Yum China Reports Q2 Same-Store Sales Growth of 3% and Operating Profit Growth of 64%; Loyalty Members Surpassed 100 Million; Mobile Payment Exceeded 40% of Total Company Sales
July 5, 2017 at 4:30 PM EDT

 

SHANGHAI, July 5, 2017 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the second quarter ended May 31, 2017.

Second Quarter Highlights

  • Total system sales grew 7%, including growth of 8% at KFC and 7% at Pizza Hut1, excluding foreign currency translation ("F/X").
  • Same-store sales grew 3%, including growth of 4% at KFC, flat at Pizza Hut.
  • Opened 90 new restaurants during the quarter.
  • Total restaurant margin increased 2.7 percentage points to 15.3%, primarily due to the impact of retail tax structure reform and also driven by same-store sales leverage, partially offset by wage inflation and commodity inflation.
  • Operating profit increased 64%, and 73% excluding F/X, primarily due to the impact of retail tax structure reform and also driven by same-store sales leverage. F/X negatively impacted reported operating profit by $8 million.
  • Net income increased 39% to $107 million.
  • Adjusted EBITDA increased 15% to $259 million.
  • Basic EPS increased 33% to $0.28 and diluted EPS increased 29% to $0.27.

1 Beginning with the quarter ended May 31, 2017, Pizza Hut Casual Dining and Pizza Hut Home Service were combined and reported together as the Pizza Hut reportable segment. Segment financial information for prior periods has been re-cast to align with this change in segments.

Key Results

 

Second Quarter

   

Year to Date

 

% Change

   

% Change

 

System

 

Same-Store

 

Net New

 

Operating

   

System

 

Same-Store

 

Net New

 

Operating

 

Sales

 

Sales

 

Units

 

Profit

   

Sales

 

Sales

 

Units

 

Profit

                                 

Yum China

7

 

3

 

6

 

64

   

6

 

2

 

6

 

34

KFC

8

 

4

 

5

 

41

   

6

 

3

 

5

 

20

Pizza Hut

7

 

-

 

9

 

157

   

8

 

1

 

9

 

95

 

Second Quarter

   

Year to Date

(in US$ million, except

for per share data and
percentages)

 

2017

 

 

2016

 

% Change

 

 

Ex F/X

   

 

2017

 

 

2016

 

% Change

   

Reported

         

Reported

 

Ex F/X

Operating Profit

$143

 

$   87

 

64

 

73

   

$397

 

$  296

 

34

 

41

Net Income

$107

 

$   77

 

39

 

46

   

$282

 

$  222

 

27

 

34

Adjusted EBITDA

$259

 

$ 226

 

15

 

21

   

$579

 

$  505

 

14

 

21

Basic EPS

$0.28

 

$0.21

 

33

 

39

   

$0.73

 

$0.61

 

20

 

25

Diluted EPS

$0.27

 

$0.21

 

29

 

35

   

$0.71

 

$0.61

 

16

 

23

 

Note: All comparisons are versus the same period a year ago. Consistent with prior years, Yum China's fiscal second quarter includes March, April and May results. Percentages may not recompute due to rounding.

System sales and same-store sales percentages exclude the impact of F/X. Adjusted EBITDA is a non-GAAP financial measure. See Reconciliation of Reported Results to Non-GAAP Measures included in the accompanying tables of this release for further details. 

CEO Comments

"I am pleased with our overall performance during the quarter, with same-store sales up 3% and system sales up 7%, on the back of continued strength at KFC. Operating profit, restaurant margin and net income all showed robust improvement." said Micky Pant, CEO. 

"We are committed to building one of the world's leading restaurant companies, and are executing against a plan that we have developed towards this goal. We are making progress in the key themes we are investing in – loyalty programs, digital and delivery capabilities, and continued upgrade of restaurant assets and optimization of store formats.  We are pleased to report some encouraging results: loyalty members for KFC and Pizza Hut have surpassed 100 million in total, and mobile payment exceeded 40% of our company sales in the second quarter.  Over 4,900 of our restaurants offered delivery service. Delivery sales accounted for 13% of company sales in the second quarter.

We also completed the acquisition of an 80% stake, on a fully diluted basis, in Daojia, an online aggregator platform with two brands focusing on higher-end delivery market segment, for a cash consideration of $36.7 million to the selling shareholders and a capital contribution of $25 million to Daojia.  We see this acquisition as complementary to our existing delivery business, and it provides valuable operational and technological expertise."

