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

Thank you, operator. Hello, everyone. Thank you for joining Yum China's Second Quarter 2025 Earnings Conference Call. On today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Adrian Ding. I'd like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release, which is available to the public through our Investor Relations website located at ir.yumchina.com. You can also find a webcast of this call and our PowerPoint presentation on our IR website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency, unless otherwise noted. Now I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. I'm excited to share that we delivered solid results once again in quarter 2. Thanks to the dedication of the entire Yum China team, we achieved second quarter record highs in revenue, operating profit and OP margin. Our dual-focused strategies have played a crucial role. First, our emphasis on both same-store sales and system sales growth is bearing fruit. Quarter 2 same-store sales growth turned positive at 1%. Same-store transactions grew for the tenth consecutive quarter. We achieved this while opening 336 net new stores in the quarter. Systems of growth reached 4%, showing a sequential improvement of 2 percentage points. This aligns with the mid-single-digit range we targeted for the full year. At the same time, our margins and profit increased significantly despite our large scale, restaurant margin improved by 60 basis points and OP margin by 100 basis points year-over-year. Operating profit grew 14% to USD 304 million. By brands, KFC remained resilient, achieving 5% system sales growth and a very healthy restaurant margin in quarter 2. The brand now operates over 12,000 stores in more than 2,400 cities, having entered around 300 new cities during the past year. We are rolling out innovative modules such as KCOFFEE Cafes, leveraging KFC store space and various in-store resources and membership to drive incremental sales and profit, both online and offline. Pizza Hut sustained its momentum, achieving 2% same-store sales growth in quarter 2. Our new menu resonated with consumers, contributing to a 17% increase in same-store transactions. The brand now comprises over 3,800 stores in 900 cities having entered around 150 new cities during the past year. Pizza Hut's margins also improved in the first half through our efforts to streamline and automate operations and enhanced supply chain efficiency. These results were driven by our 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 added creative twists to our well-loved classic products like Zinger. In quarter 2, for a limited time, we launched a new flavor Crazy Spicy Zinger. The extra spicy chicken and eye-catching promotion 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, 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 has also brought back our popular All-You-Can-Eat campaign for limited periods each year; we offer our customers an indulgent meal at an excellent value. This time, the menu featured juicy premium tomahawk steak, flavorful seafood, exotic toppings pizza and more. The campaign generated genuine excitement and drew a wave of new and young customers eager to savor diverse and abundant choices. Emotional value is equally important to our customers. On Children's Day, we achieved the highest daily sales yet in 2025 by partnering with beloved classics like Hello Kitty and Pokémon, selling over 4 million new sets with delightful toys during the promotion. These collaborations sparked significant 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 2, delivery sales were around 45% of the total sales mix, up from 38% in quarter 2 last year. The growth was driven mainly by 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 the platform's traffic, we increased exposure for our emerging businesses such as KCOFFEE Cafes and attracted new customers to our core brands. We use a balanced approach, driving top line while protecting margins. In addition to capturing sales opportunities in a disciplined manner, we carefully manage price perception and pursue other long-term benefits. As a reminder, sales outside the delivery aggregators account for around 70% of our total sales. Our own channels, including Super App and Mini programs, 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. Afterwards, I will share additional insights into our technology initiatives. Adrian?

