Yum China Holdings, Inc. Aktie

Good day, and thank you for standing by. Welcome to Yum China's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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, ma'am.

Thank you, operator. Hello, everyone, and welcome to Yum China's Third 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, please note 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 the cautionary statement in our earnings release and the risk factors in our SEC filings.

We'll also discuss non-GAAP measures. The comparable GAAP measures and reconciliations are in our earnings release on ir.yumchina.com. You can also find the webcast replay and the presentation there. Please note that all year-over-year growth rates exclude the impact of foreign currency, unless otherwise mentioned. With that, I'll turn the call over to Joey Wat, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. In quarter 3, we continued to grow sales and profit year-over-year. In reporting currency, revenue grew 8%, Operating profit grew 13% and diluted EPS grew 20%, partially supported by favorable foreign exchange impact. Excluding foreign exchange impact, system sales grew 3% year-over-year in quarter 3 and continued to outperform the catering industry. Core operating profit grew 6% year-over-year. We also achieved our tenth consecutive quarter of system sales, operating profit and OP margin growth.

Importantly, we have delivered double-digit diluted EPS growth year-to-date and in each of the past 3 years, excluding the Meituan investment. In quarter 3 same-store sales reached 97% of the prior year's level, primarily reflecting tough lapping from last year's delivery platform subsidy. and the impact of extreme weather this August. With our due focus on innovation and operational efficiency, restaurant and OP margins improved 50 and 40 bps year-over-year, respectively. This margin expansion demonstrates the resilience of our business and the disciplined execution of our teams in mitigating the sales deleveraging impact.

It was also partially supported by license fee savings following the Pizza Hut brand acquisition in Mainland China. We delivered our 15th consecutive quarter of positive same-store transaction growth, a key element of our growth strategy. Our breakthrough side-by-side modules are helping us capture new occasions and drive incremental sales and profit. We also continue to build our brand and attract more customers to our stores through compelling in-store offers and experience as well as greater takeaway convenience.

Dining and takeaway performance improved sequentially, bucking the previous trend. Active members grew 6% year-over-year to 278 million, and our goal is to engage them across even more occasions. We also continue to accelerate new store openings, adding close to 700 net new stores in quarter 3, a new quarterly record. Total store count was 19,989, keeping us on track to surpass 20,000 stores this year. Thanks to our team's strong execution and innovation, we delivered solid operational efficiency, which was particularly important this quarter. We proactively review our store portfolio to reduce rent and lowered delivery rider cost on a per order basis.

We also improved supply chain efficiency through menu innovation, together with dynamic promotions. This allows us to offer great value for money to consumers. To ease the burden of our frontline teams, we have been automating and digitizing certain tests and shifting some to our operation support center. By combining frontline operational experience with AI-enabled intelligence, the center supports inventory replenishment, staff scheduling as well as recruiting, training and online customer service for our restaurant teams.

All of these efforts have contributed to our margin expansion and will continue to support our growth going forward. Our innovative side-by-side modules have become meaningful contributors to incremental sales and profit. Their store economics have also improved. K-Coffee Cafe exceeds 4,000 locations. The Apple sparkling Americano saw more than 1 million cost per week during the peak summer season. Non-coffee drinks more than tripled year-over-year in quarter 3 with the addition of the popular Mango Pomelo cycle, Jansanlu and Sparkling.

KPO surpassed 700 locations. We expanded the venue to broaden its appeal, developing sandwiches as another sales growth pillar alongside energy both. We also introduced high-protein smoothies. which have been particularly popular with certain consumer segments and have generated strong repeat purchases. Keypro is now in around 250 cities demonstrating solid potential for further growth. Pizza Huts Burger Bar reached more than 300 locations in 50 cities, contributing double-digit incremental sales and meaningful profit to parent stores.

Overall, Pizza Hut's burger category captured new customers especially young people and solo diners with sales growing in the high double-digit percentage year-over-year in quarter 3. As side-by-side module help us capture new occasions. Our hero products anchor our strong fundamentals, inspiring innovations to drive sales and soaps. In August, KFC launched the intriguing Oreo Original respi chicken burger, Alia Yama Hama combo, a new twist on last year's original recipe chicken burger with cocoa fun and creamy Oreo blended sauce.

Trust me, it does taste very good. On its first day, we sold more than 1.5 million burgers, roughly 3x the launch day sales of the original respi chicken burger last year. At Pizza Hut, Pizza is our hero category. accounting for over 40% of sales. We sold 17% more Pizza year-over-year in the first 9 months. In August, we launched the exciting handheld pizza so targeting solo diners and on-the-go occasions, make with our latest low-sugar multigrain cut and available with a variety of topics.

It offers a high protein option under 500 Karowe. The handheld pizza drove strong repeat purchases and attracted younger customers helping us tap into the emerging light new market. Let me now turn the call over to Adrian. Adrian?

Thank you, Joey. Let me update key financial highlights by brand. starting with KFC. In quarter 3, KFC opened over 500 net new stores and exceeded 14,000 total stores. System sales grew 3% year-over-year. operating profit grew 4% year-over-year. Same-store sales index was 97% of the prior year's level. Same-store transactions grew 3% year-over-year. Ticket average was down 5% to CNY 36. The rapid growth of incremental smaller orders from new customer segments and locations such as K coffee and K-PRO was partially offset by the increased delivery mix, which covers a relatively higher ticket average.

This offset was less than in the first half due to slower year-over-year delivery mix growth. KFC's restaurant margin improved by 10 basis points year-over-year as efficiency gains more than offset sales deleveraging. This, once again, demonstrates our resilience and strong execution. Moving on to Pizza Hut. In quarter 3, Pizza Hut added nearly 200 new stores. with total stores surpassing 4,700 across 1,300 cities, system sales grew 1% year-over-year. Operating profit grew 21% year-over-year partially supported by Pizza Hut's license fee savings previously payable to Yum! Brands.

Same-store sales index was 97% of the prior year's level, with transactions up 5% year-over-year. the 15th consecutive quarter of growth. Ticket average was down 8% year-over-year to CNY 65 in line with our mass market strategy. primarily driven by value for money offerings and incremental smaller orders such as those from solo diners. Pizza Hut's restaurant margin improved by 190 basis points. or up 30 basis points year-over-year, excluding the license fee savings. Streamlined operations and automation more than offset higher cost of sales. Let me now go through our quarter 3 P&L. System sales grew 3% year-over-year, mainly driven by store growth.

Same-store sales index was 97% of the prior year's level against a tough comparison from last year's delivery platform subsidies having accounted for the later start of the summer holiday, July was broadly in line with our expectations. August was more challenging than expected. More frequent average weather impacted consumption, particularly in East China, 1 of our strongest markets. Delivery subsidies also scaled back faster than expected.

We stepped up our efforts and the sales index sequentially improved in September. Our restaurant margin was 17.8%, up 50 basis points year-over-year. Occupancy and other improvements more than offset higher cost of sales and labor. Cost of sales was 31.5%, up 20 basis points year-over-year. mainly from better value for money offerings and investment in our new modules, including K-Coffee cafe, KPO and Bergamo. Cost of labor was 26.5%. And up 30 basis points year-over-year.

Rider costs remained a headwind, although the impact moderated from first half to 30 basis points this quarter, we kept nonrider costs relatively stable with efficiency gains offsetting wage inflation and sales deleveraging. Occupancy and other was 24.2%, down 100 basis points year-over-year. helped by these renegotiations, more favorable rent in lower-tier cities and other efficiency initiatives.

Pizza Hut license fee savings also contributed 30 basis points of year-over-year improvement. OP margin was 13.0%, up 40 basis points year-over-year. Operating profit was $451 million, growing 6% year-over-year. Net income was $311 million, up 3% year-over-year or flat excluding the Meituan investment. Our Meituan investment had a positive impact of $1 million in quarter 3 compared to a negative impact of $8 million in quarter 3 last year. As a reminder, we recognized $16 million less in interest income in quarter 3 this year due to a lower cash balance resulting from the cash we returned to shareholders, lower interest rates and more interest expense to fund the Pizza Hut view.

Diluted EPS was 0.91, up 12% year-over-year or 8% excluding the Meituan investment. Following the completion of the Pizza Hut brand acquisition, Pizza Hut was no longer subject to license fees, resulting in around 30 basis points benefit to both restaurant and OP margins in quarter 3. Net of interest and financing expenses and taxes. The acquisition was accretive to diluted EPS by around 0.02 in quarter 3. Let's turn to store openings. In the first 9 months, we opened a record of 1,888 net new stores. We are entering new cities and adding store density in existing cities to better service the customers. With our dual focus on system sales growth and same-store sales growth, over half of our new stores were open in new cities, strategic locations or trade zones with non-dining or delivery coverage.

With nearly 20,000 stores spanning Tier 1 to Tier 7 cities, a cured market playbook is essential. We developed store formats for lower-tier cities, including KFC small town pizza Hut will and the KFC and Pizza Hut Gemini formats. These formats accounted for more than half of the new stores open in lower-tier cities this year. We also introduced the Taylor Menu at KFC for select low-tier cities to better match consumer needs in these markets. It is a simplified menu featuring our signature products alongside specially designed items to deliver excellent value for money.

Food is mostly made to order to fit that lifestyle in smaller cities. Our new stores remain healthy with a payback period of around 2 to 3 years. With a lower store opening hurdle and more flexible store formats with better suited menus, we see significant opportunities across city tiers. Accordingly, we are raising this year's net new store target from 1,900 to over 2,400. With more than 20,500 stores expected by year-end, we're moving closer to our goal of 30,000 stores by 2030.

Now moving on to our 2026 outlook. Let me start with sales. We're working hard to deliver a sequential improvement in same-store sales index in quarter 4 despite its higher base. While we continue to face tough comparisons from last year's delivery subsidies, we exited quarter 3 with better momentum in September and October was broadly in line with our expectations. In November, the autumn school break is slightly more broad-based than last year, which will provide some tailwinds. Overall, we're confident in delivering our 16th consecutive quarter of positive same-store transaction growth.

Moving on to margins. Before considering the impact of the Pizza Hut deal, we expect OP margin to be relatively stable year-over-year for Yum China in quarter 4. We expect rider cost pressure to moderate and our efficiency and cost initiatives to support margins, including rent, labor productivity and CapEx. As a reminder, quarter 4 is seasonally lower in sales and profit. So sales volatility will have a more potent profitability impact. The Pizza Hut deal will have a full quarter benefit in quarter 4. It is expected to contribute around 50 to 60 basis points of incremental restaurant and OP margin to Yum China. The Pizza Hut deal is expected to be accretive to quarter 4 diluted EPS.

Looking ahead to 2027. We are confident in delivering both sales and profit in line with the 3-year growth algorithm outlined at our Investor Day last year. As we continue to accelerate store openings, we're targeting 0% to 2% same-store sales growth on a full year basis, in line with our Investor Day target. We will provide more details on 2027 when we report our quarter 4 earnings in February. In terms of capital return to shareholders, we plan to return $1.5 billion to shareholders in 2026, around 10% of our market cap.

In the first 9 months, we returned $1.018 billion, including $778 million of buybacks and $302 million of dividends. In quarter 4 share repurchases will be around $350 million or about 20% above the average quarterly run rate in the first 9 months. From 2027, we remain committed to returning around 100% of our annual free cash flow after subsidiaries dividend payment to noncontrolling interests. This is expected to be about $900 million to $1 billion plus on average in 2027 and 2028 and exceed $1 billion from 2028 onwards. Our capital return program reflects the confidence in the long-term earnings power of our business. With that, let me hand it back to Joey for future growth drivers and closing remarks.

Thank you, Adrian. As we expect sales growth to pick up over time, let me walk you through our key growth drivers. In quarter 4, we will continue our side-by-side model rollout and hero product innovation, which have proven effectively. We are also focusing on bringing customers back into stores. First, our side-by-side modules tap into large, fast-growing categories, such as light news and burgers, where our trusted brand, national store network and supply chain give us a natural advantage.

K-Coffee Cafe is well on track to exceed 5,000 locations by the end of 2027. K-Pro is set to surpass 850 locations by year-end with plans to reach 1,500 locations by 2027. We aspire to be a market leader in China, promising and underserved light meal markets. Burger bar is set to exceed 500 locations by year-end. doubling to 1,000 by 2027. This helped us build awareness of Pizza Hut's burger category, while driving incremental traffic and sales. targeting over RMB 1 billion in total burger sales at all pizza stores and the burger bar this year.

This is around 5% to 6% of Pizza Hut sales. Second, our hero product platforms, chicken wings, Zynga, original RedwiChicken, whole chicken, Ita and their extensions represent close to RMB 30 billion or 40% of KFC and new sales. They provide a strong foundation for efficient product innovation. Every quarter, we launched something new and exciting, driving repeat purchases and attracting new customers. Third is to drive dine-in and takeaway. Our nearly 20,000 stores across China give us a strong platform. We are enhancing in-store offers. the dining experience and convenience to attract customers to our stores.

Being on our strong brand edit, we are also strengthening brand loyalty. Here are some examples. At KFC, CASA pickup has expanded to over 9,000 stores, targeting over 10,000 stores by year-end. In addition to drive-through options at door side pick up and curbside picked up significantly improved customer convenience and investment efficiency. So far, over 12 million members have used these services in 2026 with strong repeat purchases. We target this business to reach RMB 1 billion in sales this year. At Pizza Hut, the late September autumn menu upgraded over 20 items.

In addition to beef and chicken for heater, we add pork, shrink and dual protein options. The new menu also includes global flavors such as the bug, a Korean star rice Kadish with melted cheese and grid pulp. These items suit dine in and bring new customers into stores. Taken together, we are building brands designed to deliver sustainable growth, not just for quarter 4. Now a few words about the strategic benefits of owning the Pizza Hut brand in Mainland China.

In addition to increasing net new openings to 800 stores annually in 2027 and 2028. brand ownership also allows us to move more quickly on growth opportunities such as Burger Bar. Additionally, we are tapping into incremental opportunities, such as the retail business with greater flexibility. We see potential to broaden both categories and distribution channels. Beyond our existing pasta and stick offerings, we are also exploring new product categories.

Distribution will extend beyond e-commerce and our own restaurants to offline channels, including modern 3. Overall, owning the brands give us greater flexibility and agility in unlocking Pizza Hut's long-term growth potential in Mainland China. To wrap up, while the market remains dynamic in the near term, our fundamentals are strong, and we are confident in our long-term growth. We estimate return on equity of around 19% this year.

This is clear evidence that our growth is capital efficient. On a 3-year basis, we remain committed to the growth algorithm outlined at our Investor Day. We are laser-focused on execution. Put simply, execution is growth. Now let me pass it back to Florence.

Thanks, Joey. Now we will open the call for questions. If more people a chance to ask questions, please limit it to 1 question at a time.

[Operator Instructions] And our first question comes from the line of Michelle Cheng from Goldman Sachs.

Congrats again for the consistent profit growth and margin expansion and market share gain. As we know, the environment is very challenging. And also thank you, Adrian talk about the same-store sales stores -- but still want to explore dissect the relationship among these same-store sales story expansion and margin a bit more. So given these volatile consumption sentiment and also the very fluid weather condition. So how do you see -- how confident do we see the same-store sales growth.

And especially, we see -- we continue to accelerate the store expansion. So do we really see some dilution on the same-store sales On the freight side, we actually continue to see the margin expansion. So at the end, should we just not look at same-store sales volatility in the near term, but we still have decent room for these cost optimization to drive profit growth. So as a result, the priority is actually profit growth, and we no matter same-store sales is flowing in the short term, we're still confident to see the profit growth. So just want to understand the relationship between these 3 factors.

Thank you, Michelle. I think there are 3 points here. The same-store sales growth, store expansion and then the consumer sentiment, and I'll leave the profit question to Adrian. Same-store sales growth, as we mentioned in the prepared remarks, Michelle, we faced tough lapping from delivery platform subsidies last year and more frequent adverse weather in August this year. With that said, even with the same-store sales pressure, we did deliver solid sales and profit growth. So system sales, operating profit, OP margin all grew year-over-year for 10 consecutive quarters.

And of course, for shareholders, our year-to-date diluted EPS growth is double digit following double-digit EPS growth each year in the past 3 years. So it has been a long-term commitment. And on top of that, the same-store transaction growth, which is the absolute in our business, grew for 15th consecutive quarter. It's a very, very important element, if not the most important element of our growth strategy. We continue to build our brand and attract more customers back to our stores through compelling in-store owning -- in-store-only offers and experience. And of course, the breaker takeaway convenience. So therefore, dining and pickaway performance improved sequentially. Booking the previous trend, we will continue to drive that change over time.

One last bit about the SSG is as someone clever say, sales is vanity, profit is sanity. And we, of course, want a bit of both. But if we must do the trade-off, we tend to focus on the profit slightly more. With that said, we are still working very hard to deliver a sequential improvement in the same-store sales index in quarter 4 despite its high base and remain confident in delivering the 3-year growth algorithm in 2027 as mentioned by Adrian in the prepared remarks.

Now come to the store opening. We are both entering new cities and adding store density in existing cities to better serve customers. We have be focus on system sales and same-store sales growth. Over half of our new store openings were opened in new cities, new strategic locations or trade zones with no dining or delivery coverage to mitigate the cannibalization. However, naturally, there is some sales transfer that may impact the same-store sales growth, but it's important to recognize that we are driving incremental sales and profitable growth while protecting the margin. Point 3 about the consumer sentiment, we continue to see improving trends and believe that some volatility along the way is normal.

The sequential improvement in September retail sales compared with August is encouraging. As I mentioned in my prepared remarks, certain consumer occasions have been growing very nicely and rapidly like meals and burgers. Consumers are willing to spend when offer innovative product experience with strong value for money. We also continue to see significant opportunities from the ongoing chainification. The chain restaurant penetration in China is still relatively low, but has grown from 20% to 30%. but it's still low compared to 60% in other mature markets. Last but not the least, we continue to see some stabilization in pricing trends with more players becoming more rational on discounts and even taking price, reflecting a more supportive consumer environment, Adrian?

Thank you, Julie. Michelle, I guess, to the final part of the question on margin, you're kind of right that our margin performance has been very resilient despite there are some challenges on comp sales. And indeed, a lot of credit to the team on the strong execution, as Joey mentioned in the prepared remarks, execution is growth. Specifically on margin, I'll briefly comment on quarter 3 and then addressing your question regarding the near-term outlook. On quarter 3, obviously, as you noted from our earnings release, as improvement more than offset some slight increase in COS and COL. And among the online items, obviously, thanks to projects at price that we mentioned previously in our earnings, rental has a good improvement.

And this quarter, our rental get to approximately 8%, we don't normally externally disclose our exact rental for store, but this is a key milestone that reaches slightly below 8% -- approximately 8% for the first time ever since our listing back in 2016.

A&P, there's slight improvement as well as percent of sales, given our efficiency improvement there. And also, there is some contribution by the Pizza Hut transaction. And as I mentioned in the prepared remarks, that contribution is roughly 30 basis points of sales. So that's on quarter 3. If you look at near term, we're speaking of 2027 as Joey pointed out, we're still quite confident to achieve 0% to 2% of comp sales in 2027, in line with our Investor Day guidance. and specific on margin, right? If you think about COS, COL and O&O for all the 3 lines, I'll provide a bit more color in February earnings, but just give the high level review -- kind of preview on these line items.

For COS in 2027, we think it will be broadly stable for the group. Obviously, for Pizza Hut may slightly improve over the roughly 34% level for this year as we previously guided. And for COL, if you think about the delivery sales mix, it will be broadly stable, similar to this quarter of 54%, was only slightly up. So the overall pressure on rider will be moderate next year, like compared to this year when we lacked in last year. And lastly, when you think about O&O, the product Sacral impact on rental will be a structural impact that will still benefit next year as well. and we'll still enjoy some benefits on depreciation and probably a little bit on A&P.

So overall, let me get back to our Investor Day guidance. We think our restaurant margin for KFC will be broadly stable. that was similar -- that was consistent to what we guided back last year in our Investor Day. And for Pizza Hut, before considering the Pizza Hut transaction, the restaurant margin will slightly improve, hopefully, next year. And then we feel quite committed to deliver double-digit EPS growth. That was actually achieved in each of the previous 3 years as well as year-to-date. So we continue to commit to that next year as well. Michelle, thank you.

The next question comes from the line of Chen Luo from Bank of America..

On the stellar earnings. Of course, I have to ask this question because we always regard Yas as a steady compounder driven by very good expansion as well as margin management. But it seems that the market currently care all about just SSG. So as Q3 is already kind -- so now all the eyes are on Q4. So just now in the opening remarks Adrian do mention that October SSG was broadly in line with management expectations. also highlight that in November this year, we are going to see more regions adopting the all-time school breaks.

So can you share a bit more color on the Q4 SSG trend as well as our outlook. For example, October was pretty much in line with expectation. So with regard to expectation, I refer to the 0% to 2% SSG that we guided historically. And also, we all know that based on China checks, November comps were very difficult but that was partly due to the first time introduction of autumn school break last year, whereas this year, there were more regions adopting this break. So I'm very confused. November really having a tough comp or because of more holidays this year after November should be open. Any color will be helpful.

Well, indeed, I understand that the market actually care a lot about the comp sales. And again, before I answer the question specifically on color on comp sales, I would like to reiterate that for us, as Joey mentioned in the previous Q&A, sales is vanity, profit sanity, right? And so obviously, in normal times, we will get both. And -- but in special situations, for instance, quarter 3, when we faced the extreme weather in August, in those kind of situations, if we have to choose one, we kind of choose profit.

And hopefully, that's also what our shareholders want. And the fact that we delivered double-digit EPS growth in each of the previous 3 years as well as year-to-date also demonstrate the track record there. And to answer your question on comp sales for quarter 4, in October, yes, as I mentioned in the prepared remarks it's broadly in line with our internal expectations. if -- we will have to provide some -- a little bit more color, I would say, the Golden Week has a little sequential improvement over mid-autumn festival, which is a few days before the Golden Week people still remember, right?

There's a sequential improvement there. And October as a whole is in mind, so there is no surprises, no negative surprise, no positive surprise is broadly in line. November, we're only on the second day of November. And I guess, the good thing is the autumn school break is a bit more broad-based this year in November compared to last year, which could -- which may provide some tailwind but the headwind is obviously quarter 4 of last year has an index of 103 which is meaningfully higher than the rest of the 3 quarters in the base last year.

So it's a tough lapping, but we are working hard to try to achieve a sequential improvement in our comp sales in quarter 4 over quarter 3. But I think if you were to look at further down the road in 2027 I think we are quite confident to achieve 0% to 2% comp sales for full year which is actually only 2 months from now. Yes, I know I didn't give overly concrete information on quarter 4 comp sales because it's still 2 full months to go, but hopefully, that color may be potentially helpful.

That's already very helpful indeed. I know how difficult or fluid situation is and already appreciate efforts to share as much information as possible and also hope that our operations can go from strength to strength. .

And our next question comes from the line of Lillian Lou from Morgan Stanley.

I have a question on Pizza Hut because on the Investor Day for the next 3 years or longer term, there should be a better growth coming from Pizza Hut. I know there should be some short-term volatilities. But based on this year so far, in particular, third quarter, I think Pizza had system sales has been slower than Cafe and I would like to understand whether it's just a one-off, in particular, because of weather because of some short-term volatilities or how do we see Pizza Hut, again as a driver for the whole group? That's my main question. And just to double check, given the comment on fourth quarter same-store sales, we don't have so-called guidance for 2026 same-store, right? Just a small follow-up track. .

Yes. Lillian, let me address your question here. Your final part of the question on guidance for comp sales for full year. Yes, given the fluid situation, particularly around the lapping of delivery subsidy. And as I mentioned in the prepared remarks, the subsidy did scale back faster than expected in quarter 3. And obviously, the August extreme weather didn't help. It's a peak month of the year as well. it's -- we didn't explicitly guide in these earnings on the full year comp sales for 2026, but we did guide on 2027 outlook.

And also, we reiterated our guidance for the 3-year growth algo on a 3-year basis, we're still quite confident to achieve our guidance that we shared at Investor Day. On Pizza Hut growth, I mean, as you correctly pointed out, near term, there is some dynamic situation Also, we are indeed working on various strategic levers on improving the Pizza Hut growth. But if you were -- looked at a bit more -- further down the road, we are confident that the Pizza Hut will deliver very solid growth. I think we gave some figures back to our Investor Day. Specifically, we guided a restaurant margin of 14.5% before the Pizza Hut transaction by 2028, and if you were to include the impact of Pizza Hut transaction, hopefully, the margin will exceed 17% by 2028.

Obviously, we will invest a bit of the margin savings from the 2.8% into new stores because new store in the first year, the margin is lower than the normal stores because it takes 3 -- around 3 years for the stores to mature. and we'll invest a bit of the margin on new modules such as Pizza Burger Bar although it's profit accretive but it's slightly margin dilutive, as we pointed out previously. But overall, we are still confident to achieve restaurant margin of approximately 17% or slightly higher by 2028.

That will actually imply Pizza Hut will get to KFC's restaurant margin level in a bit more than a year's time. And also in terms of the new store growth, we dialed up the annual open guidance from 600 to 800 stores, each of 2027, 2028. And hopefully, if you have our own assumption on comp sales for each of the next 2 years that will give you a high-level -- high top line growth figure. And then with the margin expansion, you can get to a high level of bottom line growth figure. So yes, despite the short-term dynamic situation, we are confident about the mid- to long-term growth potential of Pizza Hut.

Just a few more comments on the Pizza Hut growth. First of all, we are truly excited to buy back the brand because it does give us both short-term and long-term strategic implication in a very positive way. And I would just like to highlight a few key growth drivers. First of all, pizza. We don't talk enough about it. I mean Pizza is 40% of our business. And year-to-date, we sold 180 million pizzas already, and the number is 17% up year-over-year. And that's the number of pizzas, I mean, the sales number is slightly less because these are the incremental.

A lot of it is incremental, like smaller orders, the smaller pizza, solo diner but that's fantastic because this is 40% of our business. And particularly, the 1-person pizza, the smaller one. increased by 40%. I mean in this market, like anything double-digit, not to mention 40% is something that we are excited about. Secondly, the burger bar that we talked quite a bit. We expanded to 50 cities in just 9 months, 300 locations, and we are targeting 500 by end of this year and 1000 location by 2027. And the investment rather sensible and modest really, but yes, it delivered double-digit sales uplift and incremental profit to the parent stores that's something to be excited about for the Pizza Hut business.

And then the third, while Pizza Wow is still going very nicely, and the store count double year-over-year to 490 year-to-date. And then we -- so to -- and we're going to do more by end of the year. and this is very effective to help us entering new cities. For many years Pizza Hut business stuck at 900 cities. But now with the new modules and more store formats, we enter 350 new cities this year, which is fantastic breakthrough a milestone for Pizza Hut, so all these are something that we are quite excited about.

And then not to mention -- but that brand allow us to do something strategically much faster, for example, retail, I don't know what some of you guys have tried already. It's just this week, we start to sell frozen during which is just retail, right, sold through retail. I tried myself. It's more fantastic, it smells and taste like during ice cream, but it's real during a frozen. I mean now we own the brand, we can make this kind of decision try new things much, much faster. So quite excited about Pizza Hut growth prospect in the short term and the long term. Thank you, Lillian.

And our next question comes from the line of Anne Ling from Jefferies.

Just a quick one. I just wanted to check regarding last year, 4Q, how much of the 3% same-store is coming out from the delivery subsidy and how much has come out from the autumn like spring -- the autumn break. So just wanted to check like -- like if we are trying to the base impact. And regarding like the 4Q outlook, is like we're expecting a sequential improvement versus third quarter, right? So I do -- right. Do you expect that -- you will also be at this point, able to gain some share from the peers. So some of the same-store sales essentially come out from the peers rather than the industry growth. .

Yes. Thank you, Anne. Well, I think this question is -- it's very hard to break down the impact of the delivery subsidy back in quarter 4 last year versus the school break in quarter 4. But what I would say is given it's the first time for multi-provincial school break in quarter 4 last year. The impact was actually a little positive surprise to us right back in quarter 4. And that's why when we reported our February earnings, we also mentioned kind of the same comment. And then hopefully, the 3% positive comp sales was a little surprise to the market. .

But yes, I didn't give the exact breakdown, because it's hard to break down that way. And this year it's the second time with the ATO school break in November. It's slightly more broad-based compared to last year. And we look forward to seeing how the trading goes in November. And I would encourage people to also focus equally importantly, October, November and December, right? So December is important as well. We have a lot of campaigns signing up in the coming 2 months. So yes, I mean, at this point in time, what we can say is we're working very hard to try to achieve sequential improvement in comp sales in quarter 4.

And your second part of the question is whether we're taking -- if I remember correctly, whether we are taking shares from competitors, I would say the market is not large enough, right? And I think in our previous earnings as well as -- earlier in the Joey did comment on the fact that the chainification rate here in China is still quite low. I mean, for restaurant, it's 20%, 30%; for beverage, it's much higher, right? If I remember correctly, it's around 60% for beverage chainification rate. So that's why you see a lot of new players and existing players are actually in the catering space and opening stores in a very fast fashion.

And so the market is large enough to accommodate a lot of successful players and if anything, if you're thinking about the consumer sentiment, right, as we mentioned earlier on the call, we think overall speaking, the overall consumer is more open-minded about the rational discounting -- more rational discounting as well as a little bit of pricing, right, that we all observed throughout the year.

Although arguably week-over-week, month-over-month, there is some volatility in the overall promotional environment. But if you compare this year over next year -- sorry, this year over past year, I think arguably, most people would believe that the whole consumption sentiment is more rational. And all I'm trying to say is that the market is still quite favorable for a chain restaurant like us and also, it's not favorable to us.

It can accommodate and support multiple successful players in the space, and we look forward to growing our market share, continue building our brand in this part in China. And we give quite a bit of color in how -- in terms of how we think about the store opening strategy in our prepared remarks as well as earlier on the Q&A as well. So that's, I guess, the response to a question, Anne.

Just 1 more comment for your question. Anne, last year, with the platform subsidies, Yum China, in general, we are quite disciplined with our trading particularly in food because the cost of sales in flu is quite high. So we are very disciplined. We do take some subsidy and invest in the emerging business. like the Lavasa and the smaller emerging business and drinks. Training for us -- for KFC is about mid-teens in terms of mix, is about low teens for Pizza Hut in our mix. And both drink business actually for quarter 3 grew quite nicely, actually have positive growth because we have quite a few new drinks launch, which were proven popular among customers. So I think that is the context I can share with you, Anne. Thank you. .

