Earnings Call Transcript - YUMC Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Yum China First Quarter 2026 Earnings Conference Call. Please be advised today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Senior IR Director, Florence Lip. Please go ahead.

Florence Lip, Senior IR Director

Thank you, operator. Hello, everyone, and welcome to Yum China's First Quarter 2026 Earnings Conference Call. With me on the call are our CEO, Ms. Joey Wat; and our CFO, Mr. Adrian Ding. Before we begin, I'll remind everyone that our remarks and investor materials contain forward-looking statements. These are subject to future events and uncertainties, and actual results may differ materially. Please refer to these forward-looking statements together with the cautionary statement in our earnings release and the risk factors included in our SEC filings. We'll 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.yumchina.com. You can also find both the webcast replay and our 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 Wat, CEO of Yum China. Joey?

Joey Wat, Chief Executive Officer (CEO)

Hello, everyone, and thank you for joining us. Once again, we delivered solid results in a dynamic environment, reflecting the successful execution of our RGM 3.0 strategy, which balances resilience, growth and moat. In quarter 1, revenue grew 10% and operating profit increased 12% in reporting currency, supported by a positive foreign exchange impact. We opened 636 net new stores, more than one-third of our full year target and ahead of schedule. Even as we accelerated store expansion to capture market opportunities, we maintained a dual focus on same-store sales growth and system sales growth. Same-store sales growth was slightly positive, though rounded to 0%. Same-store transactions grew for the 13th consecutive quarter. Excluding foreign exchange impact, system sales grew 4%, operating profit increased 6% and operating profit margin expanded 20 basis points year-over-year. This marks the eighth consecutive quarter in which we delivered growth across all three metrics at the same time. By brand, KFC remained resilient. Same-store sales grew 1%, the fourth consecutive quarter of growth. System sales increased by 5% and restaurant margins remained very healthy at 19.1%. Pizza Hut continued to grow in scale and profitability, delivering 18% operating profit growth on top of 27% growth in quarter 1 last year, both in reporting currency. Same-store transactions grew for the 13th consecutive quarter, while restaurant margins improved 60 basis points year-over-year to 15%. I would like to say a big thank you to our team for delivering solid results in this fast-changing environment. We maintain a strong focus on innovation and operational efficiency. Let me share a few updates on our key initiatives, and then I will hand it over to Adrian to go through our results in more detail. It always begins with good food and great value. During Chinese New Year, we offered a wide range of options to cater to both group gatherings and solo diners. At KFC, in addition to our signature Golden Bucket, we launched classic limited time offers such as Shrimp Burger, beef wrap and Win Bucket to drive additional traffic. Building on last year's hugely successful LTO campaign, Crackling Golden Chicken Wings became the first new permanent product we introduced during CNY to our menu. KFC's innovative side-by-side modules are scaling rapidly, delivering meaningful incremental sales and profit. KCOFFEE Cafes are now in over 2,600 locations and KPRO in more than 280 locations. KCOFFEE Cafe generated around mid-single-digit sales uplift and KPRO around 20% to their parent KFC stores in quarter 1. Our consumer insights help us identify consumer needs and our front-end segmentation and back-end consolidation approach help us meet these needs effectively by sharing resources with the parent stores. These modules cross-sell existing members and require far lower investment and operating costs, making them attractive business models. Adrian will provide more updates on these two modules later in the call. At Pizza Hut, alongside our classic Super Supreme campaign for Chinese New Year, we collaborated with popular IPs like Gundam and Butterbear and launched our Signature All-You-Can-Eat campaign. In quarter 1, Pizza Hut accelerated expansion with 207 net new stores. That's nearly half of last year's full year net new openings. Over 100 new stores used the WOW format, most of them in new cities. Its lower CapEx model and simpler operations supported by the franchisee model opened up opportunities in lower-tier cities. We also continued to fine-tune the WOW model and enhance the menu, adding signature items from Pizza Hut's main menu while keeping its most popular value items to strengthen both relevance and appeal. Let me now turn the call over to Adrian. Adrian?

