Q2 2025 Yum China Holdings Inc Earnings Call
Good day, and thank you for standing by. Welcome to Yum China Holdings, Inc.'s second quarter 2025 earnings conference call.
At this time, all participants are in a listen-only mode.
Press star 1 1 again.
Please be advised that today's conference is being recorded.
I'm now pleased to hand the conference over to your first speaker today, Miss Florence Lip, Senior Director of Investor Relations at Yum China. Please go ahead.
Thank you, Operator. Hello everyone. Thank you for joining Yum China's second quarter 2025 earnings conference call. On today's call, our CEO, Ms. Joey Wat, and our CFO, Mr. Adrian Ding.
I would 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 four 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 il.mychina.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.
Hello everyone, and thank you for joining us.
I'm excited to share that we delivered solid results once again in Q2.
Thanks to the dedication of the entire Yamcha team.
We achieved second quarter record highs in revenue, operating profit, and operating margin.
Our dual focus strategies have played a crucial role.
First, our emphasis on both Sims or cells and systems of growth is bearing fruit.
Quarter 2, same. So cell growth turned positive at 1%.
Same-store transactions grew for the 10th consecutive quarter.
We achieved this while opening 336 net new stores in the quarter.
Systems of growth reached 4%.
Showing a sequential improvement of 2 percentage points.
This aligns with the mid-single-digit range we targeted for the full year.
At the same time.
Our margins and profits increased significantly, despite our large scale.
Restaurant margin improved by 60 basis points and operating margin by 100 basis points year-over-year.
And profit grew 14% to $304 million.
Vibrant.
KFC, remained resilient.
Achieving 5% system sales growth and a very healthy restaurant margin in Q2.
The brand now operates over 12,000 stores in more than 2,400 cities.
Having entered around 300 new cities during the past year.
We are rolling out innovative modules, such as K Coffee cafes leveraging KFC, store space, various install resources, and membership.
To drive incremental sales and profits.
Both online and offline.
Pizza Hut sustained. Its momentum.
Achieving 2% simple 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 in 900 cities.
Having entered around 150 new cities during the past year.
Pizza 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.
KFC and Pizza Hut are to capture the growth potential in China.
Our sales initiative will be instrumental in driving our results.
By offering innovative and good food at great value, we achieved over 1 billion total transactions in the first half.
Setting a new record.
At KFC, we add creative twists to our well-loved classic products like the Zinger.
In Q2, for a limited time, we launched a new flavor: Crazy Spicy Zinger.
Chicken and eye-catching red tint.
Cell sales soared by over 30% during the promotion period.
In spicy, loving provinces, such as Johnny and Sutan, crazy spicy Zinger sales were especially high.
A Pizza Hut. We took our thin crust pizza to a new level and showcased our expertise.
This new thin crust pizza is 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 has also brought back a popular "all you can eat" campaign.
For a limited period each year, we offer our customers an indulgent meal at an excellent value.
This time, the menu featured juicy Tomahawk steaks, some on your pie.
Flavor. Pack seafood. Exotic. Durian pizza and more.
The campaign generated genuine excitement and brought in a wave of new and young customers 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 Pokémon, we sold over 4 million new sets of delightful toys during the promotion.
These collaborations spark excitement and attract 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 order to deliver, sales were around 45% of the total sales mix.
Up from 38% in the quarter to last year.
The growth was driven mainly by sales 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 increase exposure for our emerging businesses.
Such as K, Coffee Cafe, and attracted new customers to our core brands.
We use a balanced approach to driving top line growth while protecting margins.
In addition to capturing sales opportunities in a disciplined manner, we carefully managed price, perception, and pursued other long-term benefits.
As a reminder, sales outside the delivery aggregators account for around 70% of our total sales.
Our own channels, including the super app and mini programs, offer exciting, exclusive deals and membership privileges.
continuing to enhance member stickiness.
Let me now turn the call over to Adrian to discuss our results in detail. Afterward, I will share additional color on our technology initiatives agent.
Thank you, Joey.
Let me start with KFC.
In Q2, care fee system sales increased 5% year-over-year.
Same store, sales grew 1%.
Our same-store transaction index remained even with last year.
The ticket average increased by 1% to $38.
Strong growth in smaller orders caused the downward trend in the ticket averages for both delivery and dining.
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 streamlined operations.
Operating profit grew 10% year-over-year to $292 million.
We added 295 net new stores in Q2.
