Yum China Reports Second Quarter 2018 Results
August 1, 2018 at 7:00 AM EDT

SHANGHAI, Aug. 1, 2018 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the second quarter ended June 30, 2018. Reported GAAP results include Special Items, which are excluded from adjusted measures.  Special Items are not allocated to any segment and therefore only impact reported GAAP results of Yum China.  See "Reconciliation of Reported GAAP Results to Adjusted Measures" within this release.

Second Quarter Highlights

  • Total revenues increased 12% year over year to $2.1 billion from $1.8 billion (5% year over year increase excluding foreign currency translation ("F/X")).
  • Total system sales grew 3% year over year, with 5% growth at KFC partially offset by 1% decline at Pizza Hut, excluding F/X.
  • Same-store sales declined 1% year over year, with flat same-store sales at KFC and a 4% decrease at Pizza Hut, excluding F/X.
  • Restaurant margin was 15.1%, as compared with 16.6% in the prior year period.
  • Operating Profit increased 13% year over year to $193 million from $171 million (5% year over year increase excluding F/X).
  • Net Income increased 14% to $143 million from $125 million in the prior year period (6% year over year increase excluding F/X).
  • Effective tax rate was 26.0%.
  • Diluted EPS was $0.36, as compared with $0.31 in the prior year period.
  • Repurchased approximately 1.9 million shares for $73.4 million at an average price of $38.41 per share.
  • Opened 164 new restaurants during the quarter, bringing total store count to 8,198 across more than 1,200 cities.

Digital and Delivery

  • As of June 30, 2018, the KFC loyalty program had more than 135 million members and the Pizza Hut loyalty program had over 45 million members, an increase of 50 million and 20 million, respectively, year over year.
  • Mobile payments accounted for approximately 63% of Company sales in the quarter, an increase of 21 percentage points year over year.
  • Delivery contributed to 16% of Company sales in the second quarter of 2018, an increase of 3 percentage points year over year. Delivery services now available in over 1,000 cities, up from 800 cities in the prior year period.

Key Financial Results

   

Second Quarter 2018

   

Year to Date Ended 6/30/2018

 

% Change

   

% Change

 

System

 

Same-
Store

 

Net New 
Units

 

Operating

 

System

 

Same-
Store

 

Net New 
Units

 

Operating

 

Sales

Sales

   

Profit

Sales

Sales

   

Profit

                         

Yum China

+3

(1)

 

+6

 

+13

+5

+1

 

+6

 

+26

     KFC

+5

-

 

+7

 

+10

+7

+3

 

+7

 

+16

     Pizza Hut

(1)

(4)

 

+4

 

(49)

(1)

(5)

 

+4

 

(55)

                                         
                                         
 
 
   

Second Quarter

 

Year to Date Ended 6/30

(in US$ million, except

             

% Change

             

% Change

for per share data and percentages)

 

2018

 

2017

 

Reported

 

Ex F/X

 

2018

 

2017

 

Reported

 

Ex F/X

Operating Profit

 

$

193

 

$

171

 

+13

 

+5

 

$

588

 

$

467

 

+26

 

+16

Adjusted Operating Profit1

 

$

193

 

$

171

 

+13

 

+5

 

$

490

 

$

467

 

+5

 

(3)

Net Income

 

$

143

 

$

125

 

+14

 

+6

 

$

431

 

$

329

 

+31

 

+20

Basic Earnings Per Common Share

 

$

0.37

 

$

0.32

 

+16

 

+6

 

$

1.12

 

$

0.85

 

+32

 

+20

Adjusted Basic EPS Per Common Share1

 

$

0.37

 

$

0.32

 

+16

 

+6

 

$

0.93

 

$

0.85

 

+9

 

(1)

Diluted Earnings Per Common Share

 

$

0.36

 

$

0.31

 

+16

 

+6

 

$

1.08

 

$

0.83

 

+30

 

+19

Adjusted Diluted EPS Per Common Share1

 

$

0.36

 

$

0.31

 

+16

 

+6

 

$

0.89

 

$

0.83

 

+7

 

(1)

See "Reconciliation of Reported GAAP Results to Adjusted Measures" included in the accompanying tables of this release for further details.

Note:  All comparisons are versus the same period a year ago. 

NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.

Yum China's fiscal second quarter 2018 includes April, May and June results.

Percentages may not recompute due to rounding.

System sales and same-store sales percentages exclude the impact of F/X.

Prior period results have been recast for the change of fiscal quarter, same-store sales growth definition and adoption of the new revenue accounting standard.

