Yum China Holdings, Inc. (NYSE:YUMC) Q2 2025 Earnings Call Transcript

Yum China Holdings, Inc. (NYSE:YUMC) Q2 2025 Earnings Call Transcript August 5, 2025

Yum China Holdings, Inc. beats earnings expectations. Reported EPS is $0.576, expectations were $0.57.

Operator: Good day, and thank you for standing by. Welcome to Yum China’s Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your first speaker today, Ms. Florence Lip, Senior Director, Investor Relations of Yum China. Please go ahead.

Florence Lip: 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 a webcast of this call and our 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: Hello, everyone, and thank you for joining us. I’m excited to share that we delivered solid results once again in quarter 2. 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 focused strategies have played a crucial role. First, our emphasis on both same-store sales and system sales growth is bearing fruit. Quarter 2 same-store sales growth turned positive at 1%. Same-store transactions grew for the tenth consecutive quarter. We achieved this while opening 336 net new stores in the quarter. Systems of 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 USD 304 million. By brands, KFC remained resilient, achieving 5% system sales growth and a very healthy restaurant margin in quarter 2. 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 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 quarter 2.

Our new menu resonated with consumers, contributing to a 17% increase in same-store transactions. The brand now comprises over 3,800 stores in 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 enhanced supply chain efficiency. These results were driven by our due focus on innovation and operational efficiency. I’m excited about how well positioned KFC and Pizza Hut are to capture the growth potential in China. 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 add creative twists to our well-loved classic products like Zinger [Foreign Language] In quarter 2, for a limited time, we launched a new flavor Crazy Spicy Zinger. [Foreign Language] The extra spicy chicken and eye-catching [indiscernible] drove excitement. Total Zinger sales soared by over 30% during the promotion period in spicy loving provinces such as 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 [Foreign Language] handcrafted with lighter dough features a 10-inch size that allows for more cheese and toppings. This pizza is perfectly crispy and satisfied. Customers love it. Pizza has 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 [indiscernible] tomahawk [indiscernible] Flavor pack seafood, exotic [indiscernible] pizza and more. The campaign generated genuine excitement and drawing a wave of new and young customers either to savor 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 classics like Hello Kitty and Pokémon, we sold over 4 million new sets with delightful toys during the promotion. These collaborations spark so so buzz and attract a wide audience, both children and adults. The star of the show was a Hello Kitty shape camera toy, which became an instant hit. In quarter 2, delivery sales were around 45% of the total sales mix, up from 38% in quarter 2 last year.

The growth was driven mainly by dues 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’s traffic, we increased exposure for our emerging businesses such as KCOFFEE Cafes 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 Super App and Mini programs, over 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. Afterwards, I will share additional color on our technology initiatives. Adrian?

Adrian Ding: Thank you, Joey. Let me start with KFC. In quarter 2, 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 CNY 38. Strong growth in smaller orders caused a downward trend in the ticket averages for both delivery and dine-in. This was offset by the 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. We added 295 new stores in quarter 2, 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 patients 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, altered 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’re 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 CNY 76, 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 quarter 2 grew by 3%. Pizza Hut’s moderate system sales growth relative to its same-store sales growth was due primarily to the strategic optimization of the brand 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 the closures and openings.

Store closures came earlier while store openings for later. We expect both factors to normalize in the second half of the year. Quarter 2 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 to 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 ranged from CNY 650,000 to CNY 850,000 with streamlined operations and lower entry price points, our WOW model broadens Pizza Hut’s addressable market, enabling it to enter low-tier cities more effectively. Let me now go through our quarter 2 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 pass 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 cost as a percentage of sales. While we continue to lower rider cost per delivery order, the higher delivery mix led to higher rider costs overall. Non-rider cost as a percent of sales remained stable year-over-year, and our efforts to optimize operations offset low single-digit wage inflation. Occupancy in other was 25.7%, 100 basis points lower year-over-year. As a result of cost optimization 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, growing 14% year-over-year. Core OP also grew 14% year-over-year. Effective tax rate was 25.8%, 60 basis points higher year-over-year, primarily due to the increased cash repatriation resulting in higher withholding tax. Net income was $215 million, growing 1% year-over-year. As a reminder, we recognized $6 million less in interest income in quarter 2 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 in quarter 2 compared to a positive impact of $6 million in quarter 2 last year.