Adrian Ding, Chief Financial Officer (CFO)

Thank you, Joey. Let me update key highlights by brand, starting with KFC. In quarter 1, KFC system sales grew 5%. Same-store sales increased 1%, marking its fourth consecutive quarter of growth. Same-store transactions also grew 1%, while ticket average was down 1%. The rapid growth of smaller orders was largely offset by the increased delivery mix, which carries a relatively higher ticket average. KFC's breakthrough side-by-side modules continue their strong momentum and drive incremental sales and profit to their parent stores. We added around 400 KCOFFEE Cafes in quarter 1, bringing the total to over 2,600 locations across all city tiers. With broader coverage and rising daily cups sold per store, KCOFFEE Cafe sales more than doubled year-over-year. We expect KCOFFEE Cafe to keep growing rapidly to unlock further potential and reach 5,000 locations by year-end 2027, two years ahead of our original target shared at our last year's Investor Day. KPRO also gained momentum, reaching 280 locations, up from 200 at the end of 2025. While primarily focused on Tier 1 and Tier 2 cities, we're expanding into select Tier 3 cities as well, especially in Eastern and Southern China, where the demand for live meals is stronger. KPRO is performing well and showing margin improvement, driven by agile module iteration, including menu innovation and reduced investment requirements. With that, we're raising our KPRO target to 600 locations by year-end, an increase of 200 compared to our plan shared earlier this year. Now moving on to Pizza Hut. In quarter 1, system sales grew 4% year-over-year and same-store sales were 99% of the prior year period's level. This year's CNY took place considerably later than usual. Pizza Hut as a casual dining concept saw a modest impact as dining and gathering patterns shifted around the Chinese New Year holiday. In March, we brought back our popular All-You-Can-Eat campaign for a limited time. Now in its fifth year, this campaign has become a signature, attracting consumers to try new dishes, effectively driving traffic and broadening appeal. Same-store transactions grew 5% in quarter 1, marking its 13th consecutive quarter of growth. Ticket average was down 5% year-over-year, in line with our mass market strategy and driven mainly by better value-for-money offerings. Pizza Hut ticket average is moving closer to our long-term target range of CNY 60 to CNY 70 as shared at last year's Investor Day. Even with the lower ticket average, Pizza Hut restaurant margin expanded by 60 basis points year-over-year to 15.0%. Operating profit margin also increased by 100 basis points. Efficiency continued to improve at Pizza Hut as we streamlined store operations, centralized processes and advanced automation, supported by our strong food innovation, supply chain and digital capabilities. Now moving on to store opening. We accelerated store openings in quarter 1 to record levels for Yum China, KFC and Pizza Hut. With 636 net new stores in the quarter, we're on track to open more than 1,900 net new stores for the full year and to surpass 20,000 total stores in 2026. Franchisees contributed 42% of KFC and Pizza Hut's net new stores in quarter 1, helping us capture incremental opportunities in lower-tier cities, remote areas and strategic locations. Our franchise portfolio exceeded 2,500 stores at the end of quarter 1, up from around 1,800 a year ago. We expect to continue driving store network growth with capital efficiency and improving our ROIC over time. Our flexible store models continue to support franchise growth. Pizza Hut's WOW store model is making good progress. Store count doubled year-over-year to around 390. In quarter 1, restaurant margins of new equity WOW stores were already in line with Pizza Hut's main model. In addition to standard WOW stores, we're also opening WOW stores side-by-side with KFC, which we refer to as the Gemini model. Nearly 80 WOW openings in quarter 1 were Gemini stores, mostly in new lower-tier cities and operated by franchisees. With rising car ownership and the expansion of the highway network, we're leveraging franchisees' resources to tap into the growing on-the-road demand. We have already signed franchise agreements with more than a dozen provincial and municipal highway operators, enabling us to open stores at their highway service stations. In just over a year, we added nearly 100 stores and are accelerating the pace this year. We're also meeting new customer needs through innovative solutions. Traditionally, drive-thrus require dedicated car lanes. We expand on this by offering car-side pickup at locations without such lanes but with pullover areas, where our crew brings orders straight to consumers' cars. This approach significantly reduces capital expenditure requirements and gives us greater flexibility in driving takeaway sales. Today, more than 7,000 KFC stores offer either the traditional drive-thru or car-side pickup services, up from around 2,000 a year ago. While still early in building awareness and habits, in quarter 1, nearly one-third of drive-thru customers made repeat purchases, showing strong potential and stickiness. We're partnering with multiple car companies, including BYD, to enable in-car ordering and