Our next question comes from the line of Christine Peng from UBS.

For the comments given by the management so far. So I have a question specifically for Adrian in terms of your earlier comment about labor cost. So basically, your comments point to a steady cost of labor as a percentage of revenue in 2027. But having said that, we do notice that the Chinese government is putting into place a stricter enforcement of social insurance collection, especially in recent months. So I just want to understand what are the assumptions behind this cost of labor stable kind of trend you are foreseeing in 2027.

Are there any specific measures you can share with investors. And 1 thing I also want to clarify with you is that you are mentioning the Pizza Hut China acquisition is bringing 30 bps margin expansion in the quarter alone. But when I look at the details, the cost of class and others set revenue for Pizza Hut actually as percentage dropped more than 200 bps on a year-on-year basis. So I just want to understand the 30 bps margin expansion, how that compared with the more than 200 bps of margin savings in the cost of occupancy for Pizza Hut in the third quarter alone?

Thank you, Christine. The final part of your question, I think the 30 basis points margin expansion is for the group. And then if you were to calculate the impact on Pizza Hut, I believe it will be around 170 or 160, 170 basis points for Pizza Hut. So that kind of is the difference there. And the second part of the question, I guess -- I'm responding in a reverse order. Please bear with me. The second part of your question is on the assumptions on COL, so the reason stricter compliance or requirements by the government on social benefits and social security has no impact on us because as you and hopefully, everyone else call know that we are super compliant in terms of -- for the different regulations. and specifically on social security, right? Our social security base for our full-time employee is calculated on the actual wage, which include the base pay, the bonus, the overtime, et cetera, et cetera. is not calculated on the minimum wage, right?

So hopefully, that's kind of the core part of your second part of the question. The first part of your question is on the COL outlook for next year. You mentioned broadly stable. I think yes, that's kind of what we mean. But more specifically, what we mean here is the pressure on COL, and the pressure on rider cost will be much more moderate next year compared to this year, right? Because this year, we're having mid-50s delivery mix for the full year -- last in last year, especially in the first half of last year, it's around 40% in the mix, right? So that's a significant pressure on rider cost.

But coming into quarter 3, if you look at the rider cost, it's only 30 basis points of cost increase. So the pressure already meaningfully moderated compared to more than 150 basis points in the first half of the year. And then -- so hopefully, that moderation rider pressure will last into quarter 4 and next year because next year, as we mentioned in the earlier part of the Q&A, the delivery sales mix will be broadly stable compared to where we are right now. And if you use the broadly stable figure, the mid-50s percent of the resource mix lapping this year, which is, let's say, 54%, I believe, for full year. It will be only slightly increased or broadly stable, right?

And then if you take into account the wage inflation and all that, the COL, hopefully, the pressure will be much more moderate. And the key levers in driving COL efficiency to mitigate wage inflation is really the digitalization, the process optimization and centralized of many of the tops, including recruitment, training, interviewing inventory replenishment, labor scheduling and even some of the preparation work, the raw materials, we centralize some of those, right? So these are the measures as we mentioned in this earnings previously to drive our COL efficiency. But overall, COL, that will not decrease, just to be clear, it's just the pressure will be much more moderate compared to previously.

Just 1 comment on the other side of the cost. While we'll maintain the stable COL with all the factors, Adrian talked about, I just want to highlight that our store managers really are the hero to help us managed COL because right now, between cash somewhere between 70% to 80% of the stores are run by what we call mega GM, mega store manager, who run 2 to 4 stores with the help of the centralization, digitization, automation. The other side of the equation, I want to emphasize is, one, these metal GM, their take-home pay has been increasing by mid-teens in the last 2 to 3 years. despite we keep the overall labor cost stable and the turnover rate is somewhere between mid- to mid-single digits for the metal age. .

So not only we capped the COL stable, but we are retaining the best store manager and we continue to give them a very nice area increase so that we have the best people to run our stores, which is the best way to protect the business in the short term and long term.

Thank you. In the interest of time, we will take our last question today from Sui Yang Wang of CICC.

Congratulations on delivering Brazilian quite. My question is on new store openings, you have raised the year's late opening target to 2,400. What's new market opportunities have led you to increase the target and how do the sales and the profit of new stores compared with those of major stores? That's all.

Thank you, Sian. So indeed, we raised our target from 1,900 to over 2,400 for the year, which represents roughly 13% of the store base end of last year. And we do see most opportunity, ample opportunity and white space here in China. And as we mentioned in our prepared remarks, over half of our new store openings have been in lower tier cities, strategic channels and areas or trade zones with no existing dine-in or delivery coverage, right? So those we call the Hong Kong bank double white space. .

So that's actually incremental opportunity for us, and it's important for us to open store there quickly to better service our consumers there and build our brand equity because we firmly believe the strong brand equity and 1 of the leading brand equity here we enjoyed the Western U.S. space here in China is with past 4 decades hard work building a lot of our stores in high-tier city followed by a mid-tier city.

And now we are actually quite expanding into lower-tier city in a fast fashion, leveraging on our new store model like KFC more town, Pizza Hut Wow and KFC and Pizza Hut Gemini model. And we are conscious of achieving a balance of comp sales, i.e., limiting the sales transfer at the same time, grow our top line as a whole and profitability as a whole. And that's why we give the color on over half of our new store opened were in locations with limited or no sales transfer.

Yes, so that's kind of how we look at it. And it's exactly because of the ample white space that we see here in China that we believe this step up pace of store opening is something that we'll continue to do over the next few years as well. And hopefully, with that, coupled with the solid comp sales, we will be able to deliver our full year guidance as shared at our Investor Day for both the top line and bottom line last year in November.

For both --, we still have 1,000 or 1,500 cities that does not have our stores particularly for pizza. There's still 1,500 city plus that has KFC, does not pizza. It's very, very simple math there. And 1 last comment of our new store openings Above all the new store target or new store openings, we are very disciplined, very, very disciplined. We want our new store to deliver 2 to 3 years payback. And that's the quality requirement before we talk about the numbers. So therefore, buying bad the Pizza Hut brand helps Pizza new store opening because we don't have to pay 2.8% royalty anymore and expand the margin, allow more stores to meet our requirements, and we can up the target. And now we also have the modules that is very suitable for entering the lower-tier city, it really helps.

Thank you, Joey, and thank you, in as well. This concludes our Q&A session. Thank you for joining the call today.

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

Good day, everyone, and thank you for standing by. Welcome to Yum China's Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded. Now it's my pleasure to hand the conference to Florence Flip, 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 Wat, and our CFO, Mr. Adrian Ding. Before we begin, I will remind everyone that our remarks and investment materials contain forward-looking statements. These are subject to future events and uncertainties and 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?

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%, and Operating profit increased 14% and diluted EPS rose 21% year-over-year, partially supported by favorable foreign exchange impact. Excluding foreign exchange impact, system sales grew 6% in quarter 2, 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 OP 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 KCOFFEE Cafe and KPRO 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 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 made significant progress in quarter 2. Pizza Hut's same-store sales growth returned to positive at 1%, while new store openings accelerated almost double what we did in quarter 2 last year. This brings net new store openings to 381 in the first half, nearly matching our 2025 total. In April, we launched [indiscernible] and Shakshuka on the spring menu to enrich Pizza Hut protein platforms and enhance the dying experience.

In May, we extended our pizza category into lighter meal occasions with a new multigrain crust and new protein and vegetable topics, [indiscernible] pizza. The pizza's colorful look, nutrient-pack profile and grain-rich texture, make it our best-selling crust since launch in June. We also introduced an individual sized multigrain 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 fine module, Pizza Hut Burger Bar, In just 6 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 made-to-order burgers from an open kitchen.

Our buns are baked fresh [indiscernible] every day, [indiscernible] and our parties construct of the grid, 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 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 KFC. This will enable more potential new stores to meet our payback requirement of 2 to 3 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 accelerate 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 Pizza Hut, KFC continues to be our #1 growth driver, delivering strong results.

In quarter 2, 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's hero products and their expansions continued to drive strong sales and repeat purchases. Whole chicken has become a major platform for home consumption, generating over CNY 2 billion in sales last year. This category has delivered double-digit growth every year since its launch in 2021 and and remains on track for double-digit growth in 2026.

In April, we add the aromatic paper rep roast chicken, [indiscernible] to the permanent menu, is super juicy and high in protein, appealing to consumers seeking lighter meals. [indiscernible] is another top selling platform for. In quarter 2, we introduced the limited time offer, more fragrance, spicier zinger, [indiscernible]. The extra bit chicken side, Secret sauce and toasted sesame aroma attracted younger customers. Sales were especially strong in spicy loving [indiscernible] such as [indiscernible].

With more regional flavors to come, we see strong potential for the Zinger category to exceed CNY 5 billion in sales by end of 2026. The KFC side-by-side models, KCOFFEE Cafe and KPRO continue to gain momentum and deliver incremental sales and profit. KCOFFEE 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, KCOFFEE Cafe is broadening its key and food options, including more top flavors and breakfast pairing 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 its success in higher-tier cities, we are expanding KPRO into select lower-tier cities. Beyond increasing its footprint, we are capturing the growing demand for lighter meals through menu 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 sales 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 new 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 pickup. While our restaurant staff bring order 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, yes, 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, Joy. Let me update key highlights by brand, starting with KFC. In quarter 2, both KFC 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%. [indiscernible] offset the ticket average decrease of 3%. Ticket average was CNY 36 lower year-on-year, mainly due to incremental smaller orders from new customer segments and locations such as KCOFFEE and KPRO. Despite significant rider cost headwinds, KFC's restaurant margin expanded 20 basis points to 17.1% in quarter 2.

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. KCOFFEE Cafe delivered around mid-single-digit sales uplift to its parent stores while KPRO delivered around 20%. CapEx for both KCOFFEE Cafe and KPRO has come down by around half from earlier modules last year, and both are showing solid margin improvement.

Now moving on to Pizza Hut. In quarter 2, system sales grew 6% year-over-year, accelerating from 4% in quarter 1, driven by the sequential improvement in same-store sales growth to 1%. Same-store transactions grew strongly by 13% in quarter 2, marking the 14th consecutive quarter of growth, offsetting an 11% ticket average decrease. Ticket average was CNY 68 in moving closer to our target range of CNY 60 to CNY 70 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 bar.

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 initiatives 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 continue 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 enter more than 200 new cities. Both equity and franchise store openings accelerated year-over-year. In the high-tier cities, we continue 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 net new opening in the first half 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 Yum China, we're confident there are significant opportunities ahead.

Let me now go through our quarter 2 P&L. 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. Improvements in occupancy and other costs offset growth in cost of sales and cost of labor. Cost of sales were 31.5%, 50 basis points higher year-over-year, mainly due to better value for money offerings, increased packaging costs due to 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 quarter 2 driven by the strong growth in delivery sales mix, which rose from 45% last year to 54% this year.

The margin impact from rider cost was 140 basis points, slightly lower than quarter 1, and we offset most of that through enhanced store operations. Occupancy and other was 24.8%, 90 basis points lower year-over-year. The rent ratio improved through lease renegotiations and more favorable rents in lower-tier cities. We also implemented other initiatives to enhance operational efficiency. Our OP margin was 11.1%, 20 basis points higher year-over-year achieving the ninth consecutive quarter of OP margin expansion.

Savings and G&A expenses helped improve OP 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 Mainland, net income grew 3% year-on-year. Our investment in Mainland had a negative impact of $6 million in quarter 2 compared to a negative impact of $14 million in quarter 2 last year. As a reminder, we recognized $13 million less in interest income in quarter 2 this year due to a lower cash balance, resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.70, 14% higher year-on-year or up 10% excluding our investment in Mainland.

Now moving on to our 2026 outlook. Let me start with sales. Since June, we have been lapping a higher delivery sales pace, and that tougher sales comparison will continue through the second half. That said, given our disciplined 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 3 and deliver the 15th consecutive quarter of positive same-store transaction growth.

Moving on to margins. Before considering the impact of the Pizza Hut deal, we expect quarter 3 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 quarter 3 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 quarter 3 last year. There was a positive margin impact of about 20 basis points from some Ad Hoc government subsidies in quarter 3 2025 and that are not expected to repeat in quarter 3 this year.

Some similar subsidies were already recognized in the first half of this year, though in smaller amounts. For the full year, without considering the impact of the Pizza Hut deal, we're 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 OP 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. We plan to fund this transaction primarily with that. 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 will 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 payment 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 quarter 3, 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, parts and without considering the potential higher growth of Pizza Hut, we expect the deal 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 returned $718 million, including $515 million through share repurchases and $203 million through quarterly cash dividends. We stepped up share repurchases in quarter 2, reflecting what we believe was a relatively attractive share price.

From 2027 onwards, we remain committed to returning around 100% of annual free cash flow after subsidiaries' dividend payment to noncontrolling 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 his 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 are about to reach the meaningful milestone of CNY 1 billion in sales or around 1% of Yum China sales. KCOFFEE Cafe generate around CNY 1 billion in sales last year. We target to double that to nearly CNY 2 billion this year. KPRO is expected to quadruple in sales year-over-year this year and exceed CNY 1 billion in sales next year. .

KFC's drive-through and car side pick up are gaining strong momentum. We target to reach CNY 1 billion in sales this year. Pizza Hut Burgers, a category we introduced 2 years ago is also gaining popularity. We now target over CNY 1 billion in sales this year or around 5% to 6% of Pizza Hut sales. We remain confident in the strength of our brands 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 Florence. .

Thanks, Joey. We will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to 1 at a time. Operator, please start the Q&A. .

[Operator Instructions]

Our first question is from Michelle Cheng with Goldman Sachs.. .

Congrats again for the very solid results. My question is about the overall consumption environment and also the pricing on trend. So we actually heard from many customer 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 have -- has been better in China. But given these kind of consumption trend, do you see any risks on the reemergence of this pricing trend or promotion activities in the market. And since we know we have an easier base on margins, so still [indiscernible] your thought how to balance this pricing trend and promotion activities to drive the sales growth. .

Thank you, Michelle. We are encouraged to see the rebound in June retail sales compared that with May actually. And as Adrian mentioned earlier in prepared remarks, July trapped broadly in line with our expectations. There was some extreme weather, but it was temporary and it has sort of a regional impact in July. Coming back to the few trends, there are few things here worth noting. Consumers are still willing to spend on certain occasions. They are still growing nicely and present attractive opportunities such as coffee, like 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 we see some stabilization in pricing trends. More players are willing to take pricing, reflecting stable consumer environment. And the competition between the delivery platform is more rational. So these are positive. And on top of that, we continue to see ongoing increase, what we call chain application, China restaurant chain, the percentage has grown from 20% to 30% plus it's still relatively low compared with 60% plus in mature market investment.

There's also another one little trend going on. Since April the government has tightened oversight of the food delivery related to what is called Gold kitchen. We view this as a positive environment raising the standards of the industry, and we expect to benefit from our well-established food safety, which is a strategic moat for us. Thus, Michelle, Yum China team. We are working hard traffic, sales and profit all at the same time, and we target to maintain positive same-store sales growth in quarter 3 and deliver 15 quarter of same for transaction growth as well.

Our next question comes from Chen Luo with Bank of America. .

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 significant 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 are always trying to take a very disciplined approach or we're trying to maximize shareholder value. So any color or comment on our future refinancing plan would be appreciated.

Sure. Thank you, Luo Chen. So indeed, as I mentioned in the prepared remarks, 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 order as I mentioned. The bridge loan interest rate will be approximately 2%. So it's -- it will be quite favorable. And your question is actually focused on the take-out financing or the long-term refinancing. Indeed, we think all options currently are on the table, including syndicated loans, including bonds, including CB, et cetera, et cetera. And given you specifically asked about CB, 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 take our financing options, there are different ways to minimize or reduce the dilution meaningfully -- potential dilution meaningfully.

For instance, the issuer can take a top core 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 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 [indiscernible] 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, they are quite similar things to what I mentioned to minimize the dilution impact. Again, we're still studying the different long-term refinancing options and all the different options are on the table. But I just want to share more color given the last part of CB.

Our next question comes from Lillian Lou with Morgan Stanley. .

Joey, 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 accretion 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?

Yes. I'll take the question, Lillian. So on your clarification question, obviously, our guidance, as we mentioned in the prepared remarks, 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 expansion 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 of 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. 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 earnings release, we guided a full year approximately 34% U.S. for Pizza Hut. I think we should be able to deliver consistent results compared to our guidance on Pizza Hut U.S. On the long term, U.S. 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 are 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 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 in terms of store opening, we do open stores across different tiers, high tier city, low-tier city. For Pizza particularly, the lower-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 high-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, right, because it's kind of a close trade zone. For instance, when we open stores in lower-tier cities, because there are a lot of white space, the sales transfer will be rather limited. And also that's similarly true for [indiscernible] 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 satisfactory to our shareholders. Thank you. .

Our next question comes from Anne Ling with Jefferies .

Also on the Pizza Hut side, we see pizza -- the burger having very good momentum. And we are like expanding to more locations. But for me, 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 cannibalization? And it seems that like we do have like incremental sales. So as a customer, possibly even when they go to the store, I might want to go for a burger. So in that case, like how do we -- like maintain or prevent the cannibalization? And also for the incremental growth coming out from the Burger Bar , where do you think the market share is coming out from? What is the customers that you have attracted that are new to you. Yes, that's my question.

Cannibalization with what end? .

With the [indiscernible]. .

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 product need to be very unique. So it's unique compared to KFC to start with, that the buns are baked fresh in a store. So that is where you need not only compared to KFC, but many other incumbent player in the market. And then the patty will prepare 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 book. So given KFC's beef burger share is -- mid-single digit. So -- and the burgers are quite unique and different. So KFC is not the target. But from other seed burger focus, brand. And then in terms of cannibalization, with pizza, we see incremental sales because -- it's always good to a choices to customers by offering a new category. And we can see that in our number. I mean, it's a double-digit sells to their parent stores and the margin is nice. Therefore, within a few months, we built over 200 locations, and now we are targeting to increase to 500 to 600 million. And we are talking about CNY 1 billion sales, which is 5% to 6% of the Pizza Hut sales. So that is pretty fast.

And fundamentally is the quality of the products that matter most. And then, of course, the value for money is there and the brad is there, that's how we build our business. So we are very excited and hopeful about this incremental business. .

Yes, definitely. I see that you're also offering Burger at [indiscernible]. No, I'm looking forward to have a try. .

It tastes really good. I hope you like it.

I'll try. .

Our next question comes from Xiaopo Wei Citi.

Yes, I would like to take this opportunity to ask more about Pizza Hut because this is the first time you talk to investors after announcing the acquisition of the brand. We talked to try to understand how big changes you will be to the business of the provision [indiscernible] your revitalization is experienced in the past few years, what do you think will be the know-how on the business after you acquire the brand?

And what has been the challenges during the revitalization process and how could you use a self-owned brand ownership to bridge the different system and make the challenges more [indiscernible]? And also, will you make big changes in the business looking forward, like even transforming the business model of Pizza Hut. So anything -- any color on that would be very helpful. .

Xiaopo, 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 the acquisition of the brand, any additional sort of changes if that's what I heard you. .

We started Pizza Hut transformation back to 2017. By 2024, we share with our shareholders that we've reached an inflection point. So it has been a long and committed transformation. And I am very honest to say that the transformation is mainly fundamental. We built the core capabilities from the product. For example, the crust, the dough master, the crust technology and know-how. We just launched the multigrain crust in June, and it became instant hit. And this would not happen if we have not built our core capability in in the dough in the last many years. We fill 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 recently launched burger business. And I think with -- with this burger story, I would like to sort of answer your question about 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 Hut Burger bar, you can imagine there were a lot of conversation behind the scenes. Yum has been a 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 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 a better ability to be yet or to respond to the market changes. Our action would be faster and sharper and that strategic independence of speech is quite valuable. So among the many other benefits, this is one.

And additionally, if I could highlight, it does help us to open stores even faster. You have very good numbers. You will probably -- you're probably aware that quarter 1 alone, the Pizza Hut China new store opening is more than 100% of the global opening, put it that way. And we put -- open the store even faster. Why? Because you understand and fully appreciate when we open a store, we want the quality first. That means we would look at what other stores reached 2 to 3 years paper first and then we open stores.

So now with the additional margin of 2.8% into our restaurant margin, more stores will meet our requirements. And thus, we are increasing the guideline of next year new store opening to 800 on the condition that they will meet our 2- to 3-year payback. So I think with that, I'm going to pause about what are the benefits. And again, I think, yes, we need more time to go through this particular topic. Thank you again, Xiaopo.

Next question that comes from Christine Peng UBS.

So I have a question for Joey. So Joey, I noticed that in the presentation, you actually spend quite a bit of time to talk about the new initiatives, especially in terms of product innovations. So just to the broader picture -- we also noticed that the Chinese government has been trying to advocating a healthier diet for the general public in view of the increasing health care cost pressure for the government. So I was just wondering what's management sorts towards this initiative? And also, I'm also very keen to understand the supply chain efforts, any challenges when you're trying to more healthier choices, such as [indiscernible]set to the consumers of Yum China. .

We want to be more specific about the growth of new initiatives because given KFC's size of business, it's quite hard to highlight the scale of the initiative. But once we point out, they are actually quite big already, like KCOFFEE is CNY 1 billion sales and then we're going to double it to take CNY 2 billion and then April, we have for quadruple. I mean, the growth is 4x, it's not even 2x and then we are going to reach CNY 1 billion sales. And all these are very sizable, it is a stand-alone business. So we highlight that for that reason.

And coming to your question about the diet, I would like to point out that KFC and Pizza Hut on offer very healthy diet, too. Protein is very healthy. Chicken is very nice protein. What we talk about for KPRO is light meal, and that's an important concept. Light meal, it's growing very nicely, as you can see, because the concept is good and both in terms of food and also trend. so the light meal is about protein again. And that also include Pizza Hut, our recent light meal platform of the multigrain crust piece with the protein topping, like the chicken, the egg and then mixed with vegetable.

And then on the drink side, the drain come with protein, again, is getting very popular. So certainly an area growing nicely. So for KPRO, it's not something that new. We start to opened the third KPRO that was 2017 at JV. So we've been working on the menu year after year, year after year, year after year until we get to the many of the customers like with the right balance of the protein, the curry 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 committed to it. And everything we produce -- we provide in KPRO and then also the light meal option for Pizza Hut is from our supply chain, and we share the suppliers between the 2 brands and our smaller brands as well. And again, the key thing is committed food safety, our best focus. And that's our strategic mode as well. So we are very confident about the light meal option because it's not only it's light, the concept is great, but customer trust of food safety.

You can see paper, we have [indiscernible] 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 salad, whether a chinese seller or [indiscernible] and fried chicken. Thank you.

Our last question comes from Ethan Wang with CLSA. .

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

Thank you, Evan. You know asked quite well already. You -- I mean, I'm sure you're aware that whatever we do, the execution is always very disciplined and that applies to KCOFFEE as well. For KCOFFEE last year, we get to the sales of CNY 1 billion sales. And for 2026, we are going to get to CNY 2 billion. And it's still contributing about mid-single-digit same-store sales to the parent store. -- and take average or the price per comp is still a similar level compared to last year. So 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, and so we don't separately disclose the comp sales for KCOFFEE Cafe as a module. But what we can say is obviously, the daily sales is higher than the predelivery war period of time, right? That speaks for the consumer mind share improvement. And we have always been making the comment that KCOFFEE Cafe thus some will benefit from the delivery war and increasing consumer mind share, thereby helping us do a lot of new location extension. Now it's more than 3,300 locations, and we guide more than 5,000 locations end of next year, which is 2 years ahead of schedule.

And one of the key precondition for us to do that is really the daily [indiscernible] that has to be increasing in a very healthy way, right? And then we're very happy to see. And now the delivery was very rational for -- particularly for beverage sector, but the daily capsule is higher than the predelivered [indiscernible] period of time. So we are pretty bullish with that.

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.

Good day, and thank you for standing by. Welcome to the Yum China First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

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 will 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 will now turn the call over to Joey Wat, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. Once again, we delivered solid results in a dynamic environment, reflecting the successful execution of our LGM 3.0 strategy. which balances resilience, growth and moat. In quarter 1, revenue grew 10%, and operating profit increased in reporting currency, supported by a positive foreign exchange impact. We opened 636 net new stores more than 1/3 of our full year target and ahead of schedule.

Even as we accelerate 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 round to 0. Same-store transaction grew for the 13th consecutive quarter. Excluding foreign exchange impact, system sales grew 4% and 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 3 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 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 thank you to our team for delivering solid results in this fast-changing environment. We maintain a strong deal focus on innovation and operational efficiency.

Let me share a few updates on our key initiatives, and then I will hand 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 buckets, we launched Classic limited time offers, LTOs, such as Stringer, feed rep and wind bucket to drive additional traffic. Building on last year's hugely successful LTO campaign, crackling Golden Chicken Wings [Foreign Language] 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. Take Coffee cafes are now in over 2,600 locations and K-Pro in more than 280 locations. KCOFFEE Cafes generate around mid-single-digit sales uplift and K-Pro 20% to their parent KFC stores in quarter 1. Our consumer insights 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 courses, making them attractive business models. Adrian will provide more updates on these 2 modules later in the call.

[indiscernible] alongside our classic Super Supreme campaign for Chinese New Year. We collaborate with popular IPs like Gander and butter beer and launched our Signature [ All-You-Can-Eat ] campaign. In quarter 1, Pizza Hut accelerated expansion with 207 net new stores. that 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 franchisee model, open 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?

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 continued 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, coffee coffee 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 ending into select Tier 3 cities as well. especially in Eastern and Southern China, where the demand for light meals is stronger. KPRO is performing well and showing margin improvement driven by [indiscernible] module iteration including menu innovation and reduced investment requirements. With that, we're raising our KPI 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 level. This year, 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, a marking its 13th concerted 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 TA is moving closer to our long-term target range of [ 60 to 70 ] as shared of last year's Investor Day. Even with the lower A, Pizza Hut restaurant margin expanded by 60 basis points year-over-year to 15.0%. OP margin also increased by 100 basis points. efficiency continued to improve at Pizza Hut. As we streamline 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. I Franchisees contributed 42% of KFC and Pizza Huts 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 the 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 the 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 highway network, we're leveraging franchisees resources to tap into the growing underload demand.

We have already signed franchise agreements with more than a dozen provincial and municipal highway operators, [Foreign Language] 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. While also meeting new customer needs through innovative solutions, traditionally, drive-thrus dedicated car lanes.

We expand on this by offering carside pickup at locations without such lengths but with pullover areas while our crew brings orders straight to consumers' cars. This approach significantly reduces capital expenditure requirements and gives us the greater flexibility in driving takeaway sales. Today, more than 7,000 KFC stores offer either the traditional drive-through or car side pickup services, up from around 2,000 a year ago.

While still early in building awareness habits in quarter 1, nearly 1/3 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 in store nearby to offer even greater convenience -- let me now go through our Q1 P&L.

[indiscernible] sales grew 4% year-over-year. Same-store sales grew slightly year-over-year rounded down 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 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 costs 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%, and 10 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 OP margin was 13.7%, 20 basis points higher year-over-year. achieving the eighth consecutive quarter of OP margin expansion, savings and G&A expenses helped improve OP margins. Operating profit was $447 million first quarter record, growing 6% year-over-year. Net income was $309 million, flat year-over-year. Excluding our investment in Maine, net income grew 4% year-over-year.

Our investment in Meituan had a negative impact of $9 million in quarter 1 and 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 were up 11% year-over-year, excluding our investment in May.

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 lighter 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 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 OP margin roughly in line with the prior year period in quarter 2.

As for 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, 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 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 OP 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 and 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 onward. With that, let me hand it back to Joey for his closing remarks.

Thanks, Adrian. Let's take a moment to highlight our key growth drivers in quarter 2 and beyond. At KFC, our 6 hero products provide a solid foundation, accounting for around 30% of sales and are purchased by about 80% of our ASIC members. We keep innovating to drive repeat purchases [indiscernible] introduced in 2021 is a great option for a home consumption and has gained popularity quickly. Sales nearly tripled since 2022, surpassing [ JPY 2 billion ] in 2025. In April, we add aromatic paper rapid roasted chicken, [indiscernible] to the permanent menu after successful LTO in quarter 4 last year. This new offering is incredibly juicy and a simple cooking process ensures that ad 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 1/3 of our entire menu. With this menu revamp, we add new platforms tailored for doing sharing and enriched our protein offerings. For example, beef and chicken for [indiscernible] approached in space tomato sauce. In May, we are excited to upgrade our hand-tossed pizza with multigrain crust and colorful protein and vegetable toppings [Foreign Language].

These innovations not only taste great, but a 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 [indiscernible] at very affordable prices. KFC's Chinese bonds stocked with [indiscernible].

This ban weighs more than half a ton is inspired by a popular [indiscernible] and is the winner of our internal nationwide food ideation competition. And Pizza Hut offers Roman style Spicy pasta with sausage. [Foreign Language] both food gains 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 target and will continue to drive profitable growth and create sustainable value for our shareholders. Now let me pass it back to Florence.

Thanks, Joey. Now we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to 1 at a time.

Operator, please start the Q&A.

[Operator Instructions] We will take our first question. This is from Michelle Cheng from Goldman Sachs.

I would like to for the delivery business a little bit more. Adrian, you already mentioned a bit on this delivery impact. But can you still elaborate a little bit more for the past few quarters, given 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 like changes in the trend in the past 1 to 2 months. And looking ahead, what we expected, the subsidies will be more normalized. And how should we think about the financial impact? And what will be our strategy is especially driving more takeaway and the in-store consumption.

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 performed competition recently for sure, and we welcome the development and believe that it will benefit our industry over time. And specifically, the reduction in subsidies right now is more more pronounced for smaller orders, but only a slight decrease in QSR. So we see platforms increasingly focusing on higher TA orders, which is good for our business relative to the drilling business as opposed. We have been very consistent in the past last year and now that we always maintain a disciplined approach. We balanced sales growth, margin potential and brand integrity. So I believe that we are well positioned for the rationalization of the delivery subsidies. And 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. And in my prepared remarks, I talked about the Pizza Hut's new food [Foreign Language], KFC, the KCOFFEE, KPRO growth mentioned by Adrian and also the [indiscernible]. So all these are our focus, and we continue to maintain a disciplined approach [indiscernible]

Yes. And in addition to that, I guess, as to your second part of the question regarding financial impact of the more rationalization of delivery subsidy as Joey mentioned, we have been very disciplined in taking the delivery subsidy you've ever seen us a few quarters ago. And we believe we are among one of the better companies positioned in the industry to to kind of enjoy the more rationalization of the delivery environment. So I guess, as a little conclusion, we reiterate our annual guidance on top line for 100 to 102 on comp sales, which is something that we're confident to achieve. And specific to quarter 2, as I mentioned in the prepared remarks, we do expect a sequential improvement in our comp sales in Yum China, KFC and Pizza Hut and more specifically on top line, right, delivery sales growth, we still believe it's a long-term trend. Although the subsidy is more rationalized, but still it is growing on delivery mix. So we still face some videos pressure and the delivery sales mix will increase at least in the near future.