Bringing our total to 122,238 stores.
New store, payback remaining healthy. At 2 years.
New source. 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 300K coffee cafes.
Bringing our total to 1,300 locations nationwide.
Average cups sold at K Coffee. Cafes continue to increase in the quarter.
Altered by our menu, innovations and growth in delivery.
This summer, our ICE Sparkling Americano became increasingly popular.
Representing over half of average sales in June.
We offered a wide range of sparkling flavors.
From our signature Apple flavor to our new Lite Brandy flavor.
Cake and 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.
When raising our 2025 target from the previous 1,500 to 1,700 locations?
Let's now turn to Pizza Hut.
Pizza Hut has sustained this growth trajectory since reaching an inflection point in 2024.
Same for sales. Growth turned positive to 2%.
Same sort of transactions grew significantly by 17%.
The ticket average was 761.
13% lower year-over-year.
With our strategic focus on mass market positioning, we are supported by healthy margin expansion.
System cells in Q2 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's store portfolio.
We closed some larger, underperforming stores and opened new, smaller stores.
The total store operating weeks were also affected by the timing of the closures and openings.
Store closures can occur earlier, while store openings are scheduled for later.
We expect both factors to normalize in the second half of the year.
Quarter 2 marked the 5th consecutive quarter of year-over-year margin expansion for Pizza Hut.
To enhance operational efficiency and offset the impact of all-you-can-eat campaigns.
Restaurant margin expanded slightly to 13.3%.
And operating profit grew by 15% year over year.
Has reached 3,864 stores.
With the addition of 95 net new openings in the second quarter.
New store payback remained healthy at 2 to 3 years.
We remain confident in achieving double-digit percentage net new store growth for Pizza Hut in 2025.
Pizza Hut. Our doors 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 ranges from $650,000 to $850,000.
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 Q2 P&L.
Just himself School 4% year-over-year.
In the range of a full year, Target.
Same-store sales grew 1%, turning positive.
A restaurant margin was 16.1%.
60 basis points, higher year-over-year.
Sales and occupancy, along with other costs, offset increases in the cost of labor.
Cost of sales was 31.0%.
50 basis points, lower yield
Ongoing benefits from Project Red Eye, 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 year-over-year due to higher rider costs as a percentage of sales.
We continue to lower rider cost per delivery order. The higher delivery mix led to higher rider cost 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.
Occupants in other was 25.7%.
100 basis points, lower year-over-year.
As a result of cost optimizations in a number of areas, notably utilities and streamlined operations.
GA expenses were 4.7% of revenue.
And 30 basis points lower compared to 5.0% in the prior year.
Project Fresh. I generated incremental benefits year over year.
Are op margin was 10.9%.
100 basis points higher year over year.
Driven by improved restaurant margin and G&A.
Operating profit was 304 million.
Growing 14% year-over-year.
Growth 14% year-over-year.
Rate was 25.8%.
60 basis points, higher year-over-year.
Due to the increased cash repatriation resulting in higher withholding tax.
Net income was 215 million.
Only 1% year-over-year.
As a reminder, we recognized $6 million less in interest income in Q2 this year due to a lower cash balance, resulting from the cash we returned to shareholders.
A mark-to-market equity investment also had a negative impact of $14 million in Q2 compared to a positive impact of $6 million in Q2 last year.
Diluted EPS was $0.58, growing 5% year-over-year or 15% excluding the mark-to-market equity investment impact.
Let's now move on to capital returns to shareholders.
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 fully market conditions.
We are reiterating who your targets are for the net new store openings and system sales growth.
We are revising our full-year outlook on restaurant margin and core. Op margins will reflect our first half performance and our latest expectations for the second half.
Let me provide additional color.
in terms of store openings,
We anticipate the ramp-up in new store openings in the second half of the year, with more growth openings and fewer store closures.
We have a solid pipeline and remain confident in achieving our target of 1,600 to 1,800 new force in 2025.
We expect the franchise to mix up the net new openings for the whole year 2025 to be similar to the first half.
which was 41% for KFC and 26% for Pizza Hut.
That means we'll meet our guidance of 40% to 50% for KFC and 20% to 30% for Pizza Hut ahead of schedule.
We anticipate the franchise mix of our net new stores to further moderately increase within these ranges over the next few years.
With our store expansion plans unchanged.
Our target of mixing gold digit systems and 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 consumers, spending remains rational.
