Yum China Holdings, Inc.

Good day and thank you for standing by. Welcome to YumChina's second quarter 2025 earnings conference call. At this time, all participants are in the listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising, your hand is raised. To withdraw your question, please press star 1-1 again. 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 YumChina.

Please

go ahead. Thank you, operator.

Hello, everyone. Thank you for joining YumChina's second quarter 2025 earnings conference call. On today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Adrian Ding. I'd like to remind everyone that our earnings call and investment 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 a 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 .yumchina.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 -over-year growth results exclude the impact of foreign currency, unless otherwise noted. Now I would like to turn the call over to Joey Watt,

CEO of YumChina. Joey? 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 YumChina team, we achieved second quarter record highs in revenue, operating profit, and OP margins. Our dual-focus strategies have played a crucial role. 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 10th consecutive quarter. We achieved this while opening 336 net new stores in a quarter. System sales growth reached 4%, showing a sequential improvement of two percentage points. This aligns with the -single-digit range we targeted for the full year. At the same time, our margins and profits increased significantly. Despite our large scale, restaurant margins improved by 60 basis points and OP margins by 100 basis points year over year. Operating profit grew 14% to US$304 million. Five brands, KFC remained resilient, achieving 5% system sales growth and a very healthy restaurant margin in quarter two. 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 profits, both online and offline. Pizza Hut sustained its momentum, achieving 2% same-store sales growth in quarter two. Our new menu resonated with consumers, contributing to a 17% increase in same-store transactions. The brand now comprises over 3,800 stores and 900 cities, having entered around 150 new cities during the past year. Pizza Hut's margins also improved in the first half through our efforts to streamline and automate operations and enhance supply chain efficiency. 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 twisters to our well-loved classic products like Zinger, In quarter two, for a limited time, we launched a new flavor, crazy spicy Zinger. The extra spicy chicken and eye-catching red tint drove excitement. Total Zinger sales soared by over 30% during the promotion period. In spicy loving provinces 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, 手作薄底 pizza, handcrafted with lighter dough, features a 10-inch size that allows for more cheese and toppings. This pizza is perfectly crispy and satisfying. Customers love it. Pizza Hut also brought back our popular All You Can Eat campaign. For limited periods each year, we offer our customers an indulgent meal at an excellent value. This time, the menu featured juicy Tomahawk steak, some 蒸牛排, flavor packed seafood, exotic durian pizza, and more. The campaign generated genuine excitement and drew in a wave of new and young customers eager to savor the diverse and abundant choices. Emotional value is equally important to our customers. On Children's Day, we achieved the highest daily sales yet in 2025. By partnering with beloved classics like Hello Kitty and Pokemon, we sold over 4 million meal sets with delightful toys during the promotion. These collaborations sparked social buzz and attracted a wide audience, both children and adults. The star of the show was a Hello Kitty-shaped camera toy, which became an instant hit. In 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 deals on our own channels and increased promotions on delivery platforms. We are open to working with all platforms, but at our own pace. Our goal is to serve customers where they are. By June, all our brands were listed on major third-party delivery platforms. Leveraging platform traffic, we increased exposure for our emerging businesses, such as K-Coffee Cafe, and attracted new customers to our core brands. We used a balanced approach, driving top line while protecting margins. In addition to capturing sales opportunities in a disciplined manner, we carefully manage price perception and pursue other long-term benefits. As a reminder, sales outside the delivery aggregators account for around 70% of our total sales. Our own channels, including SuperApp and MiniPrograms, offer exciting, exclusive deals and membership privileges, continuing to enhance member stickiness. Let me now turn the call over to Adrian to discuss our results in detail. Afterward, I will share additional color on our technology initiatives. Adrian?