Thank you, Joey. Let me start with KFC. In quarter 2, KFC system sales increased 5% year-over-year. Same-store sales grew 1%. Our same-store transaction index remained consistent with last year. The ticket average increased by 1% to CNY 38. Strong growth in smaller orders caused a downward trend in the ticket averages for both delivery and dine-in. This was offset by the higher delivery mix, which carries a higher ticket average, resulting in a slight increase in overall ticket average. KFC expanded its restaurant margin by 70 basis points through favorable commodity prices driven by supply chain efficiency gains and through streamlined operations. Operating profit grew 10% year-over-year to $292 million. We added 295 new stores in quarter 2, bringing our total to 12,238 stores. New store payback remained healthy at 2 years. New stores bring us closer to our customers. And our side-by-side module, KCOFFEE Cafe, increases the number of customers we can serve. This quarter, we opened 300 KCOFFEE Cafes, bringing our total to 1,300 locations nationwide. Average cups sold at KCOFFEE Cafes continued to increase in the quarter, aided by our menu innovations and growth in delivery. This summer, our Iced Sparkling Americano became increasingly popular, representing over half of beverage sales in June. We offered a wide range of sparkling flavors, from our signature Apple flavor to our new Lychee brandy flavor. KCOFFEE Cafes have been effective in driving incremental traffic, sales and profit. Given the progress we have achieved in the first half of the year, we're raising our 2025 target from the previous 1,500 to 1,700 locations. Let's now turn to Pizza Hut. Pizza Hut has sustained its growth trajectory since reaching an inflection point in 2024. Same-store sales growth turned positive to 2%. Same-store transactions grew significantly by 17%. The ticket average was CNY 76, 13% lower year-over-year. These results align with our strategic focus on mass market positioning and are supported by healthy margin expansion. System sales in quarter 2 grew by 3%. Pizza Hut's moderate system sales growth relative to its same-store sales growth was due primarily to the strategic optimization of the brand store portfolio. We closed some larger underperforming stores and opened new smaller stores. The total store operating weeks were also affected by the timing of the closures and openings. Store closures came earlier while store openings were later. We expect both factors to normalize in the second half of the year. Quarter 2 marks the fifth consecutive quarter of year-over-year margin expansion for Pizza Hut. Our enhanced operational efficiency offset the impact of the All-You-Can-Eat campaign. Restaurant margin expanded slightly to 13.3% and operating profit grew by 15% year-over-year. Pizza Hut reached 3,864 stores with the addition of 95 net new openings in the second quarter. New store payback remained healthy at 2 to 3 years. We remain confident in achieving double-digit percentage net new store growth for Pizza Hut in 2025. Pizza Hut WOW stores are making progress. We saw a meaningful improvement in profitability for the converted WOW stores. We also opened new WOW stores in over 10 new cities where Pizza Hut has no existing presence. The latest CapEx per store ranged from CNY 650,000 to CNY 850,000 with streamlined operations and lower entry price points, our WOW model broadens Pizza Hut's addressable market, enabling it to enter low-tier cities more effectively. Let me now go through our quarter 2 P&L. System sales grew 4% year-over-year, within the range of our full year target. Same-store sales grew 1%, turning positive. Our restaurant margin was 16.1%, 60 basis points higher year-over-year. Savings in cost of sales and occupancy and other costs offset increases in cost of labor. Cost of sales was 31.0%, 50 basis points lower year-over-year. Ongoing benefits from Project Red Eye along with favorable commodity prices contributed to the improvement. We passed some of the savings on to customers, offering great value for money. Cost of labor was 27.2%, 90 basis points higher year-over-year due to higher rider cost as a percentage of sales. While we continue to lower rider cost per delivery order, the higher delivery mix led to higher rider costs overall. Non-rider cost as a percent of sales remained stable year-over-year, and our efforts to optimize operations offset low single-digit wage inflation. Occupancy and other were 25.7%, 100 basis points lower year-over-year as a result of cost optimization in several areas, notably utilities and streamlined operations. G&A expenses were 4.7% of revenue, 30 basis points lower compared to 5.0% in the prior year. Project Fresh Eye generated incremental benefits year-over-year. Our OP margin was 10.9%, 100 basis points higher year-over-year, driven by improved restaurant margin and G&A. Operating profit was $304 million, growing 14% year-over-year. Core OP also grew 14% year-over-year. Effective tax rate was 25.8%, 60 basis points higher year-over-year, primarily due to the increased cash repatriation resulting in higher withholding tax. Net income was $215 million, growing 1% year-over-year. As a reminder, we recognized $6 million less in interest income in quarter 2 this year due to a lower cash balance resulting from the cash we returned to shareholders. Our mark-to-market equity investments also had a negative impact of $14 million in quarter 2 compared to a positive impact of $6 million in quarter 2 last year. Diluted EPS was $0.58, growing 5% year-over-year or 15% excluding mark-to-market equity investment impact. Let's now move on to capital returns to shareholders. In the first half of the year, we returned a total of $536 million to shareholders, including $356 million in share repurchases and $180 million in dividends. For the second half of 2025, we announced our share repurchase agreements totaling $510 million, a 43% increase from our share repurchases in the first half. Assuming a quarterly dividend of $0.24 per share, we expect to return at least $1.2 billion in 2025. We remain committed to returning $3 billion to shareholders from 2025 through 2026, on top of the $1.5 billion in cash we returned in 2024. The average annual capital return is around 8% to 9% of our market cap. We maintain flexibility regarding the split of the capital returns to shareholders between the 2 years, taking into account factors such as stock price, market conditions and our cash needs. Our cash positions remain healthy with $2.8 billion in net cash as of the end of the quarter. Finally, turning to our 2025 outlook. Despite the complex and fluid market conditions, we are reiterating our full year target for the net new store openings and system sales growth. We are revising our full year outlook on restaurant margin and core OP margin to reflect our first half performance and our latest expectations for the second half. Let me provide additional context. In terms of store openings, overall, we anticipate the ramp-up in net new store openings in the second half of the year with more gross openings and fewer store closures. We have a solid pipeline and remain confident in achieving our target of 1,600 to 1,800 net new stores in 2025. We expect the franchise store mix of the net new openings for the full year 2025 to be similar to the first half, which was 41% for KFC and 26% for Pizza Hut. That means we'll meet our guidance of 40% to 50% for KFC and 20% to 30% for Pizza Hut ahead of schedule. We anticipate the franchise mix of our net new stores to further moderately increase within these ranges over the next few years. With our store expansion plans unchanged, our target of mid-single-digit system sales growth for the full year 2025 remains in place. This range is also applicable to the second half. Predicting same-store sales growth is more difficult as consumer spending remains rational. For quarter 3, we're working hard to achieve 11 consecutive quarters of same-store transaction growth. The ticket averages for both delivery and dine-in continue to show a downward trend due to an increase in smaller orders. We aim to achieve steady same-store levels year-over-year in the second half. Regarding delivery, we maintained a disciplined approach to capturing sales. We leverage delivery platforms to enhance visibility and increase traffic, especially for our emerging businesses. While sales from smaller ticket beverage orders grew nicely, the overall impact on our business is more limited. Additionally, higher delivery mix results in higher rider costs. Our balanced and nimble approach 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 more meaningful benefits from Project Fresh Eye and Red Eye were already realized in last year's performance in the second half. Additionally, rider costs driven by the higher delivery mix continued to be a headwind. For KFC, our aim is to maintain relatively stable restaurant margins. For Pizza Hut, we expect restaurant margin to slightly improve year-over-year. Considering the impact of streamlining operations, partially offset by higher delivery costs and a higher base versus the first half. With G&A percentage improving a bit, we expect Yum China's core OP margin to also slightly improve. As quarter 4 is traditionally our low season with smaller sales, profit margins may be a bit more volatile. With our outperformance in the first half, for the full year 2025, we expect the restaurant margin for KFC and Pizza Hut as well as the company's core OP margin to moderately improve. On the CapEx side, we are revising our full year CapEx guidance down from around $700 million to $800 million to $600 million to $700 million, mainly due to lower CapEx per store. With that, let me pass it back to Joey for her closing remarks.