For Q3, we're working hard to achieve 11 consecutive quarters of same-store transaction growth.
The ticket averages for both delivery and dining 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 increase traffic, especially for our emerging businesses.
Our sales from smaller-ticket beverage orders grew nicely.
The overall impact on our business is more limited.
Additionally.
Higher delivery mix results in higher rider costs.
Our balanced and nimble approach enables us to drive sales while preserving price integrity and protecting margins.
Let me now go through our margin expectations for the second half.
All comparisons are stated on a year-over-year basis.
While we continue to enhance operational efficiency.
We faced tougher comparisons as we saw more meaningful benefits from Project, Fresh Eye, and Red. I was already in last year's space in the second half.
Additionally.
Rider costs were driven by a higher delivery mix, which continues to be a headwind.
For KFC, our aim is to maintain relatively stable restaurant margins.
For Pizza Hut, we expect restaurant margins 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 GNA percentage improving a bit.
We expect Young China core. Op margin to also slightly improve.
As Q4 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 operating margin, to moderately improve.
On the capital side, we're revising our CAPEX guidance down from around $700 million to $800 million.
To $600 million to $700 million, mainly due to lower capex per store.
With that, let me pass it back to Joey for her closing remarks.
Our.
End to end digitization initiative.
Uh, central to our efforts to drive growth and efficiency.
We've been working on this for over a decade.
AI, both analytical and generative. It's simply our latest iteration.
In June, we have our first-ever AI Day, which featured our very first Yamcha 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.
How they proactively identified frontline needs and tackled problems with innovative solutions.
To support promising projects, we set up a $100 million Yum China Frontline Innovation Fund and committed to making AI Day and a new event.
Our employees are embracing new technologies, like Gen AI, and by doing so, they help us further deepen our strategic move.
Our end-to-end digitization is just that.
It starts with our customers, extends to our LGM's, 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 Q2, despite navigating a dynamic environment.
Same-store sales growth turned positive, with sales growth improving sequentially.
Restaurant, margin expanded year-over-year.
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.
Spending our addressable market for years to come.
For example, take Coffee Cafe Cafe, which leverages KFC's resources to scale up.
Pizza Hut's V 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 and, hence, our competitive edge.
And unlock more opportunities in China.
With that, I will pass it back to the foreign analysts. 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 *1, 1 on your telephone and wait for your name to be announced to withdraw your question. Please press *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 Chain from Goldman Sachs. Please go ahead, Michelle.
Uh, hi, uh, Joey, Adrian, Florence. Uh, thanks for, uh, taking my questions, and congrats again for the very strong results. Uh, so my question, uh, is about the delivery. So, uh, we see a delivery business already grow very strong in Q2. And, uh, these also, um, these are very solid sales growth in Q2.
Uh, but even, uh, the elevated, uh, the delivery platforms' uh, promotion activities into the third quarter. Uh, can you share with us, um, any thoughts about the upside in the business and same-store sales growth as we go into the quarter? And, uh, also aside from the revenue, I think you touched base a little bit regarding the margin and also higher rider costs, but can you, um, uh, elaborate a little bit more on these uh, impacts on YUM? Especially since we also heard that the platform uh, also wants uh, brands to participate in some of the promotion campaigns. So, uh, this is my question. Thank you.
Thank you, Michelle.
Uh, let me give some context and Asian can feel in more details. The, the biggest Dynamic for Q2 indeed is the intense, uh, delivery platform competition.
Uh, particularly in the small orders or related to drinks in our industry.
Want to provide a contest is such such a dynamic or disruption is not new to us. Uh, we've been through it, uh, the last time, uh, the platform competition was so intense, actually was back to 2017. So we might have learned a thing or 2 for, for the quarter 2.
So 1 Thing, uh, we we really go back and focus on is, 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 of buying sales
Uh, as a as, as I mentioned in my earlier prepared remarks, uh, 70% of our sales, uh, outside the third party. Delivery aggregator are still within our control.
And for, for, for Young China's approach.
Um, for quarter 2.
Uh, we have adopted a balanced approach.
Uh, you know, 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, uh, you know, look at how to build the long-term benefit, uh, to ensure sustainable growth. Throughout the last few months, interesting dynamics with that. I'll, I'll pass to Adrian to provide more details. Sure. Thank you, Joe, and thank you, Michelle.