In terms of TA, KFC's delivery orders generally have a higher TA. So slower growth in delivery will translate into a slight decrease in TA from the growth in smaller orders. And looking forward, consistent to what we shared in February earnings, we expect FCTA to either slightly decrease or stay generally stable for the full year. And for Pizza Hut, delivery TA, which is a bit opposite to KFC, the delivery [indiscernible] than dine-in. So slow down and delivery sales will translate to a more moderate decline in TA for Pizza Hut. And 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. So the rider cost pressure will moderate. So hopefully, together with our other efficiency initiatives that will help better support our margin in the second half. And in terms of the second quarter, the pressure is slightly less compared to quarter 1. And as always, we use the balance approach to drive sales at the same time, to protect our margin and price integrity.

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

Joey, Adrian, congrats on the results despite a very fluid environment. In fact, the recent sale off of share price has actually baked in bare expectation, but often the result [indiscernible] released. So my question is actually on our OP margin guidance I remember previously, we target a largely stable OP margin in Q1, but the actual result saw like 30 bps OP margin expansion. And just now we confirm that in the second half, we may see easing rider cost pressure given a more normalized base for the delivery sales mix. And 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 OP margin, there actually could be upside risks to our full year margin guidance. That's my question.

I will take the question on margin. I think our margin guidance share in early February was a slight increase in our operating profit margin for the group for the full year. And I understand that in the market, different people interpret slight increase a bit differently, what is light. And indeed, in quarter 1 earnings -- sorry, in the quarter 4 earnings in early February, we mentioned that OP margin the group will be generally stable or broadly in line with the same period last year for quarter 1. It turned out to be a 20, 30 basis point expansion OP. So it's still, I guess, broadly in line. And as a matter of fact, second half, indeed, the right cost pressure will moderate, right, because the delivery mix is higher in the base. And -- but specifically on the 3 key line items, I guess I'll probably share some more color it would be helpful for you guys and for the other investors to help put together and refresh our model for the coming 3 quarters and the year for COS, we expect the COS to be broadly stable for the group. And as you noticed that the KFC COS in quarter 1 is generally stable, and Pizza Hut there is an increase in COS. There are a few reasons. One is the all you can campaign, which is definitely great value for money. Second is, as we mentioned last quarter, we have a new -- a lot of new menu items, which we are still in the process of optimizing the cost. And thirdly, it's because of the higher delivery mix, which results in a higher package cost for pizza, which is actually a bit more specific to pizza. Because for KFC, the [indiscernible] similar before between dining and delivery. So with that, the COF for Pizza Hut will be between 33% and 34% for the full year, which is a bit higher than last year. However, we still guide a margin extension for Pizza Hut restaurant margin, OP margin front given the [indiscernible] So that's our [indiscernible] for the group [indiscernible]. For COL, I think it's -- we faced consistent headwinds on COL because of the delivery mix increase. And we get pretty specific figure on what is the COL pressure due to the increase in delivery mix for the quarter, and I'm sure you can have a recently good modeling on the COL for the remainder of the year, depending on your specific assumption on the delivery mix. So that's on COL, we face headwinds that will be worse on COL. Overall, we do face tailwinds on due to our efficiency initiatives. On one 1 hand, we will have hopefully better rental because currently we do -- although there's initial signs of a good turn of the property market or initial sign of stabilization in property market. But still on commercial real estate, it's quite favorable to the merchant as of right now, and we would like to leverage the opportunity to further optimize our rental. So you see a little bit of that benefit in quarter 1. Hopefully, that will come in in the coming quarters as well. And our lower capital expenditure, which results in a better depreciation that will benefit as well. together with other initiatives, including A&P, et cetera. So overall, the annual guidance on margin, which is a slight increase in OP margin for the group is unchanged. And hopefully, we are able and we are confident to be able to deliver that.

I just want to add one comment about Pizza Hut margin, which was very nice for the quarter 1 this year. It's actually I think 1 of the highest since the turnaround initiatives in 2018. We'll be very consistent with our duration of Pizza Hut turn [indiscernible] first profit later. [indiscernible]

Yes. So last remark is really impressive. I think remember, during the Investor Day, we mentioned a 3-year target of 14.5% OP margin -- restaurant margin for Pizza Hut. Based on the current run rate, I think that we should actually achieve that target earlier than expected.

Slightly, slightly. The inflation point was 2024 indeed because 2024, we feel like sales was a good position, then we start to really pressed accelerator on the margin side, and we are happy to see what we are seeing.

Next question is from Lillian Lou, Morgan Stanley.

My question is actually on the underlying demand trend and related to that, the pricing momentum as well? Because I think in the release, important statement was you are still very excited, encouraged by the underlying improvement of consumer sentiment with a more modern moderated subsidy we see the within merchants? Is the competition also getting mold or actually everybody trying to rush up the traffic without as much subsidy from platforms. So what's the dynamic of the demand and also competition right now? And also on a like-for-like basis, are we seeing a chance for some improvement on pricing in terms of the whole industry and also for ourselves.

I'll make 2 quick comments on that, and maybe Adrian has a bit more color to add. We have shared our view on the improving consumer sentiment since Investor Day last November. And we certainly have observed some stabilization of pricing trends. Not only we take the pricing but we also see more players taking pricing. So that might be a sign that shows [indiscernible] more supportive consumer environment. And right now, the more rational competition among delivery platform is happening. So we believe that's constructive for the mid and long term as well. But other than pricing, what we still fundamentally believe is still great food and great value. So without that, pricing is a bit [indiscernible] to be there. So come during the after the Chinese New Year, we have seen really good performance in [indiscernible] is extremely competitive in terms of pricing. But if you have not tried our [indiscernible] the hot dry noodle that are selling really well right now. Right now, it's time because it might go out of thought person. And then Pizza Hut, we launched the 30 new dishes, the new platform like for [indiscernible], which is the fantastic value for money and really fun way to eat thinking about Chinese, we sold almost 40 million stake last year in Pizza Hut, but it's more fun to either stay in titer with the saws and wrap. So all these are happening at the same time, together with pricing, it cannot go along.

Yes. I guess just one little note to add, which is as Joey mentioned, the pricing environment is becoming a bit more favorable, and we encourage -- continue to be encouraged by the improving consumer sentiment. But when that translates to TA obviously, Pizza Hut here is -- our strategy is to decrease the tier to be even more mass mostly friendly. For KFC, as we repeatedly mentioned in the recent earnings that for this year, we do expect KFC TA to decrease [indiscernible] Actually, I think I mentioned the multiple of the investor calls as well that even in the inflation -- in a very inflationary environment with the speed of our innovation right now, the TA may still decrease. That's because of the mix not necessarily because of pricing or discounting. So that's something I would like to caution, right? The higher growth in [indiscernible] as Joey mentioned, higher growth in KPRO, higher growth in KCOFFEE, those are all lower TA compared to the broader KFC business, so the higher growth itself, the mix itself will cause the slow a slight decrease in TA. So this is very different from the U.S. market where the TA represents roughly the inflationary index in China here with innovation, it's a different story

Next question is from Sijie Lin from CICC.

So I have a small question on KPRO. We see that the KPRO has performed very well and achieved initial success and risk expansion targets. So could you please elaborate more behind this? And also, if you an estimate of roughly how many CFCs are suitable or have potential for opening KPRO [indiscernible]?

We are very excited about KPRO as well. Although the model, it actually took 7 years to come to fruition. And we -- as we mentioned in the prepared remarks, we are accelerating the development at KPRO to to about 600 stores. The menu, if you have tried those before a completely different there's a very lovely sort of video on the social media. It's not from our company but I thought that the added a good job to talk about the capable story. The food is the Chinese style [Foreign Language] So the food is healthy, very reasonable carry, but you're still full, you're not hungry. That's important. And then the trim mix is very encouraging as well. We are selling very well with new shake is of the business. And this is much higher than the KFC business. With that said, between the drink business within KFC has normal potential. But compared to KPRO. So the product wise, very small menu, but obviously, we are doing something right after learning for 7 years. And then Tier 1, Tier 2 cities are doing well. And then we are also testing in Tier 3 cities, and we have some very exciting early results there. So we'll continue that. And the result is encouraging, it's adding to about 20% of our sales uplift to the parent store, and the margin is good. So many, many good things. But the best thing among all is it has incredibly good reputation on food safety. Other than the food tastes really good. the customer really got it offer safety is very trustworthy. They feel they can feel comfortable about it. And that really show our long-term strategic mode for Yum China, our credibility and for safety, and that's something money cannot buy. It can only be done over 40 years [indiscernible] so this year, for 2026, what's the size of business with 600 roughly could be up to $1 billion sales, which is nice. So even after the first quarter, we are adding 2 more stores to our original plan. We accelerated the pace for the second half. We are open mind about it. It really depends on the testing of the Tier 3 cities. So it's exciting. We are very grateful that our operations team really developed the challenge but we open mind about the further growth pace.

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

I have a follow-up question on the -- so Adrian mentioned the pressure will be easy in the second half because of the base. I'm just wondering, is that the pace for quarter 2 as well? And if we just have a longer like Horizon, the next year or year after. So we always expect this CL growth to be moderate and which will be fully offset by the decrease in O&O. Is that what we want to achieve when we set the stable restaurant margin target, which means it doesn't really affect how the raw material product doesn't really affect how this trend is going.

Thank you, Ethan. So in quarter 2, as we mentioned in the prepared remarks, the pressure on COL was slightly or slightly eased, given there's only -- for Yum China, given there's only 1 month of delivery subsidy -- taking the delivery subsidy in the base, which is the month of June last year. And for the second half, it's the full of the second half that the subsidy was in place and the delivery mix was in the base. So that's why I would say the pressure will [indiscernible]. Overall, I think our margin guidance in the prepared remarks for quarter 2 was we expect a broadly stable OP margin for the group year-over-year for quarter 2. That's considering the different factors on [indiscernible] on the short term. On second half, I think one of the previous response to [indiscernible] actually provide quite a bit of details on the line-by-line breakdown. Your second part of the question on long-term margin -- for long-term margin at this point in time, we're still quite confident in our guidance shared in the Investor Day in November last year. which is for KFC to have a relatively stable margin over the long run. And for Pizza Hut, to have a margin expansion to exceeding 14.5% restaurant margin by 2028. I think one of the analysts was making a comment that we might be able to achieve that slightly earlier, which at this point in time, we don't have a revision in our guidance. overall for COL, in general, given the increase in delivery with or without a delivery subsidy on the delivery mix will increase and the growth will be solid. So we will face pressure on the lighter front, although the per ticket cost on lighter May decrease. So we hopefully will be able to offset that pressure utilizing the O&O and a bit of U.S. as well over the mid to long run in the next couple of years.

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

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

Good day, and thank you for standing by. Welcome to Yum China's Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions]

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.

Thank you, operator. Hello, everyone, and welcome to Yum China's Fourth Quarter 2025 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 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 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 Wat, CEO of Yum China. Joey?

Thank you. Hello, everyone, and thank you for joining us. I would like to start by saying thank you to our team for delivering strong results this year, especially in such dynamic market. In 2025, we opened more than 1,700 net new stores, taking our total to over 18,000 stores across more than 2,500 cities. Our focus on both system sales growth and same-store sales growth is paying off. Same-store sales growth has been positive for 3 consecutive quarters. System sales growth improved sequentially in quarter 4, reaching 7%.

Our dual focus on innovation and operational efficiency also boost our healthy margins. OP margin expanded year-over-year in every quarter of 2025, reaching 10.9% for the full year. It is the highest level since our U.S. listing, excluding special items. Operating profit grew 11% to $1.3 billion for the full year and was up 23% year-over-year in quarter 4. By brand, both KFC and Pizza Hut exceed our expectations in 2025. KFC's solid momentum continued with system sales growth reaching 8% in quarter 4 and 5% for the full year.

Pizza Hut transformed its menu and operations, resulting in 16% same-store transaction growth and 20% operating profit growth in 2025. While we accelerated growth, we also returned $1.5 billion to shareholders in 2025 through dividends and share repurchases, which is around 8% to 9% of our current market cap.

Let me share a few key highlights from our core initiatives, and then I'll hand it over to Adrian to go through our results in more detail. First, we continue to delight our customers with year-round innovation, launching about 600 new or upgraded items annually. At the same time, we stay laser-focused on our hero products, which are significant drivers of sales and repeat purchases. These items have a loyal fan base that is also highly receptive to the new innovations they inspire.

At KFC, our hero inspired innovations include Spicy Original Recipe Chicken [Foreign Language] and Crackling Golden Chicken Wings [Foreign Language]. In 2025, hero products accounted for 1/3 of KFC sales. And together with their inspired innovations, they delivered high single-digit sales growth.

At Pizza Hut, we sold over 200 million pizzas in 2025. The pizza category continued to grow strongly. Our newest thin crust pizza [Foreign Language], perfectly crispy with plenty of toppings has earned top reviews and became our best-selling crust. It now accounts for 1 out of every 3 pizzas sold. And is bringing more customers, especially younger ones into our stores.

Second, we focus on delivering great value for money and emotional value on top of serving good food. As we shared at our Investor Day, our pricing strategy has been crucial to our success and has helped us deliver 12 consecutive quarters of same-store transaction growth. Total transactions grew 8%, exceeding 2 billion transactions in 2025.

Emotional value matters, too. Last year, we partnered with 70 leading IPs in gaming, animation and sports, whether tied to the latest hits or tapping into childhood memories, these collaborations help us engage customers and capture additional traffic. Beyond themed toys and special packaging, we decorated select stores and pop-up stores to make the experience more fun for our customers.

Third, we capture new opportunities through front-end segmentation and back-end consolidation. Our multi-brand portfolio, diverse modules and food offerings help us reach more customer segments and serve a wide range of occasions. On the back end, we foster synergies by sharing and centralizing resources in and across stores, regions and even brands. Side-by-side modules, KCOFFEE Cafe and KPRO are scaling quickly, reaching 2,200 and 200 KFC locations, respectively. They drive incremental sales and profit with less investment.

Last year, we also piloted the Gemini model, which places KFC and Pizza Hut stores side-by-side to support entry into lower-tier cities with a CapEx of CNY 0.7 million to CNY 0.8 million for a pair of stores is a very attractive model for franchisees. We opened around 40 pairs of Gemini stores last year and expect to ramp up openings in 2026.

Fourth, we are adopting an equity and franchise hybrid model to drive faster and more efficient store openings. We see great potential for growth in China. Recently, I visited Chongqing, China's largest city by population with over 30 million people. In this widespread market, I saw a strong appetite for affordable good food. KFC's density there is only 4 stores per million people, well below the average of 17 in Tier 1 and 2 cities or Shanghai's 28.

With menu innovation and multiple store formats, we are confident we can continue to expand our market share in China. To capture incremental opportunities in lower-tier cities, remote areas and strategic locations, we began accelerating franchise expansion in 2024. The franchise mix of net new openings for KFC and Pizza Hut increased from 25% in 2024 to 36% in 2025. Equity stores remain the core of our business, representing over 80% of our store portfolio.

The payback period of our new stores remain healthy at around 2 years for KFC and 2 to 3 years for Pizza Hut. Last but not least, we are embracing Gen AI across our business to drive growth and efficiency. In our restaurants, we are piloting Q-Smart and a Gen AI assistant that integrates operation data such as labor and inventory. It identifies potential issues, recommend actions and implement. For example, Q-Smart can detect staffing shortage, propose replacement staff and initiate calls to them. This helps our RGM save time, make informed decisions and run restaurants more smoothly.

And in January, we rolled out Smart K, our AI ordering agent to all KFC Super App users. Smart K helps customers place orders. This feature has already been used by 2 million members, especially those who order breakfast and coffee. Customers respond positively to the ad convenience and customized suggestions.

At our Investor Day in November last year, we introduced our RGM 3.0 strategy, which takes a balanced approach across all 3 aspects of resilience, growth and moat. We also outlined our plans for our next phase of growth, including expanding to over 30,000 stores by 2030. We are confident that we can continue our rapid growth while improving profitability and returning capital to shareholders.

Let me now turn the call over to Adrian.

Thank you, Joey. Let me now update key highlights by brand. Starting with KFC. In 2025, KFC opened 1,349 net new stores, bringing its total to nearly 13,000 locations. System sales grew 5%, and restaurant margins expanded 50 basis points to 17.4%. Same-store sales growth turned positive for 3 consecutive quarters. In quarter 4, system sales growth sequentially improved to 8% year-over-year. Same-store sales grew 3%, and same-store transactions increased by 3% year-over-year.

Ticket average was flat as growth in smaller orders was offset by the increase in delivery source mix, which carries a relatively higher ticket average. KFC side-by-side modules are rolling out rapidly. KCOFFEE Cafes tripled its footprint from 700 locations in 2024 to 2,200 locations in 2025. While expanding to more locations, we also increased per store daily cups sold by 25% year-over-year.

Menu innovation has been key in driving repeat purchases. Last year, we launched a new product every week on average. KCOFFEE Cafes generated a mid-single-digit sales uplift for their parent KFC stores, and we're confident in its future expansion. KPRO added more than 200 locations in just 1 year. This live new concept offers grain and pasta bowls and superfood smoothies, backed by KFC's trusted quality and strong value for money. KPRO has resonated well with consumers and generated a double-digit sales uplift in its parent KFC stores. We aim to double KPRO's footprint to more than 400 locations in 2026, focusing on higher-tier cities.

Now moving on to Pizza Hut. In 2025, Pizza Hut opened a record 444 net new stores, raising its total to 4,168 stores. Restaurant margins improved by 80 basis points to 12.8%, bringing its OP margin to 7.9%, the highest level since our 2016 listing. In quarter 4, system sales grew 6% year-over-year, up from 4% in quarter 3. Same-store sales grew 1%, positive for the third consecutive quarter. Same-store transactions increased 13%, growing double digits for the fourth consecutive quarter. Ticket average was CNY 69, down 11% year-over-year, reflecting our mass market strategy.

Last year, Pizza Hut entered more than 200 new cities. About half of these, around 100 new cities, adopted the WOW format. We continue to refine the store format and test different service models. The CapEx for a stand-alone new WOW store is around CNY 0.65 million to CNY 0.85 million. With lower CapEx, streamlined operations and simplified menu, while enables us to penetrate previously untapped locations especially in lower-tier cities. We saw improving restaurant margins and a solid estimated payback period of 2 to 3 years for the new WOW stores, in line with the average new stores for Pizza Hut.

Our emerging brands are also making steady progress. Lavazza opened 34 net new stores, including its first store in Hong Kong, taking its total store count to 146. Same-store sales growth turned positive in 2025, and overall store economics improved meaningfully. Its latest light model requires only CNY 0.5 million in CapEx, roughly half the cost of the previous formats. Its retail business of packaged coffee products, the other growth engine, delivered over 40% sales growth and more than doubled operating profit year-over-year in 2025.

Let me now go through our quarter 4 P&L. System sales grew 7% year-over-year and same-store sales grew 3%. Our restaurant margin was 13.0%, 70 basis points higher year-over-year, mainly due to improvements in cost of sales and occupancy and other cost ratios. Cost of sales was 31.6%, 30 basis points lower year-over-year, mainly due to the favorable commodity prices and supply chain efficiency gains. We shared some of these savings with our consumers in the form of great value for money.

Cost of labor was 29.4%, 120 basis points higher year-over-year. While overall rider costs were higher due to a higher delivery mix, we maintained nonrider costs as a percent of sales at relatively stable levels through operational efficiency gains besides wage inflation. Occupancy and other was 26.0%, 160 basis points lower year-over-year, mainly due to sales leverage, store CapEx optimizations and better rent.

Our OP margin was 6.6%, 80 basis points higher year-over-year. Operating profit was $187 million, growing 23% year-over-year. Net income was $140 million, 22% higher year-over-year. Excluding our investment in Meituan, net income grew 14% year-over-year. Our investment in Meituan had a negative impact of $0.5 million in quarter 4 compared to a negative impact of $9 million in quarter 4 last year.

As a reminder, we recognized $11 million less in interest income in quarter 4 this year due to a lower cash balance, resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.40, 29% higher year-over-year or up 21% year-over-year, excluding our investment in Meituan. For the full year, system sales grew 4%, and same-store sales grew 1%. Restaurant margin was 16.3%, 60 basis points higher year-over-year.

Both KFC and Pizza Hut's restaurant margin improved year-over-year. G&A expenses were 4.9% of revenue, 10 basis points lower year-over-year. Operational efficiency gains more than offset higher performance-based compensation in the year.

Operating profit grew 11% to $1.3 billion. Diluted EPS was $2.51, growing 8% year-over-year or 14% excluding our investment in Meituan. Total CapEx was $626 million. Capital efficiency improved. ROIC reached 17.3%, up from 16.9% in 2024.

Let's now turn to capital returns to shareholders. We're on track to return a total of $4.5 billion to shareholders from 2024 through 2026. That is $1.5 billion each year. In 2025, we returned $353 million in cash dividends and $1.14 billion in share repurchases. In 2026, we remain committed to returning $1.5 billion to shareholders. We're reaching our quarterly dividend by 21% from $0.24 to $0.29. At $0.29 per quarter, the payout ratio will exceed 45% of our 2025 diluted EPS with an annual dividend totaling around $400 million.

We have also initiated a $460 million share repurchase plan for the first half of 2026. With these arrangements, we are well positioned to deliver on our commitment for the year. Starting in 2027, as outlined at our 2025 Investor Day, we plan to return approximately 100% of annual free cash flow after subsidiary dividend payments to noncontrolling interests, and this is expected to translate into an average annual return of $500 million to $1 billion plus in 2027 and 2028 and exceed $1 billion in 2028 and onwards.

These commitments are supported by our healthy cash position and robust cash generation. In 2025, we generated $840 million in free cash flow, an increase of 18% year-over-year and ended the year with $2.0 billion in net cash.

Now moving on to our 2026 outlook. We're confident we will reach more than 20,000 stores in 2026. This means opening over 1,900 net new stores, with 40% to 50% coming from franchisees for both KFC and Pizza Hut. We will continue to deepen our presence across China, especially in lower-tier cities and strategic locations, using a variety of store formats. With lower CapEx per store and higher franchise mix, we expect the total CapEx to stay in the range of $600 million to $700 million this year.

As for other financial metrics, we expect our growth in 2026 to be consistent with our 3-year guidance shared at our Investor Day. That is 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 margin and OP margin for Yum China.

As activity on delivery platforms remain dynamic, we have factored in different scenarios and are confident that the impact on our businesses will be limited due to our balanced and disciplined approach. Our full year projections are based on our current plans and have not assumed any changes in macro. Any improvement will represent potential upside. We will continue to track the progress of our new store openings, module development and rollout and other core initiatives and provide updates as we go.

For quarter 1, we're working hard to deliver our fourth consecutive quarter of positive same-store sales growth and 13th consecutive quarter of positive same-store transaction growth. On margins, we faced a tough year-over-year comparison. First, rider costs are the biggest headwinds, driven by a higher delivery sales mix. Delivery mix increased from 42% in quarter 1 to 53% in quarter 4 last year and is expected to grow further.

Second, the benefit from lower commodity prices will be smaller than before. Additionally, last year's base already reflected significant benefits from Project Fresh Eye and Red Eye. KFC's restaurant margin was already 19.8% and Pizza Hut restaurant margin improved 190 basis points year-over-year in quarter 1 last year, setting a high base for quarter 1 this year. We'll focus on efficiency and sales leverage and strive to maintain Yum China restaurant margin and OP margin roughly in line with the prior year period in quarter 1.

With that, let me pass it back to Joey for her remarks on the Chinese New Year.

Thank you, Adrian. Let me share a few thoughts on the Chinese New Year, our key trading window of the year. Chinese New Year falls on February 17, considerably later than in most years. Our teams have prepared comprehensive scenario plans by the week and even daily. People will soon be traveling and gathering for the holiday season. Our brands are focusing on their signature products to capture the heavy traffic during Chinese New Year, while maintaining strong operational efficiency.

At KFC, buckets have long been our Chinese New Year signature, offering exciting food and abundant value. This year, in addition to our Classic Golden Bucket and Wing Bucket, we are introducing for the first time, peanuts and sunflower seed mini bucket [Foreign Language]. These packaged snacks honor Chinese traditions and help create a festive Chinese New Year atmosphere.

At Pizza Hut, we are focusing on one of our hero products, the Super Supreme Pizza. This time, we are adding new choices by pairing it with our Classic Bolognese and trendy salted egg yolk toppings. Customers can also top up the pizza with a mountain of crunchy potato chips and rich sauce, [Foreign Language]. These offerings are available in combos designed for family and friend gatherings and to drive ticket average. Overall, for this Chinese New Year, we are executing according to our plans. Trading year-to-date has been in line with our expectations.

With that, I would like to wish everyone a happy and prosperous year of the horse. Now let me pass it back to Florence.

Thanks, Joey. Now we will open the call for questions. [Operator Instructions]

Operator, please start the Q&A.

[Operator Instructions]

Our first question comes from the line of Michelle Cheng from Goldman Sachs.

Congrats for the very strong results and ended 2025 with these impressive numbers. My question is about pricing. We noticed that you raised the delivery menu price recently. And earlier, we also hear some other brands are raising the price. So can you comment on your expectation on the pricing trend, including any changes in your end-market promotion activities? And how this will be reflected in the same-store sales growth, especially -- we should have a pretty easy base for the first quarter on both same-store sales growth and overall sales last year first quarter.

And secondly, if I may, regarding delivery mix, we noticed that delivery mix increased quite a lot, but the margin is still pretty good. So unlike other kind of catering business, which has been suffering from higher delivery mix and lower margin, and for Pizza Hut, we even see payroll cost is down in fourth quarter. So can you still elaborate a little bit more on how we should think about 2026 delivery mix and impact on the margin?

Thank you, Michelle. Let me take the price and Adrian can answer the second one. The price increase for KFC, it was a mild adjustment. It only affects the delivery menu and it has no change to dining and takeaway. And we also did not make any change to the signature campaign, such as the Crazy Thursday or the weekend Buy More, Save More. And the price increase helped absorb some rider cost increase because of higher delivery mix.

With that said, we remain committed to offering great value for money, something we have done consistently for a long time. And therefore, we are very committed to it. And that was thoroughly discussed in our Investor Day, together with our good food and emotional value.

The primary goal of the price of our business, of our commitment is to still to drive traffic. So we are still targeting 13th consecutive quarter of same-store transaction growth and fourth quarter of same-store growth in quarter 1. And so far, the trading has been in line with our expectation. So overall, in the short term and long term, I hope this demonstrates our confidence in our business model, Adrian?

Yes, sure. Michelle, on your second question regarding margin outlook and also the delivery mix. I guess very briefly on delivery mix outlook for 2026, we do expect further increase in mix for delivery for full year 2026. I mean our delivery growth has been pretty solid for the past more than 10 years.

And for the past 1 year, given the dynamics in delivery aggregators, our growth had been particularly high, which has proven a pretty big surge in delivery mix, I think from 48% -- sorry, 40%, 42% for last year to around 48% for the full year 2025. So it's a pretty significant increase.

And for the full year 2026, we do believe, regardless of the delivery aggregator subsidy dynamics, we do expect that the delivery mix will surge further. And in terms of the margin impact on Yum China and the 2 brands, as we mentioned in the prepared remarks, we expect the full year restaurant margin, OP margin to slightly improve year-on-year and we are confident to achieve and deliver that, specifically on 2 brands.

For KFC, we expect the full year restaurant margin to remain relatively stable year-over-year. It's already at a very healthy level. And as you may recall, during our Investor Day 3 months ago, we actually gave long-term guidance for KFC's restaurant margin, which is to be relatively stable over the long term as well at a healthy level.

For Pizza Hut, we expect the full year restaurant margin to slightly improve from 2025 level with streamlined operations, offsetting higher delivery costs and a higher base year-over-year. I would like to reiterate that for quarter 1 specifically, we faced a tougher year-on-year comparison, as we mentioned in the prepared remarks.

There are different factors that we mentioned in terms of meaningful delivery mix increase and thereby the rider cost increase correspondingly and also the tailwind from favorable commodity prices gradually reduced and also the quarter 1 last year is a really high base with KFC's restaurant margin being as high as 19.8% and Pizza Hut's restaurant margin improved by 190 basis points year-over-year in quarter 1 last year.

So both brands have really high base. And obviously, our guidance for the quarter 1 margin being kind of stable, has accounted for the price increase on delivery platforms for KFC.

And lastly, I think you asked about how do we understand each line of the key cost line items for full year 2026? For COS, cost of sales, we expect it to remain relatively stable. There will be tailwinds for commodity prices, but the tailwind will be smaller, and we will pass good value for money to our consumers.

So U.S. will be relatively stable for Yum China and for KFC and Pizza Hut. For COL, cost of labor, Obviously, we face continued headwinds from the higher rider cost as a result of the higher delivery mix expected for this year as well.

And we aim to maintain the non-rider cost stable, offsetting the low single-digit wage inflation with more streamlined operations. And lastly, our O&O occupancy and other costs, we continue to explore optimization opportunities and expect O&O as a percent of sales to keep improving year-over-year for the full year 2026, which is supported by store CapEx optimization and better rents. So hopefully, that address your question. Thank you, Michelle.

We will now take this question from Chen Luo from Bank of America.

Congrats again on the strong results. In fact, today in Lichun in China and -- for those foreign investors, it actually stands for the first day of spring. So China consumption has been muted in winter for too many years and our strong results have fortunately brought us touched upon once.

And my question is more on the sales side. I noticed that our SSG has actually edged up higher in Q4 versus Q3, despite the fact that the online delivery subsidy intensity has eased a little bit Q-on-Q. What have we done differently to boost SSG in Q4? And also, as we are already into the [indiscernible] season, can you actually share with us some color on the year-to-date trading environment?

I understand that we have the calendar distortion. So any comparison based on the Lunar calendar would be helpful. And lastly, I noticed that for SSG -- for the system sales and revenue growth, usually in previous quarters, revenue growth will be slower than the system sales growth. But in Q4, on a constant currency basis, both numbers came in around 7%. How to reconcile the Q4 pattern versus the previous few quarters? That's all my questions.