select stores will have fast charging stations nearby to offer even greater convenience. Let me now go through our Q1 P&L. System sales grew 4% year-over-year. Same-store sales grew slightly year-over-year, but rounded to 100% of prior year levels. Our performance in January and February was broadly in line with our expectations. March came in slightly softer than expected as it fell between the Chinese New Year holidays and the additional spring break in several provinces and compared against last year's strong IP campaigns. Our restaurant margin was 18.2%, 40 basis points lower year-over-year. The decrease was primarily due to increased rider cost from higher delivery mix, partially offset by improved operational efficiency. Cost of sales was 31.6%, 40 basis points higher year-over-year, mainly due to strong value-for-money offerings. The tailwind from favorable commodity prices is also less than before. Cost of labor was 26.7%, 100 basis points higher year-over-year. Rider costs increased year-over-year, driven by the strong growth in delivery sales mix, which went up from 42% last year to 54% this year. Rider costs now account for close to 30% of our cost of labor. The margin impact was 190 basis points, and we mitigated around half of that through enhanced store operations. Occupancy and other was 23.5%, 100 basis points lower year-over-year, mainly due to better rent and other initiatives to improve operational efficiency. Our operating profit margin was 13.7%, 20 basis points higher year-over-year, achieving the eighth consecutive quarter of operating profit margin expansion. Savings in G&A expenses helped improve operating profit margins. Operating profit was $447 million, a first quarter record, growing 6% year-over-year. Net income was $309 million, flat year-over-year. Excluding our investment in Meituan, net income grew 4% year-over-year. Our investment in Meituan had a negative impact of $9 million in quarter 1 compared to a positive impact of $2 million in quarter 1 last year. As a reminder, we recognized $10 million less in interest income in quarter 1 this year due to a lower cash balance resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.87, 7% higher year-over-year or up 11% year-over-year, excluding our investment in Meituan. Now moving on to our 2026 outlook, starting with the second quarter. On sales, we are working hard to deliver positive same-store sales growth and the 14th consecutive quarter of positive same-store transaction growth. March, sitting between Chinese New Year and the extra school spring break in April was slightly softer. However, April benefited from the additional traffic. Taken together, March and April were broadly in line with our expectations, giving us confidence that same-store sales growth will sequentially improve for Yum China, KFC and Pizza Hut in quarter 2. On margins, rider costs remain the biggest headwind. Although delivery platform subsidies have moderated slightly, we expect delivery sales to continue growing, which means rider cost pressure will persist. That said, the tough year-over-year comparison we faced in quarter 1 restaurant margin will ease slightly in quarter 2. At this point in time, we expect the situation in the Middle East to have limited impact on the cost of sales this year. We have already secured the majority of this year's procurement contracts. We'll continue to monitor the situation closely and manage our procurement and logistics nimbly. We'll maintain our dual focus on driving same-store sales growth and system sales growth while keeping our operations efficient. All in all, we strive to maintain operating profit margin roughly in line with the prior year period in quarter 2. As for the second half, we expect sequential improvement in year-over-year margin comparisons versus the first half. With higher delivery sales mix last year, the incremental rider cost pressure should moderate. Our initiatives to optimize operational efficiency and store costs, including rent, labor productivity and capital expenditure are also expected to support margin expansion. We are confident in meeting the full year targets for 2026, which are consistent with the ranges we shared at our Investor Day last year and in February. These include a 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, a slight improvement in restaurant margin and operating profit margin for Yum China. Additionally, we remain on track to reach 20,000 stores by year-end. In terms of capital returns to shareholders, in quarter 1, we returned $316 million with $214 million in share repurchases and $102 million in quarterly cash dividends. We're on track to return $1.5 billion to shareholders for the full year 2026, around 9% of our current market cap. Of the $1.5 billion, we expect around $400 million to be distributed as dividends and $1.1 billion to be allocated to share repurchases through a mix of systematic and discretionary buybacks. From 2027, we plan to return approximately 100% of our annual free cash flow after subsidiaries' dividend payments to noncontrolling interest. This is expected to be an average of $900 million to $1 billion plus in 2027 and 2028 and exceed $1 billion in 2028 and onwards. With that, let me hand it back to Joey for her closing remarks.