Diluted EPS was $0.58, growing 5% year-over-year or 15% excluding mark-to-market equity investment impact. Let’s now move on to capital returns to shareholders. In the first half of the year, we returned a total of $536 million to shareholders, including $356 million in share repurchases and $180 million in dividends. For the second half of 2025, we announced our share repurchase agreements totaling $510 million, a 43% increase from our share repurchases in the first half. Assuming a quarterly dividend of $0.24 per share, we expect to return at least $1.2 billion in 2025. We remain committed to returning $3 billion to shareholders from 2025 through 2026, on top of the $1.5 billion in cash we returned in 2024. The average annual capital return is around 8% to 9% of our market cap.

We maintain flexibility regarding the split of the capital returns to shareholders between the 2 years, taking into account factors such as stock price, market conditions and our cash needs. Our cash positions remain healthy with $2.8 billion in net cash as of the end of the quarter. Finally, turning to our 2025 outlook. Despite the complex and fluid market conditions, we are reiterating our full year target for the net new store openings and system sales growth. We are revising our full year outlook on restaurant margin and core OP margin to reflect our first half performance and our latest expectations for the second half. Let me provide additional color. In terms of store openings, overall, we anticipate the ramp-up in net new store openings in the second half of the year with more gross openings and fewer store closures.

We have a solid pipeline and remain confident in achieving our target of 1,600 to 1,800 net new stores in 2025. We expect the franchise store mix of the net new openings for the full year 2025 to be similar to the first half, which was 41% for KFC and 26% for Pizza Hut. That means we’ll meet our guidance of 40% to 50% for KFC and 20% to 30% for Pizza Hut ahead of schedule. We anticipate the franchise mix of our net new stores to further moderately increase within these ranges over the next few years. With our store expansion plans unchanged, our target of mid-single-digit system sales growth for the full year 2025 remains in place. This range is also applicable to the second half. Predicting same-store sales growth is more difficult as consumer spending remains rational.

For quarter 3, we’re working hard to achieve 11 consecutive quarters of same-store transaction growth. The ticket averages for both delivery and dine-in continue to show a downward trend due to an increase in smaller orders. We aim to achieve steady same-store levels year-over-year in the second half. Regarding delivery, we maintained a disciplined approach to capturing sales. We leverage delivery platforms to enhance visibility and increasing traffic, especially for our emerging businesses. While sales from smaller ticket beverage orders grew nicely, the overall impact on our business is more limited. Additionally, higher delivery mix results in higher rider costs. Our balanced and nimble approach enable us to drive sales while preserving price integrity and protecting margins.

Let me now go through our margin expectations for the second half. All comparisons are stated on a year-over-year basis. While we continue to enhance operational efficiency, we faced tougher comparisons as more meaningful benefits from Project Fresh Eye and Red Eye were already in last year’s space in the second half. Additionally, rider costs driven by higher delivery mix continued to be a headwind. For KFC, our aim is to maintain relatively stable restaurant margins. For Pizza Hut, we expect restaurant margin to slightly improve year-over-year. Considering the impact of streamlining operations, partially offset by higher delivery costs and a higher base versus the first half. With G&A percentage improving a bit, we expect Yum China’s core OP margin to also slightly improve.

As quarter 4 is traditionally our low season with smaller sales and profits margins may be a bit more volatile. With our outperformance in the first half, for the full year 2025, we expect the restaurant margin for KFC and Pizza Hut as well as the company’s core OP margin to moderately improve. On the CapEx side, we are revising our full year CapEx guidance down from around $700 million to $800 million to $600 million to $700 million, mainly due to lower CapEx per store. With that, let me pass it back to Joey for her closing remarks.

Joey Wat: Thank you, Adrian. Our end-to-end digitization initiatives are central to our efforts to drive growth and efficiency. We’ve been working on this for over a decade. AI, both analytical and generative is simply our latest iteration. In June, we held our first-ever AI Day, which featured our very first Yum China employee Hackathon. The enthusiasm for AI Day was extraordinary. Participating teams from across the country represented diverse backgrounds in operations, supply chain, finance and more. I was impressed by how they proactively identified frontline needs and tackled problems with innovative solutions. To support promising projects, we set up a CNY 100 million Yum China Frontline Innovation Fund and committed to making AI Day a new event.

