou Morgan Stanley - Analyst Michelle Cheng Goldman Sachs - Managing Director Sijie Lin CICC - Analyst

NYSE: YUMC HKEX: 9987

MANAGEMENT DISCUSSION

Florence Lip - Yum China, Senior Director, Investor Relations

Thank you, operator! Hello everyone. Thank you for joining Yum China's second-quarter 2025 earnings conference call. On today's call are our CEO, Ms. Joey Wat, and our CFO, Mr. Adrian Ding.

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. Actual results may differ materially from these forward-looking statements. 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 SEC.

This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release, which is available to the public through our Investor Relations website located at ir.yumchina.com.

You can also find the webcast of this call and a PowerPoint presentation on our IR website.

Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency, unless otherwise noted.

Now, I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Joey Wat - Yum China Holdings Inc - Chief Executive Officer Hello, everyone and thank you for joining us.

I'm excited to share that we delivered solid results once again in Q2. Thanks to the dedication of the entire Yum China team, we achieved second-quarter record highs in Revenue, Operating Profit and OP Margin. Our dual focus strategies have played a crucial role.

First, our emphasis on both Same-Store Sales and System Sales Growth is bearing fruit. Q2 Same-Store Sales Growth turned positive at 1%. Same-Store Transactions grew for the 10th consecutive quarter. We achieved this while opening 336 net new stores in the quarter. System Sales growth reached 4%, showing a sequential improvement of 2 percentage points. This aligns with the mid-single-digit range we targeted for the full year.

At the same time, our margins and profit increased significantly despite our large scale. Restaurant Margin improved by 60 basis points and OP Margin by 100 basis points year-over-year. Operating Profit grew 14% to $304 million.

By brand, KFC remained resilient, achieving 5% System Sales Growth and a very healthy Restaurant Margin in Q2. The brand now operates over 12,000 stores in more than 2,400 cities, having entered around 300 new cities during the past year. We are rolling out innovative modules such as KCOFFEE cafes, leveraging KFC's store space, various in-store resources, and

membership to drive incremental sales and profit, both online and offline. Pizza Hut sustained its momentum, achieving 2% Same-Store Sales Growth in Q2. Our new menu resonated with consumers, contributing to a 17% increase in Same-Store Transactions. The brand now comprises over 3,800 stores and 900 cities, having entered around 150 new cities during the past year. Pizza Hut's margins also improved in the first half through our efforts to streamline and automate operations, and enhance supply chain efficiency.

Our sales initiatives were instrumental in driving our results. By offering innovative and good food at great value, we achieved over 1 billion total transactions in the first half, setting a new record.

At KFC, we added creative twists to our well-loved classic products like Zinger (香辣鸡腿堡). In Q2, for a limited time, we launched a new flavor, Crazy Spicy Zinger (疯辣鸡腿堡). The extra spicy chicken and eye-catching red tint drove excitement. Total Zinger sales soared by over 30% during the promotion period. In spicy-loving provinces like Jiangxi and Sichuan, Crazy Spicy Zinger sales were especially high.

At Pizza Hut, we took our thin-crust pizza to a new level and showcased our expertise. This new thin-crust pizza (手作薄底披萨), hand-crafted with lighter dough, features a 10-inch size that allows for more cheese and toppings. This pizza is perfectly crispy and satisfying. Customers love it! Pizza Hut also brought back our popular all-you-can-eat campaign. For limited periods each year, we offer our customers an indulgent meal at an excellent value. This time, the menu featured juicy Tomahawk steaks (战斧牛排), flavor-packed seafood, exotic durian pizzas and more. The campaign generated genuine excitement and drew in a wave of new and young customers eager to savor the diverse and abundant choices.

Emotional value is equally important to our customers. On Children's Day, we achieved the highest daily sales yet in 2025. By partnering with beloved classic IPs like Hello Kitty and Pokémon, we sold over 4 million meal sets with delightful toys during the promotion. These collaborations sparked social buzz and attracted a wide audience, both children and adults. The star of the show was a Hello Kitty-shaped camera toy, which became an instant hit.

In Q2, delivery sales were around 45% of the total sales mix, up from 38% in Q2 last year. The growth was driven mainly by deals on our own channels and increased promotions on delivery platforms. We are open to working with all platforms, but at our own pace. Our goal is to serve customers where they are. By June, all our brands were listed on major third-party delivery platforms.

Leveraging platform traffic, we increased exposure for our emerging businesses, such as KCOFFEE cafe, and attracted new customers to our core brands. We use a balanced approach, driving top-line while protecting margins. In addition to capturing sales opportunities in a disciplined manner, we carefully manage price perception and pursue other long-term benefits.

As a reminder, sales outside the delivery aggregators account for around 70% of our total sales. Our own channels, including SuperApp and mini programs, offer exciting, exclusive deals and membership privileges, continuing to enhance member stickiness.

Let me now turn the call over to Adrian to discuss our results in detail. Afterward, I will share additional color on our technology initiatives. Adrian?