Joey Wat, Chief Executive Officer (CEO)

Thanks, Adrian. Let's take a moment to highlight our key growth drivers in quarter 2 and beyond. At KFC, our six hero products provide a solid foundation, accounting for around 30% of sales and are purchased by about 80% of our active members. We keep innovating to drive repeat purchases. Whole chicken introduced in 2021 is a great option for at-home consumption and has gained popularity quickly. Sales nearly tripled since 2022, surpassing CNY 2 billion in 2025. In April, we added aromatic paper-wrapped roasted chicken to the permanent menu after a successful LTO in quarter 4 last year. This new offering is incredibly juicy and its simple cooking process ensures that added variety does not increase kitchen complexity. Pizza Hut also continued to innovate to meet evolving consumer needs. In our latest spring menu launched last week, we introduced over 30 new dishes, about one-third of our entire menu. With this menu revamp, we added new platforms tailored for dine-in sharing and enriched our protein offerings. For example, beef and chicken fajita and shakshuka, a poached egg in spiced tomato sauce. In May, we are excited to upgrade our hand-tossed pizza with multigrain crust and colorful protein and vegetable toppings, a colorful protein-and-vegetable pizza. These innovations not only taste great, but are fun and highly Instagram-worthy, enhancing the casual dining experience. Beyond serving our existing customers better, we are broadening our addressable market by identifying underserved customers. For example, we now have offerings for customers on tighter budgets. Through highly selective delivery channels, we offer hearty meals at very affordable prices. KFC's Chinese buns stuffed with Mala Chicken. This bun weighs more than half a pound, is inspired by a popular Sichuan dish and is the winner of our internal nationwide food ideation competition. And Pizza Hut offers Roman-style spicy pasta with sausage; both foods gained instant popularity. Since our Investor Day in November last year, we continue to be encouraged by the early signs of improving consumer sentiment and more rational competition among delivery platforms. These are positive developments that we believe will benefit our industry over the mid- to long term. We are well positioned for this, supported by our strong brand equity, food that customers love and a solid set of growth initiatives. We are confident in achieving our 2026 full year targets and we will continue to drive profitable growth and create sustainable value for our shareholders. Now let me pass it back to Florence.

Florence Lip, Senior IR Director

Thanks, Joey. Now we will open the call for questions. Operator, please start the Q&A.

Operator, Operator

We will take our first question. This is from Michelle Cheng from Goldman Sachs.

Michelle Cheng, Analyst, Goldman Sachs

I would like to explore the delivery business a little bit more. Joey and Adrian, you earlier mentioned a bit on this delivery impact. But can you still elaborate a little bit more for the past few quarters, given the still more promotional environment, the positive impact from same-store sales growth versus the negative impact from the competition and the margins? And do we see any changes in the trend in the past one to two months? And looking ahead, as we expect the subsidies will be more normalized, how should we think about the financial impact? And what will be our strategies especially driving more takeaway and in-store consumption?

Joey Wat, Chief Executive Officer (CEO)

Thank you, Michelle. I would like to make a few points about your question on the delivery topic. We see early signs of more rational delivery platform competition recently for sure, and we welcome the development and believe that it will benefit our industry over time. Specifically, the reduction in subsidies right now is more pronounced for smaller orders, but only a slight decrease in QSR. So we see platforms increasingly focusing on higher ticket average orders, which is good for our business relative to the drink business, I suppose. We have been very consistent over the past year in that we always maintain a disciplined approach. We balance sales growth, margin protection and brand integrity. So I believe that we are well positioned for the rationalization of the delivery subsidies. Going forward, in addition to the disciplined approach, we always look at our operational growth, supported by strong brand equity, food innovation, great value and many other levers. In my prepared remarks, I talked about the Pizza Hut new food like fajita and shakshuka, the KFC, the KCOFFEE and KPRO growth mentioned by Adrian and also the car-side pickup. So all these are our focus, and we continue to maintain a disciplined approach. Thank you, Michelle.

Adrian Ding, Chief Financial Officer (CFO)

Yes. And in addition to that, regarding the financial impact of the more rationalization of delivery subsidy, as Joey mentioned, we have been very disciplined in taking the delivery subsidy ever since a few quarters ago, and we believe we are among one of the better-positioned companies in the industry to enjoy the more rationalized delivery environment. So to conclude, we reiterate our annual guidance on top line for a same-store sales index of 100 to 102, which is something we're pretty confident to achieve. Specific to quarter 2, as I mentioned in the prepared remarks, we do expect a sequential improvement in our comp sales for Yum China, KFC and Pizza Hut. More specifically on top line, delivery sales growth is still a long-term trend. Although the subsidy is more rationalized, delivery mix is still growing, so we still face some rider cost pressure and the delivery sales mix will increase at least in the near future. In terms of ticket average, KFC's delivery orders generally have a higher ticket average. So faster growth in delivery will translate into a slight decrease in ticket average from the growth in smaller orders. Looking forward, consistent with what we shared in February, we expect KFC ticket average to either slightly decrease or stay generally stable for the full year. For Pizza Hut, the delivery ticket average is lower than dine-in. So a slowdown in delivery sales growth will translate to a more moderate decline in ticket average for Pizza Hut. Lastly, on the margin front, as we mentioned in the prepared remarks, in the second half, given the delivery mix is already a bit higher in the base, the rider cost pressure will moderate. Together with our other efficiency initiatives, that will help better support our margin in the second half. For the second quarter, the pressure is slightly less compared to quarter 1. As always, we use a balanced approach to drive sales while protecting margin and price integrity. Thank you, Michelle.