Thank you. Let me make a few comments on the trading in Chinese New Year and Adrian can tackle the numbers. So overall, the customer sentiment, as we mentioned at our Investor Day, we are seeing -- or we continue to see early signs of improving consumer sentiment, which is good news.

With that said, Chinese New Year is a very key trading window, heavy traffic concentrate into several days and it creates a very significant challenge to operation. So we need to balance sales initiatives with operational efficiency as wages are higher -- much higher during the public holidays.

Point two is the Chinese New Year this year, as you mentioned Luo Chen, is considerably later than most year and we actually have yet to reach the peak trading. We call it in Chinese [Foreign Language]. So we are climbing up the mountain, but we have not reached a peak yet.

So it's slightly a bit early to make any big comment. So all we can see right now is while sales is ramping up, year-to-date trading has been in line with our expectation. And last but not least, we will continue our strategy to drive traffic, sales and profit growth for the quarter, all 3 at the same time, we target to deliver our fourth consecutive quarter of positive SSG and 13 consecutive quarters of positive transaction growth, as I mentioned earlier. Adrian?

Sure, sure. Lou Chen, on the second question regarding the comparison between revenue growth and system sales growth, yes. Normally, system sales growth should be slightly higher than revenue growth, and that's mainly caused by the higher growth of the franchise business contributing fully to the system sales, but only roughly half to the revenue.

And sometimes you do see similar figure or even same figure for the growth of the 2 metrics, that's partially also because of rounding as well. But going forward, I think, generally speaking, we do expect a slightly higher system sales growth than revenue growth if we kind of disregard the rounding factor in it. So hopefully, that address your question, Lou Chen.

And also the system sales -- sorry, one more line is system sales growth, when we opened a lot of stores during the last quarter, it helps the number, particularly quarter 4 is a slightly smaller one.

We will now our next question from Lillian Lou from Morgan Stanley.

Can you hear me?

Yes.

Congrats again. I have one question on Pizza Hut sales momentum, because obviously, as we still deliver very strong momentum in fourth quarter, higher than Pizza Hut's trends. And I recall on the [ Investor Day ] 2026 onwards, major sales growth will be mainly driven by - actual growth actually will be mainly driven by Pizza Hut, which should be growing at a faster rate than KFC.

So I'd like to understand, in particular, for 2026, what kind of incremental measures management plan to implement to drive up the Pizza Hut revenue or system sales momentum, which could be higher than KFC?

For Pizza Hut, first of all, our core business continue to drive very nice growth. In 2025, you will see -- we actually enter more than 200 cities. And this is a very big number for Pizza Hut. And that was helped by the Pizza WOW model, which alone enter into more than 100 cities because for a long time, Pizza Hut city penetration was stuck at 900 cities.

But now we're in over 1,000 cities. And 2024 was the year we share that we feel that Pizza Hut has reached the inflection point. So 2024 was nice growth and 2025 with the help of Pizza WOW store also grow very nicely.

So that's one way. And the other one I would like to mention is some additional color on the product. So it's worth trying, if you have not tried yet, it's a hand-crust, thin-crust pizza, [Foreign Language] pizza. The new crust was really -- actually is really amazing. And within a very short time, it accounts for 1 out of 3 pizza sold. And this is a very big number. So now we have a good variety of pizza crust with 4 choices: the thin-crust, the pan, the hand-tossed and stuffed-crust. And for those who spend a lot of time on pizza, you will know that doing pizza crust is a real deal. It's much harder than doing the topping. And the other product I would highlight is burger. We have been selling burger for more than a year now and it's mid-single digit of our sales mix. So from the module to the key products, these are very exciting growth driver for 2025, and it will continue into 2026. And I think I'll pause here. Thank you, Lillian.

We will now take our next question from Anne Ling from Jefferies.

A couple of questions here. So I would like to check first regarding the company mentioned about the expanding -- or ramping up in year 2026, the Gemini stores. So just want to check whether we will have to figure like how much more Gemini stores that we plan to open? And you mentioned that as a new format on the franchise, which is called equity franchise model.

I'm just wondering whether it means that Pizza Hut will -- sorry, I mean, Yum China will be investing in the franchise model and if you can elaborate that? And second question is on the new -- the coffee format as well as the Cape Pro. What is our plan for year 2026? And whether this attribute to like same-store sales growth, how much is attributed to same-store sales growth in year 2025?

Again, I'll take the first question, Adrian you can take the second one. Thank you, Anne. So Gemini saw the side-by-side, KFC Small Town and Pizza Hut WOW store is a pair with their own separate entrants and counters. However, on the back, we shared the in-store resources, the staff, equipments, rent, and it's particularly effective to enter lower-tier cities.

And the CapEx is good. It's only JPY 0.7, JPY 0.8 million for pair. So very attractive for franchisees. And the sales is sort of the lighter version of the KFC Small Town and the lighter version of Pizza Hut WOW. So we would like to control the average payback estimate at about still at 2 years. The menu will continue to be even simpler. So KFC menu will be similar to the Small Town one. Pizza Hut menu is probably only about 20%, 25% of the regular margin. And we expect the margin contribution will be incremental. And it's still early stage. We only have 42 pairs right now. It's a very small number, and we are testing it, but we do expect the Germini's model to improve its OP margin of our franchise business in the long term. And that's sort of the most updated progress of the Gemini store. Adrian?

Yes, sure. Anne, I think you have a small question between the first one and second one, which is, what is the equity franchise hybrid model? Just to clarify, it's not a particular store model. It basically means the acceleration of franchising initiative for Yum China.

So in the future, will become a business shifting from an equity-focused business only to a hybrid of equity franchise business. So that's not a particular [indiscernible] just to clarify on that one. And then your second question is basically regarding KCOFFEE Cafe and KPRO. As we mentioned, KCOFFEE Cafe contributes mid-single digit of incremental sales to the parent KFC store and KPRO, which is a reasonably new initiative. I mean, the KPRO model now is quite different from the like the older KPRO towards a year ago, right?

So this new version of KPRO we opened more than 200 menu locations in the year 2025, and this contributed double-digit incremental sales for the parent store with incremental profits. And -- but given it's only 200 locations or slightly more than 200 locations, out of 13,000 total store count for KFC. So you can imagine the KPRO contribution to the same-store sales, there for KCOFFEE Cafes is rather limited.

Similar for KCOFFEE Cafes, actually, because if you think about KCOFFEE as a whole, the menu mix for KCOFFEE and KCOFFEE Cafe altogether is roughly -- we mentioned previously, roughly 4% of KFC's menu mix.

So the KCOFFEE cafe alone is even smaller. But we do have high hopes of both these 2 modules. When they grow bigger and bigger, when they have more locations, they will represent higher contribution to the same-store sales growth of KFC. Thank you.

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

So I have two questions. So firstly is about KPRO. So Adrian, can you provide more details in terms of the economics of the KPRO model, such as ticket value, the margin profile. And most importantly, if you can provide some details in terms of the customer profile, the kind of the differentiation from the major format of KFC. I think that would be very helpful to understand the module in the longer term. .

I think the second question is about the Pizza Hut launching Burger. The question for Joey is that what's the management rationale behind this? Because obviously, this is mostly targeted maybe like a single person menu. And in terms of the product differentiation, pricing strategies, what are the differentiations from the KFC burger offering? And what's going to be the longer-term development strategy for this category going forward?

Christine, for the KPRO, we plan to double the number of stores in 2026. So from 200 plus to at least 400. And it offers a very good value for money for the light meal with very strong food safety as a brand. And the menu is very distinct. You just need to cross the border and try in Shenzhen. We have quite a few of those in Shenzhen. It offers energy bowls and smoothies. Smoothies are doing incredibly well there. In terms of the format, what else I can say is again, it's consistent with our corporate strategy of front-end segmentation and back-end consolidation.

So it has its own counter and space for -- seating space for customer where we share the KFC store space, membership, equipment, resources, you name it. And here's some interesting sort of contest for the customer. A significant portion of customers naming could be as high as 80% or 90% of our sales from KFC members.

And this is a great example of how our membership program is really helping our long-term, short-term business. So it's alternative -- it's an alternative for KFC members and that drives frequency. The frequency so far is very pleasing to us because it gives very little psychological burden to people for the light meal option, I guess. And also, you can imagine the office location worked really well for the KPRO. So we are hopeful for that.

And then let me move on to Pizza Burger. We offer that for over a year now. And it's different from KFC Burger. It's different in both ways. The Pizza Burger bun is freshly made in the store with the same pizza crust store, if that makes sense. So now you can probably understand why we are doing burger because we have this lovely dough, we can make pizza dough and we can also make burgers. But why not? It tastes really good and then with very high-quality meat and there are 2 flavors, which is fantastic is the burger with pineapple, fresh pineapple and also abalone sauce, which is quite creative. Why abalone sauce? it's pizza sauce.

It's a sauce the customer really love, it is classic. So we have this category -- this new product, burger -- and you are absolutely right, it works very well for the single person's offering. And we can see the single-person meal is opportunity for Pizza Hut. Right now, the base is low, but for 2025, that one-person meal is growing at 50%, 5-0 for Pizza Hut. It's lovely. So we continue to do a bit more of that. And let's see what 2026 will bring us. But again, it's still early days. It's only 1 year. We'll continue to learn and do better for our customers. Thank you, Christine.

We'll take our next question from Ethan Wang from CLSA.

My question is...

Sorry, Ethan, you might want to speak louder. We have hard time hearing you.

Sorry about that. So my question is on the delivery strategy. So if we take a relatively longer-term view, I know delivery is our key strategy to grow our same-store sales growth. You mentioned that at Investor Day. But given what is happening in China, and especially last year, it seems likely that consumers also want dining experience when they do so much delivery. And in low-tier cities, maybe consumers also wanted to dine in.

So I'm just wondering, how do we think about the dining and the pickup consumption scenario going forward? Are we saying we still focus on delivery? So that is the only focus or actually we're doing something on those 2 fronts? That's my question.

Thank you, Ethan. That's a good question as well. So as we have observed over the last 10 years' trend, as Adrian mentioned earlier, the delivery continued to grow. So we continue to expect it to grow in 2026 too. But at the same time, I'm with you, too, the dine-in and takeaway will still continue too. If I look at Pizza Hut, the takeaway, for example, 2025 takeaway percentage compared to 2019, it almost doubled, and I want to grow more for takeaway. Takeaway is a good business. But at the same time, dine-in is still an important part of our business. For KFC, dine-in is still about 30% and Pizza Hut is over 40%, about 45%.

So it's still a very important part. And we still believe that the business will still be there in the long term. But at the same time, we are not judgmental. We basically embrace whatever the customer preference in terms of delivery, takeaway and dine-in. And we strive to serve them well in all 3 channels. And then we'll balance the cost structure to do the best we could.

So yes, we really are open-minded and we'll do our best, but dine-in will continue. And in the lower-tier city, will dine-in be slightly higher? To a certain extent in the sense that the ticket average, the big or the big family consumption still is a [Foreign Language].

One last thing is how do we balance the growth of delivery? While the growth of delivery continues, we protect the margin. As you can see, we have done it. But at the same time, we have new growth drivers such as [Foreign Language] means like customer right now, we see a growing in terms of car ownership, right? The car ownership is growing. And then the business related to that is growing, too, and then we will deliver the food closest to customers' car. And that is growing nicely. Now we have over 4,000-plus KFC stores have that we call Car-side pickup. So we are doing a variety of the business to balance the sales growth. Thank you, Ethan.

Our final question today comes from Sijie Lin from CICC.

So my question is on the delivery platform subsidy. We know it's very dynamic, but could you provide a sense on how should we evaluate the trend and impact in 2026? And when the platform competition mitigates, what measures will we take to attract customers back to our own channel?

Thank you, Sijie. So on delivery platform subsidy dynamics, as we mentioned in the prepared remarks, we have different scenarios planning for the subsidy, how that evolves. And regardless of what the scenario would be, we believe and we're confident that the impact on our business will be limited because of our disciplined approach to drive sales, at the same time to protect margin and price integrity. And at the same time, and that's kind of the short-term horizon.

The long-term horizon is we do believe this whole delivery aggregator subsidy, as we previously mentioned, is good for the merchants, especially the larger merchants in the long run because they have choice of working with multiple parties. And also we can obviously take the opportunity to secure some long-term benefits during the subsidy war. So that's a response on both the short term and long term.

And I think the natural question has always been in our margin. And as we demonstrated in the previous quarters, we were able to protect our margins, actually even slightly increase our margin. And that's why we're confident to give the guidance for the full year 2026. We have an improvement in restaurant margin and OP margin for Yum China slightly. But I would like to caution again, sorry to repeat myself. For quarter 1, we faced a tough comparison, and our guidance for quarter 1 is to stay roughly in line for restaurant margin and OP margin year-over-year for quarter 1. Thank you, Sijie.

Thank you, Adrian. Thank you, Joey.

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

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

Hello, ladies and gentlemen. Welcome to Yum China's 2025 Investor Day. My name is Florence Lip, Senior Director of Investor Relations.

We have a full agenda today. This morning, our management team will present our latest strategies, followed by store visit in the afternoon. Some of our management will present in Chinese. Simultaneous interpretation from Chinese to English will be available. For our guests here in Shenzhen, if you need a headset for the translation and haven't got one, please raise your hands and our staff will assist you. For our online audience, you may also choose the appropriate channel by following the instructions online.

Our Investor Day presentation contain forward-looking statements, which should be considered in conjunction with the cautionary statement in our presentation and the risk factors included in our filings with the SEC. Management presentations will be uploaded to our IR website after each session. Without further ado, let's get started.

[Presentation]

Thank you. Thank you. Very good morning, and very big welcome to all of you to Shenzhen. It's a city of energy and speed and innovation. And so after 2 years, it's truly wonderful to see so many of our investors, shareholders and everyone who love our company to come all the way to Shenzhen. And those online, welcome as well. So heartfelt thank you to all of you. And in addition to that, heartfelt thank you to our employees, our customer, shareholders and everyone.

So we have about 40, 45 minutes here for my session, and I would like to focus on three things. First is to have a very brief recap of what we have achieved together, particularly since 2016, since when our listing in NYSE started. Second, our belief or philosophies. I'll talk about why we go there. And then the third is our strategic priorities or our strategy for the next 3 years and beyond. So three things.

Let's have a recap of our journey in China. You might -- many of you might remember this chart. We shared that in the last Investor Day back to 2023. This is like the journey, right, the GDP growth rate and then our new store opening. And it's quite cool to look at. It took us 33 years to build the first 10,000 store. But then it took us -- it's going to take us another just 6 years to get to the next 10,000 store. So last time when we are here, we are at 13,000 stores. Then we set a target of 20,000 stores by 2026. And I'm happy to report to all of you that we believe that we can get there next year.

Now before I go to the next slide, I would like to also point out that the China market, as you can see has been very dynamic and the position of the top 10 players in our market has been dynamic. And the next slide is to show how our market position by system sales evolved during 2016 to 2024. Simon, please?

So I don't know whether you can see the movement. So for the top 10, the positioning of the top 10 has moved quite a bit, except the top 1, and that's us. So for nearly a decade, we have stayed firmly at the top as China's largest restaurant company by system sales, well ahead of our competitor year after year. So someone funny summarized this chart saying that [Foreign Language], which roughly translates to the champion still champion. I know for those people who understand the Chinese, it's not exactly that translation, but you got the idea.

Our leadership in the marketplace has translated into proven track record from top line to bottom line. So look at the system sales 2016 to 2024, over 9 years, system sales grew by 60%, 1.6x. Margin expansion happened as well given our scale. And then the operating profit increased 80%. So these are all three dimensions that we have delivered. And in our industry, we call these three dimensions, the combination of three called impossible triangle because if you develop one, the other one suffer. To improve on all three dimensions, it is a bit challenging, but we have done it. So building on this result, our diluted EPS has increased by 70% since listing and delivering, of course, more value to our shareholders.

Before I -- well this is pretty much the recap of our past, very quick. And then I'm going to talk about the philosophy or beliefs. And the question is why? Why bother talking about philosophy and belief? Why not go straight to the strategy bit. Over the years, I met a lot of investors and shareholders. Some wise one asked me very good question, focused on what I believe, what management believe because whatever strategy that we put together actually are indispensable from our philosophy and belief, particularly during the tough time, such as pandemic and many other challenges. And you guys seems pretty wise to me today, all of you here and online. So I thought it would be good to talk about our fundamental belief behind the strategy so that you really understand management's thinking in a very deep and core level.

First belief is our commitment and belief in value for money. Very sharp value for money. Of course, some of you guys ask me, what has been the secret recipe to deliver profitable growth in the short term and long term? Well, in a simple way, sometimes it's not only about what do we do, but what did we not do.

From this chart, you can see like the price index has a very simple calculation. It's our sales divided by how many items we sell. And that's the average price of the product we sold in both brands. We did not really price inflation in the last 9 years. It does not mean that we did not increase price. The way that we do it, we expand the price point. We come up with new products so that we still deliver the transaction growth, can see 40% transaction growth and almost 90% transaction growth for Pizza Hut while expanding the operating profit.

But is it the best way to describe value for money? Not really. There are some Cantonese-speaking people here, I'll tell you my favorite way to describe value for money, [Foreign Language]. Let me do some translation here. I'm not sure that simultaneous translator can translate to Cantonese here. Good price, amazing quality and authentic, all three at the same time. That is value for money, [Foreign Language]. See, many of Yum China employees actually know these three Cantonese word. I love Cantonese. It's very, very vivid, so beautiful language.

But for value for money, we have slightly different take for KFC versus Pizza Hut. For KFC, we have kept it relatively steady. By having a relatively steady price or ticket average or price index, we deliver more value. New product, emotional value. For Pizza Hut, we have gone very aggressive. The price index now is only 70% of what it used to be 9 years ago, and thank God, we did it. If we did not do it over the years, we'll be in much tougher position today. So we have anticipated that since 2016, when we decided we're going to be very, very sharp on value for money.

Because -- of course, have some history behind. 10 years ago, both KFC and Pizza Hut, we were in sort of turnaround situation. In the turnaround process, we have learned this is critical. We need to commit to it. It's easier said than done. I mean, everybody can do -- want to do it, but whether you can transform all aspects of the company to deliver the extra value, extra profit for the shareholder while keeping the price very reasonable. That's the tough bit. But it's a must, and we have done it. So in Chinese, we also call it [Foreign Language] pricing or value for money determines survival.

But it's just part of the story. What is our second belief and second philosophy. A company like us, of course, we challenge ourselves thinking about how to grow and grow faster, grow stronger even with our current big scale of business. Well, our commission comes from building a strong foundation just like how Bamboo works. We find inspiration in it, well, what are the reasons? One of the reason is I'm from Fujian. I grew in a hometown where my parent's house was at the bottom of the hill and in the hill, there's a big bamboo forest. Of course, it impact me. That's my background. And there are a few things about Bamboo that you might or might not know, you can use the AI to look for more facts later on.

Little do some people know before the Bamboo shoot break the ground, it actually took years, 3 to 5 years typically to grow a very sophisticated root system underground in [ darkness ] and interconnected underground when you cannot see it. And then when this is done, with a little bit of water, it grows rapidly. It breaks the ground, it grows rapidly. How rapid Bamboo can grow up to 1 meter a day. And then it grows to meter, it flowers, then it stop growing taller and it start to grow wider. So within a very short time, we can think about Bamboo within months or if not a year, it will become a forest. Bamboo never stands alone. It always grows as a forest. And once a forest, it can endure storms with resilience.

And I think as smart as you are, you know where I'm going, what I'm talking about already. The interconnected root system represents our core competency under the, the procurement, food innovation, food safety, the, you name it, interconnected is strong and solid. Therefore, with the strong foundation, it fuels the growth of our emerging business like K-Coffee, KPRO, Lavazza, Pizza Hut. And these business are breaking through the ground right now. And once they do, they do grow fast.

The third philosophy, our ultimate belief -- and by the way, if I were to pick 1 out of the 3, this will be it. People first. People first, people first, [Foreign Language] important thing we speak it three times. And RGM is at the heart of our culture. We stay close to frontline, listen to the voices of our restaurant manager. We empower them through the digital tool like AI automation so that they can focus more on customer service.

Beyond competitive pay, we try our best to look after our store manager. Jerry Ding is going to cover more in detail later on about our belief in people. We do take care of them. One example, which we are very proud is to provide very comprehensive medical insurance, including their families and their parents. And the level of support is so value that many [ RGMs ] joke that they need to get their parents' approval to change job. See, if they change job, their parents lose the medical insurance, and they could not find it somewhere else, simple.

And our commitment in talent have been recognized. Yum China, we are very grateful that have been named top employer of China for a seventh consecutive year, ranking #1 in our industry. So let me introduce our management team on the screen, and they are sitting here looking very nice and smart. If I could ask them, stand up, turn around, say hi to our wonderful friends here.

Thank you. You will see many of them during the presentation on the stage later on. And then we also have Chief Legal Officer, [ Ping Ping ] and Chief Development Officer, Howard here as well. Feel free to ask them questions. I'm deeply grateful to this outstanding team. I'm very grateful to the team's collective talent, dedication and leadership. Thank you. Thank you, guys.

Now we have covered the three belief and philosophy. Let's talk about our RGM strategy for the future. RGM, again, carries a dual meaning. It stands for Resilience, Growth and Moat, but it's also a simple and meaningful way to honor our Restaurant General Manager, the most important people to our strategy. RGM 1.0 focus on resilience. RGM 2.0 place greater emphasis on growth, and we are at RGM 3.0. We focus on all three dimensions. We are a little bit more greedy now because we feel that we are ready to have a balanced approach focused on resilient growth and moat at the same time. And the RGM 3.0 is driven by two complementary forces, see the two engines, innovations and operational efficiency.

Innovation helps us improve operational efficiency in scale and our expertise in operational efficiency in turn, allow us to keep innovating for future. These two has to happen at the same time, and they actually nicely reinforce each other, like an infinity loop, maintaining sustained momentum.

This is a summary page, quite an important page and worthwhile to spend some time on this one. With the RGM strategy, what are the operational strategies supporting the RGM strategy. And this pretty much covers the rest of my presentation and highlight the theme of all the rest of the management presentation this morning. So it's worth spending some time here.

In the past, we focus on single store efficiency. I'm looking at the Resilient bit now. Now as our business has become more diversified, we move towards what we call front-end segmentation and back-end consolidation. So front-end segmentation to serve customers more effectively, really looking after their needs. But then back end, we try to have even more efficiency coming out of it. In Chinese, we call it [Foreign Language].

Second, when it comes to growth, we have much deeper understanding of our core competencies in the last few years. We now anchor our ambitions around our core brands, particularly KFC and Pizza Hut. They are sub-brands, KPRO and K-Coffee Cafe and then Pizza Hut and modules, many smaller modules. It's very flexible. That is one area of growth. The other one, which we started to make the shift last year, we are shifting from mainly equity-driven business towards equity and franchise hybrid model to drive faster and even more efficient incremental growth.

Third, we continue to deepen our strategic moat. I will talk more later on. We are evolving from a business driven in the past, mainly by physical store to the current one, thriving in both physical and virtual world.

Just hang on a little bit later. And then the last two strategic is our supply chain is becoming more integrated and agile. Last but not least, we are moving beyond digitization. We are currently deploying Agentic AI to unlock new levels of efficiency. And this is RGM 3.0 more resilient, more innovative and more efficient and ready for the future. So now I'm going to go to our RGM strategy one by one.

Starting with the front-end segmentation and back-end consolidation. Well, China is a very, very big market and the customers have very diverse needs. You can customer -- you can segment the customer needs in so many ways. Here's just some example, [ by day part ], by gathering moments, by channels, IP collaboration is the emotional value, you name it. The list can be very long. But we know that we can serve customers more effectively through the different brands, different modules, different occasions. We can see that from our numbers and customers like that. And these needs are evolving, too, right?

So KPRO is a good example. We are in Shenzhen. Shenzhen, we have more K-Pro than any other cities in China. In Tier 1 city, KPRO is a fantastic lighter option with energy bows or superfood smoothies, capturing the fast-growing light meal market. And by the way, the business is particularly good on Monday. [Foreign Language].

Why on Monday? This is about consumer insight because for normal restaurant business, Monday is not the busiest day. But for KPRO, it is. Because typically as human being, we might have eaten slightly too much over the weekend. And then by Monday, we might feel slightly guilty that we want to have a slightly different choice. And by the way, these are all KFC customers, most of them KFC customers. See, we offer different choices with different options at the right time.

And on the back end, we focus on driving synergies. To this end, we aim to be both best-in-class but also best in cost. We want both cost and quality. We want both. How do we do it? We first streamline our menus, not only menus that customer or you can see in the store, but the ingredients behind that you cannot see. That is also a big saving, and that's even more difficult to streamline than the front -- than the menu that you can see. And we also centralized key process like centralized recruitment and training, one-stop RGM service center.

And third, Mega RGM synergy and technology. Among all these 4, I would say the Mega RGM is probably the most significant among all because RGM, they are the most important group of people. And in the past, we just don't have enough very good RGM to open that many stores. They were -- used to be the biggest bottleneck for us to open new store because when we open new store, not only we want new store, we want good new store. And the best predictor of a good new store is a very good RGM. But now we are at a very nice position that our RGM can manage multiple stores. We don't have the bottleneck anymore. Therefore, we can continue to build more and very good stores.

So looking ahead, we are confident. So these efforts are paying off and our operational efficiency has been very strong and will continue to be strong, and here are some numbers.

Marketing efficiency, this is again 2024 versus 2016. Marketing efficiency has improved by 55%, greater scale of our business and very innovating marketing team. They help deliver.

Rent. Rent cost as a percentage of company sales has decreased by 170 basis points, and that's very nice. Even better, the rent structure is more resilient. This year, about 70% of our new leases for KFC and Pizza Hut stores are variable rent. Flexibility is good, resilience is good, and we built into the structure. And that number is a lot less in the last 9 years ago. That's for sure.

And then what else, look at the CapEx. KFC, overall per store basis, 35% less. Pizza Hut even more, 50% less. Of course, it's a result of both smaller store and innovations is a combined result. And the key benefit here, which I'm sure you have already figured out is the [ sunk ] costs are even lower because for the cost here, it includes the [ sunk ] cost and equipment that we can move. So with this kind of number, the [ sunk ] cost is even lower that minimize the cost of making mistakes, which is important for our size of business.

So with resilience in place, let's move on to the next topic, growth. I'm happy to report that despite the market dynamics and the concern of macro, we still see China opportunity remains extraordinary.

On purchasing power parity basis, China is the world's largest consumer segment, which is about 1.6x the size of the U.S. So despite the per capita spending is less, we just have a lot more people. And after 38 years, we are still only serving about 1/3 of the Chinese population. And our midterm goal is to serve half of the Chinese population by 2028. And then we look at the restaurant industry, it still offers tremendous growth opportunity. People are on the move and going out more often. By 2030, urban residents are expected to dine out 5.5x per week, up from 3.5x, only two more times, but the growth is very nice and very great, very big for the market. And then in our industry, the chain restaurant penetration is still low. It's only about 20% and it's quite difficult to be at 50% in more developed market like U.S.

So with all the macro opportunity, we see long runway for the growth ahead, particularly in lower-tier city. So there are two numbers here. So this is the KFC store count, not system sales, store count share among top 5 QSR players. In Tier 1, Tier 2, 25% system sales-wise, our share will be higher, but our local competitor, their stores are smaller. So the store count number is a bit lower. And then you look at the Tier 3 and below cities, it's only 15%.

So you might ask, does that mean that Yum China is not doing as well in lower-tier city compared to Tier 1, 2 cities? Well, I'm very happy to report that, that's probably a fair statement. And I'm happy to see that. Why? Potential. Market potential is here. We are not having our fair share of market or store in the lower-tier cities yet. Yet. But now we have innovative store model. We have really good product. We have good value for money. We have confidence we can do it.

I mean for Tier 1 city, in particularly, you might already have a question, what if the macro improves a little bit, can we have a bit more pricing opportunity? And I would like to say that that's the upside. That's not built into our model yet. That would be very nice to have. Even exchange rate moving our way will be also another upside. But for the lower-tier city, we see the opportunity there. So with the innovation and operational efficiency, we are setting a milestone, a target that by 2030, we want to increase KFC's lower city penetration from 2,500 to 4,500 cities, almost twice. And that's the milestone we set today. So with that, Simon, please go to the next page.

Yes. Thank you. It's time to look at KFC, our flagship brand. It remains a resilient fortress behind our growth, and you will not miss the number at the title here, right? We are aiming for a new milestone, becoming China's first restaurant chain to achieve RMB 10 billion operating profit in 2028. And this target is grounded in KFC's solid foundation, much like the LEGO bricks. I like the LEGO bricks, robust, flexible, always further to build further. Imagination is the ceiling, not to mention that 80% of my son's toys budget was with LEGO for sure. Fantastic concept, and we learn from this amazing company.

Even at KFC scale, significant growth potential remains. We continue to reach new customers and unlock new occasions. Like in Warton's presentation later of KFC brand manager, he's going to go through the K-Coffee, KPRO and then KFC small town. And I would like to introduce one new concept here, the Gemini store. What is Gemini store? So when we open new store in lower-tier city right now, we have tested this year. We believe that we have some mileage in this. We opened a pair of stores, KFC store and Pizza Hut store at the same time because now with the Pizza Hut bowl model, which is perfect for lower-tier city, they can share the customer and they can even drive the traffic for each other. today, KFC, tomorrow, Pizza Hut. And then we share a lot more equipment, resources, recruiting, everything management behind the scene in lower-tier city that's far away from Shanghai. This Gemini model is just perfect for lower-tier cities. And another simple way to think about it, if you want to have a lot of kids, having one kid at a time is good, but having twins, many twins at the same time is even better, simple.

Let's move on to Pizza Hut. My humble suggestion is do not underestimate Pizza Hut China. I know there are concerns towards Pizza Hut as a brand around the world. We all have heard the news. But Pizza Hut China, after multiple years of hard work has reached an inflection point last year. And since then, Pizza Hut is on a search. Look at the store number. It took 23 years to build the first 1,000 Pizza Hut. And Pizza Hut during quarter 3 this year, just reached 4,000 stores. And the last 1,000 store only took 2 years. That's pretty decent. And then again, I'm sure you have seen it already. Right now, Pizza Hut, we are aiming to set the milestone to double the operating profit to more than USD 310 million from 2024 to 2029. Jeff, [indiscernible] in Pizza Hut will talk about it a bit more. And if you still remember our turnaround journey of Pizza Hut many years ago, we are very clear about our priorities, sales first, profit later. Now we have the sales in store, Jeff, we are ready for more profit. No pressure.