CEO and CFO Comments

"KFC achieved 5% system sales growth in the second quarter as a result of solid business fundamentals and accelerated new store development.  We are on track to add 600-650 new stores, led by KFC, by the end of the year.  This growth strategy will set us up for long-term growth in both profitability and market share.  We are confident in the sustainability of KFC's leader position in the QSR market in China.  While Pizza Hut continued to face challenges in China's competitive casual dining space, we added new talent to our team and made progress repositioning the brand with our target customers. We remain dedicated to revitalizing the brand and strongly believe that our initiatives including delivering more innovative products and introducing new store formats will restore the brand to the level of consistent growth that our shareholders expect," said Joey Wat, CEO of Yum China.

"Yum China reported total revenues and operating profit growth of 12% and 13% respectively in the second quarter. We will continue to invest in strengthening our core competencies as well as building delivery, digital and data capabilities to capture online and offline opportunities and drive future growth," added Ms. Wat.

"In an increasingly competitive environment, we stepped up food investment and promotional activities, which inevitably had some pressure on our margins. This reflects our strategic decision to invest in our brands for long-term market share gain. Our business continues to generate substantial free cash flow, and during the second quarter, we returned over $110 million of cash to our shareholders through share buyback and dividends. We remain committed to creating enduring value for our stockholders," remarked Jacky Lo, CFO of Yum China. 

Dividend and Share Repurchase

  • The Board of Directors declared a cash dividend of $0.10 per share on Yum China's common stock, payable as of the close of business on September 19, 2018 to stockholders of record as of the close of business on August 29, 2018.
  • During the second quarter, we repurchased approximately 1.9 million shares of Yum China common stock for $73.4 million at an average price of $38.41 per share.

New-Unit Development and Asset Upgrade

  • The Company opened 164 new restaurants and remodeled 365 restaurants in the second quarter of 2018.
       

New Units

Restaurant Count

 
       

Second Quarter 
2018

Year to Date
Ended 6/30/2018

As of 6/30

 
       

 

2018

 

2017

 
 

Yum China

   

164

   

367

 

8,198

 

7,704

 
 

KFC

   

128

   

272

 

5,696

 

5,324

 
 

Pizza Hut

   

27

   

68

 

 

2,209

 

2,122

 
 

Little Sheep, East Dawning, Taco Bell

   

9

   

27

 

 

293

 

258

 

Restaurant Margin

  • In the second quarter of 2018, Yum China restaurant margin was 15.1%, as compared with 16.6% in the prior year period, primarily attributable to Pizza Hut sales deleverage and investment in product upgrades and promotions for both KFC and Pizza Hut.
     

Second Quarter

     

Year to Date Ended 6/30

 
     

2018

   

2017

   

% pts

change

     

2018

 

2017

 

% pts

change

 
 

Yum China

   

15.1

%

   

16.6

%

   

(1.5)

     

16.6%

 

18.5%

 

(1.9)

 
 

KFC

   

16.8

%

   

17.5

%

 

(0.7)

     

18.9%

 

19.2%

 

(0.3)

 
 

Pizza Hut

   

11.2

%

   

14.9

%

   

(3.7)

     

10.8%

 

17.4%

 

(6.6)

 

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. US Eastern Time on Wednesday, August 1, 2018 (8:00 a.m. Beijing/HK time on Thursday, August 2, 2018).  A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com

US:

 

+1-845-675-0437

Hong Kong:

 

+852-3018-6771

Mainland China:

 

400-620-8038 or 800-819-0121

UK:

 

+44 20 36214779

International:

 

+65-6713-5090

Passcode:

 

Yum China

A replay of the conference call may be accessed by phone at the following numbers until Thursday August 9, 2018:

US:

 

+1-855-452-5696

International:

 

+61-2-8199-0299

Passcode:

 

6146028

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," "project," "likely," "will," "continue," "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, earnings and performance of Yum China, statements regarding the revitalization of Pizza Hut, anticipated effects of population and macroeconomic trends, statements regarding the capital structure of Yum China, 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 or events 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 or events 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, as well as changes in political, economic and regulatory conditions in China. 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, a California-based restaurant chain serving innovative Mexican-inspired food. Yum China also owns the Little Sheep and East Dawning concepts outright. The Company had more than 8,100 restaurants and more than 460,000 employees in over 1,200 cities at the end of June 2018. For more information, please visit http://ir.yumchina.com  

Investor Relations Contacts:

   

Tel: +86 21 2407 7556

IR@YumChina.com  

 

     

Media Contact:

   

Tel: +86 21 2407 7510

Media@YumChina.com

 

Yum China Holdings, Inc.

