Below is Dolphin Research's compiled transcript for $YUM China(YUMC.US) Q2 FY26 earnings call.

I. Key Financial Takeaways

1. Shareholder returns: Reaffirmed the 2026 target to return $1.5 bn to shareholders, approx. 10% of current market cap. Returned $718 mn in H1, including $515 mn buybacks and $203 mn in quarterly cash dividends; buybacks were stepped up in Q2 as the stock looked attractive.From 2027, will return approx. 100% of annual FCF (post minority interest payments) to shareholders, estimated at ~$900–1,000 mn on Avg. in 2027–2028 and >$1 bn thereafter. Owning the Pizza Hut brand is expected to further lift future FCF.

2. FY26 outlook (ex Pizza Hut deal impact): SSS index of 100–102; system sales growth mid- to high-single digits; OP growth high-single digits; EPS growth double digits. China restaurant margin and OPM to see modest improvement; store count to reach 20,000 by year-end.Jul performance broadly in line with plan. Q3 restaurant margin expected flat to slightly up YoY, and OPM broadly flat vs. Q3 last year (which benefited from ~20 bps one-off Gov. subsidy that will not recur).

3. Key financials (Q2): Revenue +13%, OP +14%, diluted EPS +21% (partly FX tailwind; CFO view of diluted EPS $0.70, +14% YoY, +10% ex external equity investments). Ex-FX, system sales +6% (Q1 +4%), SSS +1% (14th straight quarter of positive same-store traffic).OP of $348 mn set a Q2 record, +7% YoY; net income $244 mn, +6% YoY (+3% ex external investments). Achieved the trifecta for the 9th straight quarter: system sales growth, OP growth, and OPM expansion.

4. Margins and cost structure (Q2): Overall restaurant margin 16.1% (flat YoY); OPM 11.1% (+20 bps YoY, 9th consecutive quarter of expansion). COGS ratio 31.5% (+50 bps); labor 27.6% (+40 bps), with rider costs a 140 bps drag as delivery mix rose from 45% to 54%; most was offset via ops optimization.Rent and other at 24.8% (-90 bps), benefiting from lease renegotiations and lower-tier city rents. External investments were a $6 mn headwind in Q2 (vs. $14 mn last year); interest income fell by $13 mn YoY due to lower cash balances and rates.

5. Pizza Hut brand acquisition (expected to close in Aug): Will become the owner of the Pizza Hut brand in Mainland China after operating it for 36 years, saving a 3% royalty. After VAT, this adds 2.8% to Pizza Hut restaurant margin, equivalent to ~+60 bps for Yum China overall.Impact: +30–40 bps to restaurant margin and OPM in Q3; +20–30 bps for FY26. The deal will be bridge-financed: offshore bridge of ~$1.2 bn equivalent, tenor up to 12 months, at ~2% interest; all long-term refi options (syndicated loan, bonds, CB, etc.) are under consideration. Including deal costs, financing interest, and taxes (excluding potential faster growth of Pizza Hut), the deal is expected to be EPS accretive — modestly in 2026, and mid-single-digit accretive in 2027–2028.

II. Call Details

2.1 Management Highlights

1. KFC (primary growth engine)

a. Q2 system sales +7% (Q1 +5%), SSS +1% (5th consecutive quarter of growth). Same-store traffic +4% offset AOV -3%; average check RMB 36, down YoY mainly due to KCOFFEE and KPRO adding more small-ticket orders from new customer segments and use cases.b. Restaurant margin +20 bps YoY to 17.1%; OPM also +20 bps.

c. Nearly 800 net new stores added in H1, ~200 more than H1 last year.d. Whole chicken has become a key at-home consumption platform with sales over $2 bn last year, growing double digits each year since its 2021 launch and likely to continue in 2026. The Zinger burger family is on track to exceed RMB 5 bn in sales by end-2026; paper-wrapped roasted chicken ('香焗') was added to the core menu in Apr.

2. KFC side-by-side modules

a. KCOFFEE lifts host-store sales by mid-single digits, and KPRO by ~20%. CapEx for both has halved vs. earlier modules last year, with margins steadily improving.b. KCOFFEE has surpassed 3,300 stores, targeting 5,000 by end-2027, and will expand into tea drinks, breakfast, and more.

c. KPRO has surpassed 450 stores, outperforming expectations. The year-end target was raised from 400 to 600 and now further to ~800, expanding from top-tier into selected lower-tier cities; over 80% of KPRO sales come from KFC members, showcasing cross-sell and the power of membership.d. Drive-thru/curbside pick-up now covers 8,000+ KFC stores; over 7 mn members used it this year, yet only ~3% of active members, indicating ample runway.

