Yum China Q2 2025 Earnings Report

Yum China EPS Results

• Actual EPS: $0.58
• Consensus EPS: $0.57
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.55

Yum China Revenue Results

• Actual Revenue: $2.79 billion
• Expected Revenue: $2.80 billion
• Beat/Miss: Missed by -$13.12 million
• YoY Revenue Growth: +4.00%

Yum China Announcement Details

• Quarter: Q2 2025
• Date: 8/5/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 5, 2025
• Conference Call Time: 7:00AM ET

Yum China (NYSE:YUMC) Holdings, Inc. owns, operates, and franchises restaurants in the People's Republic of China. The company operates through KFC, Pizza Hut, and All Other segments. It operates restaurants under the KFC, Pizza Hut, Taco Bell, Lavazza, Little Sheep, and Huang Ji Huang concepts. The company also operates V-Gold Mall, a mobile e-commerce platform to sell products; and offers online food deliver services. Yum China Holdings, Inc. was founded in 1987 and is headquartered in Shanghai, the People's Republic of China.

Yum China Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: We delivered Q2 record highs in revenue, operating profit and OP margin, with system sales up 4% and same-store sales turning positive at 1% while opening 336 net new stores.
• Positive Sentiment: KFC achieved 5% system sales growth and expanded K Coffee Cafes to over 1,300 locations, and Pizza Hut posted 2% same-store sales growth and 17% more transactions thanks to new menu innovations.
• Neutral Sentiment: Delivery now represents 45% of sales versus 38% a year ago, as Yum China uses a balanced mix of its own channels and third-party platforms to boost growth while managing costs.
• Positive Sentiment: Restaurant margin improved by 60 basis points and operating profit margin by 100 basis points year-over-year, driven by commodity cost savings, streamlined operations and lower G&A.
• Positive Sentiment: The company reaffirmed 2025 targets of 1,600–1,800 net new stores and mid-single-digit system sales growth, reduced full-year CapEx guidance to $600–$700 million and committed $3 billion in capital returns through 2026.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to Yum China's Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone.

[Operator]

You would then hear an automated message advising your hand is raised. 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 Lipps, Senior Director, Investor Relations of Yum China. Please go ahead.

[Florence Lip, Senior Director - IR at Yum China]

Thank you, operator. Hello, everyone. Thank you for joining Yum China's second quarter twenty twenty five 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.

[Florence Lip, Senior Director - IR at Yum China]

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.yamchina.com. You can also find a 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, CEO & Director at Yum China]

Hello everyone and thank you for joining us. I'm excited to share that we delivered solid results once again in quarter two. 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.

[Joey Wat, CEO & Director at Yum China]

First, our emphasis on both same store sales and system sales growth is bearing fruit. Quarter two same store sales growth turned positive at 1%. Same store transactions grew for the tenth consecutive quarter. We achieved this while opening three thirty six net new stores in a quarter. System sales growth reached 4%, showing a sequential improvement of two percentage points.

[Joey Wat, CEO & Director at Yum China]

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 $3.00 4,000,000 US dollars. By brand, KFC remained resilient, achieving 5% system sales growth and a very healthy restaurant margin in quarter two.

[Joey Wat, CEO & Director at Yum China]

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 K Coffee Cafe, 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.

[Joey Wat, CEO & Director at Yum China]

Pizza Hut margins also improved in the first half through our efforts to streamline and automate operations and enhance 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 1,000,000,000 total transactions in the first half, setting a new record.

[Joey Wat, CEO & Director at Yum China]

At KFC, we added creative tweezers to our well loved classic products like Zinger, Xianah Jituebob. In Q2, for a limited time, we launched a new flavour, Crazy Spicy Zinger, Song Na Jituebob. 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 such as Jiangxi and Sichuan, crazy spicy zinger sales were especially high.

[Joey Wat, CEO & Director at Yum China]

At Pizza Hut, we took our thin crust pizza to a new level and showcased our expertise. This new thin crust pizza, Sozo Baozi pizza, handcrafted with lighter dough, features a 10 inches 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.