Thank you, Joey. Let me start with KFC. In quarter two, KFC system sales increased 5% -over-year. Same-store sales grew 1%. Our same-store transaction index remained even with last year. The ticket average increased by 1% to 38 yuan. Strong growth in smaller orders caused a downward trend in the ticket averages for both delivery and dying. 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% -over-year to $292 million. We added 295 new stores in quarter two, bringing our total to 12,238 stores. New store payback remained healthy at two years. New stores bring us closer to our customers, and our -by-side module, KFC, increases the number of occasions we can serve them. This quarter, we opened 300 KFC, bringing our total to 1,300 locations nationwide. Average cups sold at KFC continue to increase in the quarter, altered by our manual innovations and growth in delivery. This summer, our eye-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. KFC 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. Sainsore sales growth turned positive to 2%. Sainsore transactions grew significantly by 17%. The ticket average was 76 yuan, 13% lower -over-year. These results align with our strategic focus on map market positioning and are supported by healthy margin expansion. System sales in quarter two 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 were later. We expect both factors to normalize in the second half of the year. Quarter two marks the fifth consecutive quarter of -over-year margin expansion for Pizza Hut. Our enhanced operational efficiency offset the impact of our -can-e campaign. Retro margin expanded slightly to .3% and operating profit grew by 15% -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. We remain confident in achieving double-digit percentage net new store growth for Pizza Hut in 2025. Pizza Hut wild stores are making progress. We saw a meaningful improvement in profitability for the converted wild stores. We also opened new wild stores in over 10 new cities where Pizza Hut has no existing presence. The latest capex per store ranged from $650K yuan to $850K yuan. With streamlined operations and lower entry price points, our wild 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&L. System sales grew 4% -over-year, wasting the range of a full-year target. Same-store sales grew 1%, turning positive. Our restaurant margin was 16.1%, 60 basis points higher -over-year. Savings in cost of sales and occupancy or other costs offset increases in cost of labor. Cost of sales was 31.0%, 50 basis points lower -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. Cost of labor was 27.2%, 90 basis points higher -over-year due to higher rider costs as 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 percentage of sales remain stable -over-year. And our efforts to optimize operations offset low single-digit wage inflation. Occupancy and other was 25.7%, 100 basis points lower -over-year as a result of cost optimizations in a number of areas, notably utilities and streamlined operations. G&A expenses were .7% of revenue and 30 basis points lower compared to .0% in the prior year. Project Fresh Eye generated incremental benefits -over-year. Our OP margin was 10.9%, 100 basis points higher -over-year, driven by improved restaurant margin and G&A. Operating profit was $304 million, growing 14% -over-year. Core OP also grew 14% -over-year. Effective tax rate was 25.8%, 60 basis points higher -over-year, primarily due to the increased cash repatriation resulting in higher withholding tax. Net income was $215 million, growing 1% -over-year. As a reminder, we recognized $6 million less in interest income in quarter two this year due to a lower cash balance resulting from the cash we returned to shareholders. Our -to-market equity investment also had a negative impact of $14 million in quarter two compared to a positive impact of $6 million in quarter two last year. Diluted EPS was $0.58, growing 5% -over-year, or 15% excluding -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 two 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 targets for the net new store openings and system sales growth. We are revising our full-year outlook on restaurant margin and core OPE 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 moderate increase within these ranges over the next few years. With our store expansion plans unchanged, our target of mixed 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 three, 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 sales levels year over year in the second half. 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 makes resulting 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 face tougher comparisons as more meaningful benefits from Project FreshEye and RedEye were already in last year's base 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. For Pizza Hut, we expect restaurant margin to slightly improve year over year, considering the impact of streamlined operations partially offset by higher delivery costs and a higher base versus the first half. With G&A percentage improving a bit, we expect YomChina 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 up performance 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 to $800 million to $600 to $700 million, mainly due to lower CapEx per store. With that, let me pass it back to Joey for her closing remarks.

Thank you, Adrian. Our -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 YomChina 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 100 million yuan YomChina 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 mode. Our -to-end digitization 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 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 three key takeaways from today. First, we achieved solid results in quarter two despite navigating a dynamic environment. Same-store sales growth turned positive. System sales growth sequentially improved. Restaurant margins 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 VOW 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 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.

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&A. Thank you. We will now begin the question and answer session. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. We will now take our first question from the line of Michelle Chang from Goldman Sachs. Please go ahead, Michelle.