3. Pizza Hut

a. Q2 system sales +6% (Q1 +4%); SSS turned positive to +1%. Same-store traffic +13% (14th straight quarter of growth) offset AOV -11%; average check ~RMB 68, moving toward the RMB 60–70 target band and aligning with the mass-market strategy.b. Q2 restaurant margin -40 bps, driven by higher delivery mix, value investments, and Burger Bar launch costs; H1 restaurant margin +10 bps YoY and OPM +60 bps as closures and impairments declined. Margin improvement in H2 is expected to outpace H1 on efficiency gains and easing rider-cost pressure.

c. 381 net new stores in H1 (near full-year 2025 levels), with Q2 openings nearly double YoY; Pizza Hut store base is close to 5,000.d. Burger Bar: scaled to 200+ stores in six months, delivering double-digit incremental sales and solid profitability to host stores. Target 500–600 by end-2026 (~10% of Pizza Hut stores), with 2026 sales >RMB 1 bn (5%–6% of Pizza Hut sales).

4. Lower-tier expansion and franchising

a. ~1,200 net new stores in H1 (about double YoY), entering 200+ new cities; both company-owned and franchised openings accelerated.b. Franchised stores accounted for ~40% of H1 net adds but only ~18% of total China store base, focused on lower-tier, remote areas and strategic locations, indicating significant runway.

c. KFC's small-town model and Pizza Hut WOW enable rapid penetration into lower-tier cities.

5. Multiple new businesses nearing the RMB 1 bn milestone (~1% of Yum China sales): KCOFFEE delivered ~RMB 1 bn last year and targets nearly RMB 2 bn this year. KPRO sales are set to grow ~4x this year and exceed RMB 1 bn next year; drive-thru/curbside pick-up targets RMB 1 bn in 2026; Pizza Hut burgers (launched two years ago) target >RMB 1 bn in 2026.

2.2 Q&A

Q: Despite softer macro consumption and unfavorable weather since Q2, results remained solid. How do you view overall consumption trends? Any concerns about renewed price wars/promotions, and how do you balance pricing and promos to drive growth?

A: Retail sales improved in Jun vs. May, which is encouraging; Jul tracked broadly on plan, with extreme weather being short-lived and regional. Key trends: consumers still spend in certain scenarios, with strong growth and ample opportunities in coffee and light meals, and they are willing to pay for innovation, value, and emotional appeal.Pricing appears to be stabilizing, with more players raising prices, reflecting a more stable environment, and competition among delivery platforms has become more rational — all positive signals. Chain penetration continues to rise: China’s restaurant chains have grown from ~20% to >30% of the market, still below the ~60% in mature markets.

Another trend since Apr is tighter Gov. oversight on ghost kitchens, which we view as a positive as industry standards rise; given our robust food-safety moat, we should benefit. Our goal is to keep SSS positive in Q3 and deliver the 15th straight quarter of positive same-store traffic.

Q: The Pizza Hut acquisition will use a 12-month bridge loan first. Any direction on long-term refi (syndicated loan, CB, etc.)? If CBs are used, investors worry about dilution and stock impact — any color?

A: We will close in Aug using an offshore bridge of ~$1.2 bn equivalent with tenor up to 12 months at ~2%, which is attractive. All long-term refi tools are on the table, including syndicated loans, bonds, and CBs; it is early and we have no preference yet.For CBs, even if we choose that route, there are ways to materially limit dilution: for example, top-up/cap structures can lift the conversion premium from 20%–30% to 70%–80%, meaning dilution only occurs if the stock is 70%–80% above issue levels, at which point shareholders should be pleased. We can also use net-share settlement to deliver shares only for the in-the-money portion, keeping dilution minimal. Several large tech companies have done similar structures. We are still evaluating refi options.

Q: You guided Pizza Hut margin improvement in H2 — does that include royalty savings from the acquisition, or is it organic? Also, how do you balance accelerated openings with keeping SSS positive?

A: Guidance excludes the deal impact. Pizza Hut restaurant margin improvement in H2 will exceed H1, mainly as rider-cost pressure eases; the delivery-mix base in H2 last year had normalized/approached current levels, and while delivery mix will still rise this H2, the YoY increment will be much smaller and more manageable. Other cost lines show similar trends.Pizza Hut COGS ratio should be broadly stable YoY in H2 and ~34% for the full year (in line with prior guidance), with a long-term target around 31% ±1%, indicating margin expansion potential.

On openings vs. SSS: We have balanced SSS, unit growth, margin, and profit growth well in recent years, and we will not slow Pizza Hut expansion. Penetration in lower-tier cities remains underweight vs. KFC and some local QSR players, offering many opportunities, while we will consolidate leadership in top-tier cities.We can mitigate sales cannibalization by opening in enclosed venues such as hospitals and university campuses, or by infilling white-space locations in lower-tier cities where cannibalization is limited; selected areas in top-tier cities can be similar. We will continue to balance metrics to deliver outcomes that satisfy shareholders.