[Joey Wat, CEO & Director at Yum China]

For limited periods each year, we offer our customers an indulgent meal at an excellent value. This time the menu featured juicy Tomahawk Sticks flavour packed seafood, exotic durian pizza, and more. The campaign generated genuine excitement and threw in a wave of new and young customers eager to savour 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.

[Joey Wat, CEO & Director at Yum China]

By partnering with beloved classics like Hello Kitty and Pokemon, we sold over 4,000,000 new 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 quarter two, delivery sales were around 45% of the total sales mix, up from 38% in quarter two last year. The growth was driven mainly by dues on our own channels and increased promotions on delivery platforms.

[Joey Wat, CEO & Director at Yum China]

We are open to working with all platforms, but at our own pace. Our goal is to serve customers where they are.

[Joey Wat, CEO & Director at Yum China]

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 K Coffee 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.

[Joey Wat, CEO & Director at Yum China]

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, CFO at Yum China]

Thank you, Joey. Let me start with KFC. In quarter two, KFC system sales increased 5% year over year. Same store sales grew 1%. Our same store transaction index remain even with last year.

[Adrian Ding, CFO at Yum China]

The ticket average increased by 1% to 38 Yuan. 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 $292,000,000 We added two ninety five net new stores in quarter two, bringing our total to 12,238 stores.

[Adrian Ding, CFO at Yum China]

New store payback remained healthy at two years. New stores bring us closer to our customers and our side by side module K Coffee Cafe increases the number of occasions we can serve them. This quarter, we opened 300 k Coffee cafes, bringing our total to 1,300 locations nationwide. Average cups sold at K Coffee cafes continue to increase in the quarter, bolstered by our menu innovations and growth in delivery. This summer, our ice sparkling Americano became increasingly popular, representing over half of beverage sales in June.

[Adrian Ding, CFO at Yum China]

We offered a wide range of sparkling flavors from our signature apple flavor to our new lychee brandy flavor. K Coffee 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 twenty twenty five 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.

[Adrian Ding, CFO at Yum China]

Same store sales growth turned positive to 2%. Same store transactions grew significantly by 17. The ticket average was 76 Yuan, 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 two grew by 3%.

[Adrian Ding, CFO at Yum China]

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 were later. We expect both factors to normalize in the second half of the year.

[Adrian Ding, CFO at Yum China]

Quarter two marks the fifth consecutive quarter of year over year margin expansion for Pizza Hut. Our enhanced operational efficiency offset the impact of all UKE 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 two to three years.

[Adrian Ding, CFO at Yum China]

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.

[Adrian Ding, CFO at Yum China]

The latest CapEx per store range from $6.50 ks yuan to $8.50 ks yuan. With streamline 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 two P and L. System sales grew 4% year over year, within the range of a full year target. Same store sales grew 1% turning positive.

[Adrian Ding, CFO at Yum China]

Our restaurant margin was sixteen point one percent sixty basis points higher year over year. Savings in cost of sales and occupancy or other costs offset increases in cost of labor. Cost of sales was 31%, 50 basis points lower year over year. Ongoing benefits from Project Redeye along with favorable commodity prices contributed to the improvement. We passed some of the savings onto customers offering great value for money.

[Adrian Ding, CFO at Yum China]

Cost of labor was 27.2%, 90 basis points higher year over year due to higher rider costs as a percentage of sales. While we continue to lower rider costs per delivery order, the higher delivery mix led to higher rider costs overall. Non rider costs as a percent of sales remain 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.

[Adrian Ding, CFO at Yum China]

As a result of cost optimizations in a number of areas, notably utilities and streamlined operations. G and A expenses were 4.7% of revenue and 30 basis points lower compared to 5% in the prior year. Project Fresh Eye generated incremental benefits year over year. OP margin was 10.9%, 100 basis points higher year over year, driven by improved restaurant margin and G and A. Operating profit was $3.00 $4,000,000 growing 14% year over year.

[Adrian Ding, CFO at Yum China]

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 $215,000,000 growing 1% year over year. As a reminder, we recognized $6,000,000 less interest income in quarter two 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 $14,000,000 in quarter two, compared to a positive impact of $6,000,000 in quarter two last year.