Uh, I think Joey is summarized pretty well on the delivery dynamics and all philosophy. Uh, and I'll briefly comment on the SSG outlook for the second half related to a question, Michelle. And then now and later I'll go through the UEE outlook as well.
Uh, as I mentioned, the prepared remark predicting SSG is more difficult given the dynamic market and macro.
Consumer state rational and delivery platform dynamics are evolving. As Joey mentioned,
Um, and as a reminder, we face tough comparisons 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 steady same-store sales levels year-over-year. As I mentioned in the prepared remarks and 11 consecutive quarters of same-store transaction growth,
And then coming to UE, we believe the main impact from delivery aggregators, you know, the subsidy war is on our Co or Rider cost.
For Q2, we faced continual headwinds from a higher Rider cost.
With higher delivery mix, even with the lower cost per delivery, rider costs as a percent of sales are expected to increase.
We aim to maintain non-right stable offsetting, with low single-digit wage inflation through more streamlined operations.
Now, I'll also briefly comment upon COS and OH, given this is related to UE as well.
For COS, we expect to improve year-over-year for the full year, with the ratio to be between 31% and 32% for YUMC, and for KFC as well. For Pizza Hut, as I mentioned in one of the previous Q&A sessions in the earnings call, we expect a full year COS to be 32% to 33%.
In the second half, we're reaping more meaningful benefits from Project Red Eye last year.
Till we informed favorable commodity prices. As you can imagine, we will gradually decrease or gradually reduce.
We also dynamically adjust our promotional intensity depending on market conditions and competitive dynamics.
And lastly, in terms of occupancy and other costs,
That, as a percentage of sales, is likely to slightly improve year over year for the second half as well.
We continue to explore optimization opportunities to offset our cost increases.
So overall, from a restaurant margin perspective, as I mentioned in the prepared remarks for KFC, we expect that to be relatively stable year over year for the second half, and we expect Pizza restaurant margins to slightly improve for the second half.
And then, as a result, for Young China as a whole, the Russian margin will slightly improve in the second half as well. So hopefully that addresses your question, Michelle.
Thank you. Yeah, very clear. Thank you, enjoy. Thank you, Adrian. Congrats again.
Thank you.
We will now take our next question. From the line of Lillian, Lou from Morgan Stanley, please ask your question.
Opening, um, targets right now for this year and next year, given that, uh, it seems we have more confidence about the Pizza Hub 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, um, and also the growth pace. Thank you.
Thank you, Lillian. Uh, Ms. is very exciting and, um, we start our first, or I think, uh, last, uh,
May, may, may, may last year.
And then by now, uh, we have over 20 shows.
And you know, all the fundamentals, the menu, the operations, the margin, we like what we see?
And, uh, the exciting part. The most exciting part is, uh, among the over 200 stores, 10 stores are new, and they open in cities that...
Do not have.
New, new model in New City. And again, we like what we see about the cells, the margin level, um, and OP level.
And that is incredibly important for the brand. Because, um, for the 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 while the Pizza V model will be good to help Pizza Hut penetrate into lower-tier cities.
Because we talked about, we know that, and we have a very clear understanding internally that, you know, between the calcium Pizza Hut, the delta is 1,500 new cities.
And historically the traditional Pizza model. Just not sharp enough to enter the Loyalty City. And now we have 1 so that is uh incredibly exciting and and on top of many other things uh in addition to B that's why we we we suggested that 2024 was the inflation point and thus more opportunity. Uh, so I'll pause here. Agent, you have a, a bit more sure. Sure, sure.
Um, so in terms of the guidance on the opening for Wild Store, uh, Lillian, we are not giving guidance for any openings for this particular model, given its a new model and, uh, you know, especially given its potential significance within the Pizza Hut brand. You know, we do take time to develop and further iterate and evolve the model, and that's why we don't give any new menu opening guidance.
Uh and you are right that uh, you know, we did meaningfully improve the profitability of the world model actually, you know, sequentially improve in all the line items, right? Cos as a result of, you know, the project red eye initiative c, as a result of a more efficient and streamlined operation, labor scheduling and all that all, you know, in terms of a smaller utilities, uh, and a little bit of A&P as well. So, you know, we do, uh, see a meaningful Improvement in the profit with this said, the profitability of 1 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.