New-Unit Development and Asset Upgrade

  • Opened 90 new restaurants during the second quarter, and 223 year to date.
  • Remodeled 197 restaurants during the second quarter, and 229 year to date, led by KFC.
       

New Units

   

Restaurant Count

       

Second

Quarter

 

 

Year to Date

   

As of Second Quarter End

             

2017

   

2016

 

Yum China

   

90

 

223

     

7,685

     

7,246

 

KFC

   

62

 

134

     

5,301

     

5,039

 

Pizza Hut

   

25

 

64

     

2,122

     

1,949

 

Little Sheep, East Dawning and Taco Bell

   

3

 

25

     

262

     

258

Total Restaurant Count

       

Restaurant Count

       

As of Second Quarter End

       

2017

   

2016

 

Restaurants

     

7,685

     

7,246

 

Company-owned

     

6,103

     

5,800

 

Unconsolidated Affiliates

     

854

     

811

 

Franchisees

     

728

     

635

Restaurant Margin

  • For the second quarter, restaurant margin for Yum China increased 2.7 percentage points to 15.3%. Year to date, restaurant margin for Yum China increased 3.1 percentage points to 18.7%. Margin expansion was primarily due to the impact of retail tax structure reform and also driven by same-store sales leverage, partially offset by wage inflation and commodity inflation.
   

Second Quarter

     

Year to Date

   

2017

   

2016

   

% ppts

change

     

2017

   

2016

   

% ppts

change

 

Yum China

 

15.3

%

   

12.6

%

   

2.7

       

18.7

%

   

15.6

%

   

3.1

 

KFC

 

16.0

%

   

13.8

%

   

2.2

       

19.4

%

   

17.2

%

   

2.2

 

Pizza Hut

 

13.9

%

   

10.4

%

   

3.5

       

17.5

%

   

12.4

%

   

5.1

Digital and Delivery

  • Driven by our digital initiatives, we continued to strengthen our loyalty membership programs. By the end of the second quarter, total members in our loyalty programs surpassed 100 million, including 83 million members for KFC and 26 million for Pizza Hut.
  • Mobile payments exceeded 40% of company sales in the second quarter of 2017. Over $900 million in company sales were settled by cashless payment methods during the quarter.
  • Over 4,900 restaurants across China offered delivery services as of the end of the second quarter. Delivery contributed about 13% of company sales in the second quarter.

Completed Acquisition of Daojia

  • During the second quarter, Yum China completed the acquisition of a controlling interest in the holding company of DAOJIA.com.cn ("Daojia"), an established online food delivery service provider. Founded in 2010, Daojia targets higher-end orders in four Tier 1 cities. Daojia also operates Sherpa's, a leading premium food delivery platform specializing in English speaking services.  
  • Yum China agreed to pay cash consideration of $36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the acquisition, Yum China held 90% of Daojia's outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis. Mr. Hank Sun, founder of Daojia, will continue to lead the business.
  • The acquisition marks another step in executing Yum China's strategy to accelerate growth by building know-how and expertise in delivery. Daojia is complementary to Yum China's existing delivery business, and it provides valuable operational and technological expertise.

 Share Repurchase Update

  • Year to date ended May 31, 2017, we repurchased approximately 1 million shares for $39 million at an average price of $36.27 per share. 

Conference Call

Yum China Holdings, Inc. will host a conference call to review the Company's financial performance and strategies at 8:00 p.m. U.S. Eastern Time on Wednesday, July 5, 2017 (8:00 a.m. Beijing/Hong Kong Time on Thursday, July 6, 2017).  A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com.

U.S.:

 

+1-845-675-0437

Hong Kong:

 

+852-3018-6771

Mainland China:

 

400-6208-038 or 800-8190-121

International:

 

+65-6713-5090

Passcode:

 

Yum China

A live webcast of the call may also be accessed at http://edge.media-server.com/m/p/kdojo9ry.

