Yum China Holdings, Inc. (YUMC) Q2 2026 Earnings Call Transcript

Good day, everyone, and thank you for standing by. Welcome to your China Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. Now it's my pleasure to hand the conference to Florence Slip, Senior Director of Investor Relations. Please proceed.

Thank you, Operator. Hello, everyone, and welcome to Yum China's second quarter 2026 earnings conference call. With me on the call are our CEO, Ms. Joey Watt, and our CFO, Mr. Adrian Ding. Before we begin, I will remind everyone that our remarks and investor materials contain four looking statements. These are subject to future events and uncertainties and actual results may differ materially. Please refer to these four looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filing. We will also be talking about non-GAAP financial measures. We encourage you to review the comparable GAAP measures along with the reconciliation of non-GAAP and GAAP measures provided in our earnings release, which is available on our investor relations website at ir.yamchina.com. You can also find both the webcast replay and a PowerPoint presentation on our IR website. Please note that all year-over-year growth rates discussed today exclude the impact of foreign currency unless we mention otherwise. With that, I'll now turn the call over to Joey Watt, CEO of Yum China.

Hello, everyone, and thank you for joining us. We delivered strong second quarter results. For the ninth consecutive quarter, we achieved system sales growth, operating profit growth, and OP margin expansion at the same time. I would like to thank our team again for making this possible. Revenue grew 13%. Operating profit increased 14% and diluted EPS rose 21% year-over-year, partially supported by favorable foreign exchange impacts. Excluding foreign exchange impacts, system sales grew 6% in Q2. up from 4% in quarter 1 and continued to outperform the catering industry. Same-store sales growth also improved sequentially to 1%, driven by the 14th consecutive quarter of same-store transaction growth. We opened 560 net new stores with expansion accelerating year-over-year across both equity and franchise stores. With our dual focus on innovation and operational efficiency, Q2 restaurant margins and OT margins stayed resilient despite significant cost pressure from a higher delivery mix. Our breakthrough side-by-side modules are scaling rapidly, especially in higher tier cities. KFC's K-Coffee Cafe and K-Pro are effectively capturing new customer occasions. Pizza Hut's new burger bar was well received by our customers. At the same time, KFC's small-time model and Pizza Hut's WOW are helping us penetrate lower tier cities quickly. Together with innovation in our core menus these initiatives are unlocking new opportunities for us. Let me start with Pizza Hut which makes significant progress in quarter two. Pizza Hut same store sales growth returned to positive at 1% while new store openings accelerated, almost double what we did in quarter two last year. This brings net new store openings to 381 in the first half, nearly matching our 2025 total. In April, we launched Fuhita and Shashuka on the spring menu to enrich Pizza Hut's protein platform and enhance the dyeing experience. In May, we extend our pizza category into lighter meal occasions with a new multi-grain crust and new protein and vegetable toppings . The pizza's colorful look, nutrient-packed profile, and grain-rich texture make it a best-selling crust since launch in June. We also introduced an individual-sized multi-grain pizza with less than 500 calories, helping us attract more solo and light meal diners. Beyond pizza, we are taking Pizza Hut's burger category to the next level with a new side-by-side module, Pizza Hut's burger bar. In just six months, it has expanded to more than 200 locations, contributing double-digit incremental sales and meaningful profit to parent stores pizza hut burger bar features a tight menu centered on make-to-order burgers from an open kitchen our buns are baked fresh in-store every day and our patties come straight off the griddle releasing a rich savory aroma great tasting burgers amazing value for money and a quick service model have proved very appealing to young consumers and solo diners with