Um, uh, what is exciting is for the new stores, as Joey mentioned, right? We, we opened around 15 new stores, uh, for a while. Uh, the capital expenditure is somewhere between 650 K, R&B to 850 K R&B and, you know, the sales performance initially was quite, uh, you know, uh, quite uh, encouraging. And, uh, you know, obviously, there might be some honeymoon effect there. So, uh, you know, with the current sales level, the margin is
Actually, pretty, uh, pretty satisfactory. Uh, but we will continue observing, you know, the performance after the honeymoon period. Uh, and once we get more concrete, uh, you know, uh, performance of both the new model, so the new, uh, Wild Store as well as the converted store, we will provide more guidance on the financials as well as a net new open for this particular model. Uh, but in a nutshell, uh, we are quite encouraged by the Wild Model. Development is 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, Julian Adrian. Thanks.
Thank you.
Please ask your question.
Hey, thank you. Um, thank you. Hi management team. Um, also a question on Pizza Hut. Um, just wonder, you know, um, what will be the, like, you know, um, potential, like, you know, um, ultimate goal in terms of, like, you know, restaurant margin and as well as operating margin if I like, 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, um, uh, KFC. Right, and it was 19%, um, uh, restaurant margin and 15% operating margin. But of course, you know, it is a very different business model as well. Um, and a different price point, you know, um, more, uh, more high-end. Um, uh, so my question is, you know, based on the current model, um, what would it take, you know, to further improve the, um, uh, operating margin as well as the restaurant margin? Um, or, you know, is it like not realistic for me to aim at that kind of, um, target over time? Thank you.
Hi. Uh, hi and thank you for the question. Hi. Uh, I would like to leverage this opportunity to do a little bit of advertising for our investor today. This November means, and then, uh, you know, obviously, uh, 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, uh, as I mentioned in preparing, mark for a second half, uh, we expect the restaurant margin to slide in increase, the overview of.
For the second half, and with a pretty significant outperformance in the first half by 1,1110 basis points in retro margin expansion for the full year. Uh, the pizzas' retro margin is actually improving pretty moderately and nicely.
Uh, and then, speaking of mid- to long-term on Pizza Hut margin, you know, we do see opportunities for improvement in core three key line items for Pizza's margin. That's why, in the previous earnings, we did mention that, uh, in the mid- to long-term, hopefully Pizza Hut's restaurant margin will improve to somewhere between where it is today and KFC. Um, so speaking of cost, right, last year, the Pizza US was roughly 32.7%. Uh, this year, we guided the, uh, you know, year-over-year improvement in cost.
For the longer term. Uh, 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 Co currently, it's a Slightly North of 28% for, for, for Pizza Co, and in the mid to long run, you know, given the efficiency Improvement. Given the Streamline operations given the Automation and centralized, you know, of the processes Etc. Uh, we do see a little bit of Co L Improvement, uh, you know, potential there as well.
And then for 0 and 0, uh, for amp. Right. You know, as I mentioned in previous earnings, uh, although we don't disclose the exact amp split by the 2 Brands, but Pizza, how amp is a bit higher than KFC and then we do see potential there, uh, depreciation, right? You know, uh, our previous Capital standard Trip store is a 1.2 million R&B for store and this quarter. As you notice in our presentation, it's lower to 1.1 to 1 1 1, 1.1 to 1.2 million per store already. So it's a, you know, 5 to 10% down already. Uh, but if you think about the wild store development, right? The the the capital expenditure for wild store is 650 K to 850 K per store. So um with all that you can expect a depreciation for a Pizza Hut to also improve uh, you know, over the years to come. So all in all, you know, I would say there is good room for improvement for me to long run for restaurant margin. We have not yet give any guidance on
On the quantitative or figure level, uh, but we might do so in November. So let me advertise for the Investor 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 CH law from Bank of America. Please go ahead.
Uh, hi Joey. And I congratulate you on the result. Uh, so my question is, again related to the online platforms delivery subsidy war starting from Q3. Is it fair to say that the majority of subsidies are borne by the platforms, and we only share a very limited portion of the subsidies? That's all my question. Thank you.
More favorable, subsidy split. So sometimes the subsidy comes, uh, to add the entirety of the platform's expense sometimes. Uh, we do share a split, uh, 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. Uh, you know, we are do enjoy more favorable uh you know subsidy Arrangement and subsidy split. Hopefully that address your question important.
Uh, just uh, just a follow-up question, if I may. So is this fair to say that the online platform setting is, we will have any major impact on our on our margins in q.