A replay of the conference call may be accessed by phone at the following numbers two hours after the call ends until 9:00 a.m. U.S. Eastern Time on Thursday, July 13, 2017 (9:00 p.m.Beijing/Hong Kong Time on Thursday, July 13, 2017):

U.S.:

 

+1-855-452-5696

International:

 

+61-2-8199-0299

Passcode:

 

26482181

The webcast and the playback can be accessed via the internet by visiting the Yum China Holdings, Inc. website, http://ir.yumchina.com

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as "expect," "expectation," "believe," "anticipate," "may," "could," "intend," "belief," "plan," "estimate," "target," "predict," "likely," "will," "should," "forecast," "outlook" or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements include, without limitation, statements regarding the future business plans and earnings and performance of Yum China, anticipated effects of population and macroeconomic trends, the capital structure of Yum China, and statements regarding the anticipated synergies from the acquisition and beliefs regarding the long-term drivers of Yum China's business. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks and uncertainties that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or assumptions will be achieved. The forward-looking statements included in this press release are only made as of the date of this press release, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to achieve development goals at the times and in the amounts currently anticipated, if at all, the success of our marketing campaigns and product innovation, our ability to maintain food safety and quality control systems, our ability to control costs and expenses, including tax costs, changes in political, economic and regulatory conditions in China, the fact that the integration of Daojia may require significant time, attention and resources, potentially diverting attention from the conduct of our core businesses, as well as the fact that the expected synergies from the acquisition may not be realized. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results.

About Yum China Holdings, Inc.

Yum China Holdings, Inc. is a licensee of Yum! Brands in mainland China. It has exclusive rights in mainland China to KFC, China's leading quick-service restaurant brand, Pizza Hut, the leading casual dining restaurant brand in China, and Taco Bell, which opened its first restaurant in China at the end of 2016. Yum China also owns the Little Sheep and East Dawning concepts outright. Yum China is well positioned for growth thanks to its strong competitive position, integration of its brands into Chinese popular culture and consumers' daily lives, expanding geographic footprint in China and existing operational expertise. It has a strong capital position, no external debt and expects to continue growing its system sales and profit by adding new restaurants and through growing same-store sales. Yum China had more than 7,600 restaurants and more than 420,000 employees in over 1,100 cities at the end of May 2017. A new generation of younger consumers who are digitally sophisticated and brand driven are fueling growth in consumption in China. The ongoing growth of the middle class and urban population in China is expected to create the world's largest market for restaurant brands, with Yum China poised to be the market leader.

Analysts are invited to contact:

   

Christie Ju, Vice President – Finance, Investor Relations, at +86 21 2407 8090

Elaine Lai, Director – Finance, Investor Relations, at +86 21 2407 8278

     

Members of the media are invited to contact:

   

Forest Liu, Director, Public Affairs, at +86 21 2407 7505

 

 

Yum China Holdings, Inc.

 

Condensed Consolidated and Combined Summary of Results

 

 

 

 

(amounts in US$ million, except for number of shares and per share amounts)

(unaudited)

                     
   

Quarter ended

   

% Change

 

Year to date ended

   

% Change

   

             5/31/2017

   

            5/31/2016

   

B/(W)

 

             5/31/2017

   

            5/31/2016

   

B/(W)

Revenues

                                                   

Company sales

 

$

1,563

   

$

1,558

     

     

$

2,820

   

$

2,836

     

(1)

   

Franchise fees and income

   

31

     

30

     

6

       

58

     

55

     

6

   

Total revenues

   

1,594

     

1,588

     

       

2,878

     

2,891

     

   

Costs and Expenses, Net

                                                   

Company restaurants

                                                   

Food and paper

   

453

     

462

     

2

       

798

     

847

     

6

   

Payroll and employee benefits

   

358

     

342

     

(5)

       

615

     

587

     

(5)

   

Occupancy and other operating expenses

   

513

     

558

     

8

       

879

     

960

     

8

   

Company restaurant expenses

   

1,324

     

1,362

     

3

       

2,292

     

2,394

     

4

   

General and administrative expenses

   

107

     

104

     

(4)

       

174

     

170

     

(2)

   

Franchise expenses

   

15

     

17

     

12

       

28

     

31

     

11

   

Closures and impairment expenses, net

   

17

     

31

     

47

       

17

     

31

     

47

   

Refranchising gain, net

   

(1)

     

(1)

     

(73)

       

(2)

     

(4)

     

(67)

   

Other income, net

   

(11)

     

(12)

     

(1)

       

(28)

     

(27)

     

7

   