[Adrian Ding, CFO at Yum China]

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 $536,000,000 to shareholders, including $356,000,000 in share repurchases and $180,000,000 in dividends. For the 2025, we announced our share repurchase agreements totaling $510,000,000 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 $1,200,000,000 in 2025.

[Adrian Ding, CFO at Yum China]

We remain committed to returning $3,000,000,000 to shareholders from 2025 through 2026. On top of the $1,500,000,000 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 two years, taking into account factors such as stock price, market conditions, and our cash needs. Our cash positions remain healthy with $2,800,000,000 in net cash as of the end of the quarter.

[Adrian Ding, CFO at Yum China]

Finally, turning to our 2025 outlook. Despite the complex and fluid market conditions, we are reiterating our full year targets 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 glass openings and fewer store closures.

[Adrian Ding, CFO at Yum China]

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 moderate 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.

[Adrian Ding, CFO at Yum China]

This range is also applicable to the second half. Predicting same store sales growth is more difficult as consumer spending remains rational. For quarter three, we're working hard to achieve eleven 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 sales levels year over year in the second half.

[Adrian Ding, CFO at Yum China]

Regarding delivery, we maintain 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 resulting higher rider costs. Our balanced and nimble approach enable us to drive sales while preserving price integrity and protecting margins.

[Adrian Ding, CFO at Yum China]

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 face tougher comparisons as more meaningful benefits from Project FreshEye and Redeye were already in last year's space in the second half. Additionally, rider costs driven by a higher delivery mix continue to be a headwind. For KFC, our aim is to maintain relatively stable restaurant margins.

[Adrian Ding, CFO at Yum China]

For Pizza Hut, we expect restaurant margin to slightly improve year over year, considering the impact of streamline operations, partially offset by higher delivery costs and a higher base versus the first half. With G and A percentage improving a bit, we expect Yum China core OP margin to also slightly improve. As quarter four 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're revising our full year CapEx guidance down from around 700,000,000 to $800,000,000 to 600,000,000 to $700,000,000 mainly due to lower CapEx per store.

[Adrian Ding, CFO at Yum China]

With that, let me pass it back to Joey for her closing remarks.

[Joey Wat, CEO & Director at Yum China]

Thank you, Adrian. Our end to end digitization initiative 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.

[Joey Wat, CEO & Director at Yum China]

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 tackle problems with innovative solutions. To support promising projects, we set up a 100,000,000 Yuan Young China Frontline Innovation Fund and committed to making AI Day an annual event. Our employees are embracing new technologies like Gen AI, and by doing so, they help us further deepen our strategic moat.

[Joey Wat, CEO & Director at Yum China]

Our end to end digitisation is just that. It starts at our customers, extends to our RGMs, and all the way back to our suppliers, and touches everything in between customer service, our membership programmes, store operations, store management, shared service functions, logistics centres, and upstream suppliers. We look forward to sharing more details during our upcoming Investor Day in November. Before we turn to Q and A, let me recap the three key takeaways from today. First, we achieved solid results in quarter two, despite navigating a dynamic environment.

[Joey Wat, CEO & Director at Yum China]

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, K Coffee Cafe leverages KFC's resources to scale up. Pizza Hut's model is making meaningful progress in improving its profitability and helping us penetrate into lower tier cities.

[Joey Wat, CEO & Director at Yum China]

Our business remains resilient in a rapidly changing landscape. Our dual 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. Thanks, Joey.

[Florence Lip, Senior Director - IR at Yum China]

Now 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 and A.

[Operator]

Thank you. We will now begin the question and answer session. We will now take our first question from the line of Michelle Cheng from Goldman Sachs. Please go ahead, Michelle.

[Michelle Cheng, Managing Director at Goldman Sachs]

Hi, Joy, Adrian, Florence, thanks for taking my questions and congrats again for the very strong results. So my question is about the delivery. So we see our delivery business already grow very strong in second quarter and these also they took very solid same store sales growth in second quarter. But given the elevated the delivery platforms promotion activities into third quarter, Can you share with us any thoughts about the upside in the business and same store sales growth into third quarter? And aside from the revenue, I think you touched base a little bit regarding the margin and also higher rider cost.