Hi, Joey, Adrian,

and 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 lead to a very solid same-door sales growth in second quarter. But given the elevated delivery platform promotion activities into third quarter, can you share with us any thoughts about the upside in the business and same-door 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 these impacts on UE? Especially we also heard that the platform also wants brands to participate in some of the promotion campaigns. So this is my question. Thank you. 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 dynamic or disruption is not new to us. We've been through it. 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 focused on building our core competency. So anything from food innovation, supply chain, digital, solid institution and providing value, compelling value to a customer is still the most important thing is that our buying sales. As I mentioned in my earlier prepared remarks, 70 percent of our sales outside the third party delivery aggregator are still within our control. And for for for young China's approach for quarter two, we have adopted a balanced approach, you know, balanced approach in the short term to drive the top line, protect the margin and preserve the price integrity of our brand, which is incredibly important actually. But in the long term, we also, you know, look at how to build the long term benefit to ensure sustainable growth throughout the last few months. Interesting dynamics with that out our path to Asia and to provide more details.

Sure. Thank you, Joey. Thank you, Michelle. I think Joey summarized pretty well on the delivery dynamics and our philosophy. And I'll briefly comment on the outlook for the second half related to our question, Michelle. And then now and later I'll go through the outlook as well. As I mentioned the prior remark predicting 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 sales index back in the second half of last year. With this said, we are working hard to achieve a steady sales levels year over year, as I mentioned the prepared remark and 11 concept quarters of same sort transaction growth. And then coming to you, we believe the main impact from delivery aggregators subsidy war is our .O.L. writer cost for .O.L. We face continued headwind from a higher writer cost with higher delivery mix, even with a lower cost per delivery order, the writer cost as percent of sales are expected to increase. We aim to maintain non-writer cost stable offsetting the low single digit wage inflation through more streamlined operations. Now I'll also briefly comment upon .O.S. and O.O. given this is related to you as well. For .O.S. we expect it to improve year over year for the full year with the ratio to be between 31 and 32 percent for YUMC and for KFC as well. For Pizza Hut, as I mentioned one of the previous Q&A's in the earnings core, we expect a full year .O.S. to be 32 to 33 percent. In the second half, we're lacking 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 conditions and competitive dynamics, obviously. And lastly, in terms of O.O. occupancy and other costs, that as 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 remark, 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, the O.P. margin will slightly improve in the second half as well. So hopefully that addresses your question, Michelle. Thank you.

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

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

Hey, thank you. Hey, Joey, Adrian and Florence. I have a question about the new format. Since Joey mentioned this is very important for driving long-term growth, in particular for Pizza Hub V.O. For this year and next year, given that it seems we have more confidence about the Pizza Hub V.O. 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're achieving or any targets we have on the profitability and also the growth pace? Thank you.

Thank you, Lillian. The most exciting part is among the over 200 stores, 10 stores are new and they open in cities that do not have a platform. So it's a 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 the first half of the year, KFC opened stores in 300 new cities and Pizza Hub opened in 150 cities. This is a much higher number of new cities compared to previous years. And Pizza Hub V.O. model will be good to help Pizza Hub penetrate into lower tier cities because we know that and we have a very clear understanding internally that between the KFC and Pizza Hub, the Delta is 1500 new cities. And historically, the traditional Pizza Hub model is 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 that, that's why we suggest that 2024 was the inflection point and thus more opportunity. So I'll pause here, Adrian, if you have a bit more.

Sure, sure. So in terms of the guidance on a new open for wild store, Lillian, we're not giving guidance for an annual open for this particular model, given it's a new model. And, you know, especially given its potential significance within the Pizza Hub brand, you know, we do take time to develop and further iterate in one of the models. And that's why we don't give a new manual open guidance. And you are right that we did meaningfully improve the profitability of the wild model, actually, you know, sequentially improve in all the line items, right. .O.S. as a result of the project Red Eye initiatives, .O.L. as a result of a more efficient and streamlined operation, labor scheduling and all that. And, you know, in terms of small wear utilities and the AMP as well. So, you know, we do see a meaningful improvement in the profit. With this said, the profitability of a wild 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 wild. The capital expenditure is somewhere between 650K RMB to 850K RMB. And, you know, the sales performance initially was quite, you know, quite encouraging. And, you know, obviously there might be some honeymoon effect there. So, you know, with the current sales level, the margin is actually pretty, pretty satisfactory. But we'll continue observing, you know, the performance after the honeymoon period. And once we get more concrete, you know, performance of all the new models, third, the new wild store as well as the converted store, we'll provide more guidance on the financials as well as the new open for this particular model. But in a nutshell, we are quite encouraged by the wild 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.