light investment and by utilizing space in existing stores we believe Pizza Hut's burger bar can unlock significant growth opportunities for Pizza Hut we plan to accelerate the rollout in the second half reaching 500 to 600 locations by the end of 2026 that would represent around 10% of Pizza Hut's nearly 5,000 store portfolio and we are about to reach a major breakthrough by becoming the owner of the Pizza Hut brand in mainland China after operating the brand in the market for 36 years. In the near term, the savings in license fees will enhance store economics and make Pizza Hut's restaurant margin closer to KFCs. This will enable more potential new stores to meet our payback requirement of two to three years. Over the longer term, brand ownership will give us greater strategic flexibility and allow us to respond more nimbly to market opportunities and consumer needs. While we are still reviewing our growth plan, our initial assessment points to accelerated store openings beginning next year. In 2027 and 2028, we now expect net new openings to exceed 800 per year, up from our original target of over 600. As we step up our efforts at Pisa Hut, KFC continues to be our number one growth driver delivering strong results. In quarter two, both system sales and core operating profit grew 7% year over year. Same-store sales grew 1%. in the first half KFC opened nearly 800 net new stores around 200 more than in the first half last year KFC hero products and their extensions continued to drive strong sales and repeat purchases whole chicken has become a major platform for at-home consumption generating over 2 billion in sales last year. This category has delivered double-digit growth every year since its launch in 2021 and remains on track for double-digit growth in 2026. In April, we add the aromatic paper-wrapped roast chicken to the permanent menu. It's super juicy and high in protein, appealing to consumers seeking lighter meals. Zinger is another top-selling platform for KFC. In Q2, we introduced the limited-time-over, more fragrant, spicier Zinger. The extra spicy chicken thigh, secret sauce, and toasted sesame aroma attracted younger customers. Sales were especially strong in spicy-loving provinces such as Jiangxi and Sichuan. With more regional flavors to come, we see strong potential for the Zinger category to exceed 5 billion yuan in sales by end of 2026. KFC's side-by-side modules, K-Coffee Cafe and K-Pro, continue to gain momentum and deliver incremental sales and profits. K Coffee Cafe grew to more than 3,300 locations and we are on track to reach 5,000 locations by the end of 2027. In addition to coffee offerings, K Coffee Cafe is broadening its tea and food options including more egg tart flavors and breakfast pairings to expand its addressable market KPro has expanded to over 450 locations and has proven more promising than we expected earlier this year we raised our year-end rollout target from 400 to 600 locations and we now expect to reach around 800 locations following is success in higher tier cities we are expanding K Pro into select lower tier cities beyond increasing its footprint we are capturing the growing demand for lighter meals through manual innovation in addition to our signature energy bowls we recently launched sandwiches featuring whole wheat buns and chia seeds and high protein ingredients. The sandwiches became an instant hit with good repeat purchases. In fact, more than 80% of KPro cells came from KFC members, showing the power of cross-selling and membership. Combined with our trusted food quality standards and strong value for money, Kpro is well-positioned to become a leading player in China's light meal business. Aside from new modules, KFC is also rolling out car-side pickup service to improve convenience for customers who drive. More than 8,000 KFC stores now offer either drive-through or car-side pick-ups, where our restaurant staff bring orders to designated pull-up areas. While customer awareness and habits are still in the early stage, the service is gaining traction, supported by strong repeat purchases. Over 7 million members have used this service this year, yet that still represents only 3% of our active member base, leaving significant room for growth. Let me now turn the call over to Adrian.