Our employees are embracing new technologies like GenAI. And by doing so, they help us further deepen our strategic move. Our end-to-end digitization is just that it starts at our customers, expands to our RGMs and all the way back to our suppliers and touches everything in between. Customer service, our membership programs, store operations, store management, shared service functions, logistics centers, and upstream suppliers. We look forward to sharing more details during our upcoming Investor Day in November. Before we turn to Q&A, let me recap the 3 key takeaways from today. First, we achieved solid results in quarter 2 despite navigating a dynamic environment. Same-store sales growth turned positive, System sales growth sequentially improved.

Restaurant margin expanded year-over-year. Second, we remain confident in achieving our full year targets for 2025, including new store openings, system sales growth and margin expansion. And lastly, our new initiatives are shaping up well, expanding our addressable market for years to come. For example, KCOFFEE Cafe leverages KFC’s resources to scale up. Pizza Hut WOW model is making meaningful progress in improving its profitability and helping us penetrate into lower-tier cities. Our business remains resilient in a rapidly changing landscape. Our due focus on operational efficiency and innovation continues to generate strong results. Looking ahead, we are confident in our ability to grow our brands, enhance our competitive edge and unlock more opportunities in China.

With that, I will pass it back to Florence.

Florence Lip: Thanks, Joey. Now we will open the call for questions. [Operator Instructions] Operator, please start the Q&A.

Q&A Session

Operator: [Operator Instructions] We will now take our first question from the line of Michelle Cheng from Goldman Sachs.

Michelle Cheng: Congrats again for the very strong results. So my question is about the delivery. So we see our delivery business already grew very strong in second quarter. And this also led to a very solid same-store sales growth in second quarter. But given the elevated — the delivery platforms promotion activities in the third quarter. Can you share with us any thoughts about the upside in the business and same-store sales growth into third quarter? And also, aside from the revenue, I think you touched base a little bit regarding the margin and also higher rider costs. But can you elaborate a little bit more on this impact on [indiscernible] especially, we also heard that the platform also want brands to participate in some of the promotion campaign. So this is my question.

Joey Wat: Thank you, Michelle. Let me give some context and Adrian can fill in more details. The biggest dynamic for Q2 indeed is the intense delivery platform competition, particularly in the small orders or related to drinks in our industry. What I want to provide a context is such a dynamic or disruption is not new to us. We’ve been through it. The last time the perform competition was so intense actually was back to 2017. So we might have learned a thing or 2 for the quarter 2. So one thing we really go back and focus on is really focused on building our core competency. So anything from food innovation, supply chain, digital, solid institution and providing value, compelling value to our customer is still the most important thing instead of buying sales.

As I mentioned in my earlier prepared remarks, 70% of our sales are outside the third-party delivery aggregators are still within our control. And for Yum China’s approach for quarter 2, we have adopted a balanced approach. Balanced approach in the short term to drive the top line, protect the margin and preserve the price integrity of our brands, which is incredibly important, actually. But in the long term, we also look at how to build the long-term benefit to ensure sustainable growth throughout the last few months, interesting dynamics. With that, I’ll pass it to Adrian to provide more details.

Adrian Ding: Sure. Thank you, Joey, and thank you, Michelle. I think Joey summarized pretty well on the delivery dynamics and our philosophy. And I’ll briefly comment on the SSG outlook for the second half related to a question, Michelle. And then — and later, I’ll go through the UE outlook as well. As I mentioned in the prepared remarks, predicting SSG is more difficult given the dynamic market and macro. Consumers stay rational and delivery platform dynamics are evolving, as Joey mentioned. And as a reminder, we faced tough comparison from the aggressive promotions and higher same-store sales index back in the second half of last year. With this said, we are working hard to achieve a steady same-store sales levels year-over-year, as I mentioned in the prepared remarks, and 11 consecutive quarters of same-store transaction growth.

And then coming to UE, we believe the main impact from delivery aggregators subsidy war is on our COL or rider cost. For COL, we face continued headwind from higher rider cost with higher delivery mix, even with a lower cost per delivery order, the rider cost as a percentage of sales are expected to increase. We aim to maintain non-rider cost stable, offsetting the low single-digit wage inflation through more streamlined operations. Now I’ll also briefly comment upon COS and O&O, given this is related to UE as well. For COS, we expect it to improve year-over-year for the full year with the ratio to be between 31% and 32% for YUMC and for KFC as well. For Pizza Hut, as I mentioned in one of the previous Q&As in the earnings call, we expect the full year COS to be 32% to 33%.