Consolidated Statements of Income

(amounts in US$ million, except for per share amounts)

(unaudited)

 
   

Quarter Ended

   

% Change

 

Year to Date Ended

   

% Change

   

6/30/2018

   

6/30/2017

   

B/(W)

 

6/30/2018

   

6/30/2017

   

B/(W)

Revenues

                                                   

Company sales

 

$

1,888

   

$

1,664

     

13

     

$

3,904

   

$

3,402

     

15

   

Franchise fees and income

   

34

     

33

     

2

       

74

     

69

     

7

   

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

141

     

141

     

       

302

     

288

     

5

   

Other revenues

   

5

     

3

     

79

       

9

     

8

     

15

   

Total revenues

   

2,068

     

1,841

     

12

       

4,289

     

3,767

     

14

   

Costs and Expenses, Net

                                                   

Company restaurants

                                                   

Food and paper

   

571

     

483

     

(18)

       

1,165

     

969

     

(20)

   

Payroll and employee benefits

   

424

     

366

     

(16)

       

866

     

734

     

(18)

   

Occupancy and other operating expenses

   

607

     

539

     

(13)

       

1,226

     

1,069

     

(15)

   

Company restaurant expenses

   

1,602

     

1,388

     

(15)

       

3,257

     

2,772

     

(18)

   

General and administrative expenses

   

101

     

118

     

16

       

215

     

216

     

1

   

Franchise expenses

   

17

     

17

     

       

37

     

35

     

(6)

   

Expenses for transactions with

   franchisees and unconsolidated affiliates

   

138

     

137

     

(1)

       

298

     

284

     

(5)

   

Other operating costs

   

7

     

3

   

NM

       

11

     

6

     

(67)

   

Closures and impairment expenses, net

   

17

     

18

     

7

       

16

     

18

     

15

   

Other income, net

   

(7)

     

(11)

     

44

       

(133)

     

(31)

   

NM

   

Total costs and expenses, net

   

1,875

     

1,670

     

(12)

       

3,701

     

3,300

     

(12)

   

Operating Profit

   

193

     

171

     

13

       

588

     

467

     

26

   

Interest income, net

   

10

     

4

   

NM

       

18

     

8

   

NM

   

Income Before Income Taxes

   

203

     

175

     

16

       

606

     

475

     

28

   

Income tax provision

   

(53)

     

(43)

     

(24)

       

(160)

     

(133)

     

(21)

   

Net income – including noncontrolling interests

   

150

     

132

     

13

       

446

     

342

     

30

   

Net income – noncontrolling interests

   

7

     

7

     

(2)

       

15

     

13

     

10

   

Net Income – Yum China Holdings, Inc.

 

$

143

   

$

125

     

14

     

$

431

   

$

329

     

31

   

Effective tax rate

   

26.0

%

   

24.3

%

   

(1.7)

 

ppts.

   

26.4

%

   

27.9

%

   

1.5

 

ppts.

                                                     

Basic Earnings Per Common Share

 

$

0.37

   

$

0.32

             

$

1.12

   

0.85

           

Weighted average shares outstanding (in millions)

   

386

     

387

               

386

     

387

           
                                                     

Diluted Earnings Per Common Share

 

$

0.36

   

$

0.31

             

$

1.08

   

0.83

           

Weighted average shares outstanding (in millions)

   

398

     

399

               

400

     

397

           
                                                     

Cash Dividends Declared Per Common Share

 

$

0.10

   

$

             

$

0.20

   

$

           
                                                     

Company sales

   

100.0

%

   

100.0

%

             

100.0

%

   

100.0

%

         

Food and paper

   

30.3

     

29.0

     

(1.3)

 

ppts.

   

29.8

     

28.5

     

(1.3)

 

ppts.

Payroll and employee benefits

   

22.5

     

22.0

     

(0.5)

 

ppts.

   

22.2

     

21.6

     

(0.6)

 

ppts.

Occupancy and other operating expenses

   

32.1

     

32.4

     

0.3

 

ppts.

   

31.4

     

31.4

     

 

ppts.

Restaurant margin

   

15.1

%

   

16.6

%

   

(1.5)

 

ppts.

   

16.6

%

   

18.5

%

   

(1.9)

 

ppts.

Operating margin

   

10.2

%

   

10.3

%

   

(0.1)

 

ppts.