Thanks a lot, Joey and Adrian.

Thanks.

Thank you.

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

Thank you. Thank you. Hi, management team. Also questions on Pizza Hut. I just wonder, you know, what will be the, like, you know, potential, like, you know, ultimate goal in terms of, like, you know, restaurant margin and as well as operating margin. If I, you know, take a look at, like, you know, all the way back, you know, back in the year 2013, it can be as high as KFC, right, you know, with 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, more high end. So my question is, you know, based on the current model, what would it take, you know, to further improve 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.

Hi, Ann. 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. You know, obviously, at that time, we'll provide some more longer term guidance, you know, 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, prepare remark for second half, we expect the restaurant margin to slightly increase the over year for the second half. And with a pretty significant outperformance in the first half by 11, 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, you know, we do see 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 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 a year over year improvement in COS. But for the longer term, you know, our optimal COS range is always 31 plus or minus 1%. So there's a, you know, 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, you know, given the efficiency improvement, given the streamlined operations, given the automation and centralized, you know, of the processes, etc. So we do see a little bit of COL improvement, you know, potential there as well. And then for O&O, for AMP, right, you know, as I mentioned in previous earnings, although 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, you know, our Pizza Hut previous capital expenditure per store is 1.2 million RMB per store. And this quarter, as you notice in our presentation, it's lower to 1.1 to 1.2 million per store already. So it's like, you know, five to 10% down already. But if you think about the wild store development, right, the capital expenditure for wild store is 650k to 850k per store. So with all that, you can expect a depreciation for Pizza Hut to also improve, you know, over the years to come. So all in all, you know, 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 quantitative or figure level, but we might do so in November. So let me advertise for you Mr. Day again. And thank you for that question. Okay.

Thank you. Thank you.

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

Hi, Joey and Aiyun. Congratulations on the results. So my question is again related to the online platform 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. Thank you.

Thank you, Luo Chen. So in terms of the subsidy and whether the merchant contributes to the subsidy, it's actually rather dynamic. You know, 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 to add the entirety of the platform's expense. Sometimes we do share a split, you know, 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, you know, we are doing more favorable subsidy arrangement and subsidy split. Hopefully that addresses your question, Luo Chen.

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 Q3?

Well, Luo Chen, so, you know, we don't give quarterly guidance on margin, but for second half, right, as I mentioned, for KFC, we do expect the retro margin to be relatively stable for the second half year over year. We do expect people to have some margin to slightly increase for the second half year over year. This guidance actually took into account the subsidy by the aggregators and, you know, 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 smaller sales and smaller profitability. So it's a bit more volatile there.

Thank you. OK, got it. That's a very helpful thing. Congrats again.

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

Thank you. And yeah, congrats on same store sales turning positive into Q. A big piece of this at KFC was the average check change. Average check went from 4 percent drag in the first quarter to a 1 percent tailwind in this quarter. Can you just talk more specifically on what drove that trend change from one Q to two Q? And do you anticipate average check at KFC to remain positive in three and four Q and into 26? Thanks. Thank you, Brian.

So indeed, KFC's ticket average was 38 for quarter two, which is enjoying one percent tailwind. You know, the strong growth in smaller orders caused a downward trend in TA for both delivery and dying. As I mentioned, the prepared remark, but this was offset by a higher delivery mix, which carries a higher ticket average for delivery. The mix impact actually one offset the dropping in both channels for second half. We actually expect the downward trend in TA for both delivery and dying to continue. And we aim to contain the YOY decline to low single digit overall of the 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 dying 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 this count. It's more caused by the mix and incremental small orders we're getting for both the dying and delivery channels. For instance, if you think about K coffee, you know, the average TA is only mid teens, R&D, right. But incremental and that helps our incremental sales and profit. That's definitely, you know, it's rational for us to definitely do as much as a business like that as possible. And similarly for breakfast, right. It's a lower TA day part. But, you know, 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.