Q: Burger Bar is scaling fast, but burgers and pizza co-exist in the same store. How do you avoid cannibalization? Where does the incremental share come from and which new customers are you attracting?

A: The burger category is growing well, which is a good backdrop. We made Burger Bar distinct: bread is baked fresh in-store daily (not only vs. KFC but also vs. many established players), patties are made to order, and quality is strong.From 200+ stores of learning, we mostly compete with brands focused on beef burgers — KFC’s beef-burger share is only mid-single digits and our burgers are quite distinct, so KFC is not the target; it is those burger-focused brands. As for cannibalization, we see incremental sales as adding a new category is positive for customers, and data shows double-digit incremental sales and good margins for the host store.

That is why we built 200+ stores in months and raised the target to 500–600, with sales around RMB 1 bn (5%–6% of Pizza Hut). Product quality matters most, supported by value and brand, and we are excited about this incremental business.

Q: This is the first investor interaction post brand acquisition. Based on the revival experience in recent years, what are the 'low-hanging fruits' post acquisition? What were the biggest challenges during the turnaround? How does brand ownership reduce friction and challenges? Any big changes to Pizza Hut’s biz. model ahead?

A: (This could warrant a dedicated session.) Pizza Hut’s transformation began in 2017, and by 2024 we told shareholders we had reached an inflection — it has been a long, determined rebuild anchored on fundamentals. We built core product capabilities, such as master-level dough base technology and know-how — the multigrain crust launched in Jun was a hit, which would not be possible without years of accumulation; we rebuilt the menu, with pizza now only ~40% of Pizza Hut sales, unlike pizza businesses outside China; and we launched burgers recently.Brand ownership helps, as seen with burgers: when we did not own the brand, even great ideas like Burger Bar required extensive behind-the-scenes coordination — Yum is a great partner, but logic alignment and assessing global brand impact took time. Owning the brand gives us the recipe, trademarks, and more, enabling faster, sharper market responses — strategic independence and speed are valuable.

It also accelerates openings — in one quarter, new Pizza Hut China openings exceeded 100% of global openings. We insist on quality-first openings with 2–3 year payback; adding 2.8% to restaurant margin broadens the set of sites that meet payback, so we raised next year’s opening guidance to 800, conditional on the 2–3 year payback. This topic likely deserves an investor day.

Q: The Gov. is advocating healthier diets. How do you view this, and what are the supply-chain efforts and challenges when offering healthier options?

A: First, on new businesses — because KFC is large, individual modules can be underappreciated, but they are substantial: KCOFFEE at RMB 1 bn last year, doubling to RMB 2 bn this year; KPRO growing ~4x with a target >RMB 1 bn; if standalone, they would be sizable businesses.On healthy eating, KFC and Pizza Hut already offer healthy meals — protein is healthy, and chicken is high-quality protein. Our concept of 'light meals' is important and growing well, spanning food and beverages; protein remains core, including Pizza Hut’s multigrain-crust light pizzas with chicken, eggs, and vegetables, and protein-based beverages are increasingly popular. KPRO is not new — the first store opened in 2017 and the menu has been refined over years to meet customer expectations on protein, calories, and vegetable ratios.

On supply chain, food safety in China is paramount for us and non-negotiable. Pizza Hut’s light options are supported by our supply chain; our two major brands and smaller ones share suppliers. Our confidence in light meals is not only about the concept but also customer trust in our food safety.Going deeper: food safety requirements for light meals are even higher than for fried chicken — whether Chinese or Western salads, meeting food-safety standards is more challenging than fried items.

Q: KCOFFEE is now a major contributor to KFC sales. How are its SSS trends in Q2–Q3? Other coffee/tea peers saw weak SSS starting Q2 due to high bases and delivery subsidies.

A: We are disciplined, and KCOFFEE is no exception. It delivered ~RMB 1 bn in sales last year and will reach RMB 2 bn in 2026, still contributing mid-single digits to host-store SSS, with price per cup roughly flat YoY — perhaps a 'boringly stable' answer, which is our style.(CFO) We do not disclose KCOFFEE SSS separately. Its daily sales are higher than pre-delivery-war levels, reflecting increased mind share; we have said KCOFFEE benefited from the delivery wars and rising mind share, enabling rapid site rollout. It has passed 3,300 stores and will exceed 5,000 by end-2027 (two years ahead of prior plan). The key prerequisite is very healthy daily sales growth — with delivery competition now more rational and daily traffic still above pre-war levels, we are very pleased.

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