Thank you, Joey. Let me update key highlights by brand, starting with KFC. In Quarter 2, both KFC's same-store sales growth and system sales growth improved sequentially. System sales grew 7%, up from 5% in Quarter 1. Same-store sales grew 1%, the fifth consecutive quarter of growth. Same-store transaction grew 4%, more than offset the ticket average decrease of 3%. Ticket average was 36 yuan, lower year-on-year, mainly due to incremental smaller orders from new customer segments and locations, such as K-Coffee and K-Pro. Despite significant rider cost headwinds, KFC's restaurant margin expanded 20 basis points to 17.1% in Q2. OP margin also expanded by 20 basis points. once again demonstrating KFC's strong execution and nimble operations at scale. KFC's side-by-side modules continue to drive incremental sales and profit, while improving store economics through model iteration. K-Coffee Cafe delivered around mid-single-digit sales uplift to its parent stores, while K-Pro delivered around 20%. TAPEX for both KCoffee Cafe and KPro has come down by around half from earlier modules last year, and both are showing solid margin improvements. Now moving on to Pizza Hut. In Quarter 2, system sales grew 6% year-over-year, accelerating from 4% in Quarter 1, proven by the sequential improvement in same-store sales growth to 1%. Same-store transactions grew strongly by 13% in Q2, marking the 14th consecutive quarter of growth, offsetting an 11% ticket average decrease. Ticket average was 68 yuan, moving closer to our target range of 60 to 70 yuan in line with our mass market strategy, mainly driven by better value for money and incremental smaller orders, including those from solo diners and burger bars. Pizza Hut restaurant margin was down 40 basis points, mainly due to the increased costs associated with the higher delivery sales mix, better value for money, and expenses related to the launch of the Pizza Hut burger bar. The new initiative successfully drove incremental sales and profit with a modest margin investment. In the first half, restaurant margin was up 10 basis points year-over-year. OP margin expanded by 60 basis points, mainly driven by lower closure and impairment expenses, reflecting improved store performance. In the second half, we expect greater year-on-year improvement versus the first half in Pizza Hut's restaurant margin, as efficiency continues to improve and rider-cost headwinds soften. Moving on to store opening. We opened around 1,200 new stores in the first half, about double the pace of the same period last year and entered more than 200 new cities. Both equity and franchise store openings accelerated year over year. In the higher tier cities, we continued to densify our network, primarily through equity stores to sustain our powerful brand momentum and operational mode. At the same time, franchisees, which accounted for 40% of total annual opening in the first are unlocking incremental opportunities for us. They provide additional resources to help us expand into lower-tier cities, remote areas, and strategic locations. With franchise stores accounting for only 18% of total stores of Yum China, we're confident there are significant opportunities ahead. Let me now go through our Q2 PML. System sales grew 6% year-on-year. Same-store sales grew 1%, sequentially improved from Quarter 1. Our restaurant margin was 16.1%, in line with the prior year level. Improvement in occupancy and other costs offset growth in cost of sales and cost of labor. Cost of sales was 31.5%, 50 basis points higher year-over-year, mainly due to better value for many offerings, increased packaging cost due to a higher delivery sales mix, and Pizza Hut's new menu items, which have higher COS and are still being optimized. Commodity prices remain favorable, though the benefit was smaller than before. We also improved our procurement efficiency through menu innovation and dynamic price management. Cost of labor was 27.6%, 40 basis points higher year-on-year. Rider costs continued to increase year-on-year in Q2, driven by the strong growth in delivery sales mix, which rose from 45% last year to 54% this year. The margin impact from rider costs was 140 basis points, slightly lower than in Q1, and And we offset most of that through enhanced rural operations. Occupancy and other was 24.8%, 90 basis points lower year over year. The rent ratio improved through lease renegotiations and more favorable rent in lower tier cities. We also implemented other initiatives to enhance operational efficiency. Our OPE margin was 11.1%, 20 basis points higher year-over-year, achieving the