Give uh quarterly guidance on margin but for second half, right? As I mentioned for KFC, uh, we do expect the Retro Market to be relatively stable for the second half in the over the year and we do expect people have special 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, uh, but for Q3 and Q4 split. Uh, we are not getting the guidance, uh, but I do want to give a reminder that quarter 4 is, typically our smaller quarter with a smaller sales and smaller uh, smaller profitability. So it's a bit more volatile there.
Thank you. Okay. Got it. Uh, that's very helpful. Thanks and congrats again.
Thank you.
Uh, the next question comes from the line of Brian Bittner from Oppenheimer & Company. Please go ahead.
Hi, thank you. And yeah, congrats on same-store sales turning positive in Q2, a big piece of this at KFC.
Was the average check change average? The check went from a 4% drag in the first quarter to a 1% tailwind in this quarter. Can you just talk more specifically on what drove that trend change from Q2 to Q3, and do you anticipate average check at KFC to remain positive in Q3 and Q4 and into 2026? Thanks.
so indeed KFC's, take the average was uh 3821 for quarter 2 uh which is uh you know enjoying 1% till wind
Um, you know, the strong growth in
In, uh, T.A., for both delivery and dining. As I mentioned in the prepared remarks.
Uh, but this was offset by a higher delivery mix, which carries a higher ticket average for delivery.
Uh, so the mix impact actually more than offset the, uh, dropping TA in both, uh, the channels.
Delivery and dying to continue.
And we aim to contain the year-over-year decline to low single digits overall for KFC in the second half and maintain a relatively stable restaurant margin.
So in other words, uh, 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 would like, what I would like to caution is, uh, this decrease in ta is not necessarily caused by the promotion intensity or discounts. It's more caused by the mix and incremental small orders. We're getting for both both the dining and uh, delivery uh channels. For instance, if you think about the K coffee, you know, the average ta is only mid teens R&B U, right? But that's incremental and that helps our, you know, incremental sales and and profit. Uh, that's definitely, you know, it's rational for us to definitely, you know, do as much as uh, uh, you know, business like that as possible, right? And similarly, for breakfast, right? It's a low tier, uh, Day part, uh, but uh,
You know, we do uh, Happy opportunity of lots of incremental orders so we do a bit of that. Uh, so the mix actually is the major factor that drives the lower ta um and then we do expect a margin to be stable uh year-over-year in the second half for KFC. Thank you. Um Adrian let me add just 2 comments. Um, for this question, Brian.
In the longer term.
Which we are delivering.
And because of our, uh, fully, uh, robust management of margin, with the movement of the TA, even with the, uh, headwind, uh, we managed to protect the margin. I think that capability is demonstrating even more. It is.
Than in KFC. Uh, so net. Net. We do have a very balanced approach of PA profitability, big or smaller order, but the ultimate focus is the same for transaction growth. Thank you, Brian.
Right. Thank you. We will now take our next question from the line of Christine Pong from UBS. Please go ahead.
Uh, thank you, management. Uh, for addressing my question. So my question is about the key packs. Uh, in the earlier presentation, Adrian mentioned the key packs guidance has been lowered from, nowadays, $600 million to $700 million. So Adrian, can you share with us some details in terms of the underlying reason?
R4D key packs, uh, card, and any colors, uh, for 2026 or even beyond.
Sure. Christine, thanks for the question.
Um so if you look at uh, our guidance for capex, the previous guidance of 700 to 800 million uh is assuming a same Assumption of manual. Open of 1600 stores to 1800, men used to work and that Target has not changed. So the key Delta, there is really the capex pursuer.
As you may have noticed from our presentation uploaded earlier today, the capex for the pursuit of a KFC has lowered from $1.5 million per store to around $1.444 million per store. I'm talking about R&B Un.
And then, uh, the CapEx per store for pizza has lowered from $1.2 million per store to $1.1 million per store. So with that 5% to 10% improvement in CapEx per store, we're lowering our guidance from $700 million to $800 million to $600 million to $700 million.
Uh, another perspective is if you think about first-half actual results, right, uh, this year versus last year, there is a decrease in capital expenditure for the first half actual. Uh, and that, you know, in addition to the lower capex per store, indeed, the lower equity menu opened for the first half is also partially contributing to that.
Uh, 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 manned open 1,600 to 1,800 range. So, hopefully, that addresses your question, Christine.