Michelle Cheng, Analyst, Goldman Sachs

Very clear.

Operator, Operator

And the next question comes from Chen Luo from Bank of America.

Chen Luo, Analyst, Bank of America

Congrats on the results despite a very fluid environment. In fact, the recent selloff of the share price has actually baked in very bad expectations, but having seen the result, I feel really relieved. My question is on our operating profit margin guidance. I remember previously, we targeted a largely stable operating profit margin in Q1, but the actual results saw around 30 basis points operating profit margin expansion. You just confirmed that in the second half we may see easing rider cost pressure given a more normalized base for the delivery sales mix. This, together with a lot of cost-saving initiatives, is it fair to say that compared with our previous guidance of flat to slightly upward trend of operating profit margins, there could be upside risks to our full year margin guidance?

Adrian Ding, Chief Financial Officer (CFO)

Thank you, Chen. I'll take the question on margin. Our margin guidance shared in early February was for a slight increase in our operating profit margin for the group for the full year. I understand that people interpret 'slight increase' differently. Indeed, in quarter 1 we saw a 20 to 30 basis points expansion in operating profit margin, which is broadly in line with our expectations. For the second half, the rider cost pressure will moderate because the delivery mix is higher in the base. Let me give more color on the three key line items to help you refresh your model for the rest of the year. On cost of sales (COS), we expect COS to be broadly stable for the group. KFC COS in quarter 1 was generally stable, while Pizza Hut saw an increase in COS. There are a few reasons for Pizza Hut: one is the All-You-Can-Eat campaign, which is great value for money; second is new menu items where we are still optimizing the cost; and third is higher delivery mix, which results in higher packaging costs for Pizza. So COS for Pizza Hut will be between 33% and 34% for the full year, a bit higher than last year. However, we still guide margin expansion for Pizza Hut on restaurant margin and operating profit margin given the tailwind on O&O. On cost of labor (COL), we face a consistent headwind because of the increase in delivery mix. We gave a specific figure on the COL pressure due to increased delivery mix for the quarter, and you can model COL for the remainder of the year based on your assumptions on delivery mix. On occupancy and other (O&O), we see tailwinds from efficiency initiatives. We expect continued rental optimization given a somewhat favorable commercial real estate environment, and lower capital expenditure results in lower depreciation that benefits O&O, together with other initiatives including A&P. Overall, the annual guidance of a slight increase in operating profit margin for the group is unchanged, and we are confident we can deliver that.

Joey Wat, Chief Executive Officer (CEO)

I just want to add one comment about Pizza Hut margin, which looked very good for quarter 1. It's actually one of the highest since the turnaround initiatives began in 2018. We'll be very consistent with our direction of Pizza Hut turnaround: sales first, profit later. Now it is later—later is now for Pizza Hut.

Chen Luo, Analyst, Bank of America

Yes. That remark is really impressive. I remember during the Investor Day you mentioned a three-year target of 14.5% restaurant margin for Pizza Hut. Based on the current run rate, should we actually achieve that target earlier than expected?

Adrian Ding, Chief Financial Officer (CFO)

Thank you.

Operator, Operator

Our next question is from Lillian Lou, Morgan Stanley.

Lillian Lou, Analyst, Morgan Stanley

My question is actually on the underlying demand trend and related pricing momentum. In the release, one important statement was you are encouraged by the underlying improvement of consumer sentiment. With moderated platform subsidies, do we see competition getting milder among merchants or is everyone still trying to rush traffic without as much subsidy from platforms? What's the dynamic of demand and competition right now? Also, on a like-for-like basis, are we seeing a chance for some improvement on pricing in terms of the whole industry and for ourselves?