Let's talk about our emerging brands. Emerging brands with a lot of hard work under the soil, behind the scene, actually gaining momentum. First, let's talk about Lavazza. I mean, Maggie will talk -- we have a presentation on Lavazza later on. 5 years of hard work underground, trial and errors, Lavazza has built a very solid foundation. There are three facts I want to share with you right now.

First, Lavazza this year has delivered double-digit like-for-like growth. We like that, don't we. Second, the stores opened in the last 2 years have been profitable at the store level, well done, Lavazza team. Third, the retail business, namely the Beam business, the Drip business, the Concentrate business, they're profitable. It's good scale to grow is lovely, it's profitable. By the way, we also built a local roasting plant in China behind the scene without telling too many people. So the foundation has been good. And we are ready to break the ground and to ready to scale with professional coffee positioning.

Chinese dining, like we went through the journey thinking that the Chinese dining is also -- can be also part of the Bamboo forest. After a while realized it probably slightly different species. It's same thing but different. So it took a bit longer to connect the root. But this year, we are having this pretty decent breakthrough, again, side by side, not twins, almost twins, side by side, [Foreign Language], put them together, a lot of synergy we can get out of it. We have some pretty interesting momentum out of it already. But Chinese dining as a sector is struggling a bit more in the current macro situation than the [ QSR ], but some nice momentum and encouraging results so far.

Taco Bell, another slightly different little bamboo. But this year, we also see double-digit growth in same-store sales in the first 3 quarters, and this year, we do expect to achieve store level cash flow breakeven for the first time. So all going to the right direction, some faster and some slower, but it's very hard for the smaller brands to compete with the two big brothers in the company, namely KFC and Pizza Hut, but they have to keep work harder.

So I've covered the growth on the brands. What is the second one I have covered earlier, equity franchise hybrid model as a growth accelerator. We really start to make the shift and determined to focus on that since 2024 last year. The two focus for our franchising strategy, lower-tier city and strategic channels, such as highway station, tourist location, strategic channel typically are those places where it's quite hard to get the site or even universities or hospitals, these are strategic channels. We now have more than 2,000 franchise stores in our system, and we aim for over 5,000 by 2028. In terms of system sales, you can see we are aiming to double that system sales mix by 2028 as well.

So our transition Okay. Our transition to the hybrid model is a strategic evolution grounded in decades of experience and learning. There's some good learnings, some more challenging learning, but they're all good learnings. We have developed innovative store models and that deliver attractive payback for our franchisees. Without attractive payback, it's just talking, right? It's not real.

So what makes this shift so powerful, of course, is the add value that it brings to Yum China. It allow us to deliver stronger return on invested capital over the longer term. It make our business more resilient, which again is nice.

So that concludes the growth session. Let's move on to strategic moat. So I don't know how do you feel about that little swipe, KFC, K-Coffee, KPRO and [Foreign Language], The Tea Concept. So traditionally, we have the physical store, right? We build stores. That's what we start. But then in the last many years, we actually have also been building virtual space. This concept, many companies are doing it, but it's not very clearly articulated. And let me be very clear today, virtual space to stay relevant with consumers.

Why this is so important? Because people, especially the younger generation, younger than me, right? They live in two different worlds right now, the physical world and the virtual world. And both worlds are important. I'm not sure whether it's equally important or which one is more important than the other, but we have to address that. So when we have KFC takeoff in April Day, you can imagine between these concept, there's a door in between. Customer can walk from one store to the next door to the next door. Similar idea here with a swipe, you can move from one store to the next store to the next store. Virtual space, physical world, they kind of connected in a very subtle way.

So soon, very soon, I hope, we aim to let consumer move seamlessly between the virtual space from KFC to Pizza Hut as well, all within one app, but it's in the plan right now. So in our virtual space, we have -- you guys all know the number already, more than 500 million members in our system. But in terms of active member means those customers who shop with us in the last 12 months, the number is about 265 million. And even with 265 million, which is not a small number, this will create some cross-sell opportunity, as you can imagine.

One example is most of our K-Coffee cafe and KPRO members are actually KFC members, but most of the KFC members, they have not tried KPRO or K-Coffee yet, and that's the opportunity.

What is the next two strategic moat? Highly efficient supply chain over the past 38 years. And in the last few years and going forward, our integrated procurement system will continue to help up this business going to the next expansion phase, supported by dynamic pricing and consumer-centric food innovation, consumer-centric food innovation.

Right now, last year, instead of launching 500 new food to customer, we actually launched about 600, even more. Some are [ LTO ], some are [ hero ] product and occasionally new growth drivers. And our logistics network is agile, and we can already cover 5,000 cities in China. Remember, the 4,500 cities that we want to go to in a few years, the supply chain is there already. We built the support network there already. It's not a question whether a supply chain can support in any of those 4,500 cities. Even now, yes, we can. because supply chain has to be ahead of the rest of the business expansion. Howard, our Chief Supply Chain Officer, will share more about the supply chain strategy.

Behind all of this is the technology. For years, we have been on a journey of digitization, many years. And we have really big, high-quality transaction and operation data since 2015 when we start to build the CRM system. This gave us a head start. Today, we are stepping into a new era defined by Agentic AI. Leila, our CTO, will share how digital and AI support our business.

So this is a page that you are probably looking for, and Adrian will have more details in his session at the end of this morning's presentation. With everything we've built, we have a clear vision for the future. In the near term, we remain confident in meeting our quarter 4 and full year guideline. We do see early signs of improving consumer sentiment, which is nice to see. And looking ahead, our ambition is to reach 20,000 stores next year and then 30,000-plus store by 2030, a milestone I look forward to celebrating together with the fantastic Yum China team and hopefully, with you all.

By then, we aim to grow our active member to 400 million from 265 million right now. Along the way, KFC aim to exceed RMB 10 billion operating profit or USD 1.4 billion at the current exchange rate. If the exchange rate move to us favor? Wonderful. And there's a good chance that it will be the first restaurant chain in China to achieve that. And by 2029, Pizza Hut expect to double its operating profit to over USD 310 million compared to 2024. And by 2028, we also look forward to deliver $1.1 billion in free cash flow. Our CFO will talk more.

So with a clear ambition, we are moving forward with confidence under the RGM 3.0 strategy. Looking ahead, our vision remains unwavering to be the world's most innovative pioneer in the restaurant industry. Thank you. Now please welcome, Warton.

[Presentation]

[Interpreted] Dear investors, dear friends, ladies and gentlemen, good morning. Welcome to Shenzhen and welcome to our Investor Day event. My name is Warton Wang. I'm the General Manager of KFC China. Thank you for your support to the KFC brand.

Today, I'll talk about three things. First, our confidence and conviction in building long-lasting brands. And second, the opportunities we see for future brand growth. Third, also talk about our RGM 3.0 strategy focused on brand Resilience, Growth and Moat.

There's no doubt that KFC is one of the most successful restaurant brands in China. According to statistics, the average lifespan of restaurants in China is only 2 to 3 years. In comparison, KFC, now with over 10,000 stores has thrived in China for 38 years and continues to grow rapidly. This makes us extremely proud and grateful and also gives us the confidence and strength to face future opportunities and challenges.

First, we have many, many iconic classic products that have collectively established KFC's leadership in the Western [ QSR ] segment. There are two products, I'm sure you're already very familiar with Hot Wings and Zinger. Each has an annual sales of RMB 4 billion. RMB 4 billion, what does that mean? It means that the sales of a single KFC product have surpassed the annual sales of 70% of Asia listed companies. That's truly remarkable, and we are very proud in our Hero products.

In addition to these classic products, we continue to innovate, and that is widely recognized. Over the past few years, Taco, Double-Down and Original Recipe Chicken Burger, et cetera, have gained market recognition. Forever tasty is our sole promise to consumers. Beyond products, Convenience is also a core competitiveness of the brand.

For the time being, KFC China operates over 12,000 stores across more than 2,500 cities nationwide. Our extensive footprint is enabled through brand strength and also flexible models. Now we operate with four store formats. The classic store is the basic format, covering approximately an area of 170 square meters with a CapEx of RMB 1.6 million. Its design is now brighter and simpler. And over the past 2 years, the CapEx for new open stores has been reduced by an additional 10%. Then the flagship store is specifically designed for unique business statistics to highlight the theme of the commercial district and spirit of the brand. Then the compact format is adopted for higher tier cities through optimized kitchen workflows, compact special design, precise capacity installment and higher seating efficiency, it significantly reduces the full area and CapEx. Then there is the small town format, which was developed 2 years ago to facilitate the rapid expansion into lower tier cities. It covers an area of 100 square meters with a CapEx of RMB 500,000 to RMB 700,000. So far, we've entered 400-plus small cities with the store format.

With these efficient and flexible models, the brand has the ability to expand rapidly. We hope that where there are people, there will be a KFC store at your service.

KFC also enjoys a broad consumer base. We now have over 500 million members.

As we celebrate the milestone of reaching 10,000 stores, we asked ourselves one question, why do Chinese consumers choose us? The answer comes from extensive nationwide consumer service. First, consumers find us highly convenient. Indeed, our network of 10,000 stores makes KFC easily accessible. Whenever consumers need us, we are ready to serve them instantly. And second, consumers also trust us. We have an extensive network. Nevertheless, we have maintained very high quality consistency in our product and service offerings. Many consumers say that when they visit an unfamiliar city and have no idea what to eat. KFC is often their faster choice. Consumers also appreciate our constant innovation, whether it's our products, marketing campaigns, our games and toys, at KFC, there's always something new and exciting, conveying the sense of brand vitality. Last but not least, the feeling of ease and comfort. Whether it's meeting up with friends or grabbing a 1-person meal, or simply hand out in the store without ordering anything, just waiting for someone killing time before a ride or scrolling through their phones, consumers feel comfortable and relaxed in the KFC stores as if they were at home. This brings KFC brand closer to our consumers, attracting more people into our stores.

We also have an outstanding brand operating team. Across the country, we have 6,000-plus RGMs, Restaurant General Managers, leading over 200,000 restaurant crew members in serving our customers every day. RGM #1 is our most important culture we firmly believe that the success of each individual store collectively builds the success of the KFC brand. All operating leaders regardless of their current position are promoted from RGM. They understand store operations emphasize with the challenges and hard work of RGMs and are genuinely motivated to help solve on the ground problems. This ensures that our highest standards and the best practices are effectively passed down. With the RGM #1 culture and an experienced operations team, we are confident to expand KFC presence across the entire country.

Over the past 5 years, we've navigated tremendous external changes, the pandemic trade frictions, tariff disputes, aggregator competition among others. Thanks to the trust that consumers place in us, the dedication of our team and strong support from our partners, the brand has maintained steady growth throughout this period. By the end of this year, we expect to grow the number of stores to nearly 13,000 nationwide. And with system sales and profit growing at 5% plus CAGR.

More importantly, our team capabilities have rapidly evolved, whether in product innovation, store model innovation, membership program design or efficiency improvements, our brand has developed new insights and new competencies, opening up broader opportunities for future growth.

Looking ahead, lower-tier markets represent massive opportunities for the brand. First, we are now entering more cities. On one hand, China's urbanization is accelerating population concentration and many lower-tier cities and towns are quickly expanding in size. On the other hand, we continue to innovate our models, so lowering the threshold for entry into new cities. Currently, there are 2,000-plus unpenetrated cities and more than 3,000 whitespace locations in strategic channels for us to tap into.

Another opportunity is to reach new consumer segments. In China, the living conditions of budget or value-conscious consumers are improving rapidly with their income growth significantly outpacing the national average. This group has a strong desire to enhance their quality of life. So for the brand through product and marketing innovations, we're also penetrating this previously hard-to-reach consumer segment. So this will also be a key source of future incremental growth. In short, whether it's lower tier cities or value-sensitive consumers, the alignment between our brand strategy and evolving market dynamics presents enormous opportunities.

Another growth opportunity lies in the continuous emergence of new occasions. Coffee and tea drinks are currently booming. The segment is large and growing rapidly. The healthy light meal category holds strong long-term potential, although it hasn't yet scaled up, we have a chance to establish first-mover advantage. And then drivers always have this need for drive-through services. So with the continued increase in private vehicle ownership, we believe this segment also boasts great potential.

Additionally, fried chicken and other indulgent snacks are thriving. This segment is very close to our core capabilities and well within our operational scope offering ample room for future expansion. There is a lot we can do. Our current challenge isn't a lack of possibilities, but rather how to execute business initiatives steadily and efficiently, stay grounded in our core strength and capabilities while also making disciplined explorations on new frontiers.

RGM 3.0 is our strategy for future brand expansion, resilience, growth and moat. Balancing these 3 will deliver future growth well ensuring stability. We are fully committed to reaching the next milestone of opening another 10,000 stores and achieving the ambitious goal of 10 billion plus operating profit by 2028.

So the next important question, how -- let's start with store expansion. In the coming years, our strategy for opening new stores will be twofold, increasing store density and high tier while penetrating lower-tier markets. So on the left-hand side, you can see that is our Tian'an restaurant or fast three-in-one format, which you will visit this afternoon. And then KPRO, KCOFFEE Cafe have their distinct image, menu and dining area, yet the share back of office infrastructure equipment and are managed by the restaurant team by the same restaurant team.

So this model maximizes the utilization of resources. And this is one of the important ways to execute our high density and competition strategy in high-tier cities. On the right-hand side is a franchise store in a small town in Henan province. As already being alluded to by our CEO, you can see that after several iterations, our small town model now requires an investment of only RMB 500,000 to RMB 700,000. Franchisees can recoup their investment in 2 to 3 years, making it extremely popular among franchisees.

So with such a flexible small town model and with AI empowerment, we are more precise in location selection and also with new technologies such as agile kitchen, this lowers our investment cost per store. We are also adopting flexible rent structures for different store models. And with these initiatives, the brand can rapidly expand into currently untapped cities and commercial districts.

The second lever is our franchise strategy. Focusing on 2 things: first, enter small towns and remote areas with the franchise model to enhance the efficiency of store openings and management; and second, is to tap into previously unpenetrated strategic channels by leveraging franchisee resources. Over the past 2 years, through franchising, we've entered over 400 white space cities and 500 unpenetrated commercial districts.

Notable examples include prestigious universities like Renmin University and Xiamen University and famous sync spots such as Mount Tai and Mount Lu. This year, franchised stores will account for 40% of net new builds, making franchisees an essential contributor to our brand growth.

Managing and serving franchisees effectively is crucial. We now adopt a one system, one process policy across franchise and equity stores in terms of restaurant design, equipment and facilities, operational standards and centralized procurement of raw materials. The cashier system of franchise stores is also integrated with the brand, allowing real-time tracking of sales data. Our team regularly audits and evaluates franchisee performance and underperforming franchisees will be disqualified.

In addition, we have launched the RGM copilot program for franchisees. With integrated data systems, AI comes up assistance in consolidating and analyzing management data, identifying operational gaps and providing suggestions for improvement. These new systems are available for all franchisees for continued empowerment ensuring food safety remains our #1 priority when growing our franchise business. Therefore, effective management and empowerment of franchisees from a critical foundation for sustainable franchise growth.

Now let's shift to sales growth. We focus on 2 strategic directions. First, then the call, including our product strength, value-for-money offering, channel mix and IP collaborations, which constitute our core competency and underpin our business performance. We will continue to invest resources to solidify these basics. On this basis, we will scale up 3 new engines.

First, tapped into the value-conscious groups with targeted product design and channel optimization. Reaching this large demographic will unleash huge growth potential for the brand. Second, high-frequency occasions, focusing on coffee cafes, drive-through pickups and flight chicken and skewers. And third, explore future-oriented business fronts, such as KPRO.

Let me now elaborate on how we plan to strengthen our call. Starting with improving product strength. The focus is here. First, continue to reinforce the popularity of our 6 classic products. With the combined sales expected to reach 22 billion this year, accounting for 30% of total sales. Next year, we will leverage quality improvement, continued innovation marketing campaigns and ingredient supply optimization to further grow the sales of these hero products and build a moat based on unparalleled sales.

Second, reinforce our leadership position as the chicken cooking expert. We launched the first whole chicken product in 2012. And the sales of whole chicken are projected to exceed 2 billion this year and are on track for faster growth next year with the addition of full baked whole chicken.

There's another focus, Chicken Wings. This is the largest category in fried chicken category, and this category has always been dominated by our brand. In addition to our existing offering of fried and roasted wings last month, we launched a new product called Crackling Golden Chicken Wings, adopting brand-new processes, and it's a Chinese style chicken wing. This is very popular among the consumers. It's sold out within 1 week. And on November 11, we rebuilt this product back to our menu, and we're considering making it a long line product for us.

So now we aim to hit RMB 10 billion in these 3 wing products. So the third aspect is to continuously enrich our offerings. So on this year, the mid-autumn festival, we actually launched the Golden Moon Burger. This is to boost our sales in the festival occasion. So the response was great. So next year, we will continue to explore holiday theme, the food and marketing to drive a seasonal business.

On top of that, we also have another big project called [ carbohydrate ] staple stable food. So I will talk more about that shortly. So the second key aspect of our core is the cost performance. And we also have 3 major directions.

First is IP-oriented value for money offers, beyond the discounts and good taste. They have to offer emotional value. So for example, we have Crazy Thursday feather duster activity and also the [ crazy day Super 13 combo], they all performed very well. And the second is we want to build the [ solo ] dining brand mindset.

So [ 3 -- ] we started with RMB 19.9, 3 item combo and then have since developed RMB 22.9 and 25.9 solo meal sets miles which have increased both the frequency and average speed. So next year, we will also launch more offerings -- and other is [indiscernible] marketing campaigns. We have examples of 20th anniversary of the egg tart and the 85th anniversary of the original recipe chicken. So these campaigns give marketing a theme that consumers understand very well and we have a good story to tell and driving up the business. So we have actually many moments to celebrate.

So going forward, we will leverage these occasions and native business through them. And the channel marketing has become quite complex with the fierce external competition. So for us, on one hand, we need to continue to optimize our commercial areas and also to improve rider costs to improve the delivery efficiency. On the other hand, external platforms are innovating constantly, platforms like Pin Hao Fan and Shen Qiang Shou, the examples that we need to learn from. And internally, our focus is our SuperApp.

This year, the battle among the third-party platforms has significantly impacted every brand equity channels. But against the backdrop, our share has increased by 5 percentage points this year. So we'll continue to work hard on this. IP marketing has proven to be a very highly efficient marketing method. It does not cost too much. And also it does not increase our ad resources. And the IP-driven traffic can easily raise business, providing emotional value to our consumers. And in the past 2 years, IP has brought many surprises to us.

So in the future, we will strengthen in external collaboration, hoping that we can partner with more global top-tier IPs. At the same time, we need to improve IP marketing efficiency, we'll promote more themed stores to improve efficiency.

So just now I talk about the -- what is core at KFC. And now I would like to talk about some incremental opportunities. I think many of you are already very familiar with the KCOFFEE Cafe. Right now, we have over 1,800 stores. Well, by having this [Foreign Language], so we are able to reduce our cost. And the sparkling coffee is a creative product, which is very welcomed by our consumers and the egg tarts, a very good pairing with the coffee. So we have big egg tarts and caramel egg tarts, they sell very well, taking a very good proportion of ourselves.

Right now, KCOFFEE has a relatively complete product mix. So going forward, we will invest more in KCOFFEE by opening more stores. so that our consumers can be more familiar with our offerings. We are very confident that by 2029, KCOFFEE will have more than 5,000 stores and we also have 2 milestone goals. Firstly, we want to make sure that we can run our equity KCOFFEE very successful. Second, we want to explore the franchise development model to boost the growth of KCOFFEE. KPRO is a new business we began to do earlier this year.

This is a healthy light meal segment. Right now, it is not a huge segment, was around RMB 20 billion. But we believe it has a great potential going forward, especially for brands like KFC, which is primarily known for fried chicken. So over the past 12 months, we have been growing very fast. Right now, we have over 120 stores in more than 20 cities. And we offer, panini and healthy drinks and snacks and energy bowls. Energy bowls are our biggest item. So 7 variants of the energy bowls account for over 50% of our [indiscernible] sales.

So we also -- so with the shared operation costs and also the investment in the product, we have full confidence that we can reach over 1,000 stores within 5 years. Drive-through pickup is also another business with a great potential. Before it was constrained by limited road lane resources, so the growth was relatively slow. Over the past year, our team has come up with more innovative ideas and practices. For example, out of the door delivery. So our customers can order online and the employee deliver by working out of the restaurant. This can dramatically improve lane accessibility.

So we have also developed the street-side pickup service by using location technology, enabling delivery right to the road side near restaurant. So thanks to these innovations, we have full confidence with more investment next year. We are going to expand this service. So this is the project of [ high carbo -- high carb ] business. So we hope that we can reach more to the low budget, low-income population.

So we want to target, for example, the riders, the taxi drivers and the university students, we have already got to the products already. So [indiscernible] a month ago, we actually ran in competition, creative competition on the stable food. For example, the braised [indiscernible] chicken rice and pork tomato rice during the competition, and we also have local stable food like [indiscernible] noodles are also very impressive offerings.

So we have a lot of confidence that we're going to launch this to the market and the emerging channels like [indiscernible] is gaining popularity. So we will also work with a third-party platform by offering riders meal or drivers meal to reach the cost-conscious groups. And also for the universities, we want to put our offerings on the investing in the campaigns so that we can reach university students. We have great expectation in this category next year. And right now, building the resilience of our brand focuses on ensuring a healthy cost structure and operation efficiency with 4 key areas of our effort.

First is to streamline and improve efficiency across products, raw materials, packaging and so on. Second, we want to centralize our work in a more efficient way. Right now, we already have made office for recruitment, training and the new store openings. Now we are testing a centralized ordering and scheduling platform as well as to more outsourcing and the factory-based initiatives to reduce pressure on restaurants and raise efficiency, certainly shared empowerment.

In recent years, the brand has actually done a lot of experiments, and we have a lot of lessons learned. For example, the labor service sharing via [ Mega ] and also product sharing for items like original recipe chicken and also share the location resources like [indiscernible] stores. So these have proven to be very efficient business models. We believe that within the brand or across the group, we have more opportunities for improvement firstly, technology employment. Emerging new technologies have made innovation possible in the traditional front store, back end management model.

While engineering stability, we will explore more [ future vision ] facing restaurant management models gradually shifting goods management and the personal management out of the store so that the restaurant can focus more and more on serving our customers while using human machine collaboration to boost production efficiency and using AI to improve decision-making efficiency, we will continuously build a more efficient technology-driven operational model for the brand.

Now let's talk about the mode. The brand has over 500 million members. So it is very difficult to be [ completed ] by our competition. Through a carefully designed membership system, we have clearly mapped out membership growth path from regular members to paid members all the way to the top. So this tiered approach maximizes member value.

Right now, we have over 1 million members at the top level and averaging 100 visits per year, demonstrating their strategic role as the foundation of our competitive advantage. And also, we have got more and more clear consumer profiles. We understand their spending habits, behavior characteristics and how they engage with media.

This enables us to recommend the right products to the right consumers. So improving our marketing efficiency, also has a positive impact on our brand strategy. and high-quality customer service and RGM #1 culture part of our moat, we use a platform serving with [ compassion 2.0 and RGM voice ] to listen in real-time ideas and suggestions from our consumers and frontline staff and to act quickly to solve the issues or problems they have.

So we're also built in concessions from our family, the [ sepocultural ] platform, making such good behavior, making sure a good behavior is being seen and rewarded. In customer service and restaurant support with our culture simply doing the simple thing again. So KFC China has brought together generations of people and efforts of hundreds of thousands of employees. We hope that we always remain a leading brand in China's catering industry.

So we want to realize through 3 [indiscernible]. First is for rebates. This is our solemn promise to our consumers. Second is we want to be present, be with our customers all the time. We want to open more stores to make KFC accessible by maintaining good cost performance, we will make our product and service affordable. And over last -- so we put respectively, and we serve our customers passionately with care. And we believe that united culture will inspire us to go further. So going forward, we will continue to move forward with this culture. Once again, thank you sincerely for your great support and the trust in the KFC brand. Now let me pass the mic to Jeff, General Manager of Pizza Hut.

[Presentation]

Good morning, everyone. Welcome to today's Yum investor conference. So I'm very happy to see you again here in Shenzen. I'm Jeff Kuai, the General Manager of [indiscernible] China. So in the next 30 minutes, I will share with you 3 topics.

First is the accomplishments we have achieved. And the second is based on the segment and the price range -- so the growth opportunities and the potential. Finally, I will share with you how we are going to seize the opportunities and our growth goals in the coming years.

First of all, we're very happy to share with you that this year, we opened Pizza Huts 4,000 stores [indiscernible]. So took us 33 years from [indiscernible] in 1990 to reach 3,000 stores by 2023, but we added the next 1,000 stores in just over 2 years. As our store count accelerates the quality of our new stores continue to improve compared with the 2019 payback period for our new stores has social turned from around 3 years 2 to 3 years.

So in terms of our sales, for the first 3 quarters of this year, our same-store sales have maintained a solid growth. What is even more encouraging that with our brand development strategy, our same-store traffic has continued to grow strongly. In the first 3 quarters, same-store traffic year-over-year. And as of Q3 this year, we have a positive same-store traffic growth in overall [indiscernible].

While we deliver better products, better value for money and better customer experience, we also managed to improve operational efficiency continuously. Compared to 2019, restaurant margin in 2024 has improved by approximately 90 basis points. Building on that, in the first 3 quarters of this year, margin has improved by another 90 basis points. As a result, in the first 3 quarters of this year, operating profit increased by 16% year-on-year. In this highly competitive market. Pizza Hut has achieved simultaneous improvement across multiple dimensions, same-store sales and profit margin.

So what's behind Pizza Hut's sustained growth through cycles? First, we have an effective team that's fought and won tough battles and has been honed through years of collaboration. From frontline staff to headquarter, this effective team allows us to respond swiftly to market changes and challenges formulate the most effective strategies continuously innovate and improve efficiency, seize opportunities and maintain growth. Second, our brand strength. Pizza Hut is recognized by consumers as their favorite Western casual dining restaurant brand in China.

Over the past few years, customer recognition of Pizza Huts, taste, flavor and value we value for money has continued to grow. This trust and endorsement from our customers form our strongest moat, supporting the brand's rapid development. Third, our product strength. We hold a leading position in multiple categories. These strong categories have given us a significant competitive advantage and have driven overall brand growth and market share expansion. Among them, the most important categories, of course, the pizza category, which has achieved rapid growth through continuous innovation.

We expect our total pizza sales this year to exceed 200 million units. What does that mean? This means that we are doubling the sales compared to 2022. Finally, our store network spreading across China, along with strong capabilities in off-premise channels and digital. Our off-premise sales includes both delivery and takeout.

This has consistently outpaced overall system growth. In Q3 of this year, these 2 channels together accounted for more than 50% of system sales. And our member base has also been growing rapidly and has surpassed the $200 million mark. These digital channels and systems provide tremendous convenience for customers, while also enables the brand to reach them more effectively forming a key source of long-term competitive advantage.

Our team, brand, products, omnichannel presence and member system have enabled us to successfully navigate multiple business cycles. They also constitute the critical foundation for the brand to achieve further breakthroughs and accelerate growth in the future. Of course, another critical condition for accelerated growth is whether the market still has potential.

At present, there are still abundant opportunities in the market. First, pizza category still has robust growth momentum. According to [ Euromonitor], between 2025 and 2029, the Chinese pizza market is projected to grow at a CAGR of 10%, significantly outpacing the overall restaurant industry. Second, in terms of categories, Pizza Hut has already established a second growth curve beyond pizza and into the bagger category.

Since we first launched burgers in April last year, our burger business has grown rapidly and contributed meaningfully to the brand's overall growth. The addressable market of the burger category is much larger than that of pizza. Although competition is intense, Pizza Hut has firmly established itself through a differentiated positioning of CDR quality burger.

Consumers highly appreciate our freshly baked burger bonds made daily, generously sized whole meat parties make-to-order preparation and approachable pricing. As a result, repeat purchase rates for this category are significantly higher than the overall average. Third, we still have significant growth opportunities to cover more price ranges. In 2019, our average per person order size was around RMB 60 higher than 98% of snack and QSR brands. The market size of this price bracket is not enough to support rapid growth for Pizza Hut.

As a result, in the years prior to 2019, we faced challenging same-store sales performance and net new builds declined sharply. Thanks to the efforts over the past few years, we significantly adjusted our order size and now our price positioning has settled into a more reasonable range. We still have room to move further down the price leader, but even at our current price point, the segment is already large enough to support accelerated growth.

Finally, due to adjustments and enhance the value for money proposition. We now have a better opportunity to enter nearly 3,500 previously unpenetrated cities and towns across China. We can also expand to new occasions such as solar dining. We can also reach younger and value-conscious, value-sensitive customer groups. In a nutshell, we have expanded categories adjusted price positioning and improved value for money, getting ready to broaden our coverage across price ranges, cities, occasions and customers.

All right. That's enough storytelling. We now possess both the capability and opportunities for accelerated growth. So what exactly is our future growth target? [ Joey ] already alluded to this, our goal is to grow by another Pizza Hut in the next 5 years. That is to say, to double our operating profit by 2029 compared to 2024. This is the first year of our 5-year plan. So far, we are right on track to reaching that goal. As Joey already alluded to, our RGM 3.0 strategy is the way towards this 5-year target.

Next, I'll talk about our growth strategy, resilience and multi. First, I'll talk about our growth strategy, involving both new store openings and same-store growth. And second, regarding resilience, I'll mainly talk about how we plan to improve store profit margin. Last I'll share a few things about reinforcing our moat through in-store customer service and our people first culture.

In the next few years, we will increase annual net new build from 400 or 450 to over 600 per year. By 2028, our total store count is expected to exceed 6,000. As we accelerate new store openings, we will not compromise on quality and ensure a 2 to 3 year new store payback period. We will focus on 4 levers to accelerate new store development. in high-tier cities, we will increase store density with flexible formats.

In cities where we have already established presence we will continue to optimize store assets. For the 3,500 low-tier cities and small towns that we have not yet entered, we will penetrate with the [ GEMINI ] and WOW model. Finally, we will accelerate our franchise business and rely on franchisees to help us reach previously unpenetrated locations, such as tourist attractions and schools or areas where they boast higher operational efficiency, like remote areas and some small towns.