Thank you, Adrian. Let me add just two comments for this question, Brian. In the longer term, we are expanding our addressable bond market. So as Adrian mentioned, the drink, the smaller order, but also lower tier city. As we enter even more aggressively to lower tier city, the ticket average there is indeed lower. But the profit margin stays. 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 we manage to protect the margin. And I think that capability is demonstrate even more than in KFC. So net net, we 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.

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

Thank you, management, for addressing my question. So my question is about the key packs. So the earlier presentation, Adrian mentioned the key packs guidance has been lowered from nowadays 600, 700 million. So Adrian, can you share with us more details in terms of the underlying reason for the key packs card and any colors for twenty twenty six or even beyond?

Sure, Christine. Thanks for the question. So if you look at our guidance or capex, the previous guidance of 700 to 800 million is assuming a same assumption of menu open of 1600 stores to 1800 menus to work. And that target has not changed. So the key delta there is really the capex pursue. As you may have noticed from from our presentation uploaded earlier today, the capex for pursue of a KFC has lowered from one point five million per store to around one point four million per store. I'm talking about R&B UN and then the capex pursue of a pizza has lowered from one point two million per store to one point one million per store. So with that five to ten percent improvement capex per store, we're lowering our guidance from 700 to 800 million to 600 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, you know, in addition to the lower capex pursue, indeed, the lower equity menu open for the first half is also partially contributing to that. But, you know, as we mentioned, we do expect the second half of menu open to pick up in pace and we are quite confident in our ability to achieve our guidance of the menu open 1600 to 1800 range. So hopefully that addresses your question, Christine.

Yeah, thank you. Can I just pull up any indication in terms of the trend beyond 2020 in 2026 and beyond? Will this trend be continuing, meaning that in the future, should we be expecting 600, 700 million of key packs per year or is there any further room to cut the key packs? Thank you, A.

Sure, sure. I mean, I was originally planned to give this guidance in November, but, you know, I think qualitatively you're right. But going forward for capital expenditure per year will be similar to our guidance for this year. And then, you know, we are keeping our equity menu open relatively stable year over year. And then obviously, franchising is incremental, you know, on top of that, obviously, franchising is not, you know, 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.

Thank you, Adrian. Thank you.

Next question comes from the line of Si Jie Ling from CICC. Please ask your question.

Thank you, Joey and Adrian. 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 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 a 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. Thank you.

Thank you, Si Jie. The context of accelerating franchise 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 stores. So there are two 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 franchisees. And sort of our management efficiency in those locations are not as good as franchisees. And those are one type of incremental franchise stores. So lower tier cities. Second is strategic channels, such as certain stores 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 had. So those are what we call strategic channel franchisees. So these are the two to focus.

Thank you, Joy. Thank you, Si Jie. Thank you. In the interest of time, we will take our last question from Ethan Wang from CLSA. Thank you.

Good evening. So my question is competition, because it seems many other restaurants or drinks companies 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 Joy mentioned the company has learned the 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. Thank you.

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 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 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 incremental sales. But then by 2018, obviously, when the subsidy was pulled, then the business self-suffer quite a bit. So we have seen how things play out. So by the time quarter two, 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 were out there. So we took our time to test the dynamic between different moving pieces. And then we figured 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 of the drinks. The price perception. But at the same time, you know, set it up, the business in a way that we also see how to grow the delivery business in the long term, particularly while 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 balance growth of the sales and protect the margin and nice growth. Adrian, any further comments?

I think that's pretty much all of it. Thank

you, Ethan.

Thank you, Ethan. Thank you,

Joey. Thank you, Joey. And Adrian. This concludes our Q&A session. Before we end the call, we are delighted to announce that our Invest Today 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.

Thank you.

Thank

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