[Michelle Cheng, Managing Director at Goldman Sachs]

Can you elaborate a little bit more on this impact on UE? Especially, we also heard that the platform also want brands to participate some of the promotion campaign. So this is my question. Thank you.

[Joey Wat, CEO & Director at Yum China]

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 such a dynamic or disruption is not new to us. We've been through it.

[Joey Wat, CEO & Director at Yum China]

The last time the platform competition was so intense actually was back to 2017. So we might have learned a thing or two for the quarter two. So one thing we really go back and focus on is really focus on building our core competency. So anything from food innovation, supply chain, digital, solid execution and providing value, compelling value to a customer is still the most important thing instead of buying sales. As I mentioned in my earlier prepared remarks, 70% of our sales outside the third party delivery aggregator are still within our control.

[Joey Wat, CEO & Director at Yum China]

And for Yum China's approach for quarter two, 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 to Adrian to provide more details.

[Adrian Ding, CFO at Yum China]

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.

[Adrian Ding, CFO at Yum China]

And then now and and later, I'll go through the UE outlook as well. As I mentioned in the prepared remark, 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 face 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 eleven consecutive quarters of same store transaction growth.

[Adrian Ding, CFO at Yum China]

And then coming to UE, we believe the main impact from delivery aggregators subsidy war is our COL or rider cost. For our 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 and O given this is related to UE as well.

[Adrian Ding, CFO at Yum China]

For COS, we expect it to improve year over year for the full year with the ratio to be between 3132% for YAMC and for KFC as well. For Pizza Hut, as I mentioned in one of the previous Q and As in the earning 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'll also dynamically adjust our promotional intensity depending on market condition and competitive dynamics, obviously. And lastly, in terms of O and O occupancy and other costs, that as percentage of sales is likely to slightly improve year over year for the second half as well.

[Adrian Ding, CFO at Yum China]

We continue to explore optimization opportunities to offset cost increases. So overall from restaurant margin perspective, as I mentioned in the prepared remark, for KFC, we expect that to be stable, relatively stable year over year for the second half. And we expect PISA'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. Thank you.

[Michelle Cheng, Managing Director at Goldman Sachs]

Yeah, Very clear. Thank you, Joey. Thank you, Adrian. Congrats again.

[Operator]

Thank you. We will now take our next question from the line of Lillian Liu from Morgan Stanley. Please ask your question.

[Lillian Lou, Equity Research Analyst at Morgan Stanley]

Thank you. Hey, Joey, Adrian and Florence. I have a question about the new format. Think Joey mentioned this is very important for driving long term growth, in particular for Pizza Hut Vault. 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 Vowel performance?

[Lillian Lou, Equity Research Analyst at Morgan Stanley]

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're achieving? Or any targets we have on the profitability and also the growth pace? Thank you.

[Joey Wat, CEO & Director at Yum China]

Thank you, Lillian. Mild content is very exciting. Start our first store, I think, last May.

[Joey Wat, CEO & Director at Yum China]

Last year. And then by now, we have over 20 stores now. And, you know, all the fundamentals, manual, 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 open in cities that do not have. So it's a pretty new model in New City.

[Joey Wat, CEO & Director at Yum China]

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. This is a much higher number of new cities compared to previous years. And PISA Vow 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 royalty city and now we have one.

[Joey Wat, CEO & Director at Yum China]

So that is incredibly exciting. And on top of many other things, in addition to that's why we suggest that 2024 with the inflection point and thus more opportunity. So, I'll pause here. Adrian, do you have a bit more?

[Adrian Ding, CFO at Yum China]

Sure, sure. So, in terms of the guidance on nano open for Wow store, Lillian, we are not giving guidance for nano 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 walk the model. And that's why we don't give a manual open guidance. And you are right that we did meaningfully improve the profitability of the Wow model, actually sequentially improve in all the line items, right?