So first, let me elaborate on the store formats. Whether it's increasing high-tier density or penetrating lower-tier cities, our primary focus is on creating more efficient store formats. To enable shorter payback period, lower investment upfront and higher same-store sales. In high-tier cities, we operate in 2 formats. The classic format leans more towards dining customer experience with certain off-premise volume whereas satellite stores focused primarily on delivery.

Over the past period, we've significantly reduced the investment required for satellite stores and found ways to lower investment upfront for the classic stores as well. Moving forward, we can leverage these 2 formats to open more profitable stores in high-tier cities. For lower-tier cities, on the other hand, the [ PH WOW ] format introduced last year has proven highly effective, compared to high tiers. For the WOW model, pricing is adjusted from [indiscernible] pricing to everyday low pricing, better aligning with the spending habits of small town residents.

Service model is also upgraded to be closer to QSR model, enhancing peak time service capability. Additionally, the investment required per store is down by nearly 50%, and now for [ WOW model ], in lower tier cities, upfront investment is between 600,000 to 800,000. With that, the PH format has a greater chance to succeed in smaller cities. We have already opened more than 40 new Pizza Hut WOW stores in low-tier cities.

So far, the initial performance in terms of CapEx, [ WPSA ] profit margin and payback period, the performance is in line with our expectations. At the same time, we have invited a select franchisees to pilot this format in small towns. On the right-hand side, you can see some prices. This is to give you a sense of the product offered at [ WildStar]. And in the afternoon, you will also visit some of our [ WOW ] stores to better understand what is like to open a [ wow ] store, what's our price, what's our service in the [ Wildstores ].

For the existing 4,000 stores, we will continue making adjustments and upgrades. First, we will leverage AI for zero-based network planning by analyzing demographic distribution and the mobility patterns of individual cities. Guided by this blueprint, we will retain high-performing stores and relocate or close underperforming ones. At the same time, we will upgrade store facade and outdoor areas annually to enhance brand image. So I've talked about new openings.

Now let's shift to sales. In terms of sales, our goal is to sustain high single-digit [ SSSG ] annually. Our strategy will focus on 2 pillars: strengthening the call and expanding adjacencies. First, reinforcing our core business. We will continue to improve in family and group dining occasions. Enhance products and value for money, optimize our delivery channels, continue to expand our price range, further penetrate low-tier cities, et cetera.

To capture greater market share, at the same time, we will continue to expand into adjacent areas. We will innovate and scale adjacent opportunities, including developing the burger category catering to solar dining occasions, strengthening takeout channels and further engaging with younger consumer groups.

So I will elaborate on the core and adjacencies, respectively. To enhance our core, the most crucial aspect is continuously enhancing our product strength. And first, we must strengthen our leadership in the pizza category. Over the past few years, the pizza category has been a critical growth enabler for overall brand sales. In the first 3 quarters of this year, pizza sales increased by over 24%. Underpinning this growth is constant innovation particularly in pizza crust.

In August this year, we launched the 10-inch handmade think across the pizza series, which has since become the best seller. Customer feedback and the repeat purchase rate for the thin crust series is higher than those for the entire pizza category, coupled with the hand hospices introduced in 2022, innovative crusts now account for over 70% of total sales. Going forward, most of our pizza innovations will focus on developing new crusts.

Second, we will continue to strengthen classic pizza flavors such as Super Supreme and New Orleans. So these existing [ HERO ] products will be further strengthened. At the same time, we will create new hit flavors. Like the [indiscernible] pizza, they're also very popular. Lastly, we will expand our value offerings priced at RMB 39 and RMB 49 to increase market share across different segments.

Another key approach to enhancing product strength is continuous product focus, creating [ hero ] products and new hits. Over the past few years, we have streamlined our menu reducing the number of long-term products from 105 to fewer than 80. So individual product efficiency is significantly improved. During this process, we focused on creating hero products, like Bolognese Pasta and [indiscernible] Pizza, high repeat purchase items have seen growing sales. At the same time, we continue to introduce new hits such as the secret recipe chicken thigh burger Barker and Korean fried chicken, driving overall sales.

The second approach to strengthening our core is improving brand value for money, focusing on 2 things here as well. First, enhancing the value of long-term menu items, not only have we maintained prices without any increase for [ ATS], but in December, Q4 last year, while preserving healthy profit, we even made significant price cuts which proved highly effective. Since Q4 of last year, same-store traffic has been steadily rising. In the first 3 quarters of this year, same-store [ TC ] grew by 17 percentage points.

Moving forward, we will aim to stabilize average [ TA ] and introduce highly competitive value for many products at higher price points to drive both [ TC ] and [ TA ] growth. Second, strengthening signature value platforms. This year, we -- this year, we upgraded [ screen ] Wednesday, offering customers more predictable promotions, which has shown promising results. We plan to upgrade other value platforms using similar strategies. Our long-term goal is to strengthen these value platforms and to enhance customer trust and promotional effectiveness.

Third lever, delivery remains our most important growth engine. In the first 3 quarters of this year, delivery has been performing very well. Sales grew by 27%. We outperformed the system sales. Going forward, we'll continue to drive delivery growth. So we'll focus on enhancing the taste of delivered food will engage platform riders to effectively improve delivery efficiency and speed, we will optimize algorithms to increase conversion rates on public domain traffic. And finally, we will strengthen our own channel with exclusive benefits, mechanisms and campaigns to accelerate growth in our proprietary delivery channel.

The final piece of the puzzle is to enhance our digital capabilities. Over the recent period, our membership base has continued to grow rapidly and driven by the full menu promotion, our new member acquisition has significantly outpaced that of last year. Looking ahead, we will use CRM program and privilege membership costs to increase repeat purchase frequency. At the same time, we will enhance private domain traffic and drive users to our own app and mini program by providing more attractive benefits, exclusive discounts and improve the customer experience. So having covered the core business, we now turn to the adjacencies.

We are pursuing 4 key levers to expand adjacencies. First, newly launched burger category. Product-wise, we will focus specifically on beef burgers. In marketing, we will highlight our positioning as make-to-order CDR quality. Through various [ LTOs ] and promotional campaigns. We aim to raise awareness that Pizza Hut offers high-quality burgers. Second is solo dining. Actually, this is a segment also went up by 25% in the first 3 quarters. So going forward, we will also promote our solo dining IP to offer more -- a good value for money product combinations. So as to continuously improve the [indiscernible] meal experience in both dining and the delivery channels to drive more sales.

Third lever is our takeout business. So going forward, we want to further improve our brand awareness and speed of food preparation and the delivery. Lastly is IP co-branding. In recent years, we actually have collaborated with more than 20 different IPs annually, bringing emotional value to our customers and also drawing new customers. In the future, we will continue to collaborate with IPs that are popular with our family customers. And we will also look to have a more diverse co-branding with gaming animation and other IPs.

So having discussed our sales. I would like to talk about how to improve our store profitability to make our business more resilient. So now we have the sales. We want to make sure that the stores are profitable so that we can contribute to the competitiveness of Yum China. So our target is to grow brand gross profit by more than 75% compared to 2024. So as to double it by year 2. Correspondingly, we aim to improve store level margin by about 250 basis points by 2028.

So while boosting the profitability of our brand and restaurants will also look to widen our moat by continuously enhancing the customer experience and satisfaction. For us, the most important lever to increase restaurant margin is to improve labor productivity. So we will do this through 4 aspects. First, is to simplify or streamline our menu preparation steps of each product and the restaurant management tasks.

So for task that cannot be simplified further. We will try to use automated equipment system to help. And for tasks that cannot be simplified or automated. I will try to centralize them via our mid office to improve overall efficiency. For example, we have already launched a centralized recruiting and the training mid office. Our store managers, you longer need to work about hiring and training, they can free up more time to take care of our customers.

Going forward, we can also do as for example, the centralized scheduling, training, et cetera. And we will continue to also our front-line incentive plans, so that our productive employees can more than encouraging productivity and to have a better retention of our good employees. So in terms of customer experience, on top of overall satisfaction, we pay special attention to product quality and speed of delivery.

So over the past few years, we have made continuous improvement in all these areas related to customer experience. Going forward, we're further to stabilize new product quality, especially for pizza. We have also launched our AI quality inspection system with image regulation technology. We are able to attract the quality of every pizza. And based on this data, we will also do targeted training and process improvement for our employees.

So will continue to improve speed of service. With our [indiscernible] system, we can do real-time inventory calculation and come up with the best solution. And leveraging on the latest [indiscernible], we continue to optimize algorithm to boost production capacity and the delivery speed during peak hours. In addition, and we will further improve the overall satisfaction by enhancing learning environment and [indiscernible] service.

Finally, to execute our RGM 3.0 strategy, the most important enablers are each RGM and also our organizational culture. We have launched an [ RGM 3.0 ] system to collect suggestions and the problems from every RGM and provide timely feedback. Whereas the [ top ] of AI, we ensure that every [ RGMsvoice ] can be cut quickly and their concerns addressed properly. Regarding customers, we have hold [indiscernible] customers with a culture. We also have a system to collect customer feedback from multiple channels and to respond in a timely manner and to of the issues to serve every customer well.

So ruling on team capability, brass,product strength and a strong network we have navigated cycles repeatedly and ready to accelerate growth. The pizza and the burger credit [indiscernible] with a new price range and lower tier markets and also the dining situation, we have a couple of huge market space to accelerate growth. We are very confident that can build Pizza Hut into the most innovative pizza brand in the world to build Pizza Hut with another Pizza Hut in 5 years. Thank you. Now let's welcome Maggie Chen our Chief Customer Officer and the General Manager of Lavazza to share with you the [indiscernible].

Thanks, Jeff. Good morning, everyone. I think this morning, everybody already enjoyed the first cup of Lavazza. Maggie Chen as a new role of General Manager of Lavazza JV. Today, I'm really excited to share the most legacy Italian coffee brand, Lavazza and its progress in China market. Let's start with a short video to understand the essence of the brand.

[Presentation]

Yes, detail, tradition and excellence show brands never changing attitude of 100 years. Lavazza was founded in 1895, inventor of blend and the hometown of espresso. Over the years, Lavazza has became the Italian flavored brand around the world. What brings us here is a perfect espresso. It is the heart of tradition and the moment of coffee pleasure. Every single cup starts with the same uncompromised espresso, strong flavor, rich creamer and smooth foam.

And in China market, we are trying to connect the authentic Italian [indiscernible], not just the detail in every cup, not just tradition in every menu innovation, but also a very exciting life moment. We have been refining this brand in the past 5 years to find out a right but still unique Lavazza for China. As [ Joey ] mentioned, it takes years for bamboo to grow its root system beneath the soil. Once the root are solid, we believe bamboo should up at a very fast speed. We truly believe we will be one of the bamboos in Yum China.

Actually, we started to build our own rule system 5 years ago and passed through a dynamic [indiscernible] market environment and consumer habits. We will continue to evolve the brand and 2025 marks a tipping point. We are happily Lavazza has finally find its growth path, and there are some positive signal after Chinese New Year.

By quarter 3, we had 118 stores. Our coffee shop business showed strong month-over-month momentum. SSG rebounded to 111, and we've seen a sustainable trend in the early of quarter 4. At the same time, thanks to the [ live model ] we developed last year, those new format stores achieved restaurant margin around 5.8% in quarter 3. That's a very encouraging result for single-store economy. Therefore, we are confidently moving to a new phase.

We will accelerate new store opening. By year-end, our target is to reach 145. Globally, Lavazza is very excellent in the retail business. Last Investor Day, we mentioned our plan to step into the retail market in China. Now it has already become one of 2 the most important growing engines for Lavazza JV. Actually, retail revenue rose 38% year-over-year with an operating margin around 9%. We also know that to drive in China must to adapt. At Yum China, we know how important the local insight is. We are making sure our coffee truly resonates here.

China coffee market has been a significant growth in recent years. When we compare consumption level of developed Asian market, we are still at very early stage. This is huge potential. As Chinese consumer drink more and more coffee, many of them will evolve from simply drinking coffee to being coffee drinker. Their taste will naturally upgrade. And if the price is accessible, they will stay with better quality coffee in daily needs.

This growing segment for Lavazza is our sweet spot. We believe we are perfectly positioned in their needs, stay true to authentic Italian coffee, while offering localized menu with accessible price. And also, Italian lifestyles, craft, art, passion and love.

As the Italian coffee master, we offer diverse coffee bean to meet different preference, from classical Italian blends to single origins and special blends for different seasons and life moments. Actually, more and more Chinese consumers have known and loved our KAFA. Lavazza's iconic KAFA bean. This is a real bean from Ethiopia KAFA forest. It is the birthplace of the first coffee bean. After several years' efforts, now we can offer it every day in China at a very good price.

Today, 1 in 5 Lavazza customers will naturally trade up to KAFA bean. The menu mix doubled in past year. Surrounding by KAFA this collection, surrounding with KAFA lovers, we will continue to innovate our KAFA collection. Our recent KAFA Geisha launch achieved the highest repeat rate in the past two years. We will offer more KAFA bean choice and we believe it will further grow our business and our fan base.

Blending coffee, much like perfume and wine, is the art of combining different origins to achieve unique balance of aroma and character. As blends inventor, we bring our global blending technical into China. Since last year, we speed up the cycles to offer different seasonal blends, inspired by a lot of emotional moments like tennis celebration. This approach has significantly grown our business and the love base. We plan to double or even triple our blend circles in the future.

To win in the market, we know we need signature products. Different from Italy, Chinese consumer more prefer milk-based coffee over black coffee. Our 100% buffalo latte, milk latte, was tailor-made to Chinese consumer and taste, but still with Italian DNA, sweet, ice cream-like texture. We believe in that. Year over year, we promote it. The result is very encouraging. Buffalo milk latte already has been Lavazza's signature item. In the past 12 months, we are so happy to sell over 1.5 million cups. This is 25% of our total beverage.

Building this insight, we launched liquid tiramisu coffee this summer. We're transforming a global well-known dessert into a drinkable format, creating a new experience of coffee plus dessert. The product hit the market and became our new blockbuster. And there are a lot of good ideas coming from my team. I think this is not only one. Actually, there are a lot of dessert-inspired beverage will launch in our shop as a daily offer.

Lavazza family are big fans of tennis, and more and more Chinese consumers play tennis, watch tennis and dress up during tennis. For us, that's really perfect. Make tennis as a platform to connect, engage with our potential customers. With world #1 player Sinner, Lavazza ambassador and a strong brand activation across all channels. During Shanghai ATP season, we enjoyed 20% sales revenue growth year-on-year. We hope the fast-growing fan base of tennis will be Lavazza lovers as well.

Fashion and car racing are the pride of Italy. They also present a certain life attitude, pursued by Lavazza’s core targets. This year, Lamborghini, Moschino campaign proved our approach. We could build connection with our customer within coffee and beyond coffee.

China is a famous country of cuisine, so as Italy. Take inspiration from Lavazza's network, with Michelin star chefs and the leveraging Yum China's expertise in localization and standardization, our joint team really delivers high-quality food with simplified equipment and streamlined operation. Good taste and light investment works in Lavazza China.

We've introduced over 100 Italian-inspired food items in China. Some like Focaccia and the Toast Dolce have become the must-try favorite items in our menu. Some like the Turin-style pizza and Panettone. They are starting to gain their own lovers. The clear food portfolio has also given us very unique growth pillar to drive our TA on different dayparts, and meanwhile to bring extra sales during holiday.

We found Chinese consumer super love a lot of Italian elements. We should better leverage and visualize and strengthen the connection with our potential customers. This summer, we launched the first Italian summer concept in China. We'll present a more comprehensive experience across coffee, drink, retail and gift. The summer sales result is so impressive, as I mentioned earlier. Now we are in Italian winter season, ski season. Actually, we gained a very good start as well.

We found all key elements to connect with our core audience and now it's time to match ahead. We all know store model is very critical to speed up. Consumer priorities are dramatically changed in recent years in China. We need to meet the core needs, while becoming more streamlined and getting closer to the customer, in distance and the price. We have continuously adjusted our model. Actually, the first-generation model offers large space, good coffee, light meal, and restaurant-level experience. While this is our third-generation model, it focused more on core needs for specialty coffee.

What remains as uncompromised are the quality of coffee, coffee equipment, barista and the Italian design. But for the store size, it has been cut in half and the CapEx optimized to 1/3. The essential model allowed us to open more store and offer accessible price in their daily needs.

The latest version requires an investment of less than 0.5 million, almost 1/2 compared with before. With this design, we launched our first store, Pinzun, in Shanghai last June. The promising sales performance and the [ unique ] economy have led us to another 24 stores. These stores have achieved around 6% of restaurant margin in quarter 3, healthy and still growing.

Now we are more confident than ever to expand. In the future 3 to 5 years, we will be doubling down our presence in Tier 1 and selected Tier 2, becoming more accessible to coffee lovers and elites. We see potential for each Tier 1 city housing 150 to 200 stores. It gives us thousands in scale. The light format with coffee mastery as its core allowed us to go broader or even go deeper.

At current stage, we will more prioritize commercial and office trade zone to increase brand exposure and meet daily needs. We're also testing strategic location like campus, transportation hub, leverage Yum China franchisee resources.

To provide a cup of good coffee, we must ensure freshness, innovation and good price, meanwhile, retaining Lavazza's century-old roasting and blending expertise. We are enhancing local capabilities under the support from Lavazza R&D and Yum China supply chain ecosystem. This allowed us to improve our agility to the market, reduce the cost and strengthen our innovative pipeline.

We've launched more than 40 products in the past 3 years. So far, close to 30% product is roasted locally and we plan to reach 70% by 2027.

In mature market, coffee retail is another huge business. China retail business even grows faster because the user base enlarges. Last Investor Day, we mentioned Lavazza JV was a step into retail market. We set up our local dedicated team work closely with our Italian teams, and gradually shift from 100% global imports to local R&D and production. We've expanded from only bean-based products to capsule, liquid and drip. Some are very Asia-specific format.

We have the opportunities to build capability to react to the market like a local player, which gives us confidence to go broader and even go deeper. Meanwhile, we create synergies between shop and retail to offer and promote signature beans across all channels. As I introduced KAFA, now it gets signature sales in both businesses. In just 3 years, we doubled our retail sales, and we see more breakthrough ahead.

We are so happy we reconnected with our channel partners. Now you can see more and more Lavazza in premium, up, middle scale hotels. Also, we're already presenting almost all leading key accounts in Tier 1 to Tier 3. This is another very efficient way to build brand awareness.

This year we designed to set up our self-run capabilities for online channel. We have very good business result during this 11.11. In terms of GMV, actually, we are top 2 roast and ground coffee brands in e-commerce. My team see more and more opportunities we can do better. We are very excited about that.

Our team is in place and fully confident to break the ground. By 2029 will remain our goal: over 1,000 Lavazza stores in China and USD 60 million in retail sales.

Lastly, allow me 20 more seconds to send an invitation here. Two weeks ago, we opened our first test store in Hong Kong to better understand Asia customers. The store is located in Central. I believe it’s also the home or office for many of you. Please come and enjoy authentic Lavazza there. More signature and new product will launch, aligned with the pace of Mainland China.

Thanks again for your time. Now let's take a short break. Please join us outside for the second Lavazza moment. Thank you.

Thanks, Maggie. We'll now take a short break and give management team a rest. You will have more time to interact with them after all the presentations. So please come back at 11:25. So that's about 10 minutes, 11:25.

Our lunch is a bit late today. So make sure you grab something to eat during the break. And following the break, we will have our Chief Technology Officer, Leila Zhang, to discuss our digital strategy. Thank you. 11:25.

[Break]

[Interpreted] All right. Welcome back. Good morning, ladies and gentlemen. My name is Leila Zhang. I'm the CTO of Yum China.

Earlier today from the presentation by Joey, you saw the bamboo forest in the first half of today's investor event. So I think we have heard a lot of stories about the bamboo forest, the different brands we have. And starting from me, I'll be talking about what's happening underground behind the scenes.

You've heard from Joey and the brand general managers that talked about Yum China and we have always considered innovation and digital capability as one of our core competencies. Today it's my great honor to be here and share with you some of our latest initiatives and achievements in intelligence transformation, and also to take you into our future tech development and innovation.

So the digitalization of Yum China has happened in tandem with its business growth and always resonates with the company's RGM strategy. In 2013, while we rolled out digital initiatives for customers and stores, we also started constructing data warehouses to accumulate data. By 2019, based on high-quality data, we started building and centralized the AI platform and utilized decision supporting AI capabilities, such as forecasting, optimization and recommendation to accelerate business growth.

Starting from 2023, following OpenAI's lead into the era of GenAI with the launch of ChatGPT, we also actively embraced this technology, introducing AI agents to deepen the integration of technology and business. Entering 2025, AI Agent 2.0 began to serve as digital employees, assisting store operations and back-office staff.

Throughout the years, we continue to maintain an industry-leading position in applying and utilizing emerging technologies. Currently, Yum China has fully embraced AI, with deep applications across 4 major areas; customers, stores, supply chain and back office. For customers, we provide convenient personalized services for 575 million members. For stores, we continue to improve operational efficiency with end-to-end digitalized product management. For the supply chain, AI enables farm-to-table management to deliver on both food safety and agility. For back office, AI agents have been integrated into various functional workflows to drive efficiency improvements.

Next, I will delve into each of these 4 areas. At every touch point of consumer service, AI plays an indispensable role. First, through our consumer insights platform, we can collect and analyze customer feedback within hours after a new product launch, driving rapid product innovation. Our refined operational capabilities allow us to precisely reach over 200 million targeted customers within 24 hours.

Communication has become more efficient. The ordering and membership systems are updated weekly for better functions and performance. This helps meet the fast-growing business needs, at the same time also enhances user experience.

Then is our AI-aided customer support system, which handles over 150,000 customer interactions daily, with 90% handled by robots, and a satisfaction rate exceeding 90% as well.

I'd like to highlight the latest upgrade of the KFC Super App, an AI-powered ordering agent. This incorporates LLM intent recognition on top of AI recommendation capabilities, making ordering more convenient.

Here's a demo to show you how it works. So the user says, "Help me order a set combo." And I'll change a specific item. I'll also change the beverage. Make the payment. All right.

We're now promoting this AI-assisted ordering system. Nearly 500,000 customers have tried it. We also welcome you to try it out, and your feedback is very welcome. Every piece of input helps us improve our agent capabilities.

Regarding store operations, we have implemented end-to-end digitalized product management. For example, the automated replenishment system covers most items. The AI suggests and RGM confirms. This enhances efficiency and also ensures flexibility for store-level decision-making. With the Smart Stocktaking system, AI generates store-tailored checklists to ensure optimal efficiency improvement case by case.

The i-Kitchen is an AI-powered real-time production management system. It helps restaurants flexibly manage peak hours and ensures stable quality through image recognition. These AI-powered systems free employees from repetitive tasks, allowing them to focus on serving customers, and this also helps better address food safety.

In terms of supply chain, we have achieved full-spectrum intelligence covering food safety, logistics and replenishment. For food safety, we use knowledge graphs to proactively identify and mitigate risks and enhance control efficiency. For logistics, intelligent network planning enables faster and more economical distribution to over 17,000 restaurants nationwide.

For replenishment, precise demand forecasting, combined with end-to-end collaborative planning, significantly boosts supply chain responsiveness and agility. All these AI capabilities are supported by a supply chain control tower and data platform that integrate data across core suppliers, logistics and stores, so that AI algorithms can effectively assist decision-making.

For the back office, we have established a system integrating structured data with unstructured knowledge, enabling full AI coverage both horizontally and vertically. At its foundation lies digital business systems, constantly generating and accumulating vast data. The middle layer consists of data platforms across different functions so that data can be connected and translated from being inactive resources to becoming usable assets.

Currently, we focus on several vertical domains such as finance, human resources and store development to develop and deploy AI agents to improve efficiency across the board. Looking to the future, we will continue developing our AI agent and embrace the Agent 2.0 era. Agent 2.0 represents 3 major upgrades, from being reactive where humans seek AI, to proactive services where AI initiates interaction with humans. From single-agent to multi-agent collaboration. From executing isolated tasks to empowering entire workflow. We believe that Agent 2.0 is not just a technological leap, it's also about reimagining human-AI collaboration.

Today I want to use 2 agents. One is the dev agent. Dev is the store operations agent, to show you the future of agentic AI application and how they empower our business in different scenarios. As you know, the selection of store location is the start of restaurant operations. It requires a lot of public domain and private domain data. It also relies on the extensive experience and knowledge of our human employees.

We're currently building a Dev Copilot that integrates GenAI and decision support AI, creating an end-to-end intelligent workflow for store development. For example, during site selection, the agent leverages AI algorithms to recommend optimal locations. In contract review, the AI agent pre-screens key items and flags potential risks. With this Dev Copilot, the human development staff can work more efficiently to support rapid store expansion to 20,000 or 30,000 stores.

For in-store management, Q-Smart is becoming a reliable digital coworker. So we are now working on a smart agent matrix based on multi-agent collaboration. We have this Q series, centered on Q-Smart. There's also D-Smart for delivery operations and C-Smart for customer service.

So these agents work together to support frontline staff. They have various capabilities covering a wide array of functions, and they have four important strengths. First, hands-free natural language interaction to better ensure food safety. Second, real-time sensing and feedback. In case of possible sellout, the agent will send a timely alert and generate a production plan so that emergency situations can be handled timely. Third, highly responsive to employee questions with reference to data and menus anywhere, anytime. And fourth, multi-agent collaboration and a clear division of roles so that each employee is supported by multiple digital coworkers.

We launched Q-Smart in June this year. It is now being tested in several pilot stores, with continuous iteration based on frontline feedback. Next year we'll extend it to wider scenarios and also launch the test in more stores. Before I conclude, I want to show you a video on Q-Smart to help you better understand how Q-Smart empowers our store operations.

[Presentation]

[Interpreted] Yum China has always believed that digitalization and AI are vital accelerators for the company's development. Looking ahead, we will continue to increase our investment in digital and AI. So for Yum China, AI is not just AI. It also symbolizes accelerated innovation.

Thank you very much for your time and for your support. Next, let me have Mr. Huang, Chief Supply Chain Officer, to come onto the stage.

[Interpreted] Thank you. Thank you, Leila. Good morning, everyone. So I'm the second person in charge of what's behind the scenes. So I'm in charge of supply chain management.

So I'm very honored to share with you what we have been doing in supply chain. Yum China has a world-class supply chain management system. Our efficient organizational capabilities ensure end-to-end management of all our products, from farm to table. Purchasing the logistics as our core pillar empowering and driving brands growth; R&D acts as an accelerator, fueling continuous product innovation; and then food safety serves as a stabilizer.

So food safety and sustainability have always been at the heart of what we do. We consistently prioritize food safety as our top priority, as our long-term goal is to build a responsible supply chain ecosystem.

On the business side, through our integrated procurement across multiple departments, we bring competitively advantageous products to the market. On the logistics side, relying on warehouse and distribution network that covers over 5,000 cities and towns. We ensure efficient product delivery, so giving strong support for our brand expansion to remote and lower-tier regions.

Our coordinated procurement strategy has enabled us to maintain effective cost control over the years. By building a supplier ecosystem, using pricing strategies and fostering local innovation with suppliers, we have achieved our strategic goal of being best-in-class, best-in-cost in recent years.

And the cost-of-sales ratio of our products has remained stable or even declined. For example, our core raw material, the bone-in piece chicken, remains among the most competitive in the market year after year.

Our dynamic pricing management strategy helps us to closely monitor and respond to market trends. For example, crayfish is a core ingredient for our crayfish series products, and its price is influenced by demand, farming volume, weather and water quality. Over the past few years, we have tracked this data and adopted a dynamic coordination, timely purchasing strategy at each relatively low price point. During the harvest season, we swiftly lock in procurement volume and price. This gives us a competitive edge, enabling us to launch additional crayfish-related offerings.

Another key ingredient is durian. To ensure a stable supply and avoid multiple markups along the value chain, we launched upstream direct sourcing in Vietnam and Thailand. By doing so, we maintain a closer connection with upstream producers, securing supply while greatly reducing procurement costs.

Price locking is also another critical lever in our pricing strategy. Take coffee beans as an example. Our specialized team continuously monitors the amount in the supply and has developed in-depth know-how across multiple production regions. We signed a big volume and price locking agreement to mitigate the risk of sharp cost increases in coffee beans.

And last but not least, in response to deglobalization and tariff risks, we began diversifying supply and promoting domestic alternatives several years ago. For cheese products, we have developed new overseas suppliers as well as local domestic suppliers. With joint technological innovation with the domestic suppliers, we have become the first restaurant company in China to use domestically produced mozzarella cheese.

In addition, in 2024, we launched a global supplier recruitment platform, transforming our supplier engagement from a one-way selection process to interaction between us and the suppliers. This gives many small and medium-sized suppliers more opportunity to proactively introduce themselves and get chosen to Yum China. It has also helped us to build a healthy supplier pool.

And in recent years, Yum China has also actively expanded its global supply chain resources and engagement opportunities. In 2024, we have participated in China International Supply Chain Expo organized by CCPIT, where we can interact with international suppliers. In September 2024, we also attended the Procurement and Supply Chain Live Summit in London, promoting our supply chain experience to a global audience.

Our internal innovation in processes is also helping us optimize procurement strategy. Over the past few years, we have also refined our existing product launch mechanism, upgrading from a linear collaboration model between departments to a multi-level, 2-way model. This adjustment allows us to capture consumer trends from multiple dimensions, facilitate cross-departmental information exchange and coordinate supplier resources. As a result, our product development mechanism has become more flexible, accelerating the speed of launching new items, and we are also able to bring new products to the market that are faster, more affordable, better and bursting with potential.

So in the past 3 years, we have launched more than 1,600 new products. In the past 12 months, over 100 of our products have surpassed RMB 100 million in sales. And considering the product needs of our brands, we are exploring broader, full material utilization from raw material sourcing to product design, creating a complementary closed-loop system. Guided by consumer insights, we match ingredients of different specifications and parts with brands [indiscernible] brands optimally place them on brands' menus. And we have successfully put together a whole chicken from various resources of suppliers and we hope that moving forward we can put together a whole cow, 1 truckload and 1 logistics and warehouse distribution network by working with various partners.

The strong logistics and the warehousing distribution network as another pillar of our moat is also the foundation of our confidence to continue to expand our brand footprint. To strengthen supply chain efficiency, we are continuously advancing the logistics business flow projects, starting with cutting distribution centers, we are evolving into a 3-in-1 model that integrates distribution, fresh vegetable facilities and bread factories.

Ultimately, we plan to build a Yum China supply chain industrial park that aggregates distribution, packaging, food production equipment and more. By leveraging synergy, we will not only drastically reduce delivery costs, but also deliver -- achieve highly coordinated effect.