ninth consecutive quarter of OPE margin expansion. Saving in GNA expenses helped improve OPE margins. Operating profit was $348 million, a second quarter record, growing 7% year-on-year. Net income was $244 million, up 6% year-on-year. Excluding our investment in Meituan, net income grew 3% year-on-year. Our investment in Meituan had a negative impact of $6 million in Q2 compared to a negative impact of $14 million in Q2 last year. As a reminder, we recognize $13 million less in interest income in Q2 this year due to a lower cash balance, resulting from the cash we return to shareholders and lower interest Diluted EPS was $0.70, 14% higher year-on-year, or up 10% excluding our investment in Meituan. Now moving on to our 2026 outlook, let me start with sales. Since June, we have been lapping a higher delivery sales base, and that tougher sales comparison will continue through the second half. That said, given our discipline execution last year and multiple growth drivers, we remain confident in our ability to lead the catering industry in China. July tracked broadly in line with our expectations. We are working hard to maintain positive same-store sales growth in quarter three and deliver the 15th consecutive quarter of positive same short transaction growth. Moving on to margins. Before considering the impact of the Pizza Hut deal, we expect Q3 restaurant margin to be stable to slightly positive year on year. Relative to the first half, incremental rider cost pressure is expected to moderate slightly as delivery sales mix already increased to 51% in Q3 last year. Our continued efforts to improve operational efficiency and optimize store costs, including rent, labor productivity, and capex, are expected to support margins, giving us room to reinvest in growth. We expect OP margin to be roughly in line with Q3 last year. There was a positive margin impact of about 20 basis points from some ad hoc government subsidies in Q3 2025 that are not expected to repeat in Q3 this year. Some similar subsidies were already recognized in the first half this year, though in smaller amounts. For the full year, without considering the impact of the Pizza Hut deal, we are confident in meeting our 2026 targets, which are consistent with the range we shared at our investor day last year and in February. These include same store sales index of 100 to 102, mid to high single-digit system sales growth, high single-digit operating profit growth, double-digit EPS growth, and a slight improvement in restaurant ROP margins from Yum China. Additionally, we remain on track to reach 20,000 stores by year-end. Now let's turn to the Pizza Hut deal, which is on track to close in August. list. We plan to fund this transaction primarily with debt. We expect to borrow an offshore bridge loan of around $1.2 billion equivalent for up to 12 months. For longer term financing, all options remain on the table. We'll proceed in the best interest of our shareholders and execute financing when market conditions are appropriate. We'll provide an update once our financing plan is finalized. The savings in the 3% license fee payments to Yum Brands are expected to add 2.8% to Pizza Hut's restaurant OP margins after taking VAT into account. This translates to approximately 60 basis points for Yum China overall. For Q3, we expect around 30 to 40 basis points positive impact to both Yum China's restaurant and OP margins. and for the 2026 full year, around 20 to 30 basis points. After accounting for deal-related costs, financing interest expense, tax, and without considering the potential higher growth of Pizza Hut, we expect the due to be accretive to diluted EPS, slightly accretive in 2026, and mid-single-digit accretive in 2027 and 2028. In terms of capital returns to shareholders, we remain on track to return $1.5 billion to shareholders in 2026, equivalent to around 10% of our current market cap. In the first half, we return $718 million, including $515 million through share repurchases and $203 million through quarterly cash dividends. We stepped up share repurchases in Q2, reflecting what we believe was a relatively attractive share price. From 2027 onward, we remained committed to returning around 100% of annual free cash flow after subsidiary's dividend payment to non-controlling interests. This translates to an average of $900 million to $1 billion plus in 2027 and 2028, and exceed $1 billion in 2028 and beyond. With ownership of Pizza Hut brands supporting faster growth, we also see potential upside to our future free cash flow. With that, let me hand it back to Joey for her closing remarks.