Thank you, Adrian. Our end-to-end digitization initiatives are central to our efforts to drive growth and efficiency. We've been working on this for over a decade. AI, both analytical and generative, is simply our latest iteration. In June, we held our first-ever AI Day, which featured our very first Yum China employee Hackathon. The enthusiasm for AI Day was extraordinary. Participating teams from across the country represented diverse backgrounds in operations, supply chain, finance, and more. I was impressed by how they proactively identified frontline needs and tackled problems with innovative solutions. To support promising projects, we set up a CNY 100 million Yum China Frontline Innovation Fund and committed to making AI Day a new event. Our employees are embracing new technologies like GenAI, and by doing so, they help us further deepen our strategic move. Our end-to-end digitization starts at our customers, expands to our RGMs, and all the way back to our suppliers, touching 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 2 despite navigating a dynamic environment. Same-store sales growth turned positive, system sales growth sequentially improved, and restaurant margin expanded year-over-year. Second, we remain confident in achieving our full year targets for 2025, including new store openings, system sales growth, and margin expansion. And lastly, our new initiatives are shaping up well, expanding our addressable market for years to come. For example, KCOFFEE Cafe leverages KFC's resources to scale up. The Pizza Hut WOW model is making meaningful progress in improving its profitability and helping us penetrate into lower-tier cities. Our business remains resilient in a rapidly changing landscape. Our 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. Operator, please start the Q&A.