Joey Wat, Chief Executive Officer (CEO)

I'll make two quick comments and Adrian can add more color. We have shared our view on improving consumer sentiment since Investor Day last November, and we certainly have observed some stabilization of the pricing trend. Not only have we taken pricing actions, but we also see more players taking pricing, which may reflect a more supportive consumer environment. The more rational competition among delivery platforms is happening, which we believe is constructive for the mid- and long-term. But pricing alone is not enough. Fundamentally, great food and great value matter. After Chinese New Year we are seeing really good performance in breakfast. Breakfast is extremely competitive in terms of pricing, but our Wuhan Re Gan Mian hot dry noodle is selling really well right now. For Pizza Hut, we launched 30 new dishes and a new platform like fajita, which is a fantastic value-for-money and fun way to eat. These product and menu initiatives are happening alongside pricing changes; they are complementary.

Adrian Ding, Chief Financial Officer (CFO)

Yes. Just one note to add: as Joey mentioned, the pricing environment is becoming a bit more favorable, and we're encouraged by the improving consumer sentiment. However, when that translates to ticket average, Pizza Hut's strategy is to be more mass market friendly, which means a lower ticket average. For KFC, we expect ticket average to decrease or stay generally stable this year. The shift in mix—higher growth in breakfast, KPRO and KCOFFEE—are all lower ticket average compared to broader KFC, so the mix itself will cause a slight decrease in ticket average. This is different from markets where ticket average simply follows inflation. In China, with innovation, the mix effect is material.

Lillian Lou, Analyst, Morgan Stanley

That's very clear.

Operator, Operator

Next question is from Sijie Lin from CICC.

Sijie Lin, Analyst, CICC

I have a small question on KPRO. We see that KPRO has performed very well and achieved initial success and you raised the expansion target. Could you please elaborate more behind this? Also, is there an estimate of roughly how many cafes are suitable or have potential for opening KPRO next to them?

Joey Wat, Chief Executive Officer (CEO)

Thank you, Sijie. We are very excited about KPRO as well, although the model actually took seven years to come to fruition. As mentioned earlier, we are accelerating development of KPRO to about 600 stores. The menu is completely different from KFC's main menu. There's a very lovely video on social media that tells the KPRO story—it's not from our company, but it captures the concept well. The food is Chinese-style light meals. I like the quote there: 'It's self-discipline. It's not self-indulgent.' The food is healthy, reasonably priced, and satisfying. The drink mix is very encouraging as well; drinks account for 20% of the business, which is much higher than in regular KFC stores. So KPRO is adding about 20% of sales uplift to the parent store and the margin is good. KPRO also has a strong reputation on food safety, which builds trust with customers and reflects Yum China's long-term strategic moat developed over decades. For 2026, with 600 KPRO we could reach roughly RMB 1 billion in sales contribution, which is meaningful. We are accelerating openings in the second half and are open-minded about further growth pace depending on testing in Tier 3 cities. It's an exciting opportunity.

Operator, Operator

And the last question today comes from Ethan Wang from CLSA.

Ethan Wang, Analyst, CLSA

I have a follow-up question on cost of labor (COL). Adrian mentioned the pressure will be easing in the second half because of the base. I'm wondering, is that also the case for quarter 2? If we look at a longer horizon, the next one to three years, should we always expect COL growth to be moderate and fully offset by decreases in O&O, which would result in a stable restaurant margin target? In other words, does raw material price or delivery mix trends fundamentally change that expectation?

Adrian Ding, Chief Financial Officer (CFO)

Thank you, Ethan. For quarter 2, the pressure on COL does slightly ease because in Yum China there is only one month in the base where delivery subsidies were in effect—June last year. For the second half, the entire second half is in the base, so that's why we expect the pressure to ease more noticeably then. Overall, our margin guidance for quarter 2 is that we expect a broadly stable operating profit margin year-over-year for the group, considering COS, COL and O&O factors. On the longer-term margin outlook, we remain confident in the guidance shared at our Investor Day: KFC to have a relatively stable margin over the long run, and Pizza Hut to expand restaurant margin to exceed 14.5% by 2028. We are not revising that guidance today. For COL, given continued expansion in delivery, we will face pressure from rider costs, although per-ticket rider cost may decrease over time. We aim to offset that pressure through improvements in O&O and some COS efficiencies over the mid- to long-term. Thank you, Ethan.

Florence Lip, Senior IR Director

Thank you, Adrian. This concludes our Q&A session. Thank you for joining the call today.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.