Thank you, Adrian. Looking ahead, we are firing on all cylinders to drive sales and expand our addressable market a number of our initiatives have each reached or about to reach the meaningful milestone of 1 billion yuan in sales or around 1% of young China sales K Coffee Cafe generated around 1 billion yuan in sales last year we target to double that to nearly 2 billion yuan this year KPRO is expected to call triple in sales year-over-year this year and exceed 1 billion yuan in sales next year. KFC's drive-thru and car-side pickup are gaining strong momentum. We target to reach 1 billion yuan in sales this year. Pizza Hut burgers, a category we introduced two years ago, is also gaining popularity. We now target over 1 billion yuan in sales this year, or around 5-6% of Pizza Hut sales. We remain confident in the strength of our brand and our ability to deliver sustainable growth, even in the current dynamic environment. and we continue to see significant long-term growth potential in China. Together with our team, I look forward to achieving our growth targets for 2026 and beyond. Now, let me pass it back to Foran.

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 so much. And as a reminder, to ask a question, simply press star 1-1 to get in the queue and wait for your name to be announced. To withdraw the question, press star 1-1 again. Our first question is from Michelle Chang with Goldman Sachs. Please proceed.

Hi, Joy, Adrian, Florence. Thanks for taking my question, and congrats again for the very solid result. My question is about the overall consumption environment. and also the pricing and promotion trend. So we actually heard from many consumer companies and also looking at the macro data. Second quarter market has been turning softer and even into third quarter, it's not exciting. And definitely the weather didn't help at all. But you still deliver a very solid result in second quarter. So can you share with us your observation on the overall consumption trend? And I remember a few quarters ago, you mentioned the promotional activities has been more has been better in china but given these kind of a consumption trend do you see any rigs on the re-emergence of these pricing trend or promotion activities in the market and since we know we have an easier base on margin so still want to hear your thoughts uh how to balance this pricing trend and the promotion activities to drive the sales growth thank you thank you michelle Well, we are encouraged to see the rebound in June retail sales compare that with May actually.

And as Adrian mentioned earlier in prepare remark, July trapped broadly in line with our expectations. There was some extreme weather, but it was temporary and it had certain regional impact in July. coming back to the few trends the few few few things here worth noting consumers are still willing to spend on certain occasions they are still growing nicely and present attractive opportunity opportunities such as coffee light meal and they're willing to spend money on innovative products and experiences strong value for money and emotional value and then additional interesting trend is like we we see some stabilization in pricing trends more players are willing to take pricing reflecting a stable consumer environment and the competition between the delivery platform is more rational so these are these are positive and on top of that on top of that we continue to see ongoing increase what we call chainification China China restaurant chain chain the percentage has grown from 20% to 30% plus, and it's still relatively low compared with 60% plus in mature market. And there's also another one little trend going on is since April, the government has tightened oversight of the food delivery related to what is called Gold's Kitchen. We view this as a positive environment raising the standard of the industry and we expect to benefit from our well-established food safety which is the strategic mode for us thus Michelle young China team we are working hard to drive traffic sales and profit all at the same time and we target to maintain positive same-source growth in quarter three and deliver 15 quarter of same-source transaction growth as well. Thank you, Michelle. Thank you, Joey. That's very encouraging.

Our next question comes from Chen Lu with Bank of America. Please proceed.

Hi, Joey, Adrian, and Florence. Congrats again on the strong result for Q2. My question is focused on our Pizza Hut China brand acquisition. Just now, Adrian mentioned that there will be a 12-month bridge loan. But regarding the future refinancing plan, do we have any options in mind that we can share with investors, say whether these options may include syndicated loans or even CB? In particular, there have been some market concerns from some investors that if we are opting for CB, whether this will have some negative impact, either in terms of dilution or in terms of the share price performance. I understand that we're always trying to take a very disciplined approach, always trying to maximize shareholder value. So any comment on our future refinancing plan would be appreciated.

Sure. Thank you, Luo Chen. So indeed, as I mentioned in the previous remark, we expect to take a bridge loan of approximately $1.2 billion equivalent of up to 12 months to close the transaction first. And by the way, the closing will take place in August, as I mentioned. The bridge loan interest rate will be approximately 2%, so it will be quite favorable. And your question actually focuses on the takeoff financing or the long-term refinancing. Indeed, we think all options currently are on the table, including syndicate loans, including bonds, including CBs, et cetera, et cetera. And given you specifically asked about CB, you know, although it's actually pretty preliminary and we don't have any inclination on which instrument we take. But speaking for CB specifically, let's say even if we choose to take CB as the takeout financing option, there are different ways to minimize or reduce the dilution meaningfully, potential dilution meaningfully. For instance, the issuer can take a cap call option, thereby to increase the conversion premium from 20%, 30% to as much as 70% or 80%. That means the share price, when it only gets to 70%, 80% premium versus the time when they issue the CB, then the dilution will occur, in which case the shareholders will be pretty happy, right? The share price is 80% up. And even at that point in time, there is still an option to use net share settlement, meaning that only the indie money portion of the CB will be used, will be issuing shares. So the dilution all in all will be very limited. So that's about CB. And you can see some of the other big technology companies actually did quite similar things that's what I mentioned to minimize the dilution impact. Again, we're still studying the different long-term refinancing options. All the different options are on the table, but I just want to share more color given you all about the CD. Thank you, Luo Chen. Thank you. Really helpful.

Thank you. Our next question comes from Lilian Wu with Morgan Stanley. Please proceed.