We will now take our first question from the line of Michelle Cheng from Goldman Sachs.

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

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 related to drinks in our industry. What I want to provide context is such a dynamic or disruption is not new to us. We've been through it. The last time the competition was so intense was back in 2017. So we might have learned a thing or two for the quarter 2. So one thing we really focused on is building our core competency. Anything from food innovation, supply chain, digital, solid institution, and providing compelling value to our customer is still the most important thing instead of buying sales. As I mentioned in my earlier prepared remarks, 70% of our sales are outside the third-party delivery aggregators and still within our control. Our approach for quarter 2 has been a balanced approach. A 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. But in the long term, we also look at how to build the long-term benefit to ensure sustainable growth throughout the last few months, interesting dynamics. With that, I'll pass it to Adrian to provide more details.

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 your question, Michelle. As I mentioned in the prepared remarks, predicting SSG is more difficult given the dynamic market and macro. Consumers stay rational, and delivery platform dynamics are evolving, as Joey mentioned. As a reminder, we faced tough comparisons from 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 mentioned in the prepared remarks, and 11 consecutive quarters of same-store transaction growth. In terms of rider costs, we face continued headwind from higher rider costs with a higher delivery mix. Even with a lower cost per delivery order, rider costs as a percentage of sales are expected to increase. We aim to maintain non-rider costs stable, offsetting the low single-digit wage inflation through more streamlined operations. Overall, from a restaurant margin perspective, as I mentioned in the prepared remarks, we expect KFC's margin to be stable year-over-year for the second half, and we expect Pizza Hut's restaurant margin to slightly improve for the second half.

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

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

Thank you, Lillian. The WOW model is very exciting. We started our first store last May, and by now, we have over 200 stores. All the fundamental areas, including the menu, operation, and margin, we like what we see. The exciting part is among the over 200 stores, 10 stores are new and have opened in cities that do not have existing stores. So it's pretty new model in new city. Furthermore, we like what we see about the sales, margin level, and OP level. This is incredibly important for the brand because for the first half of the year, KFC opened stores in 300 new cities and Pizza Hut opened in 150 cities, which is a much higher number of new cities compared to previous years. The WOW model will be beneficial for Pizza Hut to penetrate lower-tier cities. We acknowledge that there is a significant opportunity between KFC and Pizza Hut to enter those new territories. I will pause here, and Adrian, do you have more to add?

Sure. So in terms of the guidance on net new openings for WOW stores, Lillian, we are not giving guidance for net new openings for this particular model, given it's a new model. Especially given its potential significance within the Pizza Hut brand, we take time to develop and further iterate and evolve the model. We do see meaningful improvement in the profitability of the WOW model, actually improving sequentially in all line items. With this said, the profitability of the WOW model for the converted store is still slightly less than Pizza Hut as a brand overall. What is exciting is for the new stores, as mentioned, we opened around 15 new stores for WOW. The capital expenditure is somewhere between RMB 650,000 and RMB 850,000. The sales performance initially was quite encouraging, and there might be some honeymoon effect. With the current sales level, the margin is satisfactory. We will continue observing the performance after the honeymoon period. Once we get more concrete performance of both the new WOW stores as well as the converted stores, we'll provide more guidance on the financials as well as net new openings for this particular model. Overall, we are quite encouraged by the WOW model development, which has been a major breakthrough for Pizza Hut.