We expect Yum China's first 3-in-1 industrial park to be completed and operational in Datong by the end of 2026. Other projects are also under development, including a 3-in-1 facility in Jinan, Shanghai and Harbin, as well as supply chain industrial parks in Guangzhou and Zhangjiagang.

Furthermore, we are piloting a hybrid warehousing delivery network to improve delivery efficiency in remote areas to reduce logistics costs. While ensuring food safety, we are introducing third-party resources and then partnering with companies that have a wider network coverage to reduce the cost and to improve the coverage.

And of course, logistics automation is the foundation for innovation efficiency. Two years ago in Xi'an, you may have seen our narrow-aisle, 4-direction vehicle and goods-to-person projects. These have already produced great results, increasing warehouse space by over 35% and operational efficiency by over 50%. Building on that, we have established narrow-aisle 4-direction vehicle system in the frozen warehouse of Nanxiang Shanghai, a leading player in this industry. Going forward, we will further upgrade by combining 4-direction wheels with AGV goods-to-person system, enabling multi-level picking inside the warehouse to manual operation. At the same time, we are actively testing autonomous trucks and robotic dog freight movers.

Now let's take a look at the VCR footage of our supply chain automation.

[Presentation]

[Interpreted] Okay. Welcome back. Now let's take a look into the foundation of resilience. We understand in terms of supply chain, managing food safety upstream, with the upstream of -- upstream, it's extremely complex and tedious. We are leveraging AI to increase efficiency in our day-to-day management. We have developed cloud inspection plus AI diagnostics to trace back to the most challenging and complex areas, the field themselves.

On the store side, we use OEC plus AI to automatically monitor and standardize sanitation in key areas such as employee hygiene, equipment maintenance, restaurant cleanliness, preventing cross-contamination and cultivating long-term food safety habits. In Pizza Hut, we have launched the AI quality inspection, which is trained with a massive pizza data to ensure every pizza delivered to customers meets our quality standards. As Zhang Leila mentioned, our facilities system is moving from end-to-end control to the AI agent era, supporting the rapid expansion of our brands and our franchise business.

So the ultimate goal of our supply chain is sustainable development. YUM is committed to building a responsible ecosystem. As shown, our achievements have far surpassed expectations. We have also received multiple recognitions. But that's not the end. Continuously having green development together with our upstream and downstream industry partners is our long-term mission. Here I would like to highlight several key milestones.

In the past 2 years, we have expanded our coffee grounds recycling to 8,700 KFC stores, collecting over 3,000 tons of used grounds. In the first phase, we've transformed these grounds into eco-friendly plates, baskets and straws in the stores. In the second phase, we optimized the process to produce logistics pallets and activated carbon filters, which we plan to use in our restaurants and warehouses. We also encourage our beef suppliers to add a specific bioenzymes in feed to reduce emissions of ammonia, improving feed-to-meat efficiency and lower carbon impact.

At the same time, we have also asked the potato suppliers to reuse potato peels as fertilizer, thereby reducing environmental pollution. Additionally, we're encouraging inter-cropping of potatoes and oats across the 3 seasons, which helps preserve soil health while increasing potato yield.

Balancing nutrition and health is also part of our commitment. In response to China's Healthy China 2030 Plan and the National Nutrition Plan 2017 to 2030, we're continuously improving our existing product formulas, launching more low-salt, low-sugar innovative items such as reduced salt mozzarella, French fries, sugar-free cola and sugar-reduced fruit juice.

We have also previously announced our sugar and salt reduction goals through 2023 and are steadily making progress. Based on current average progress, we expect to overachieve our 2025 targets. Building on that, our ultimate goal for 2030 while ensuring flavor and customer experience may even be attained ahead of our schedule.

Finally, we will drive continuous efficiency and innovate, strengthen the resilience of our supply chain and deepening our moat, working hard with our partners to build a responsible and sustainable green supply chain that empowers our brands to reach new heights.

Thank you. Now, please join me in welcoming our Chief Human Resource Officer, Mr. Ding Shiyan.

Thank you, Duoduo. It's a pleasure to be here today with you. I'm Jerry Ding, Chief People Officer of Yum China.

Today we have shared much about our RGM 3.0, our business strategy on the surface, right? Now I would like to bring the focus beneath the surface, to people, our strong foundation. At Yum China, you hear this a lot of times today, we say RGM #1. RGM means Restaurant General Manager. They are the ones who keep our restaurant running smoothly every day, lead our teams and bring our brand culture to life for customers.

Over the past 12 months, our RGM turnover rate was only 8.3%, with an average tenure of nearly 12 years, reflecting our long-term commitment to caring for and to enable our people. We care deeply about our RGMs and have built a comprehensive benefit framework to support them. Beyond our core benefits such as medical insurance, we offer supplementary benefits, including upgrade medical coverage of up to RMB 1 million for RGMs and their families. These benefits also extend to our restaurant management team.

Our care program also extends beyond that. Early this year, we launched a flexible benefit program, offering over 20,000 restaurant crew members comprehensive, accessible and affordable health coverage options.

Behind these benefits are real stories. We have an RGM whose father was able to get lifesaving heart surgery through our family protection plan. We also have an RGM whose cancer treatment expense was fully covered by our medical insurance.

But RGM #1 is more than just providing benefits. It is about empowering them. Today, our centralized recruitment and training platform now fulfills approximately 89% of our restaurant crew hiring needs. RGMs no longer need to spend long hours sourcing CVs. Instead, they submit a request and a fully-trained team member arrive at the store within only 1 to 2 weeks.

With our centralized new-store-opening platform, tasks that used to take RGMs months of preparation are now being handled by our shared service. On average, this saves an RGM around 100 working hours per new store opening.

And we know that it is important to listen to their voice and recognize their achievements. Through our RGM voice platform, we continuously gather frontline feedback, response around the clock and close the loop with timely resolutions. We are also delighted to share that more than 90% of KFC restaurant employee have been recognized and rewarded through our K-Bean program.

Once centralized, AI could play a critical role in transforming how we manage people in our stores. AI supports every stage, right, from resume screening to e-onboarding, to a 24/7 AI chat bot that handles almost 80% of restaurant teams' inquiries.

This does not stop at hiring and training. The platform also brings staff scheduling, performance and career development together into one seamless end-to-end process. With this system in place, employees have a clear view of their training, pay, recognition and growth opportunities, so they can take charge of their own development. And for RGMs, these digital tools also free up time to focus on what truly matters: food safety, customer service and developing their teams.

One of our most important initiatives this year is the Mega RGM. Today we have almost half of all our RGMs are Mega RGMs. Rather than manage a single store, Mega RGM oversees 2 to 4 stores with their management team, leading a total of 60 to 90 staff.

The model tackles 3 key frontline challenges. First, it helps fuel the RGM talent pipeline that we need to fuel the rapid store expansion. Second, it creates diverse and attractive career pathways for our frontline employees. And third, it enhances workforce efficiency so our team can deliver at their best. But we are not simply asking RGM to do more. We are helping them, helping them work smarter.

And the results speak for themselves, right? Mega RGM retention is strong. Turnover last year was only 5.1%, well below the overall average.

So why is this a good job? People always joke that an ideal job is about [Foreign Language]. Higher pay, greater impact and more accessible. In this case, it is true.

Higher pay. Mega RGM earn 20% to 30% more, and top performers see an increase up to 50%. Pay is linked to the store managed and the bonuses are tied to the sales. Greater impact. Centralization and the digital tools have reduced the routine tasks, helping Mega RGMs lead multiple stores and focus on operations and team development. More accessible. This may sound counterintuitive, but with technology, Mega RGMs can monitor the store remotely even if they are not on site. Our one system store management tool reduces unnecessary commute across stores by providing real-time operation data and automating routine tasks.

Rather than just hear from me, we invite one of our Mega RGM, Deng Weiwei, to share his firsthand perspective from the frontline.

[Presentation]

We have already thousands of our Mega RGMs, like we just showed. But our mission is far from complete. We will continue to strengthen frontline enablement by, first, consolidating resources to build a one-stop service center. Second, drive franchising business by sharing operational house and providing flexible talent support. And third, strengthen our frontline teams and culture to support the growth of new modules and initiatives.

To help our team focus on what matters most, we are now building 5 centralized platforms. We have now covered new store opening platform and end-to-end employee management. The other 3 are the customer support center, a dedicated team to help RGMs deliver greater customer service, particularly during peak hours. Inventory management: automated tools for smarter ordering, replenishment and stock allocation. Equipment maintenance: predictive maintenance and faster repairs. Together, this platform will make it simpler and focused for RGMs to run their restaurants efficiently.

Building on that, we are making it even simpler for RGMs to get support and problems solved by bringing all these restaurant support under one roof, the one-stop service center. Instead of reaching to 8 to 6 different shared service teams, RGM now can have only one single interface. Each RGM's request will be handled by a dedicated case manager for end-to-end accountability. Our closed-loop system ensures clear processes, measurable KPIs and real-time feedback. So we call it [Foreign Language]. Keep simplicity in our restaurant, leave complexity to shared service. With the integrated system, that has become a reality.

Let's now talk about how we enable franchising as a strategic growth driver. So at the market level now, we have dedicated operation teams and development teams, together with our franchisees who work hand-in-hand on site selection and construction. At the restaurant level, we provide qualifications and training standard and share the best practice to build a strong talent system. And of course, on technology side, we give franchises access to our system, our one system store management platform and soon our new one-stop franchise service app. Over the time, we will build a comprehensive franchise platform that supports every stage, from opening to daily operation, giving franchisees the skills to succeed.

Last but not least, we are strengthening our frontline leadership to scale our new business models. For example, we inspire our RGMs with role models from our top performers, excite them through engagement programs like the champion challenges that build new skills and elevate their thinking with K-creator camps and RGM forums to help them grow into cross-thought leaders.

At the same time, we are deepening our culture. This year, we refreshed our company culture, embracing founder's mentality with truth-seeking pragmatism. Our leadership team regularly visits markets and restaurants to share these values, while RGMs live these values in restaurants. And initiatives like K-Beans and Restaurant Battles bring our culture to life in daily management, inspiring frontline teams to grow.

So at Yum China, people first is more than a motto. People are our most valuable asset, and our culture is the soil that helps them grow and thrive. Like bamboo, deeply rooted in the cultural soil, connected by shared value, resilient through every challenge, and always growing upward and growing wide into a forest. This is who we are, and this is how we grow. Thank you.

Now, let's welcome our CFO, Adrian Ding.

Good morning, everyone. It's great to see everyone here in Shenzhen today. I'm Adrian Ding, CFO of Yum China. Thank you for joining us today. As Joey and our team have just shared, we're encouraged by the positive momentum in China's consumer sector. Consumer sentiment shows early signs of improvement. And while consumers are rational, they're willing to pay for great quality, taste, value and emotional value. And against this backdrop, we're well-positioned to capture the growth opportunities through the strategic initiatives that we discussed about today.

In my session, I'll focus on how we turn these strategies and initiatives into dollars and cents and provide additional color on our latest three-year growth algorithm, linking our strategic plans to financial outlook. As each of my colleagues has emphasized, innovation and operational efficiency are the twin engines that power our value creation algorithm. Today, I'll walk you through how these engines drive measurable results through balanced growth, resilient economics, capital discipline and strong returns.

Let me start with our growth algo. We maintain a dual focus approach in driving both system sales and same-store sales growth. Our growth strategy is built on two pillars: footprint expansion, innovation and operational efficiency. So, first, our footprint expansion is anchored by several key drivers: a clear growth runway in the underserved market, a portfolio of flexible store formats and the acceleration unlocked by capital-light franchising.

Second, and just as important, we seek to uphold high-performance standards that underpin our growth. And that's why we've also built multiple levers to drive SSSG, even as our base becomes significantly larger. To put this into numbers, we target to deliver mid- to high-single-digit system sales growth from 2026 to 2028 while sustaining a 101 and 102 same-store sales index each year over the same period. We're not expanding simply for scale. We are building a stronger and high-quality store base, as well as supporting infrastructure to position us for long-term success.

China continues to present substantial headroom for penetration for our brands. And as Joey has mentioned, our goal is to enter 4,500 cities and towns and to have more than 30,000 stores in China by 2030. By 2028, we expect to bring our brands to approximately 3,700 cities and towns across China, expanding our reach to over half of the country's population, up from around one-third today. And to be able to achieve this, we're accelerating our store network expansion. We ended quarter 3 with over 17,500 stores. And we'll get to 20,000 stores, exactly as we promised, by the end of next year. And in 2028, we aspire to achieve 25,000 stores. And this represents a double-digit net new store CAGR, supported by strong consumer demand for our brands, food services across all city tiers, and of course, our relentless focus on innovation.

To capture the significant opportunities here, we've built a portfolio of innovative and flexible store formats, each designed to expand our addressable market and meet diverse consumer needs. We deploy the right store format to the right location, enabling rapid, focused and capital-efficient expansion. So in higher-tier cities, formats like KFC Compact and Pizza Hut Satellite deepen our presence and improve our consumer convenience. And in lower-tier cities, we leverage formats like KFC Small Town, Pizza Hut WOW and KFC and Pizza Hut Gemini to unlock the significant and currently underserved opportunities with much leaner capital expenditure.

For example, a KFC Small Town store requests less than 40% of the capital expenditure of a standard store. Looking ahead, innovation remains our core competence while also testing other new initiatives and concepts that, if scaled successfully, could add further upside to our outlook. We look forward to sharing more with you as they evolve. Together, these store formats allow us to expand faster and better serve the different needs of our consumers here in China.

Now, let's turn to franchising. Franchising is a powerful accelerator in our expansion playbook. The capital-light approach enables us to unlock opportunities that were previously beyond our reach, namely in lower-tier cities, remote areas and strategic locations. It helps us capture the incremental demand with both speed and capital efficiency.

As of 2025, KFC and Pizza Hut franchise stores represent approximately 13% of our total store count. Between 2026 and 2028, we plan to open more than 3,000 additional franchise stores, raising the total franchise unit mix into the 20% range by 2028. For Pizza Hut in particular, we're raising the net new build franchise mix to increase into 40% to 50%, broadly in line with KFC's level and up from the 20% to 30% today. Our franchise stores typically generate a third to two-thirds of the average sales of our standard equity stores.

Given the lower investment and favorable cost structure, the payback for our franchisee stores has been quite healthy. For example, KFC Small Town's payback for our franchisees is 2 to 3 years. Franchise stores are expected to contribute mid-teens percentage to our system sales by 2028. And their share of revenue and operating profit is expected to reach high single-digit percentages. We also expect the OP margin of our franchise businesses to improve to around 10% by 2028.

Beyond new store openings, same-store sales growth is an important driver for our overall business. While our expansion plans over the next 3 years are ambitious, we are equally focused on sustaining healthy SSSG. To this end, we have multiple levers in place to drive our SSSG, as both Warton and Jeff have already covered in detail.

So I will just highlight a few key points here. Our strong brand equity built over the past 38 years and deep emotional connection with our consumers remain a powerful differentiator. We continue to delight our consumers with innovative and tasty food and drinks at great value. Equally importantly, we offer exceptional convenience, aiming to be whenever and wherever our consumers need us through our super apps, mini apps, aggregator partnerships and extensive store network, as well as the new modules such as KCoffee Cafe and KPRO. All these help us broaden our reach across a wide range of consumer segments and occasions.

Over the next 3 years, we expect to drive 100 and 102 same-store sales index year-over-year. And we aspire to reach a same-store sales index of 102 for the Group and for our 2 core brands at some point within the next 3 years. This would effectively bring our SSSG back to the levels seen during the periods of higher GDP growth while operating on a significantly larger footprint today.

Beyond our two core brands, speaking of emerging businesses. For Lavazza, the stores opened in the past two years are profitable in quarter 3 this year. And as Maggie has shared, it is on a clear path to 1,000 stores by 2029, while its retail business is progressing towards $60 million of profitable sales. Meanwhile, our other emerging brands, including Huang Ji Huang, Little Sheep, and Taco Bell, are targeting a combined 1,000 stores by 2028, supported by continuously improving store economics. We're disciplined in cultivating our emerging businesses, which are a force contributing to our future growth and success.

Now, let's turn to the other two cornerstones of our RGM 3.0 strategy, resilience and moat. These are equally important as growth in driving our long-term success. Our resilience is reflected in the continuously improving margins, driven by structural cost advantages and operational excellence. And our moat, built on core capabilities in areas such as supply chain, digital, and people, is demonstrated by expanding returns on invested capital. Together, these support our strong free cash flow growth.

We are targeting an 11.5% plus OP margin and approximately 20% ROIC in 2028 and double-digit CAGR for free cash flow per share growth. These targets quite clearly demonstrate our resilience and moat. We're building a business that grows in scale, profitability, and durability, all at the same time. Resilience starts at the store level.

We continue to work on restructuring our cost base and improving our operational efficiencies, and it's paying off. KFC remains our resilient fortress. And consistent with the philosophies and guidance shared over the previous few years, we expect KFC to maintain strong restaurant margins, reaching 17.3% plus in 2028, even as they continue to scale.

Pizza Hut has reached an inflection point, and quarter 3 marked the sixth consecutive quarter of year-over-year margin expansion. Thanks to the operational efficiency gains, it is set to reach a higher than 14.5% restaurant margin in 2028. Together, our two core brands are forging a clear path for overall margin expansion, with KFC providing a solid and high-margin foundation and Pizza Hut accelerating its performance, we're targeting a Yum China restaurant margin of 16.7% or higher by 2028.

To achieve the restaurant margin expansion, we're actively managing our key cost lines while enhancing productivity across the whole organization. We expect cost of sales to remain at healthy levels, sustaining the benefits from Project Red Eye, spending better and buying better initiatives and favorable commodity prices. As previously guided, our COS in the long term should stay within the range of 31, plus and minus 1%. COL, cost of labor, may see moderate pressure from wage inflation and the rising delivery mix, which we work hard to partially offset with our productivity gains. Occupancy and other costs are expected to trend downward through streamlined operations, better rent and store capital expenditure optimizations.

To achieve all this, we've embedded innovation and operational efficiency into every layer of our operation, from streamlining menus to centralizing key processes and deploying digital and AI. These efforts, together with our G&A leverage, strengthen the structural cost advantages and operational resilience, allowing us to navigate dynamic markets while growing margins. As a result, we expect to deliver steady improvement in our OP margin from 10.8% to 10.9% in 2025 to 11.5% or higher in 2028.

Solid top-line growth, combined with sustained margin extension, will drive significant increases in our absolute operating profit dollars. We expect high single-digit OP growth CAGR from 2026 to 2028. Our formula is straightforward and proven: growth multiplied by efficiency delivers greater profitability, which is a dynamic with scaling, with precision.

Okay. Now let's get to the capital expenditure. We remain disciplined in capital expenditure. We're targeting an average annual CapEx of $600 million to $700 million from 2026 to 2028, with 75% to 85% allocated to store development, including remodels. Per-store investment has been decreasing, as we've disclosed. In addition, we continue to make investments in remodeling, which also includes investment in our side-by-side modules like KCOFFEE Cafe and KPRO.

Digital, supply chain, and infrastructure are key and central to driving our growth and efficiency, as well as deepening our moat. These areas are expected to account for the remaining 15% to 25% of our capital expenditure over the next 3 years. Here comes my favorite quote. As Warren Buffet once said, "A truly great business must have an enduring moat that protects excellent return on invested capital." The moat that we've been building and deepening over the past few years, as presented by our management team today, helps us deliver exactly that.

Operating profit is climbing. Capital efficiency is improving. And with the incremental growth fueled by capital-light franchising, we expect ROIC to reach around 20% in 2028, up from 2024, which is 16.9%. Our team has walked you through key elements of the RGM 3.0 strategies, and our goal is to turn this execution into strong free cash flow. The key drivers for this are quite clear: solid operating cash flow growth, continuously optimized and disciplined capital expenditure and the value-enhancing approach towards share buyback. Together, this will give us double-digit CAGR for our free cash flow per share growth over 2026 to 2028.

And that brings me to a topic that I know is important to many of you: capital returns. As this chart shows, we have significantly stepped up our capital return to shareholders in recent years. We're on track to return approximately $1.5 billion to shareholders each year from 2024 to 2026, or $4.5 billion in total. We expect to end 2026 with and also maintain a sustainable net cash position of $1.2 billion to $1.4 billion going forward.

And looking ahead, our current plan for 2027 and beyond is to return our shareholders with around 100% of our free cash flow to the parent company. That is, our total free cash flow after deducting dividends paid to non-controlling interests in our consolidated joint ventures, primarily our KFC JVs, which will be approximately $100 million annually in 2027 and 2028. And this is expected to translate into an average annual return of $900 million to $1 billion plus in 2027 and 2028 and exceeding $1 billion in 2028 and onward.

In terms of allocation, we plan to increase our dividend per share over time, with the remainder returned through value-enhancing share buybacks. This approach is designed to balance and meet the diverse needs of our various long-term shareholders.

So to bring it all together, here are the key financial targets that will define our path for the next 3 years, and we are excited to share the following: first, a 100 to 102 same-store sales index every year; second, system sales CAGR of mid- to high-single-digit; third, operating profit CAGR of high single digit; fourth, EPS CAGR of double digit; and lastly, free cash flow per share CAGR of double digit. These targets are built on the initiatives that we discussed today. But importantly, our projections do not factor in any macro improvement, nor do they reflect the full potential upside from the new store models and initiatives which we are still developing currently. This outlook reflects our commitment to delivering long-term shareholder value, our confidence in future growth and our discipline in executing our RGM 3.0 strategy.

Okay. Lastly, the message I want to leave you with is simple. Our journey is about moving from strategy to results, and from results to long-term value. And that concludes our presentation today. Thank you.

Thanks, Adrian. Please stay on the stage, and let me invite other speakers to join us on the stage as we move to the Q&A session. When we start the Q&A, if you have a question, please raise your hand, and our colleagues will bring you a mic. Please limit your question to one so that more people can participate. Before asking, please state your name and company name. So maybe give our management team a moment.

All right, let’s get started. Our first question from Luo Chen.

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So on the second part of the question regarding capital return and some of the strategic transactions, obviously, as a policy, we are not able to comment on any particular M&A transactions. But in terms of our philosophy, we have been adopting a very prudent approach towards M&As, and it will be continue, the case. And we set a very high bar.

So only to the extent a transaction that creates a lot of value to our shareholders, when it's very strategically sound, then we'll potentially consider. And it's worth noting that, obviously, all the M&A transactions is subject to rigorous internal discussions as well as discussions with our Board. So that's the first part.

The second part of that question on capital return, in particular, is, I guess, what we can share at this point in time is we currently do not have a plan to change our capital return, which is shared earlier today just now. And we have been a very shareholder value-conscious company, and it will continue to be the case. Hopefully, that addresses your question, Luo Chen. Thank you.

Let's take our second question, Michelle from Goldman Sachs.

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Let me comment on two things: competition between the local and multinational, and then the membership. This is my humble opinion and humble opinion only. I don't think the origin of whether a company is multinational or local is the biggest deciding factor about the result. What matters more is who are running the business.

If we look at the local player, why are they so strong? By the way, we have so much respect for them, and we keep learning from them. I cannot agree with Warton more. And our optimism is always good time builds confidence, bad time builds character. If it's challenging, that means we have something to learn from the local, like the lower-tier city. We need to learn from them how to be very effective in lower-tier city. And we are learning, which is brilliant.

But who are the local players? They tend to be run by the founders. Look at the local player. Founders run businesses. My god. Founders, they're motivated. They're hard-working. They're insightful. Many good reasons that they have in order to be successful, except brands or money.

But what matters in a company? Of course, people first. And then you look at the multinationals, and I'm pretty straightforward to my fellow friends or whoever from all over the world. I do personally believe that cultural difference or even language difference is overrated. However, whoever wants to win in whatever market, particularly the Chinese market, better have the bloody sharpest insight of business judgment. That is not only necessary, but also absolutely critical.

And if we look at the multinationals -- I'm not only talking about my industry. Overall, there are some really, really good multinational companies doing really well in China. If you look at the management team, there's something interesting. I'm not going to name some of them. They send the A team over, the best team over. Whoever -- if they can make it work in China, then they might have future career in the headquarters. That is the type of people they need to send over because this is not the market for soft people. This is for tough competitors. But if the multinational only sends over the B team or C team, then I'm sorry.

The top-notch MBA school does not give you any advantage in that regard. I went to one of them, right? But it's the real deal. We need real business people to compete. So from my humble opinion, it really has very little to do with whether you're multinational or local, it's whether you have the best team. And I have seen people who don't speak Chinese and work really, really well here, produce good results.

And then come to the membership. We need another session to give more granularity of the active membership, but it is sort of the first time we share about active members. And what we want to get our team to focus on is move from quantity to also quality. We've been building a very, very big membership base, so big that it's bigger than the U.S. population. So at the same time, we have been focusing on the quality. Therefore, for the number of our best customers who has a black card, which is not for sale, only to be given from a brand to them, there are 1 million of those in China. Not a small number. And the minimum requirement is more than 100x shopping with KFC a year. And that's pretty high frequency.

So we want to drive frequency. We want to focus more, even more on the quality. And when we look at what is active member, right now, we define it as a customer who shops with us in the last 12 months. It is about 265 million, and we want more of them. Once we get to 12 months, we might look at, you know, six months and three months, but one step at a time, but this is the beginning. Thank you, Michelle.

Our next question from Lillian, Morgan Stanley.

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We really are very grateful that this year, we have the luxury to look at the long-term strategy. And I call the long-term strategy a luxury because during the COVID time, we just do have to be very, very efficient and effective in dealing with whatever unexpected thing. And then by end of 2023, we already noticed that the market is not the same anymore.

So by 2024, which is last year, that's when the challenge -- looking back, the challenges are the most critical one. But at the same time, our team were most productive one. Our team have a huge amount of innovation coming out of it. K-Coffee, we started -- when did we start K-Coffee? 2024, I still remember our conversation. 2024, how many K-Coffee we want to have extra growth driver. And then 2024, Pizza Hut have the WOW. Because whatever we were doing seems to losing that momentum, we need something very different. We are very open-minded.

The menu, the pricing and the operation of Pizza Hut is completely different. But that's the beauty. When things are very challenging and we have amazing team, then the innovation come. And actually, to make it really, really simple, how do we define strategy, where to focus, come down to 2 factors: core competency or capability and where are the opportunity. 2x2 matrix, very simple.

And then where to focus? Well, whatever our team, we are excited what we are good at. And then I'd like to summarize things into one sentence so that my entire group of RGM 300,000 people team, they understand. [Foreign Language]

Let me do my own translation. With the core competency, with the competent team, even when there's very little opportunity, we can see the pockets of opportunity just like a piece of gold just shining at us. If the team is not capable enough, even the goal is in front of us, we cannot pick it up. And this is -- I learned from Japanese, too. And that's what we focus on, and it works. And it gives us a reasonable level of optimism. The market will continue to be challenging.

By the way, with or without macro challenge, China market is always challenged because it's so big. It has so many opportunities going forward. Why would anyone not want to come? So we better take it for granted and try to find a way to focus on the high-growth one. With good team, we will find opportunity no matter how and when. We'll move to the next one.

Yes, sure. As to the particular breakdown by brands in our guidance. First, we would like to clarify that the $10 billion plus -- RMB 10 billion plus is a jump, true, right? Whole figure, a milestone figure. What we mean is really, we aspire to be the first brand to get to that milestone. That doesn't mean we give guidance for 2028 is $10 billion. We're definitely higher than that, right?

Plus. Look at the plus.

Yes. But specifically on the breakdown between the brands, we would expect KFC's growth CAGR to be similar to the group's growth CAGR that we shared just now. And then Pizza Hut, as Jeff already mentioned in his presentation, will be high single-digit system sales growth CAGR and double the OP in five years, which really translates to mid-teens of OP growth CAGR, right? Which is a significant step up.

By the way, I would like to add a couple of additional color. That high single-digit system sales growth CAGR for Pizza Hut, we even expect next year to achieve that, right? Remember, this year is only like a 3% to 4% system sales growth for Pizza Hut, and next year is a significant step up. So that's on one hand, the breakdown between the two brands.

And then speaking of the Group, I mentioned in my remarks that all the guidance we shared is prudent, meaning that we do not account for any improvement in macro, which actually, we are confident there will be improvement in macro, we're talking about China fundamentals. And it also does not account for the full potential of the new store models and initiatives that we're currently developing, right? We will definitely update the market when some of these initiatives become more mature and in scale.

Lastly, I think it's important to note that we mentioned that we have double digit EPS growth in the next three years with double-digit per share growth in the next three years on CAGR basis. What does that mean, really? It means EPS growth, coupled with our capital return, that almost delivers to our shareholder without a multiple re-rating, delivered to our shareholder a teens percentage of almost guaranteed total shareholder return, right? I don't think the “almost guarantee” is the perfectly legally right figure -- way to say it. But, as all of you may appreciate, the single most advantage for Yum China is really the execution certainty, right? Whatever we promise the market, we either meet it or beat it. And Jeff told me just now that he would like to add some additional color on the Pizza Hut role. With that, I will pass it to Jeff, please.

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Thank you, Joey. Very insightful. Sorry, that's all the time we have for the Q&A, as we want to save some time for you to interact with management directly. For those of you joining online, this is the end of our webcast. And thank you very much for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Good day, and thank you for standing by. Welcome to Yum China Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

Please be advised that today's conference is being recorded.

I would now like to turn the call over to your first speaker today, Ms. Florence Lip. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Yum China Third Quarter 2025 Earnings Conference Call. With me on the call are our CEO, Ms. Joey Wat; and our CFO, Mr. Adrian Ding.

Before we begin, I need to 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 consider 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 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 will now turn the call over to Joey Wat, CEO of Yum China. Joey?

Hello, everyone, and thank you for joining us. Building on our first half momentum, we achieved another solid quarter 3, accelerating store openings, driving growth in both same-store and system sales and expanding margins. Delivering growth across all three dimensions was no easy task, but we made it happen.

System sales grew 4% year-over-year, outpacing the China restaurant industry. Same-store sales grew for the second consecutive quarter. Restaurant margin expanded to 17.3%. Together, these gains drove an 8% year-over-year increase in operating profit to $400 million, a quarter 3 record for adjusted operating profit. These results reflect the resilience of our established RGM strategy, which stands for resilience, growth and moat and the steadfast execution of our teams in a dynamic market.