Yeah, thank you. Can I just follow up? Um,
Any indication in terms of the trend Beyond 2020 uh in 2026 and Beyond. With this trend, be continuing saying, meaning that in the future, should we expecting 600 700 million of key packs per year or is there any further room to cut the key packs?
Thank you. Yeah.
Sure, sure, sure. I mean, uh, I was originally planned to give this guidance in November, but, uh, you know, I think qualitatively, uh, you are right that, uh, going forward for capital expenditure per year, it will be similar to our guidance for this year. And then, uh, you know, we are keeping our equity line new open relatively stable year over year, and then obviously franchising is incremental, uh, you know, on top of that. But, and obviously franchising is not, uh, you know, taking any capital expenditure. So hopefully, with that in mind, with the improvement in 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.
Um, next question comes from the line of CIC, please. That's your question.
Install right. Uh, so I'm trying to understand how to achieve the optimal balance and maximize profit. Thank you.
Thank you. Um, the context of accelerating franchise store growth is based on, uh, one element within our company, which is that franchise stores are incremental.
Because our equity store is actually fairly profitable.
Uh, so it would make sense for our business if we open incremental franchises.
So, there are 2 types of, uh, franchise stores. We are talking about and internally. We are quite clear about the focus and strategy. 1 is the lower tier cities, uh, store that are, uh, probably more effective to be managed by franchisees. Uh, and sort of our management efficiency in those locations are not as good as franchising. And those are 1 type of increment incremental franchise store.
So lower tier City.
Uh, second is, uh, strategic channels, uh, such as certain stores, uh, in, uh, sort of, uh, high-traffic, uh, sort of, the high-speed rail locations, or tourist locations.
So, sort of sites that we could not obtain, but the franchisee has.
Uh, so those are what we call strategic channel franchises. So these are the 2-2 focus.
Thank you, Joy.
Thank you.
In the interest of time, we will take our last question from Ethan Wong from CLSA. Please, go ahead.
Thank you. Good evening. Um, so my question is, um, competition, um, because it seems many other restaurants or drinks company are being pretty active in this round of, um, delivery substitute battle. But for us since um, we're just doing things our own way and Joey mentioned. Um, the company has been a lesson back in 2017, so I'm just wondering when everyone else is doing a lot of promotions. Um, in some way, may sacrifice the margin trying to take market share, um what's our take on that? Uh, or and at the same time do we think the competition environment actually worsens? Um in the second quarter? Uh that's my question, thank you.
Thank you, Ethan. Um, well, the China market is always very competitive. It is just in different forms and shapes.
Uh, so Q2 happened and it was slightly unexpected. But, uh, thank God that we have learned a few lessons. And one lesson, as I mentioned,
Earlier, one lesson we learned is that we don't buy sales.
Uh, back to 2017. KFC business was very robust and we, we, we have a nice balance of the incremental sales. We can get versus the margin and Pizza Hut actually. Uh, that was before I managed the pizza business uh, was going a bit. Uh, quite aggressive to get the subsidies uh, to get incremental sales. Uh but then by 2018 obviously, when the substance was was the subsidy was pulled then the business sells software, quite a bit. So so we we we have seen how things play out. So by the time for the 2, this platform, comp competition happened, uh we we 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 uh, to to to learn in in a small scale uh about how the
Sort of the numbers worked. And we realized that the focus.
for the uh hyper competition was on the smaller order, mainly the drinks.
Uh, but we also work out.
There are certain thresholds for the ticket average. We need to protect the price integrity; otherwise...
It just does not work, the numbers don't work. So we took our time, uh, to to test the the, the dynamic between different moving pieces and then we figure out, you know what to do. And I think so far, we have, uh, uh, we have maintained a good balance between the incremental sales and delivery and also the price Equity, the price perception. But at the same time, uh, you know, set it up the business,
In the way that we also see, uh, how to grow the delivery business in the long term, uh, particularly while our super app our own delivery, our own, uh, takeaway business, etc. Etc. So I think uh, overall um we we see the, the, the, the balance, as a result. You see, we see the balanced growth of the sales and protect the margin and the ninth op growth Adrian. Any further comment, I think that's, uh, pretty much, uh, all of it. Thank you even. Thank you, Ethan.
Thank you. Thank you, Joe.
Thank you, Joey, and also Adrian.
This concludes our Q&A session.
And the call, we are delighted to announce that our investor day will be hosted on November 17th 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.
Thank you for your participation. In today's conference, this does conclude the program. You may now disconnect your lines.