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

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

Anne, thank you for the question. I would like to leverage this opportunity to do a little bit of advertising for our Investor Day this November in Shenzhen. Obviously, at that time, we'll provide some more longer-term guidance, potentially including the Pizza Hut restaurant margin. Just to briefly address your question, for the second half, we expect the restaurant margin for Pizza Hut to slightly increase year-over-year. Speaking of the mid- to long-run Pizza Hut margin, we do see opportunities for improvement in all three key line items for Pizza Hut margin. 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. In terms of COS, last year, Pizza Hut COS was roughly 32.7%. This year, we are guiding year-over-year improvement in COS. For the longer term, our optimal COS range is always 31% plus or minus 1%. So there is room for potential improvement there. For COL, currently, it is slightly over 28% for Pizza Hut COL. Given the efficiency improvement and streamlined operations, we do see potential COL improvement there as well. For O&O, we do see potential for improvement. Our capital expenditure per store for Pizza Hut was previously RMB 1.2 million, and this quarter, it has lowered to RMB 1.1 million. So it's down by 5% to 10%. If you consider the WOW store development, the capital expenditure is RMB 650,000 to 850,000 per store. So all in all, there is good room for improvement in the mid- to long-run for restaurant margin. We have not yet given any guidance on a quantitative level, but we might do so in November.

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

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

Thank you, Luo Chen. In terms of the subsidy and whether the merchant contributes to the subsidy, it's actually quite dynamic. In general, as you can imagine, bigger merchants or brands like ourselves do enjoy more favorable subsidies and do enjoy a more favorable subsidy split. Sometimes the subsidy comes at the entirety of the platform's expense; sometimes we do share a split. Given it's very commercially sensitive, we are not able to provide exact guidance on the split, but for larger merchants like ourselves, we do enjoy a more favorable subsidy arrangement. 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 Q2?

Well, Luo Chen, we don't give quarterly guidance on margin. But for the second half, as I mentioned, for KFC, we do expect the restaurant margin to be relatively stable for the second half year-over-year. We expect Pizza Hut restaurant margin to slightly increase for the second half year-over-year. This guidance takes into account the subsidy by the aggregators and current delivery dynamics. But for Q3 and Q4 split, we are not providing guidance. I do want to remind you that quarter 4 is typically our smaller quarter with smaller sales and profitability, so it can be a bit more volatile.

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

Congrats on same-store sales turning positive in Q2. A big piece of this at KFC was the average check change. Average check went from a 4% drag in the first quarter to a 1% tailwind in this quarter. Can you just talk more specifically about what drove that trend change from Q1 to Q2? And do you anticipate average check at KFC to remain positive in Q3 and Q4 and into '26?

Thank you, Brian. KFC's ticket average was CNY 38 for quarter 2, enjoying a 1% tailwind. The strong growth in smaller orders caused a downward trend in TA for both delivery and dine-in, as I mentioned in the prepared remarks. However, this was offset by a higher delivery mix, which carries a higher ticket average, resulting in a slight increase in overall ticket average. For the second half, we expect the downward trend in TA for both the delivery and dine-in to continue, and we aim to contain the year-over-year decline to low single digits overall for KFC in the second half. In other words, the impact of the decrease in TA for both dining and delivery channels in the second half will offset the increase in the delivery mix, meaning that TA for KFC is anticipated to have a slight decrease year-over-year. It's important to note that this decrease in TA is not necessarily caused by the promotion intensity or discounts; it stems from the mix and the incremental small orders we're getting for both dining and delivery. For instance, the average TA for KCOFFEE is only in the mid-teens RMB, but that's incremental, and it helps our incremental sales and profit. Similarly, breakfast is a lower TA daypart, but we have the opportunity for numerous incremental orders. Thus, the mix is the major factor that drives the lower TA. We do expect the margin to remain stable year-over-year in the second half for KFC.