Store expansion accelerated in quarter 3 with 536 net new stores. Our total store count exceeds 17,500 stores, keeping us on track to reach 20,000 stores by the end of 2026. As we promised in our last Investor Day, leveraging our portfolio of brands and flexible store formats, we are penetrating deeper into more cities while enhancing convenience in existing cities.

By brand, KFC is as resilient as ever with 2% same-store sales growth, strong and steady restaurant margins and a year-to-date record pace of new store openings. Pizza Hut accelerated store openings from the first half of 2025, surpassing the 4,000 store milestone while expanding restaurant margins year-over-year for the sixth consecutive quarter. Our dual focus on innovation and operational efficiency underpins our success, starting with our sales initiatives. We have delivered same-store transaction growth every quarter since 2023, 11 in a row. Notably, Pizza Hut has achieved 17% same-store transaction growth for three consecutive quarters. These results highlight the success of our pricing strategy, keeping KFC price points relatively steady and lowering them at Pizza Hut, amid improving restaurant margins.

By making our food more accessible to more consumers, we attract more traffic. At the same time, we have transformed our operations for better efficiency. Great value and great prices must be accompanied by innovative, good tasting food. Our focus spans three key areas: hero products, limited time offers and new growth drivers. First, our hero products remain powerful growth driver and inspire strong repeat purchases.

At KFC, chicken wings have been one of our core categories, featuring our hero products, roasted wings and hot wings. We extended this core category with the launch of the latest Crackling Golden Chicken Wings, [Foreign Language], extra crispy outside, juicy inside. This Chinese style wing is packed with a sweet and spicy garlic punch. During the promotion, sales of the new wings surged, matching the popularity of our roasted wings and showing great potential as a future growth engine.

At Pizza Hut, pizzas account for over 40% of sales, with double-digit sales growth this quarter. We serve a broad range of pizzas, including pan and stuffed crust to satisfy diverse taste. Most recently, our new hand-crafted thin-crust pizza [Foreign Language] became our best-selling crust within just 2 months of launch, now making up one in every three pizzas sold. Perfectly crispy with abundant toppings, it earned rave reviews and drove promising repeat purchases.

Second is our LTOs or limited time offers. We keep our core menu focused to ensure operational efficiency while introducing highly selective products for limited time periods to drive repeat visits. These offerings are not onetime wonders, but are designed for lasting appeal, in some cases, enduring for decades. [Foreign Language] KFC has developed several classic LTOs with a proven sales record that return periodically, such as Chicken Taco and Double Down each time we add fresh choices, like our Spicy Beef Wrap with crunchy lotus root [Foreign Language] which became our best-selling beef wrap LTO in the last 4 years.

Third, we are constantly exploring new growth drivers. New products such as KFC's whole chicken, along with Pizza Hut burgers are showing strong growth. We also see opportunities across our price ranges. Entry-level combos at KFC and entry-level pizzas at Pizza Hut achieved double-digit sales growth year-to-date. Taking it a step further, KFC is now exploring satisfying meals priced below RMB 20 to better reach customers with tighter budgets via select channels in some regions. These initiatives will also strengthen our relevance and appeal in lower-tier cities. With our menu innovation and superb supply chain, we deliver outstanding value and drive traffic to our store at solid margins.

While great tasting food is fundamental, emotional value is just as important. We collaborate with leading IPs in animation, gaming and sports on themed food, packaging and gifts, attracting new and young customers. In quarter 3, delivery sales accounted for 51% of total sales, up from 40% in the same quarter last year. While there have been increased promotions on delivery platforms, as we discussed before, our core brands maintain a balanced approach, driving top line growth while protecting margins. KCOFFEE Cafes took the opportunity to increase exposure and drive additional traffic, and Lavazza achieved double-digit same-store sales growth in quarter 3.

Let me now turn the call over to Adrian to discuss our results in detail. Afterwards, I will share additional color on our strategy. Adrian?

Thank you, Joey. Let me now update key highlights by brand. Let me start with KFC. KFC opened a record of 402 net new stores in quarter 3, expanding its portfolio to 12,640 stores. System sales grew 5%. Same-store sales grew 2%, led by same-store transaction growth of 3%. Ticket average was CNY 38, down 1%, primarily due to the rapid growth of smaller orders.

Our side-by-side modules grew nicely and delivered incremental sales and profits. KCOFFEE Cafes expanded to 1,800 locations, well ahead of our expectations. Daily cups sold per store increased 30% year-over-year in quarter 3, driven by strong menu innovations and platforms promotions. We saw strong repeat purchases, particularly for our most popular beverages, Sparkling Americano series. Riding on strong summer demand, sales of this signature series grew over 50% quarter-on-quarter. Similar to KCOFFEE Cafes, KPRO also enjoy synergy with KFC by sharing its store space, in-store resources and membership programs. Offering lighter options such as Energy Bowl and Super Food Smoothies, KPRO is designed to capture the fast-growing light meal market. It stands out with its excellent value for money and KFC's trusted quality standards.

We have expanded KPRO to 100 locations. Initial results have been encouraging. We're continuing to refine the model and plan to scale it further, primarily across higher-tier cities. Our membership data indicates that a significant majority of our members have yet to try KCOFFEE and KPRO. As such, we see huge potential for growth.

Now turning to Pizza Hut. Pizza Hut surpassed the 4,000 store milestone in quarter 3. Store openings accelerated with 298 net new stores year-to-date, keeping us on track for double-digit percentage growth in total store count for 2025. System sales growth sequentially improved from 2% in quarter 1 to 3% in quarter 2 and 4% in quarter 3. Same-store sales rose 1%, driven by 17% same-store transaction growth for the third consecutive quarter. Ticket average was CNY 70, down 13% year-over-year, in line with our strategic focus on the mass market segment.

Alongside our investments in food and value for money offerings, we improved restaurant margin by 60 basis points by streamlining operations and enhancing supply chain efficiency. Pizza Hut WOW has expanded to 250 stores, adding nearly 50 stores year-to-date with its low CapEx model and streamlined operations. These openings have taken us into 40 new cities with no prior Pizza Hut presence. We'll continue to ramp up new WOW store openings, primarily focusing on lower-tier cities.

Let me now go through our quarter 3 P&L. System sales grew 4% year-over-year and same-store sales grew 1%, both in line with our targets. Our restaurant margin was 17.3%, 30 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 31.3%, 40 basis points lower year-over-year. Our continued efforts to optimize supply chain efficiency and favorable commodity prices contributed to the improvement. This enabled us to pass some of the savings to customers, offering great value for money.

Cost of labor was 26.2%, 110 basis points higher year-over-year. While non-rider costs as a percentage of sales remained relatively stable year-over-year, the higher delivery mix led to higher rider costs overall. We continue to optimize store operations to partially offset wage inflation and the impact of higher delivery mix. Occupancy and other was 25.2%, 100 basis points lower year-over-year as a result of better rent and store CapEx optimizations. G&A expenses were 4.5% of revenue, even with the prior year period.

Our OP margin was 12.5%, 40 basis points higher year-over-year, primarily driven by improved restaurant margin. Operating profit was $400 million, growing 8% year-over-year. Core OP also grew 8% year-over-year. Effective tax rate was 27.6%, 30 basis points higher year-over-year. Net income was $282 million, 5% lower year-over-year. Excluding our investment in Meituan, net income grew 7% year-over-year. Our investment in Meituan had a negative impact of $8 million in quarter 3 compared to a positive impact of $26 million in quarter 3 last year. As a reminder, we recognized $8 million less in interest income in quarter 3 this year due to a lower cash balance, resulting from the cash we returned to shareholders and lower interest rates. Diluted EPS was $0.76, 1% lower year-over-year or up 11% year-over-year, excluding the impact from our Meituan investment.

Let's now move on to capital returns to shareholders. Year-to-date, we returned a total of $950 million to shareholders, including $682 million in share repurchases and $268 million in dividends. In September, we announced an additional $270 million share repurchase program on top of the $866 million previously announced for 2025. With a quarterly dividend of $0.24 per share, we are on track to return a total of approximately $1.5 billion to shareholders in 2025.

From 2024 to 2026, we are committed to returning approximately $1.5 billion each year to shareholders or annually around 8% to 9% of our current market cap. Our cash position remains healthy with $2.7 billion in net cash as of the end of quarter 3.

Turning to our outlook. We accelerated store openings in quarter 3, bringing our year-to-date net new store count to 1,119. This keeps us on track for 1,600 to 1,800 net new stores in 2025. Franchise mix of net new stores year-to-date was 41% for KFC and 27% for Pizza Hut. We expect similar ratios for the full year, in line with our target ranges of 40% to 50% for KFC and 20% to 30% for Pizza Hut. Our 2025 CapEx target of $600 million to $700 million remains unchanged.

Per store CapEx for new openings continue to decrease. KFC per store CapEx has decreased from CNY 1.5 million in 2024 to CNY 1.3 million to CNY 1.4 million currently, while Pizza Hut has fallen from CNY 1.2 million in 2024 to CNY 1.0 million to CNY 1.1 million. For quarter 4, with solid new store openings, we remain on track for mid-single-digit system sales growth. Predicting same-store sales growth is always challenging, but our goal is to keep quarter 4 same-store sales growth at similar levels as quarter 3.

We're also working hard toward achieving our 12th consecutive quarter of positive same-store transaction growth. On margins, we continue to expect core OP margin for the second half to be slightly higher year-over-year, with quarter 4 broadly in line with last year due to tougher year-over-year comparisons. Last year's base benefited from Project Fresh Eye and Red Eye, while higher rider costs from a larger delivery mix remain a headwind. We'll focus on enhancing efficiency to mitigate these headwinds.

As a reminder, quarter 4 is traditionally our low season with smaller sales and profits. Overall, we remain committed to meeting our full year target of mid-single-digit system sales growth and moderately improved margins.

With that, let me pass it back to Joey for her closing remarks.

Thank you, Adrian. Let me share a few thoughts on our strategy. On the front end, our multi-brand portfolio, diverse modules and offerings cater to a wide range of customer segments and occasions. Through continuous innovation, we unlock new opportunities that drive incremental sales.

On the back end, we are fostering even greater synergies. We expect more sharing, centralization and consolidation of resources in and across stores, regions and even brands. This will enable deeper market penetration and faster, more efficient expansion. For example, Mega RGMs manage multiple stores and support rapid store portfolio expansion. Side-by-side modules share KFC's in-store resources and membership programs to drive additional sales and profits with lighter investment and operating costs. We see tremendous opportunity ahead of us as we leverage synergies to grow our businesses while protecting margins. We are excited about our growth potential and look forward to sharing more at our Investor Day.

Before we turn to Q&A, let me recap the three key takeaways from today. First, our dual focus on innovation and operational efficiency enable us to deliver yet another quarter of solid results. We accelerated store openings, recorded 1% same-store sales growth and expanded margins, delivering growth across all three dimensions. Second, we grew our businesses by leveraging synergies while protecting margins. KFC's KCOFFEE Cafes expansion is ahead of plan, and both KPRO and Pizza Hut WOW are building encouraging momentum. And lastly, our established RGM strategy, resilience, growth and moat, and our team's strong execution, we are on track to meet our 2025 targets while setting the stage for future growth.

With that, I'll pass it back to Florence.

Thanks, Joey. Now let me share a quick preview of our upcoming Investor Day, which will be held in Shenzhen on November 17. Joey, Adrian, along with our leadership team, will share updates on our RGM strategy and 3-year growth algorithm. A live webcast of the presentations will be available on our IR website. For those visiting in person, we planned visits to a range of store formats and locations. Investors will be able to gain firsthand insights into the local market, see our operations in action as well as sample our signature and innovative menu items.

With that, 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.

The first question comes from the line of Michelle Cheng from Goldman Sachs.

Joey and Adrian, congrats again for this very resilient result. We understand that the environment has been very challenging. So my question is about the delivery. So you have been mentioning that you will be disciplined in managing this delivery platform, subsidy campaign. But can you share with us more on your observation on the subsidy impact on the company and the whole market in the near term and in long term? Particularly, I think there is another round of concerns on this deflation. So how should we think about the pricing trend and also the competitive landscape impact? So that's my question.

And actually, I just saw a news coming out regarding Yum! Brands, they mentioned something about Pizza Hut. So I'm wondering whether Joey can also comment on that. It looks like there's a review of the strategic options for Pizza Hut. So wondering whether there's any impact on the Yum China Pizza Hut business as well.

Thank you, Michelle. I would like to make three comments on the delivery and subsidies, and then Adrian can address the Pizza Hut question. Three comments here. One is, we have observed a more pronounced decrease in the subsidies in -- via the delivery platforms in coffee and tea but only a slight decrease in QSR. Point two is, overall, we still expect the impact on us to be limited as we have been and will continue to maintain our strategic focus and balanced approach with our core brands. That means we are driving sales growth while protecting margins at the same time. We will be capturing sales while ensuring long-term brand positioning.

Point three, in the longer term, we do see -- and we've learned from the, I think, 2017, last time, similar scenario, that subsidies will eventually normalize. Therefore, it's important that we have the discipline as a company, as a brand to focus on menu innovation, good quality, customer service and protect the price perception, particularly for a well-established brand, like ourselves. So these are all fundamentals to the competitiveness of the business in the long term.

Thank you, Michelle. Adrian?

Sure, Joey. Michelle, on your question regarding Pizza Hut and Yum! Brands' announcement earlier today, we are aware of the development, and we understand Yum! Brands will be initiating a formal review of a range of strategic options. Obviously, Yum China and Yum! Brands are two independent companies. So we're not in a position to comment on their process of strategic review.

But regardless of the outcome, we are confident in the strength of Pizza Hut brand in China, and our ongoing operations and significant growth potential of Pizza Hut here in China remain unchanged. Also, I would like to say that Yum! Brands and ourselves have been close and long-time partners, and it will continue to be the case.

And I guess part of the question is the impact of Yum China, right? I'm not sure if you are implying whether we will be participating in some way or form into this strategic review process. Our policy is not to comment on any specific transactions. With that said, we have always taken a prudent approach, Michelle, as you appreciate, to evaluate potential investment opportunities, and we'll continue to do so. We set a very high bar. We'll conduct M&A only when the transaction is strategically sound and expected to create great value for our shareholders. Additionally, all M&A matters are subject to rigorous evaluation and discussions with our Board. Thank you, Michelle.

The next question comes from Brian Bittner from Oppenheimer & Co.

Can you give us a refreshed overview of what you are seeing from a macro perspective as it relates to restaurant industry in China and consumer spending by the China consumer? It seems like visibility is improving relative to past quarters and years, maybe the opposite of what you're seeing with the U.S. consumer. Any color there? And I think, Adrian, you said that you expect 4Q same-store sales to look similar to 3Q. Just want to confirm you said that. Any additional color on that dynamic would be helpful.

Thank you, Brian. In terms of the macro, as we have observed in quarter 3 and then probably even a little bit on the October holiday, the performance, as we can see the result and also as we can see a little bit now is -- it was good and it's in line with expectations. The traffic is good as people are traveling around, particularly during the holiday.

But consumers still remain value cautious. And for us, if we look into the details of the performance across regions, it's similar. Lower-tier cities still, but they perform slightly better due to greater domestic travel here. But again, the consumer is still value cautious. So for us, we are acutely aware that it's not just about having good price. It's about pricing right, providing value for money together with good quality food and emotional value. So we continue to provide our customers with innovative products and together with breakthrough business models.

Our focus is still focused on delivering the same-store transaction growth. And although it's nice to have the same-store sales growth as well, particularly for KFC with 2% same-store sales growth. And then along the way, we'll continue to focus on the operational efficiency and innovation at the same time. Thank you, Brian.

Our next question comes from Chen Luo of Bank of America.

Joey and Adrian, congrats again on the solid Q3 results. My question is, again, on our expansion strategy to focus on smaller formats and franchise stores. So if we do the math, approximately 10% expansion in Q3 lead to around 4% sales growth. So can we say that this kind of 40% ratio can be maintained in the coming few quarters as we continue to pursue a shift to the smaller format? And meanwhile, if you look at the franchise stores, I understand that we try to improve the economics to P&L in the future. But where are we now? Is there any progress at the moment?

Thank you, Lou Chen. Firstly, I think the observation of system sales growth at around 40% of the store count growth, that will not necessarily be true down the road because there are a few dynamics and nuances.

Firstly, as I mentioned in the prepared remarks, both this quarter and previous quarter, this year, we have some strategic optimization of the store portfolio, with closure of some of the large stores with higher sales and opening of some of the smaller stores with a slightly lower sales. And as you correctly pointed out, new store sales is at an initial year at a discount to the mature store. And as I previously provided, the figure, is that the ratio is roughly 50% to 60% for the new stores in the initial year. Obviously, in the first 3 years, it will ramp up. So that's the first factor, right, the strategic optimization. So all else equal, even if the net new store is still 10% growth, if we don't have this factor, the system sales growth would have been a bit higher. So first thing.

Second thing is the timing and opening and closure within the quarter affected the total operating weeks. For this quarter, as you can do the math very nicely, the timing of openings, particularly for KFC, there is a shift towards the September, so the third month of the quarter, thereby, even with the similar net new openings, that will impact the store week and thus the system sales growth.

And for Pizza Hut, we're catching up in the store openings this quarter as well as the store week. I would say that's more evenly spread across the quarter, across the 3 months. So you can see with a similar net new store openings, the system sales did sequentially improve. And thirdly, as always, we have some little rounding differences.

So in a nutshell, the system sales growth as a percentage of the -- compared to the net new build percentage, the discount will not stay the same down the road. And I guess your natural question would be what is the system sales growth down the road in the coming quarters and years? That exactly leads to our kind of guidance and outlook in our Investor Day in 2 weeks' time. So please bear with us and look forward to the Investor Day.

I think the second part of the question -- I can't [ think]. Economics. Okay. Franchise improvement economics, yes. So we made some progress in improving the economics for our franchise business. As I mentioned in previous quarters, currently, it's still slightly lower than our equity business, right? Our operating margin for equity business is anywhere between 10% to 11%. For franchise business, without G&A, the operating margin is also around 10%, right, basically 4%, 5% out of 40%, 50% of system sales, so around 10%. But if we do a proper G&A allocation, the franchise operating margin will be high single-digit percentage of sales of our revenue.

We did have some progress in the quarter. Obviously, I think some of the analysts and including yourself already noticed that we have some slight revision in our pricing mechanism for our franchisees, basically sharing some of the savings from our Project Eye Fresh and Red Eye between franchisees and ourselves. So that's a little progress. While we have more savings from these efficiency projects, we'll do a bit more of that. And hopefully, in the mid- to long run, the operating margin for franchise business will be in line with the equity business.

And overall, in conclusion, I would say, in the short run, there will be no margin dilution from our franchise initiative because the mix is still small, and the margin is actually very similar already. In the mid- to long run, not only there will be no margin dilution, but more importantly, there will be ROIC improvement over the mid- to long run given the efficiency and capital for the franchise business. Thank you, Luo Chen.

[Operator Instructions] Our next question comes from Lillian Lou of Morgan Stanley.

My question is on the delivery as well, but it's more a little bit of short term. So I would like to understand in terms of the delivery order mix from food aggregators and also from our own system because I think in this quarter, the contribution of membership sales kind of dropped sequentially and also on a year-on-year basis. So is it -- are we seeing more orders from aggregators for the time being given the subsidy program, et cetera?

And what kind of business initiatives or efforts we're making trying to get the customer back in terms of order generation into our own system? And related to that, I just want to understand whether there's any cost saving initiatives in terms of the riders costs in the future.

Thank you, Lillian. So first of all, as you pointed out that the membership sales contribution to the overall sales has slightly decreased for the quarter. I would say this is more of a mechanical or mathematical result because when we account for membership sales contribution, we exclude our members who spend on the aggregators. Because -- actually, we know who are spending on the aggregators. If they are our members, but we exclude those parts. So when aggregator mix goes up, our membership, in the disclosed metric -- membership contribution will slightly go down. So that's a mechanical result. But if we take into account our members who spend on the aggregators and take everything into account, the overall so-called adjusted member sales contribution is actually very stable quarter-over-quarter, year-over-year. So that's the first part of the question.

The second part of the question is the increase in delivery mix and the rider cost. Yes, we are actually not only working on the rider cost per ticket, which is indeed going down, but the delivery mix is going up. So that impact of the delivery mix going up have a higher overall impact, thus causing a headwind in our COL. By the way, this is exactly as we cautioned the market back in February, right, before even the delivery-aggregator war started, that we'll face headwind on delivery costs.

So we are optimizing the delivery efficiency. But in addition to that, on COL, for the non-delivery part, we are doing a lot to improve the efficiency, right, in terms of streamlining, automating and centralizing processes so that the operational efficiency hopefully more than offset not only the wage inflation, but also partially offset the impact of the delivery mix increase.

But all in all, we would say the COL continues to face a headwind. That's actually been very consistent ever since we started to give the guidance back in February. But we'll make all efforts to try to achieve a slightly improvement in both the UC margin and a moderate improvement in OP margin for the year for Yum China. And also, as we commented on the mid- to long run for both brands, we said KFC's margin -- restaurant margin will be stable. Pizza Hut, there's a good potential for margin improvement. Those comments actually do take into account the different scenarios of delivery aggregator subsidy and delivery mix.

So hopefully, that addresses your question, Lillian.

I'll just make two quick comments, Lillian. Adrian talked about all the short term technical measures we are doing to protect our P&L. But at the same time, as you can see, we are also pushing for innovation and operational efficiency, at the same time in a slightly longer term, to protect the P&L. So one example is our continued acceleration of like KPRO and KCOFFEE. When we pursue the front-end segmentation of sales and then back-end consolidation of the operating costs, we -- in the longer term, in a more holistic situation, we manage the cost structure and protect it, if that makes sense. Thank you, Lillian.

Our next question comes from Sijie Lin from CICC.

So I have one question. We see more and more attempts at expanding new store formats and new categories. For example, besides KCOFFEE and Pizza Hut WOW, there are also KPRO, Fried Chicken Brothers, et cetera. So trying to learn more about our strategic planning and methodologies for these. So whether we have identified a few promising categories and concentrate our efforts, or we just try out various options, and they may work as a total? And also, what are the key considerations when we decide to develop a new model or new category? Maybe like, some competitors have proved it's a promising category, or it can create synergy with our other business?

Sijie, I think we will have more holistic, robust discussion with this particular topic in Investor Day for sure. It's a focus. However, right here right now, I would like to make a few points here. We are very focused on the growth initiatives to focus both of the same-store sales and system sales. So KPRO is one example. KCOFFEE is another one. And KCOFFEE actually were ahead of schedule. We originally tried to get to like 1,500 or 1,600 locations. I think right now, we are there already. So we'll continue to pursue it where we could. And I think KCOFFEE need no further introduction. KPRO, it's a concept we developed actually 9 years ago, but we keep working on it. And then this year, we certainly see the acceleration of the concept.

So the thinking behind it, as I mentioned in my prepared remarks and also earlier, we understand we can pursue more growth with front-end segmentation of the customer and occasion. [Foreign Language] But at the back end, we just utilize our equipment, resources, labor, on the back end, to deliver the operational efficiency. So that's one way to do it, and it works. I mean, otherwise, it's very hard to grow new business to deliver incremental sales and incremental profit.

Secondly is a promising category. Yes, of course. So we are focusing on fried chicken. But at the same time, KPRO is a concept that we deliver alternative for customers. And as we can see from the membership or the customer of KPRO, a very high percentage of KPRO customers are actually KFC customers. But they need a choice during -- once or twice during the week, and we provide the choice.

So it's close enough, the category is niche, and we also have the food safety that customer trust. So we'll just continue to explore. But for new category or new concept, of course, the success rate is not 100%. So there's always some trial and then figure out how the new model -- new module will work. And then KFC fried chicken, Brothers or whatever, it's one of those trials. It's very, very early days. But we keep trying different things. Thank you, Sijie.

Our next question comes from Xiaopo Wei from Citi.

I have a question on KFC business. If we look at the 3Q results, 2% same-store sales growth with 5% system sales growth, very impressive. But however, if we look at the restaurant profit growth, which was at 5% and OP growth was only at 6%, we didn't see a lot of positive operating leverage. Shall we say that the delivery-driven strong growth will not have a lot of positive operating leverage in your business? If that is the case, will you work on something to try to improve that part of business to expand the OP margin of KFC to looking forward?

Thank you, Xiaopo. KFC is a very resilient business. As we actually guided in the previous quarter's earnings release, we do expect the second half -- we did expect the second half of KFC restaurant margin to be broadly stable year-over-year. And that's kind of consistent to the real results that we see in the quarter.

And one key philosophy we've always been mentioning throughout -- actually ever since 2019, over the past 6 years is, we expect the KFC's restaurant margin to be stable in the mid- to long run because it's actually at a very healthy level today, above 17%, full year basis, and it's one of the highest, if not the highest, in the restaurant industry. To the extent we have some leverage -- sales leverage that we generate from KFC today and in the future, we do look to share that margin upside with multiple partners, right, including our suppliers, landlords, frontline staff and also retain a small portion within the group and share with the shareholders. So that's quite consistent with our philosophy there.

And tactically, for the quarter, for quarter 3, we do see a significant increase in the delivery mix, right, to 51% last year, quarter 3 was around 40% or so. So the significant increase in the mix caused a significant headwind in the COL as we cautioned the market. You can see the COL, KFC surge more -- around 160 basis points for KFC as a brand. For the group, it's [ 1 to 10 ] basis points. That's all because of the delivery mix increase. And we are -- we were successful in more than offsetting that increase with the benefits of COS and O&O.

So technically, there is that driver there. But philosophically, in the mid- to long run, we do stick to our philosophy of keeping KFC restaurant margin broadly stable at a very healthy level. Thank you, Xiaopo.

Our next question comes from Christine Peng from UBS. Christine, your line is open. You may unmute locally.

Sorry, I was muted. So I have a quick question regarding the same-store sales growth of KFC. So obviously, 2% same-store sales growth was upside surprise given Adrian previously mentioned about 0% to 1% same-store sales growth. So I was just wondering how sustainable you think this level of same-store sales will be continued going forward? The reason I ask is because, obviously, in the third quarter, there are some benefit from the subsidy provided by delivery platform.

On the other hand, we also noticed that your management has been very diligent to launch new formats such as the tea, coffee, KPRO. So I was just wondering whether management can provide us some colors in terms of the contributions from delivery subsidy and the new formats launching to this 2% same-store sales growth. In addition to that, if you could talk a bit about the KPRO economics just briefly, I think that will be very helpful for us to understand the economic benefits of this new format.

Thank you, Christine. So first of all, SSG for KFC, 2%, is actually slightly above our own expectation as well. It's also similar for KCOFFEE Cafes, right? Our own expectation, as Joey mentioned, was like 1,700 or so. And now in quarter 3, we already achieved 1,800 locations for KCOFFEE Cafes. So those are actually encouraging results, and we're happy to be wrong. We're happy to be wrong there. So it's slightly above our 0% to 1% target.

And as to whether that level is sustainable, obviously, predicting SSSG is always difficult. The market is still quite dynamic, and consumers stay quite rational. But as we mentioned in the prepared remarks, we are working very hard to keep the quarter 4 SSSG at similar levels of the quarter 3 and achieve 12 consecutive quarters of same-store transaction growth.

I think transaction growth is, I guess, slightly more within our control. And for SSG, in overall, it will be subject to different situations, including different factors, including competitive dynamics, including macro, et cetera, et cetera. So I will not be able to give outlook or guidance on whether this level of SSG will be sustainable.

And on your second part of the question on KPRO economics, obviously, similar to KCOFFEE Cafes, KPRO is a module. It's a side-by-side module to our KFC mother store, and it contributes incremental sales and incremental profits. And as one can reasonably expect, the incremental sales contributed by KPRO will be larger than the incremental sales contributed by KCOFFEE Cafes because it's a restaurant concept, right, so restaurant module. But we have not given any guidance on the exact economics for KPRO because it's still in the early stage. We only have slightly more than 100 modules for KPRO and -- but the initial progress we made is encouraging.

And we'll be ready to share more color on the economics and growth potential for KPRO as well as other modules or other initiatives, as some of the analysts asked during the early part of the call, in due course when we think we're ready.

So hopefully, that addresses your question, Christine.

I'll add some color to the KPRO, Christine. So [ the need of ] KPRO, we share. We really utilize the synergy with KFC brand. So we leverage KFC store space, the membership program, the kitchen, the COL. And this is incredibly important because then the incremental investment is much smaller than a stand-alone store, which you are familiar with from the KCOFFEE.

And because of so much synergy that we're pursuing, so it is -- the concept, it is delivering incremental sales and incremental profit. But at the same time, as you know us well after all this year, whenever we do something new, new concept, new product, we always look at sales first and profit later, step by step. Thank you.

In the interest of time, we'll now take the last question from Linda Huang from Macquarie.

My question is regarding for the sales. Because we are pleased to see that in the third quarter, right, our sales up 4% faster than industry. But looking ahead, do you think that we have a chance to accelerate the growth to like high single digit? And if we can achieve this growth rate, will it come from the macro factor? Or is there any company-specific strategy that we can buck the trend to go faster? So that's my simple question.

Thank you, Linda. Well, actually, you asked a question that we will share exactly the same topic in the Investor Day in a couple of weeks' time. So I'll try to keep some secret there to the Investor Day in 2 weeks. But overall speaking, as you correctly point out, from a company-specific perspective, we are ready in terms of lots of fundamental improvement, a lot of new modules are ready, new initiatives are being tested. The innovation is spread across all different parts of business, name it, right, menu innovation, store model innovation, emotional value, the new emotional value, exciting ones that also involves innovation, et cetera, et cetera.

So I would say we're very well positioned to capture future opportunities. And obviously, we will not be settled with a mid-single-digit top line growth, system sales growth. But as to the exact growth algorithm over the next 3 years, that will be some topic we'll share in 2 weeks' time. Yes. So please stay tuned. Thank you, Linda.

Linda, I think I just have one quick comment here is, although KPRO [indiscernible] really exciting because it's new, but the biggest growth driver will still be from the core brand, ourselves. For example, KFC, the small-town mini, the different modules and then Pizza Hut, the bowls are doing very well to enter new cities, which we are very excited about. And then the hero product, in the prepared remarks, we talked about hero product. It's incredibly exciting to, again, focus on "surprise, surprise, fried chicken," and for KFC and then for Pizza Hut, "surprise, surprise, the pizza -- the new thin dough pizza." So we'll go through the building blocks or the key modules of these key drivers of the business in the Investor Day. So we look forward to it.

Thanks, Joey, Adrian and also thanks, Linda. This concludes our Q&A session. Thank you for joining the call today.

Yes. That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.

Thank you.

Thank you.