In the second half, we’re lapping a more meaningful benefit from Project Red Eye last year. Tailwind from favorable commodity prices, as you can imagine, will gradually decrease or gradually reduce. We also dynamically adjust our promotional intensity depending on market condition and competitive dynamics, obviously. And lastly, in terms of O&O, occupancy and other costs, that as a percentage of sales is likely to slightly improve year-over-year for the second half as well. We continue to explore optimization opportunities to offset cost increases. So overall, from a restaurant margin perspective, as I mentioned in the prepared remarks, for KFC, we expect that to be stable, relatively stable year-over-year for the second half, and we expect Pizza’s restaurant margin to slightly improve for the second half.

And then as a result, for Yum China as a whole, the restaurant margin, OP margin will slightly improve in the second half as well. So hopefully, that address your question, Michelle.

Operator: We will now take our next question from the line of Lillian Lou from Morgan Stanley.

Lillian Lou: I have a question about the new format since Joey mentioned this is very important for driving long-term growth, in particular, for Pizza Hut WOW. Do we have store opening targets right now for this year and next year, given that it seems we have more confidence about the Pizza Hut WOW performance. And also Joey mentioned there has been meaningful improvement. Can you share a little bit more detail about the operation, i.e., what kind of margin level right now we are achieving or any targets we have on the profitability and also the growth pace?

Joey Wat: Thank you, Lillian. [indiscernible] is very exciting. And we started our first store, I think, last May — May last year. And then by now, we have over 200 stores now. And all the fundamental, the menu, the operation, the margin, we like what we see. And the exciting part — the most exciting part is among the over 200 stores, 10 stores are new and they are opened in cities that do not have stores. So it’s pretty new model in new city. And again, we like what we see about the sales, the margin level and the OP level. And that is incredibly important for the brand because for first half of the year, KFC opened stores in 300 new cities and Pizza Hut opened in 150 cities. Like this is a much higher number of new cities compared to previous years.

And WOW — Pizza Hut WOW model will be good to help Pizza Hut penetrate into lower-tier cities because we talk about — we know that, and we have very clear understanding internally that between the KFC and Pizza Hut, the delta is 1,500 new cities. And historically, the traditional Pizza Hut model just not sharp enough to enter the lower-tier city, and now we have one. So that is incredibly exciting. And on top of many other things, in addition to WOW, that’s why we suggest that 2024 with an inflection point and thus more opportunity. So I’ll pause here. Adrian, do you have a bit more.

Adrian Ding: Sure, sure. So in terms of the guidance on net new open for WOW store, Lillian, we are not giving guidance for net new open for this particular model, given it’s a new model. And especially given its potential significance within the Pizza Hut brand, we do take time to develop and further iterate and evolve the model. And that’s why we don’t give a new — net new open guidance. And you are right that we did meaningfully improve the profitability of the WOW model, actually sequentially improved in all the line items, right, COS as a result of the Project Red Eye initiatives, COL as a result of a more efficient and streamlined operation, labor scheduling and all that. O&O in terms of smallware, utilities and a little bit A&P as well.

So we do see a meaningful improvement in the profit. With this said, the profitability of WOW model for the converted store is still slightly less than the Pizza Hut as a brand overall, still less than the main model. What is exciting is for the new stores, as Joey mentioned, right, we opened around 15 new stores for WOW. The capital expenditure is somewhere between RMB 650,000 to RMB 850,000. And the sales performance initially was quite encouraging. And obviously, there might be some honeymoon effect there. So with the current sales level, the margin is actually pretty satisfactory. But we will continue observing the performance after the honeymoon period. And once we get more concrete performance of both the new model — sorry, the new WOW store as well as the converted store, we’ll provide more guidance on the financials as well as net new open for this particular model.

But in a nutshell, we are quite encouraged by the WOW model development. It’s one of the major breakthroughs over the past few years for Pizza Hut, and we continue to develop the model. Thank you, Lillian.

Operator: Our next question comes from the line of Anne Ling from Jefferies.