[Adrian Ding, CFO at Yum China]

COS as a result of the Project Redeye Initiatives, COL as a result of more efficient and streamlined operation, labor scheduling and all that. O and O in terms of smallware utilities and the A and P as well. So, you know, we do see a meaningful improvement in the profit. With this said, the profitability of a Wow model for the converted store is still slightly less than, you know, the Pizza Hut as a brand overall, still less than the main model. What is exciting is for the new stores, as Joey mentioned, we opened around 15 new stores for a while.

[Adrian Ding, CFO at Yum China]

The capital expenditure is somewhere between $6.50 ks RMB to $8.50 ks RMB. 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'll continue observing the performance after the honeymoon period.

[Adrian Ding, CFO at Yum China]

And once we get more concrete performance of both the new model for 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.

[Lillian Lou, Equity Research Analyst at Morgan Stanley]

Thanks a lot, Joey and Adrian. Thanks.

[Operator]

Thank you. Our next question comes from the line of Anne Ling from Jefferies. Please ask your question.

[Anne Ling, Managing Director at Jefferies]

Thank you. Thank you. Hi, management team. Also questions on Pizza Hut. Just wonder what will be the potential ultimate goal in terms of restaurant margin and as well as operating margin.

[Anne Ling, Managing Director at Jefferies]

If I let you know take a look at, like, all the way back, back in the year 2013, it can be as high as KFC, Right? You know, it was 19%, restaurant margin and 15% operating margin. But, of course, you know, it is a very different business model as well, and a different price point, you know, a more, more high end. So my question is that, you know, based on the current model, what would it take, you know, to further improve the, the operating margin as well as the restaurant margin? Or, you know, it is not realistic for me to aim at that kind of target over time? Thank you.

[Adrian Ding, CFO at Yum China]

Hi, Anne. Thank you for the question.

[Anne Ling, Managing Director at Jefferies]

Hi.

[Adrian Ding, CFO at Yum China]

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's restaurant margin. But just to briefly address your question, right? Speaking of Pizza Hut's 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 eleven, one hundred and ten basis points in restaurant margin expansion, for the full year, the Pizza Hut's restaurant margin is actually improving pretty moderately and pretty nicely.

[Adrian Ding, CFO at Yum China]

And then speaking of mid to long run Pizza Hut's margin, you know, we opportunities for improvement in all the three 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's restaurant margin will improve to somewhere between where it is today and KFC. So speaking of Ksc, right, last year the pTASCOS was roughly 32.7%. This year we guided a year over year improvement in Ksc, 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.

[Adrian Ding, CFO at Yum China]

For COL, currently it's slightly north of 28% for PISAL COL And in the mid to long run, given the efficiency improvement, given the streamline operations, given the automation and centralized of the processes, etcetera, we do see a little bit of a COL improvement potential there as well. And then for O and O for AMP, right? As I mentioned in previous earnings, we don't disclose the exact AMP split by the two brands, but Pizza Hut AMP is a bit higher than KFC, and then we do see potential there. Depreciation, our previous capital expenditure per store has a 1,200,000.0 RMB per store. And this quarter, as you notice in our presentation, it's lower to 1.1 to 1,200,000.0 per store already.

[Adrian Ding, CFO at Yum China]

So it's like five to 10% down already. But if you think about the Wow store development, right? The couple of standards for Wow store is $6.50 ks to $8.50 ks per store. So with all that, you can expect a 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.

[Adrian Ding, CFO at Yum China]

We have not yet give 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 that question.

[Anne Ling, Managing Director at Jefferies]

Okay. Thank you. Thank you.

[Operator]

Thank you. We will now take our next question from the line of Chung Luo from Bank of America. Please go ahead.

[Chen Luo, Analyst at Bank of America]

Hi, Joey and Adrian. Congrats again on the results. So my question is again related to the online platforms delivery subsidy war starting from Q3. So is it fair to say that the majority of the subsidies are formed by the platforms and we only share a very limited portion of the subsidies? That's all my question. Thank you.

[Adrian Ding, CFO at Yum China]

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 more favorable subsidy split. So sometimes the subsidy comes out to adding 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 are doing a more favorable subsidy arrangement and subsidy split. Hopefully that address your question, Tien.