Thank you for the chance to ask a question. Hey, Zhou Yi, Adrian, and Florence. Yes, congrats again on the strong result. My question is focusing on Pizza Hut again. I think in the previous statement you mentioned, second half Pizza Hut margin will see some improvement. Just a little bit of clarification, does that include the buyback, the margin equation from the loyalty fee or its underlying margin improvement that's more technical question to clarify and the major question is more on the Pizza Hut store expansion acceleration how do you balance this store expansion pace versus maintaining a positive same store thank you yeah I'll take I'll take the question of Lillian so on the clarification question obviously our guidance as we mentioned prepared remark is disregarding or without taking into account the Pizza Hut view.

We do expect the restaurant margin for Pizza Hut in the second half will enjoy a greater extension compared to the first half. And the key reason is the moderation of rider cost pressure. Obviously, in the second half of last year, the delivery sales mix in the base was a bit more normal or comparable to what we see currently. Obviously, in the second half this year, there will still be a delivery sales mix increase, But the delta year-over-year will be much less, meaning the rider cost pressure will be more manageable in the second half. In other cost line items, I think the trend will be kind of similar. For COS on the second half for Pizza Hut, it will be broadly stable year-over-year. In our last earning release, we guided a full year, approximately 34% COS for Pizza Hut. I think we should be able to deliver consistent results compared to our guidance. on Pizza Hut COS. On the long term, COS for pizza will be 31 plus or minus 1%, as we always commented. All in all, we do see opportunity for expansion there. So that's on the first question. The second part of the question is the relationship between store opening and comp sales. For Pizza Hut specifically, I think you mentioned. I think over the past few quarters, or even the past few years, we have always trying to balance the different factors, right? like comp sales, store opening, margin, profit growth. And hopefully it's fair to say that we successfully delivered a right or proper balance in most of the quarters or hopefully in the past few years in a consistent manner. And indeed, we see lots of untapped opportunities for Pizza Hut here in China, obviously for KFC too, but you asked about Pizza Hut. So we will open the stores. We will not slow down the store opening. And, you know, in terms of store opening, we do open stores across different tiers, high-tier city, low-tier city. For pizza particularly, the low-tier city penetration, there are actually lots of opportunities, right? We are kind of underrepresented there compared to where we are for KFC and compared to some of the local Chinese QSR brands there. And for higher tier city, we will also continue to defend our market leadership and open stores in higher tier city. And I think you focus on the relationship between store opening and comp sales. There are different ways where we can manage or reduce the sales transfer by store opening. For instance, when we open stores in strategic channels like hospitals, university campuses, the sales transfer will be rather limited because it's kind of a closed trade zone. For instance, when we open stores in lower tier cities, because there are lots of white space, the sales transfer will be rather limited. And also, that's similarly true for outskirts areas in high tier cities, too. So, as always, we'll try to balance the different metrics and hopefully deliver a set of results that's satisfactory to our shareholders. Thank you.

Thanks a lot, Idris.

That's very clear. Thank you. Our next question comes from Anne Ling with Jefferies. Please proceed.

Hi, management team. Thank you very much for taking my question. Also on Pizza Hut side, we see the burger bar having very good momentum, and we are expanding to more locations. But for me, it's like, you know, I would like to understand, like, because we're offering burger, the product itself, something similar to that of pizza. So how do we, like, prevent from, like, you know, cannibalization? And it seems that, like, you know, we do have, like, you know, incremental sales. So as a customer, you know, possibly, like, you know, even when I go to the store, I might want to go for a burger. So in that case, like, you know, how do we, like, you know, maintain or prevent the cannibalization? And also, like, you know, for the incremental growth coming out from the burger bar, like, where do you think the market share is coming out from? What is the customers that you have attracted that are new to you? Yeah, that's my question.