Kin Shun Ling: Also questions on Pizza Hut. I just wonder what will be the potential ultimate goal in terms of like restaurant margin and as well as operating margin. If I take a look at like all the way back in year 2013, it can be as high as KFC, right, with 19% restaurant margin and 15% operating margin. But of course, it is a very different business model as well and a different price point, more high end. So my question is based on the current model, what would it take to further improve the operating margin as well as the restaurant margin? Or it is not realistic for me to aim at that kind of target over time?

Adrian Ding: Anne, thank you for the question. I would like to leverage this opportunity to do a little bit of advertising for our Investor Day this November in Shenzhen. Obviously, at that time, we’ll provide some more longer-term guidance, potentially including the Pizza Hut restaurant margin. But just to briefly address your question, right, speaking of Pizza Hut margin this year, as I mentioned in prepared remarks, for second half, we expect the restaurant margin to slightly increase year-over-year for the second half. And with a pretty significant outperformance in the first half by 110 basis points in restaurant margin expansion. For the full year, the Pizza Hut restaurant margin is actually improving pretty moderately and pretty nicely.

And then speaking of mid- to long run on Pizza Hut margin, we do see opportunities for improvement in all the 3 key line items for Pizza Hut margin. And that’s why in the previous earnings, we did mention that in the mid- to long run, hopefully, Pizza Hut restaurant margin will improve to somewhere between where it is today and KFC. So speaking of COS, right, last year, the Pizza Hut COS was roughly 32.7%. This year, we guided year-over-year improvement in COS. But for the longer term, our optimal COS range is always 31% plus or minus 1%. So there’s a good room for potential improvement there. For COL, currently, it’s slightly north of 28% for Pizza Hut COL. And in the mid- to long run, given the efficiency improvement, given the streamlined operations, given the automation and centralized of the processes, et cetera, we do see a little bit of COL improvement potential there as well.

And then for O&O, for A&P, right, as I mentioned in previous earnings, although we don’t disclose the exact A&P split by the 2 brands, but Pizza Hut A&P is a bit higher than KFC and then we do see potential there. Depreciation, right, our Pizza Hut previous capital expenditure per store was RMB 1.2 million per store. And this quarter, as you noticed in our presentation, it’s lower to RMB 1.1 million to RMB 1.2 million per store already. So it’s 5% to 10% down already. But if you think about the WOW store development, right, the capital expenditure for WOW store is RMB 650,000 to 850,000 per store. So with all that, you can expect the depreciation for Pizza Hut to also improve over the years to come. So all in all, I would say there is good room for improvement for mid- to long run for restaurant margin.

We have not yet given any guidance on a quantitative or figure level, but we might do so in November. So let me advertise for Investor Day again, and thank you for your question.

Operator: We will now take our next question from the line of Chen Luo from Bank of America.

Chen Luo: Congrats again on the results. So my question is again related to the online platform’s delivery subsidy war starting from Q3. So is it fair to say that the majority of the subsidies are borne by the platforms, and we only share a very limited portion of the subsidies? That’s all my question.

Adrian Ding: Thank you, Luo Chen. So in terms of the subsidy and whether the merchant contribute to the subsidy, it’s actually rather dynamic. In general, as you can imagine, the bigger merchants or bigger brands like ourselves do enjoy more favorable subsidies and do enjoy a more favorable subsidy split. So sometimes the subsidy comes at the entirety of the platform’s expense. Sometimes we do share a split. Given it’s very commercially sensitive, we are not able to give exact guidance on the split, but you can imagine for the larger merchants like ourselves, we do enjoy more favorable subsidy arrangement and subsidy split. Hopefully, that address your question, Luo Chen.

Chen Luo: Just a follow-up question, if I may. So is it fair to say that the online platform subsidies won’t have any major impact on our margins in Q2?

Adrian Ding: Well, Luo Chen, so we don’t give quarterly guidance on margin. But for second half, right, as I mentioned, for KFC, we do expect the restaurant margin to be relatively stable for the second half year-over-year. We do expect Pizza Hut restaurant margin to slightly increase for the second half year-over-year. This guidance actually took into account the subsidy by the aggregators and the current delivery dynamics. But for Q3 and Q4 split, we are not giving the guidance. But I do want to give a reminder that quarter 4 is typically our smaller quarter with a smaller sales and smaller profitability. So it’s a bit more volatile there.