Total costs and expenses, net

   

1,451

     

1,501

     

3

       

2,481

     

2,595

     

4

   

Operating Profit

   

143

     

87

     

64

       

397

     

296

     

34

   

Interest income, net

   

5

     

2

     

66

       

7

     

4

     

59

   

Income Before Income Taxes

   

148

     

89

     

64

       

404

     

300

     

34

   

Income tax provision

   

(35)

     

(16)

   

        NM

       

(111)

     

(78)

     

(40)

   

Net income – including noncontrolling interests

   

113

     

73

     

55

       

293

     

222

     

32

   

Net income (loss) – noncontrolling interests

   

6

     

(4)

   

        NM

       

11

     

   

        NM

   

Net Income – Yum China Holdings, Inc.

 

$

107

   

$

77

     

39

     

$

282

   

$

222

     

27

   

Effective tax rate

   

22.9

%

   

18.6

%

   

(4.3)

 

ppts.

   

27.4

%

   

26.2

%

   

(1.2)

 

ppts.

                                                     

Basic Earnings Per Common Share

 

$

0.28

   

$

0.21

     

33

     

$

0.73

   

$

0.61

     

20

   

Weighted average shares outstanding

   

387,901,955

     

363,758,219

   

        NM

       

387,754,681

     

363,758,219

   

        NM

   
                                                     

Diluted Earnings Per Common Share

 

$

0.27

   

$

0.21

     

29

     

$

0.71

   

$

0.61

     

16

   

Weighted average shares outstanding

   

397,326,233

     

363,758,219

   

        NM

       

396,679,703

     

363,758,219

   

        NM

   
                                                     

Company sales

   

100.0

%

   

100.0

%

             

100.0

%

   

100.0

%

         

Food and paper

   

29.0

     

29.6

     

0.6

 

ppts.

   

28.3

     

29.9

     

1.6

 

ppts.

Payroll and employee benefits

   

22.9

     

21.9

     

(1.0)

 

ppts.

   

21.8

     

20.7

     

(1.1)

 

ppts.

Occupancy and other operating expenses

   

32.8

     

35.9

     

3.1

 

ppts.

   

31.2

     

33.8

     

2.6

 

ppts.

Restaurant margin

   

15.3

%

   

12.6

%

   

2.7

 

ppts.

   

18.7

%

   

15.6

%

   

3.1

 

ppts.

Operating margin

   

9.1

%

   

5.6

%

   

3.5

 

ppts.

   

14.1

%

   

10.5

%

   

3.6

 

ppts.

 

Percentages may not recompute due to rounding.

     

 

 

Yum China Holdings, Inc.

KFC Operating Results

(amounts in US$ million)

(unaudited)

 
   

Quarter ended

   

% Change

 

Year to date ended

   

% Change

   

 5/31/2017

   

 5/31/2016

   

B/(W)

 

  5/31/2017

   

 5/31/2016

   

B/(W)

Revenues

                                                   

Company sales

 

$

1,087

   

$

1,078

     

1

     

$

1,957

   

$

1,975

     

(1)

   

Franchise fees and income

   

29

     

29

     

4

       

55

     

53

     

4

   

Total revenues

   

1,116

     

1,107

     

1

       

2,012

     

2,028

     

(1)

   

Costs and Expenses, Net

                                                   

Company restaurants

                                                   

Food and paper

   

330

     

330

     

       

581

     

605

     

4

   

Payroll and employee benefits

   

236

     

223

     

(5)

       

403

     

382

     

(6)

   

Occupancy and other operating expenses

   

347

     

377

     

8

       

594

     

649

     

9

   

Company restaurant expenses

   

913

     

930

     

2

       

1,578

     

1,636

     

4

   

General and administrative expenses

   

39

     

38

     

(3)

       

64

     

62

     

(5)

   

Franchise expenses

   

14

     

17

     

13

       

27

     

31

     

12

   

Closures and impairment expenses, net

   

8

     

21

     

65

       

9

     

21

     

61

   

Other income, net

   

(12)

     

(8)

     

36

       

(27)

     

(22)

     

21

   

Total costs and expenses, net

   

962

     

998

     

4

       

1,651

     

1,728

     

4

   

Operating Profit

 

$

154

   

$

109

     

41

     

$

361

   

$

300

     

20

   

Company sales

   

100.0

%

   

100.0

%

             

100.0

%

   

100.0

%

         

Food and paper

   

30.3

     

30.5

     

0.2

 

ppts.