[Chen Luo, Analyst at Bank of America]

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, CFO at Yum China]

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 margins to be relatively stable for the second half year over year. We do expect Pizza Hut's 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 four is typically our smaller quarter with a smaller sales and smaller profitability. So, it's a bit more volatile there. Thank you.

[Chen Luo, Analyst at Bank of America]

Okay, got it. That's very helpful. Thanks and congrats again.

[Operator]

You. Our next question comes from the line of Brian Bittner from Oppenheimer and Company. Please go ahead.

[Brian Bittner, MD & Senior Analyst - Restaurants at Oppenheimer & Co. Inc.]

Hi. Thank you. And, yeah, 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 four percent drag in the first quarter to a 1% tailwind in this quarter.

[Brian Bittner, MD & Senior Analyst - Restaurants at Oppenheimer & Co. Inc.]

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 2026? Thanks.

[Adrian Ding, CFO at Yum China]

Thank you, Brian.

[Adrian Ding, CFO at Yum China]

So indeed KFC's ticket average was 38 for quarter two, which is enjoying 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 remark. But this was offset by a higher delivery mix, which carries a higher ticket average for delivery. The mix impact actually more than offset the drop in TA in both the channels. For second half, we actually expect, you know, the downward trend in TA for both the delivery and dining to continue.

[Adrian Ding, CFO at Yum China]

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, other words, the impact of the decrease in TA for both the dining 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 with discounts, it's more caused by the mix and incremental small orders we're getting for both the dining and delivery channels. For instance, if you think about K Coffee, the average TA is only mid teens RMB, But that's incremental and that helps our incremental sales and profits. That's definitely, it's rational for us to definitely, do as much as business like that as possible, right?

[Adrian Ding, CFO at Yum China]

And similarly for breakfast, right? It's a 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, CEO & Director at Yum China]

Thank you, Adrian. Let me add just two comments for this question, Brian. In the longer term, we are expanding our addressable market. So as Adrian mentioned, the drinks, the smaller order, but also lower tier cities. As we enter even more aggressively to lower tier cities, the ticket average there is indeed lower, but the profit margins stay, that's key.

[Joey Wat, CEO & Director at Yum China]

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 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]

Right. Thank you. We will now take our next question from the line of Christine Peng from UBS. Please go ahead.

[Christine Peng, Head - Greater China Consumer Sector at UBS Group]

Thank you, management, for addressing my question. So my question is about the CapEx. So the earlier presentation, Adrian mentioned the CapEx guidance has been lowered from now the 600,000,000 to $700,000,000 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, CFO at Yum China]

Sure, Christine. Thanks for the question. So if you look at our guidance for CapEx, the previous guidance of 700,000,000 to 800,000,000 is assuming a same assumption of menu open of 1,600 stores to 1,800 menu 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 1,500,000.0 per store to around 1,400,000.0 per store.

[Adrian Ding, CFO at Yum China]

I'm talking about RMBYuan. And then the CapEx per store for pizza has lowered from 1,200,000.0 per store to 1,100,000.0 per store. So with that five to 10% improvement in CapEx per store, we're lowering our guidance from 700 to 800,000,000 to 600 to 700,000,000. 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.

[Adrian Ding, CFO at Yum China]

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 you know, 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 manual open 1600 to '18 100 range. So hopefully that address your question, Christine.

[Christine Peng, Head - Greater China Consumer Sector at UBS Group]

Yes, thank you. Can I just follow-up any indication in terms of the trend beyond 2020 in 2026 and beyond, Would this trend be continuing meaning that in the future, should we expecting 600,000,700 million dollars of CapEx per year? Or is there any further room to cut the CapEx? Thank you, Adrian.

[Adrian Ding, CFO at Yum China]

Yes.

[Adrian Ding, CFO at Yum China]

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

[Joey Wat, CEO & Director at Yum China]

Thank you, Adrian.

[Operator]

Thank you.

[Operator]

Our next question comes from the line of Sijie Lin from CICC. Please ask your question.