Operator: Our next question comes from the line of Brian Bittner from Oppenheimer & Company.

Brian John Bittner: Congrats on same-store sales turning positive in 2Q. A big piece of this at KFC was the average check change. Average check went from 4% drag in the first quarter to a 1% tailwind in this quarter. Can you just talk more specifically on what drove that trend change from 1Q to 2Q? And do you anticipate average check at KFC to remain positive in 3Q and 4Q and into ’26?

Adrian Ding: Thank you, Brian. So indeed, KFC’s ticket average was CNY 38 for quarter 2, which is enjoying a 1% tailwind. The strong growth in smaller orders caused a downward trend in TA for both delivery and dine-in, as I mentioned in the prepared remarks. But this was offset by a higher delivery mix, which carries a higher ticket average for delivery. So the mix impact actually more than offset the drop in TA in both the channels. For second half, we actually expect the downward trend in TA for both the delivery and dine-in to continue, and we aim to contain the Y-o-Y decline to low single digit overall for KFC in the second half and maintain a relatively stable restaurant margin. So in other words, the impact of the decrease in TA for both the dine-in and delivery channel in the second half more than offset the increase in delivery mix and thereby, the TA for KFC will have a slight decrease year-over-year.

And what I would like to caution is this decrease in TA is not necessarily caused by the promotion intensity or discounts. It’s more caused by the mix and the incremental small orders we’re getting for both the dining and delivery channels. For instance, if you think about KCOFFEE, the average TA is only mid-teens RMB, right? But that’s incremental, and that helps our incremental sales and profit. That’s definitely — it’s rational for us to definitely do as much as a business like that as possible, right? And similarly for breakfast, right, lower TA daypart, but we do have the opportunity of lots of incremental orders, so we do a bit of that. So the mix actually is the major factor that drives the lower TA. And then we do expect the margin to be stable year-over-year in the second half for KFC.

Joey Wat: Thank you, Adrian. Let me add just 2 comments for this question, Brian. In the longer term, we are expanding our addressable market. So as Adrian mentioned, the drink, the smaller order, but also lower-tier cities. As we enter even more aggressively to lower-tier city, the ticket average there is indeed lower, but the profit margin stay, that’s key. Secondly, in our business, the ultimate focus among all is to drive the same-store transaction growth, which we are delivering. And because of our pretty robust management of margin, so with the movement of the TA, even with the headwind, we managed to protect the margin. And I think that capability is demonstrated even more in Pizza Hut than in KFC. So net-net, we do have a very balanced approach of TA profitability, big order, smaller order, but the ultimate focus is same-store transaction growth. Thank you, Brian.

Operator: We will now take our next question from the line of Christine Peng from UBS.

Yan Peng: So my question is about the CapEx. So the earlier presentation, Adrian mentioned the CapEx guidance has been lowered from now the $600 million to $700 million. So Adrian, can you share with us more details in terms of the underlying reason for the CapEx cut? And any colors for 2026 or even beyond?

Adrian Ding: Sure, Christine. Thanks for the question. So if you look at our guidance for CapEx, the previous guidance of $700 million to $800 million is assuming the same assumption of net new open of 1,600 stores to 1,800 net new stores, and that target has not changed. So the key delta there is really the CapEx per store. As you may have noticed from our presentation uploaded earlier today, the CapEx per store for KFC has lowered from RMB 1.5 million per store to around RMB 1.4 million per store. I’m talking about RMB/Yuan. And then the CapEx per store for Pizza has lowered from RMB 1.2 million per store to RMB 1.1 million per store. So with that 5% to 10% improvement in CapEx per store, we’re lowering our guidance from $700 million to $800 million to $600 million to $700 million.

Another perspective is if you think about first half actual, right, this year versus last year, there is a decrease in capital expenditure for the first half actual. And that in addition to the lower CapEx per store, indeed, the lower equity net new open for the first half is also partially contributing to that. But as we mentioned, we do expect the second half of net new open to pick up in pace, and we are quite confident in our ability to achieve our guidance of the net new open 1,600 to 1,800 range. So hopefully, that addressed your question, Christine.

Yan Peng: Yes. Can I just follow up? Any indication in terms of the trend beyond in 2026 and beyond? Will this trend be continuing, meaning that in the future, should we expecting $600 million, $700 million of CapEx per year? Or is there any further room to cut the CapEx?