Thank you, Adrian. Let me add just two comments to this question, Brian. In the longer term, we are expanding our addressable market. As Adrian mentioned, we see the growth in smaller orders and lower-tier cities. As we enter more aggressively into lower-tier cities, the ticket average there is indeed lower, but the profit margin remains key. Additionally, our ultimate focus is to drive same-store transaction growth, which we are achieving. Thanks to our robust margin management, even with the headwind of TA, we've managed to protect margins. This capability is demonstrated even more in Pizza Hut compared to KFC. In summary, we maintain a balanced approach regarding TA profitability and therefore support same-store transaction growth.

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

My question is about the CapEx. Earlier, Adrian mentioned the CapEx guidance has been lowered from $700 million to $800 million. Can you share with us more details regarding the underlying reason for the CapEx cut? And any color for 2026 or even beyond?

Sure, Christine. Thanks for the question. If you look at our guidance for CapEx, the previous guidance of $700 million to $800 million assumed the same target of net new openings of 1,600 stores to 1,800 net new stores, and that target has not changed. The key difference is really the CapEx per store. As you may have noticed from our presentation uploaded earlier today, the CapEx per store for KFC has lowered from RMB 1.5 million per store to around RMB 1.4 million per store. Specifically, for Pizza Hut, the CapEx per store has lowered from RMB 1.2 million per store to RMB 1.1 million per store. With that 5% to 10% improvement in CapEx per store, we are lowering our guidance from $700 million to $800 million to $600 million to $700 million. Additionally, we do expect net new openings to pick up in the second half. We are quite confident in achieving our guidance of net new openings within the range of 1,600 to 1,800 stores.

Yes. Can I just follow up? Any indication regarding the trend beyond 2026? Should we expect approximately $600 million to $700 million of CapEx annually, or is there further room to cut the CapEx?

Sure. I was originally planned to provide this guidance in November. Qualitatively, you are correct that going forward for capital expenditure per year, it will be similar to our guidance for this year. We are keeping our net new openings relatively stable year-over-year. Additionally, franchising will provide incremental growth without requiring capital expenditure. Therefore, with the improvement in profitability and operating cash flow, combined with relatively stable capital expenditure, our free cash flow will increase nicely.

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

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

Thank you, Sijie. The context of accelerating franchisee store openings is based on alignment within our company, which is that franchise stores are incremental because our equity stores are fairly profitable. It makes sense for our business to open incremental franchises. There are two types of franchise stores we are discussing. The first type is lower-tier city stores that are probably managed more effectively by franchisees, as our management efficiency in those locations is not as strong. The second is strategic channel locations, such as high-traffic areas like high-speed rail locations or tourist spots, which we could not obtain, but franchisees do. These are our two focus areas.

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

My question is on competition because it seems many other restaurants or drinks companies are quite active in this round of delivery subsidy battle. For us, it seems we're just doing things our own way. Joey mentioned the company has learned lessons back in 2017. I'm wondering when everyone else is doing a lot of promotions, sacrificing some margins to take market share, what is our stance? Do we think the competition environment has worsened in the second quarter? That's my question.

Thank you, Ethan. Well, the China market is always very competitive, just in different forms and shapes. So quarter 2 unfolded with a bit more unexpected intensity, but we have learned several lessons. One lesson is that we don't buy sales. In 2017, KFC's business was robust, and we maintained a healthy balance between incremental sales and margin. Conversely, Pizza Hut was quite aggressive in seeking subsidies to bolster sales, but when those subsidies were withdrawn, business suffered. By quarter 2, when platform competition intensifies, we knew we had to maintain this balance. The bottom line is we don’t buy sales, and we took our time to experiment on a small scale to understand how those numbers worked. We also realized that hyper-competition was primarily focused on smaller orders, particularly beverages. However, we identified a threshold for the ticket average. We need to protect our price integrity; otherwise, the numbers do not work. Thus far, we've successfully balanced incremental sales in delivery while maintaining price perception, which has allowed us to achieve OP growth. Adrian, do you have any further insights?

I think that's pretty much all of it.

Thank you, Ethan.

Thank you, Ethan.

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

Thank you.

Thank you.

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