   

29.7

     

30.6

     

0.9

 

ppts.

Payroll and employee benefits

   

21.7

     

20.7

     

(1.0)

 

ppts.

   

20.6

     

19.3

     

(1.3)

 

ppts.

Occupancy and other operating expenses

   

32.0

     

35.0

     

3.0

 

ppts.

   

30.3

     

32.9

     

2.6

 

ppts.

Restaurant margin

   

16.0

%

   

13.8

%

   

2.2

 

ppts.

   

19.4

%

   

17.2

%

   

2.2

 

ppts.

Operating margin

   

14.1

%

   

10.1

%

   

4.0

 

ppts.

   

18.4

%

   

15.2

%

   

3.2

 

ppts.

 

Percentages may not recompute due to rounding.

 

 

Yum China Holdings, Inc.

Pizza Hut Operating Results

(amounts in US$ million)

(unaudited)

                     
   

Quarter ended

   

% Change

 

Year to date ended

   

% Change

   

5/31/2017

   

5/31/2016

   

B/(W)

 

5/31/2017

   

5/31/2016

   

B/(W)

Revenues

                                                   

Company sales

 

$

467

   

$

465

     

1

     

$

846

   

$

832

     

2

   

Franchise fees and income

   

1

     

1

     

23

       

1

     

1

     

27

   

Total revenues

   

468

     

466

     

1

       

847

     

833

     

2

   

Costs and Expenses, Net

                                                   

Company restaurants

                                                   

Food and paper

   

120

     

127

     

6

       

212

     

232

     

9

   

Payroll and employee benefits

   

119

     

115

     

(5)

       

207

     

197

     

(5)

   

Occupancy and other operating expenses

   

163

     

175

     

7

       

279

     

301

     

7

   

Company restaurant expenses

   

402

     

417

     

3

       

698

     

730

     

4

   

General and administrative expenses

   

26

     

26

     

2

       

43

     

43

     

2

   

Franchise expenses

   

1

     

     

(21)

       

1

     

     

(13)

   

Closures and impairment expenses, net

   

9

     

11

     

21

       

8

     

10

     

21

   

Total costs and expenses, net

   

438

     

454

     

4

       

750

     

783

     

4

   

Operating Profit

 

$

30

   

$

12

     

157

     

$

97

   

$

50

     

95

   

Company sales

   

100.0

%

   

100.0

%

             

100.0

%

   

100.0

%

         

Food and paper

   

25.8

     

27.5

     

1.7

 

ppts.

   

25.1

     

28.0

     

2.9

 

ppts.

Payroll and employee benefits

   

25.6

     

24.4

     

(1.2)

 

ppts.

   

24.5

     

23.6

     

(0.9)

 

ppts.

Occupancy and other operating expenses

   

34.7

     

37.7

     

3.0

 

ppts.

   

32.9

     

36.0

     

3.1

 

ppts.

Restaurant margin

   

13.9

%

   

10.4

%

   

3.5

 

ppts.

   

17.5

%

   

12.4

%

   

5.1

 

ppts.

Operating margin

   

6.6

%

   

2.6

%

   

4.0

 

ppts.

   

11.6

%

   

6.0

%

   

5.5

 

ppts.

 

Percentages may not recompute due to rounding.

 

 

Yum China Holdings, Inc.

Condensed Consolidated Balance Sheets

(amounts in US$ million, except for number of shares)

             
   

5/31/2017

   

12/31/2016

 

ASSETS

 

(Unaudited)

         

Current Assets

               

Cash and cash equivalents

 

$

892

   

$

885

 

Short-term investments

   

310

     

79

 

Accounts receivable, net

   

74

     

74

 

Inventories, net

   

266

     

268

 

Prepaid expenses and other current assets

   

150

     

120

 

Total Current Assets

   

1,692

     

1,426

 

Property, plant and equipment, net

   

1,617

     

1,647

 

Goodwill

   

103

     

79

 

Intangible assets, net

   

105

     

88

 

Investments in unconsolidated affiliates

   

51

     

71

 

Other assets

   

287

     

254

 

Deferred income taxes

   

166

     

162

 

Total Assets

   