[Sijie Lin, Analyst at China International Capital Corporation (CICC)]

Thank you, Joey and Adrian. So, have one question on the franchise mix, because we are seeing the franchise mix of store opening quickly achieved our previous guidance. So, will we decide whether to open one 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 own store.

[Sijie Lin, Analyst at China International Capital Corporation (CICC)]

So trying to understand how to achieve the optimal balance and maximize profit. Thank you.

[Joey Wat, CEO & Director at Yum China]

Thank you, Suzie. 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 two types of franchise stores we are talking about and internally we are quite clear about the focus and strategy.

[Joey Wat, CEO & Director at Yum China]

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, of the high speed rail location or tourist location, certain sites that we could not obtain but the franchisee had. So those are what we call strategic channel franchisees store. These are the two focus.

[Sijie Lin, Analyst at China International Capital Corporation (CICC)]

Thank you, Joy.

[Joey Wat, CEO & Director at Yum China]

Thank you, Cynthia.

[Operator]

Thank you. In the interest of time, we will take our last question from Ethan Wong from CLFA. Please go ahead.

[Ethan Wang, Equity Research Analyst at CLSA Limited]

Thank you. Good evening. So my question is competition because it seems many other restaurants or drinks company are being pretty active in this round of delivery subsidy battle. But for us, since 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.

[Ethan Wang, Equity Research Analyst at CLSA Limited]

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. Thank you.

[Joey Wat, CEO & Director at Yum China]

Thank you, Ethan. Well, China market is always very competitive. It's just in different forms and shape. So quarter two 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 cells.

[Joey Wat, CEO & Director at Yum China]

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 PISAHA actually, that was before I managed the PISAHA business, was going a bit quite aggressive to get the subsidies, to get incremental sales. But then by 2018, obviously when the subsidy was pooled, then the business sales suffered quite a bit. So we have seen how things play out. So by the time quarter two, this platform competition happen, we know that we have to have a good balance.

[Joey Wat, CEO & Director at Yum China]

And the bottom line is we don't buy sales. And we took our time to learn a small scale about how the sort of the numbers were. And we realized that the focus for the hyper competition was on the smaller order, mainly the trains. But we also were out the certain threshold of the ticket average. We need to protect the price integrity need to protect otherwise.

[Joey Wat, CEO & Director at Yum China]

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, it up the business in a way that we also see how to grow the delivery business in the long term, particularly why our Super App, our own delivery, our own takeaway business, etcetera, etcetera. So I think overall, see the balance as a result, we see the balance growth of the sales and protect the margin and nice OP growth. Adrian, any further comment?

[Ethan Wang, Equity Research Analyst at CLSA Limited]

I think that's pretty much all of it.

[Joey Wat, CEO & Director at Yum China]

Thank you, Ethan.

[Adrian Ding, CFO at Yum China]

Thank you, Ethan.

[Ethan Wang, Equity Research Analyst at CLSA Limited]

Thank you, Joey.

[Florence Lip, Senior Director - IR at Yum China]

You, Joey. Also, Adrian. This concludes our Q and A session. Before we end the call, we are delighted to announce that our Investor Day will be hosted on November 17 in this year. If you're interested in joining, please contact the IR team.

[Florence Lip, Senior Director - IR at Yum China]

Thank you for joining the call today. Thank you all.

[Joey Wat, CEO & Director at Yum China]

Thank you. Thank you.

[Operator]

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

Participants

Executives

• Florence Lip, Senior Director - IR
• Joey Wat, CEO & Director
• Adrian Ding, CFO

Analysts

• Michelle Cheng, Managing Director at Goldman Sachs
• Lillian Lou, Equity Research Analyst at Morgan Stanley
• Anne Ling, Managing Director at Jefferies
• Chen Luo, Analyst at Bank of America
• Brian Bittner, MD & Senior Analyst - Restaurants at Oppenheimer & Co. Inc.
• Christine Peng, Head - Greater China Consumer Sector at UBS Group
• Sijie Lin, Analyst at China International Capital Corporation (CICC)
• Ethan Wang, Equity Research Analyst at CLSA Limited