Adrian Ding - Yum China Holdings Inc - Chief Financial Officer Thank you, Joey. Let me start with KFC.

In Q2, KFC System sales increased 5% year-over-year.

Same-Store Sales grew 1%. Our Same-Store Transaction Index remained even with last year. The Ticket Average increased by 1% to 38 RMB. Strong growth in smaller orders caused a downward trend in the ticket averages for both delivery and dine-in. This was offset by a higher delivery mix, which carries a higher ticket average, resulting in a slight increase in overall ticket average.

KFC expanded its Restaurant Margin by 70 basis points through favorable commodity prices driven by supply chain efficiency gains and through streamlined operations. Operating Profit grew 10% year-over-year to 292 million USD. We added 295 net new stores in Q2, bringing our total to 12,238 stores. New store payback remained healthy at 2 years.

New stores bring us closer to our customers. And our side-by-side module, KCOFFEE cafe, increases the number of occasions we can serve them. This quarter, we opened 300 KCOFFEE cafes, bringing our total to 1,300 locations nationwide. Average cups sold at KCOFFEE cafes continued to increase in the quarter, bolstered by our menu innovations and growth in delivery. This summer, our Iced Sparkling Americano became increasingly popular, representing over half of beverage sales in June. We offered a wide range of Sparkling flavors, from our signature Apple Flavor to our new Lychee Brandy Flavor. KCOFFEE cafes have been effective in driving incremental traffic, sales and profit. Given the progress we have achieved in the first half of the year, we are raising our 2025 target from the previous 1,500 to 1,700 locations.

Let's now turn to Pizza Hut. Pizza Hut has sustained its growth trajectory since reaching an inflection point in 2024. Same-Store Sales Growth turned positive to 2%. Same-Store Transactions grew significantly by 17%. The ticket average was 76 RMB, 13% lower year-over-year. These results align with our strategic focus on mass market positioning and are supported by healthy margin expansion. System sales in Q2 grew by 3%. Pizza Hut's moderate system sales growth relative to its same-store sales growth was due primarily to strategic optimization of the brand's store portfolio. We closed some larger, underperforming stores and opened new, smaller stores. The total store operating weeks were also affected by the timing of closures and openings. Store closures came earlier, while store openings were later. We expect both factors to normalize in the second half of the year.

Q2 marks the fifth consecutive quarter of year-over-year margin expansion for Pizza Hut. Our enhanced operational efficiency offset the impact of all-you-can-eat campaign. Restaurant Margin expanded slightly to 13.3% and Operating Profit grew by 15% year-over-year. Pizza Hut reached 3,864 stores with the addition of 95 net new openings in the second quarter. New store payback remained healthy at 2-3 years. We remain confident in achieving double-digit percentage net new store growth for Pizza Hut in 2025.

Pizza Hut WOW stores are making progress. We saw a meaningful improvement in profitability for the converted WOW stores. We also opened new WOW stores in over 10 new cities where Pizza Hut has no existing presence. The latest capex per store range from 650K to 850K RMB. With streamlined operations and lower entry price points, our WOW model broadens Pizza Hut's addressable market, enabling it to enter lower-tier cities more effectively.

Let me now go through our Q2 P&L.

System Sales grew 4% year-over-year, within the range of our full-year target. Same-Store sales grew 1%, turning positive.

Our Restaurant Margin was 16.1%, 60 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 31.0%, 50 basis points lower year-over-year. Ongoing benefits from Project Red Eye, along with favorable commodity prices, contributed to the improvement. We passed some of the savings on to customers, offering great value for money.

Cost of Labor was 27.2%, 90 basis points higher year-over-year due to higher rider costs as a % of sales. While we continued to lower rider cost per delivery order, the higher delivery mix led to higher rider costs overall. Non-rider costs as a % of sales remained stable year-over-year. And our efforts to optimize operations offset low single-digit wage inflation.

Occupancy and Other was 25.7%, 100 basis points lower year-over-year, as a result of cost optimizations in a number of areas, notably utilities and streamlined operations.

G&A expenses were 4.7% of revenue and 30 basis points lower compared to 5.0% in the prior year. Project Fresh Eye generated incremental benefits year-over-year.

Our OP Margin was 10.9%, 100 basis points higher year-over-year, driven by improved Restaurant Margin and G&A. Operating Profit was 304 million USD, growing 14% year-over-year. Core OP also grew 14% year-over-year.

Effective effective tax rate was 25.8%, 60 basis points higher year-over-year, primarily due to increased cash repatriation resulting in higher withholding taxes.

Net Income was 215 million USD, growing 1% year-over-year. As a reminder, we recognized 6 million USD less in interest income in Q2 this year due to a lower cash balance, resulting from the cash we returned to shareholders. Our mark-to-market equity investments also had a negative impact of 14 million USD in Q2, compared to a positive impact of 6 million USD in Q2 last year.

Diluted EPS was 58 cents, growing 5% year-over-year or 15%, excluding the mark-to-market equity investment impact.

Let's now move on to capital returns to shareholders.