4,021

     

3,727

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

               

Current Liabilities

               

Accounts payable and other current liabilities

   

966

     

971

 

Income taxes payable

   

36

     

33

 

Total Current Liabilities

   

1,002

     

1,004

 

Capital lease obligations

   

27

     

28

 

Other liabilities and deferred credits

   

260

     

252

 

Total Liabilities

   

1,289

     

1,284

 

Redeemable Noncontrolling Interest

   

5

     

 

Equity

               

Common stock, $0.01 par value; 1,000,000,000 shares authorized;

  386,617,759.42 shares and 383,344,835.42 shares issued at May 31, 2017

  and December 31, 2016, respectively; 384,760,471 shares and 383,344,835.42 shares

  outstanding at May 31, 2017 and December 31, 2016, respectively

   

4

     

4

 

Treasury stock

   

(59)

     

(20)

 

Additional paid-in capital

   

2,367

     

2,352

 

Retained earnings

   

322

     

40

 

Accumulated other comprehensive income

   

35

     

1

 

Total Equity – Yum China Holdings, Inc.

   

2,669

     

2,377

 

Noncontrolling interests

   

58

     

66

 

Total Equity

   

2,727

     

2,443

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

4,021

   

$

3,727

 

 

 

Yum China Holdings, Inc.

Condensed Consolidated and Combined Statements of Cash Flows

 

(amounts in US$ million)

 

 

 

 

(unaudited) 

       
   

Year to date ended

 
   

5/31/2017

   

5/31/2016

 

Cash Flows - Operating Activities

               

Net income - including noncontrolling interests

 

$

293

   

$

222

 

Depreciation and amortization

   

160

     

171

 

Closures and impairment expenses

   

17

     

31

 

Refranchising gain

   

(2)

     

(4)

 

Deferred income taxes

   

(1)

     

(29)

 

Equity income from investments in unconsolidated affiliates

   

(30)

     

(26)

 

Distributions of income received from unconsolidated affiliates

   

26

     

13

 

Share-based compensation expense

   

10

     

5

 

Changes in accounts receivable

   

3

     

(8)

 

Changes in inventories

   

7

     

(30)

 

Changes in prepaid expenses and other current assets

   

5

     

 

Changes in accounts payable and other current liabilities

   

7

     

35

 

Changes in income taxes payable

   

3

     

25

 

Other, net

   

(25)

     

18

 

Net Cash Provided by Operating Activities

   

473

     

423

 

Cash Flows - Investing Activities

               

Capital spending

   

(177)

     

(172)

 

Purchase of short-term investments

   

(229)

     

(54)

 

Proceeds from refranchising of restaurants

   

3

     

13

 

Acquisition of business, net of cash acquired

   

(25)

     

 

Other, net

   

(4)

     

(1)

 

Net Cash Used in Investing Activities

   

(432)

     

(214)

 

Cash Flows - Financing Activities

               

Net transfers to Parent

   

     

(118)

 

Payment of capital lease obligations

   

(1)

     

(1)

 

Repurchase of shares of common stock

   

(30)

     

 

Employee stock option proceeds

   

4

     

 

Other, net

   

(16)

     

 

Net Cash Used in Financing Activities

   

(43)

     

(119)

 

Effect of Exchange Rates on Cash and Cash Equivalents

   

9

     

(7)

 

Net Increase in Cash and Cash Equivalents

   

7

     

83

 

Cash and Cash Equivalents – Beginning of Period

   

885

     

425

 

Cash and Cash Equivalents – End of Period

 

$

892

   

$

508

 

 

Reconciliation of Reported Results to Non-GAAP Measures
(amounts in US$ million)
(unaudited)

In this press release:

  • The Company provides certain percentage changes excluding the impact of F/X. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
  • System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our concepts, except for non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales on the Condensed Consolidated and Combined Statements of Income; however, the franchise fees are included in the Company's revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.
  • Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the Company system one year or more.
  • Company Restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales. 

In addition to the results provided in accordance with US Generally Accepted Accounting Principles ("GAAP") in this press release, the Company provides non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings Per Common Share before Special Items, Effective tax rate before Special Items and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, depreciation, amortization and other items, including store impairment charges. Special Items consist of provision for losses associated with the sale of the aircraft and impact of the redemption of the Little Sheep noncontrolling interest which are described in (a), (b) and (c) in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that we do not believe are indicative of our ongoing operations due to their nature. These non-GAAP measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Condensed Consolidated and Combined Summary of Results and other information presented herein. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures follows.