Adrian Ding: Sure, sure. I mean I was originally planned to give this guidance in November. But I think qualitatively, you are right that going forward for capital expenditure per year, it will be similar to our guidance for this year. And then we are keeping our equity net new open relatively stable year-over-year. And then obviously, franchising is incremental on top of that. And obviously, franchising is not taking any capital expenditure. So hopefully, with that in mind, with the improvement in profitability, operating cash flow, with a relatively stable capital expenditure, our free cash flow will increase at a nice pace. Thank you, Christine.

Operator: Our next question comes from the line of Sijie Lin from CICC.

Sijie Lin: So I have one question on the franchise mix because we are seeing the franchise mix of store opening quickly achieved our previous guidance. So when we decide whether to open franchise store, will we decide to open one franchise store instead of one company-owned store because of macro uncertainty or we decide to open one franchise store only because this location is only suitable for a franchise store in the foreseeable future. I’m asking this because after all, the profit contribution of one franchise store is less than one owned store, right? So trying to understand how to achieve the optimal balance and maximize profit.

Joey Wat: Thank you, Sijie. The context of accelerating franchisee store is based on one alignment within our company, which is the franchise store are incremental because our equity store actually are fairly profitable. So it would make sense to our business if we open incremental franchise. So there are 2 types of franchise stores we are talking about. And internally, we are quite clear about the focus and strategy. One is the lower-tier cities stores that are probably more effective to be managed by franchisee and sort of our management efficiency in those locations are not as good as franchisee, and those are one type of incremental franchise store. So lower-tier city. Second is strategic channels, such as certain store in sort of high traffic sort of the high-speed rail location or tourist location, certain sites that we could not obtain, but the franchisee has. So those are what we call strategic channel franchisee store. These are the 2 focus.

Operator: In the interest of time, we will take our last question from Ethan Wang from CLSA.

Yushen Wang: So my question is on competition because it seems many other restaurants or drinks company are being pretty active in this round of delivery subsidy battle. But for us, it seems we’re just doing things our own way. And Joey mentioned the company has learned a lesson back in 2017. So I’m just wondering when everyone else is doing a lot of promotions in some way may sacrifice the margin, trying to take market share. What’s our take on that? And at the same time, do we think the competition environment actually worsens in the second quarter? That’s my question.

Joey Wat: Thank you, Ethan. Well, the China market is always very competitive. It’s just in different forms and shape. So quarter 2 happened. It’s slightly unexpected, but thank God that we have learned a few lessons. And one lesson, as I mentioned earlier, one lesson we learned is we don’t buy sales. Back to 2017, KFC business was very robust, and we have a nice balance of the incremental sales we can get versus the margin. And Pizza Hut actually, that was before I managed the Pizza Hut business, was going a bit quite aggressive to get the subsidies to get the incremental sales. But then by 2018, obviously, when the subsidy was pulled, then the business sales suffered quite a bit. So we have seen how things play out. So by the time quarter 2, this platform competition happened, we know that we have to have a good balance.

And the bottom line is we don’t buy sales. And we took our time to learn in a small scale about how the sort of the numbers work. And we realized that the focus for the hyper competition was on the smaller order, mainly the drinks. But we also work out the certain threshold of the ticket average. We need to protect the price integrity, we need to protect. Otherwise, it just does not work. The numbers don’t work. So we took our time to test the dynamic between different moving pieces, and then we figure out what to do. And I think so far, we have maintained a good balance between the incremental sales in delivery and also the price equity, the price perception. But at the same time, set it up the business in a way that we also see how to grow the delivery business in the long term, particularly via our Super App, our own delivery — our own takeaway business, et cetera, et cetera.

So I think overall, we see the balance — as a result, we see the balanced growth of the sales and protect the margin and nice OP growth. Adrian, any further comments?

Adrian Ding: No, I think that’s pretty much all of it.

Joey Wat: Thank you Ethan.

Adrian Ding: Thank you Ethan.

Operator: Thank you, Joey, and also Adrian. This concludes our Q&A session. Before we end the call, we are delighted to announce that our Investor Day will be hosted on November 17 in Shenzhen this year. If you’re interested in joining, please contact the IR team. Thank you for joining the call today. Thank you all.

Adrian Ding: Thank you.

Joey Wat: Thank you.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect your lines.