Cannibalization with what end? With the existing... Yeah, okay. So the overall market of the burger, first of all, is growing very nicely, so that's a good starting point. And when we decided to launch the Pizza Hut burger, it's very clear among our team that the products need to be very unique. So it's unique compared to KFC to start with, that the buns are baked fresh in the store. So that is very unique, not only compared to KFC, but many other incumbent players in the market. And then the paddy were prepared based on order. So the quality of product is fantastic. And I think after learning from over 200 locations, we can see we are probably competing with business. They focus on beef burger. So given KFC's beef burger share is a mid-single digit, and the burgers are quite unique and different. So KFC is not the target, but from other Big Burger focus brands. And then in terms of the cannibalization with PISA, we see incremental sales because it's always good to offer choices to customer by offering a new category and we can see that in our number I mean it's double digit cells to their parent stores and the margin is nice therefore within few months we built over 200 location and now we are telling to increase to five to six hundred and we are talking about you know a billion cells a billion yen cells which is five to six percent of the Pizza Hut sales so that is pretty fast and fundamentally and it's the quality of the product that matter most and then of course the value for money is there and the brand is there that that's how we build that's how we build our business so we are very excited and hopeful about this incremental business yeah definitely I see that I'm you're also offering burger at one one to one no I'm looking forward to tell it to have a try thank you it tastes really good yeah I hope you like it yeah I'll

try okay thank you thank you thank you our next question comes from shop oh we West City please proceed hi hi Joey can you hear me hi yeah I'd like to give this opportunity to ask more about Peter because it's the first time you talk to investors after announcing acquisition of the grant we just try to understand how big changes you will be to the business of the position for example from your virtualization experience the past a few years, what do you think will be the low-hunting food on the business after you acquire the brand, and what has been the big challenges during the revitalization process, and how could you use a self-owned brand ownership to bridge the differences and make the challenges more less, and also will you make big changes in the business looking forward, like even transformed that is a model of Bizahad so anything any color on that would be very helpful thank you I suppose we feel like we need a separate meeting just for that topic let me try to answer at the high level here you are asking about the

challenges in revitalization and then with acquisition of the brand any additional sort of the changes if that's what I heard you we thought the PISA HUD transformation back to 2017 by 2024 we share with our shareholder that we reached a inflation point so it has been a long and committed transformation and you know I am very honest to say this the transformation is mainly fundamental we we built the core capabilities from the product for example the the crust the dough master the the crust technology and know-how we just in the launched the multi-grain crust in June and it became instant hit and this will not happen if we have not built our core capability in in the dough in the last many years we rebuild our menu pizza right now is only 40% of our sales which is significantly different from the rest of pizza business outside China we also so you know recently launched burger burger business and I think with with this burger story I would like to sort of answer your question about you know what is the benefit of the brand ownership in the past because we did not own the brand even when we have this brilliant idea of doing pizza burger but you can imagine there were a lot of conversation behind the scenes. Yelm has been very, very good partner, but still the communication takes time. The explanation, the logic, and how would that impact the overall pizza brand globally, all these conversations takes time. And you know, there are many benefits for the brand ownership because not only we are buying the brand, but we also are going to own the recipe, the trademark, and many other things. And with that, we will have better ability to react or to respond to the market changes. Our action will be faster and sharper. and that strategic independence and speed is quite valuable so so among among among the many other benefit this is this is one and additionally if I could highlight it does help us to open stores even faster you know you're very good numbers, you are probably aware that for quarter one alone, you know, the Pizza Hut China new store opening is more than 100% of the global opening, put it that way. And we could open the store even faster. Why? Because you will understand and fully appreciate when we open store we want the quality first that means we would look at what other store reach two to three years paper first and then we open store so now with the additional margin of 2.8 into our restaurant margin more store will meet our requirement and thus we are increasing the guideline of next year new still opening to 800 on the condition that they will meet our two to three years payback so I think with that I'm going to pause about what other benefit and again I think yeah we need more time to go through this particular topic thank you again Shakur okay we're part of you that investor beyond this topic thank you one moment for our next question that comes from Christine Penn yes please proceed thank you for this opportunity to raise the question so I have a question for for for Joey so Joey I noticed that in the presentation you actually you know spend a quite a bit of time to talk about the new initiative especially in terms of portal innovations so just to you know to a broader picture we also noticed that the Chinese government has been trying to advocating a healthier you know diet for the general public in view of the increasing you know house care cost pressure for the government so I was just wondering what management sorts towards this initiative and also I'm also very keen to understand the supply chain you know efforts you know any challenges while you're you know trying to you know more house your choices such as you know tape roll is such a true to the to the consumers of young China thank you thank you Christy we want to be more specific about the growth of new initiatives because given KFC size of business it's quite hard to highlight the the scale of the initiative but once we point out you know they are actually quite big already like K coffee is 1 billion yourself and then we're going to double it to two billion and then Kpro we are called triple I mean there's the growth is four eggs it's not even two eggs and then we're going to reach one billion yourself and all these are very sizable if it's a standalone business so we highlight that for that reason and come to your question about the diet I would like to point out that KFC and Pizza Hut both offer very healthy diet too protein is very healthy chicken is very nice protein what we talk about for k-pro is light meal and that's the important concept like light meal it's growing very nicely as you can see because the concept the concept is is good, both in terms of food and also drink. So the light meal is about protein again. And that also includes Pizza Hut, our reason light meal platform of the multi-grain crust pizza with protein topping, like the chicken, the egg, and then mixed with vegetable. And then on the drain side, the drain come with protein, again, is getting very popular. So certainly an area growing nicely. So for K-Pro, it's not something that new. We start to open the first K-Pro, that was 2017, actually. So we've been working on the menu year after year, year after year, year after year, until we get to the menu that customers like with the right balance of the protein, the calorie, and the vegetable, et cetera. And then when it comes to the supply chain, the key thing about the supply chain in China and for us is food safety. and we are absolutely commit to it and everything we produce we provide in Capro and then also the light meal option option for Pizza Hut is from our supply chain and we share the suppliers between the two brands and our smaller brand as well and again the key thing is get committed food safety that's the focus and and that's our strategic mode as well so we are very confident about the light new option because it's not only is it's like is the concept great but customer trust our food safety you can see paper we have new but I'm seeing six six promise if we go a bit deeper and make one more comment before I conclude my answer here is food safety for light meal the requirement is even higher than fried chicken it's much harder to achieve food safety for for salad, whether the Chinese salad or Western salad, than fried chicken.