   

Quarter ended

 

Year to date ended

Detail of Special Items

 

5/31/2017

 

5/31/2016

 

5/31/2017

 

5/31/2016

Provision for loss associated with sale of aircraft(a)

 

$

     

$

(1)

     

$

     

$

(1)

   

Special Items Expense - Operating Profit

   

       

(1)

       

       

(1)

   

Special Items Expense, net of tax of nil

    - including noncontrolling interests

   

       

(1)

       

       

(1)

   

Special Items Expense, net of tax of nil

    - noncontrolling interests(b)

   

       

(8)

       

       

(8)

   

Special Items Income, net of tax of nil

    - Yum China Holdings, Inc.

 

$

     

$

7

     

$

     

$

7

   

Weighted average diluted shares outstanding

   

397,326,233

       

363,758,219

       

396,679,703

       

363,758,219

   

Special Items Diluted Earnings Per Common Share

 

$

     

$

0.02

     

$

     

$

0.02

   

Reconciliation of Reported Operating Profit to

   Operating Profit Before Special Items

                                       

Reported Operating Profit

 

$

143

     

$

87

     

$

397

     

$

296

   

Special Items Expense - Operating Profit

   

       

(1)

       

       

(1)

   

Operating Profit before Special Items

 

$

143

     

$

88

     

$

397

     

$

297

   

Reconciliation of Reported EPS to EPS Before

   Special Items

                                       

Reported Diluted Earnings Per Common Share

 

$

0.27

     

$

0.21

     

$

0.71

     

$

0.61

   

Special Items Diluted Earnings Per Common Share

   

       

0.02

       

       

0.02

   

Diluted Earnings Per Common Share before Special Items

 

$

0.27

     

$

0.19

     

$

0.71

     

$

0.59

   

Reconciliation of Reported Effective Tax Rate to

   Effective Tax Rate Before Special Items

                                       

Reported effective tax rate

   

22.9

%

     

18.6

%

     

27.4

%

     

26.2

%

 

Effective tax rate before Special Items(c)

   

22.9

%

     

18.6

%

     

27.4

%

     

26.2

%

 
 

(a)         During the quarter ended May 31, 2016, we recognized a loss of $1 million associated with the sale of the aircraft.

(b)         During the quarter ended May 31, 2016, the Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to the Company pursuant to their redemption rights. The difference between the purchase price of less than $1 million, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable noncontrolling interests was recorded as an $8 million loss attributable to noncontrolling interests.

(c)         Impact on effective tax rate as a result of Special Items was nil.

 

Reconciliation of Net Income to Adjusted EBITDA

(amounts in US$ million)

(unaudited)

Net income, along with the reconciliation to Adjusted EBITDA, is presented below.

             
   

Quarter ended

   

Year to date ended

 
   

5/31/2017

   

5/31/2016

   

5/31/2017

   

5/31/2016

 

Reconciliation of Net Income to Adjusted EBITDA

                               

Net income (loss) – noncontrolling interests

 

$

6

   

$

(4)

   

$

11

   

$

 

Net Income – Yum China Holdings, Inc.

   

107

     

77

     

282

     

222

 

Income tax provision

   

35

     

16

     

111

     

78

 

Interest income, net

   

(5)

     

(2)

     

(7)

     

(4)

 

Operating Profit

   

143

     

87

     

397

     

296

 

Depreciation and amortization

   

96

     

103

     

160

     

171

 

Store impairment charges

   

20

     

35

     

22

     

37

 

Special Items Expense – Operating Profit

   

     

1

     

     

1

 

Adjusted EBITDA

 

$

259

   

$

226

   

$

579

   

$

505

 

 

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

                                       

Quarter Ended 5/31/2017

KFC

   

Pizza Hut

   

Others

   

Corporate

   

Total

 

and

Unallocated

Total revenues

$

1,116

   

$

468

   

$

10

   

$

   

$

1,594

 

Company restaurant expenses

 

913

     

402

     

9

     

     

1,324

 

General and administrative expenses

 

39

     

26

     

2

     

40

     

107

 

Franchise expenses

 

14

     

1