Thank you.

Thank you.

Our last question comes from Ethan Wang with CLSA.

Good evening. Congrats for the result again. My question is on K-Coffee. K-Coffee is now an important contributor to KFC sales. I'm just wondering, how's the theme store sales growth trend going in the second quarter and third quarter? Because we noticed for the other coffee and new tea companies, because of a high base, because of delivery subsidy, theme store sales growth has been pretty weak starting from second quarter. So just wondering, how's that going with K-Coffee? Thank you.

Thank you, Ivan. You know us quite well already. you I mean I'm sure you are aware that whatever we do the execution is always very disciplined and that applies to K coffee as well for K coffee last year we get to the sales of 1 billion yen sales and for 2026 we are going to get to 2 billion yuan plus and it's still contributing about mid-single-digit same-store sales to the parent stores and ticket average or the price per cup is still a similar level compared to last year so you know I'm afraid I'm going to give you a boringly stable answer, which is sort of our style here. Adrian, anything else to add?

Sure, sure. Indeed, Ethan, so we don't separately discuss the comp sales for K-Coffee Cafe as a module, but what we can say is obviously the daily sales is higher than the pre-delivery war period of time, right? That speaks for the consumer mindshare improvement and we have always been making the comment that kickoff the cafe does somewhat benefit from the delivery war and increasing consumer mindshare thereby helping us do a lot of new location extension now it's more than 3,300 locations and we guide them what a 5,000 location end of next year which is two years ahead of schedule and you know one of the key precondition for us to do that is really the daily cup so that has to be increasing on a very healthy way right and then we're very happy to see and now the delivery wall idea is very rational uh for particularly for beverage sector uh but the daily capsule is higher than the

pre-deliverable period of time so we are pretty satisfied with that thank you ethan got it thank you joey thank you adrian thank you thank you thank you joey and thank you adrian now we will conclude our Q&A session. Thank you for joining the call today. Thank you.

And this concludes our conference. Thank you for participating, and you may now disconnect.