   

15.1

%

   

13.7

%

   

1.4

 

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

   

6/30/2018

   

6/30/2017

   

B/(W)

 

6/30/2018

   

6/30/2017

   

B/(W)

Revenues

                                                   

Company sales

 

$

1,352

   

$

1,159

     

17

     

$

2,796

   

$

2,358

     

19

   

Franchise fees and income

   

33

     

32

     

1

       

70

     

66

     

5

   

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

15

     

15

     

(1)

       

32

     

32

     

   

Total revenues

   

1,400

     

1,206

     

16

       

2,898

     

2,456

     

18

   

Costs and Expenses, Net

                                                   

Company restaurants

                                                   

Food and paper

   

413

     

348

     

(19)

       

837

     

701

     

(19)

   

Payroll and employee benefits

   

289

     

241

     

(20)

       

582

     

482

     

(21)

   

Occupancy and other operating expenses

   

423

     

367

     

(15)

       

849

     

723

     

(17)

   

Company restaurant expenses

   

1,125

     

956

     

(18)

       

2,268

     

1,906

     

(19)

   

General and administrative expenses

   

45

     

38

     

(13)

       

91

     

77

     

(16)

   

Franchise expenses

   

17

     

17

     

2

       

36

     

34

     

(5)

   

Expenses for transactions with

   franchisees and unconsolidated affiliates

   

15

     

15

     

1

       

32

     

32

     

   

Closures and impairment expenses, net

   

6

     

9

     

43

       

6

     

10

     

44

   

Other income, net

   

(7)

     

(11)

     

(40)

       

(30)

     

(30)

     

(2)

   

Total costs and expenses, net

   

1,201

     

1,024

     

(17)

       

2,403

     

2,029

     

(18)

   

Operating Profit

 

$

199

   

$

182

     

10

     

$

495

   

$

427

     

16

   

Company sales

   

100.0

%

   

100.0

%

             

100.0

%

   

100.0

%

         

Food and paper

   

30.5

     

30.1

     

(0.4)

 

ppts.

   

29.9

     

29.7

     

(0.2)

 

ppts.

Payroll and employee benefits

   

21.4

     

20.8

     

(0.6)

 

ppts.

   

20.8

     

20.4

     

(0.4)

 

ppts.

Occupancy and other operating expenses

   

31.3

     

31.6

     

0.3

 

ppts.

   

30.4

     

30.7

     

0.3

 

ppts.

Restaurant margin

   

16.8

%

   

17.5

%

   

(0.7)

 

ppts.

   

18.9

%

   

19.2

%

   

(0.3)

 

ppts.

Operating margin

   

14.7

%

   

15.6

%

   

(0.9)

 

ppts.

   

17.7

%

   

18.1

%

   

(0.4)

 

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

   

6/30/2018

   

6/30/2017

   

B/(W)

 

6/30/2018

   

6/30/2017

   

B/(W)

Revenues

                                                   

Company sales

 

$

528

   

$

497

     

6

     

$

1,092

   

$

1,024

     

7

   

Franchise fees and income

   

     

     

23

       

1

     

1

     

24

   

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

     

1

     

5

       

     

1

     

(1)

   

Total revenues

   

528

     

498

     

6

       

1,093

     

1,026

     

7

   

Costs and Expenses, Net

                                                   

Company restaurants

                                                   

Food and paper

   

156

     

132

     

(18)

       

323

     

261

     

(24)

   

Payroll and employee benefits

   

133

     

122

     

(9)

       

280

     

246

     

(14)

   

Occupancy and other operating expenses

   

181

     

169

     

(7)

       

371

     

339

     

(9)

   

Company restaurant expenses

   

470

     

423

     

(11)

       

974

     

846

     

(15)

   

General and administrative expenses

   

28

     

26

     

(6)

       

56

     

51

     

(10)

   

Franchise expenses

   

     

     

(65)

       

1

     

1

     

(42)

   

Expenses for transactions with

   franchisees and unconsolidated affiliates

   

     

1

     

(5)

       

     

1

     

1

   

Closures and impairment expenses, net

   

11

     

9

     

(34)

       

10

     

8

     

(22)

   

Other income, net

   

(1)

     

   

NM

       

(2)

     

   

NM

   

Total costs and expenses, net

   

508

     

459

     

(11)

       

1,039

     

907

     

(15)

   

Operating Profit

 

$

20

   

$

39

     

(49)

     

$

54

   

$

119

     

(55)

   

Company sales

   

100.0

%

   

100.0

%

             

100.0

%

   

100.0

%

         

Food and paper

   

29.5

     

26.5

     

(3.0)

 

ppts.

   

29.6

     

25.5

     

(4.1)

 

ppts.

Payroll and employee benefits

   

25.2

     

24.5

     

(0.7)

 

ppts.

   

25.7

     

24.0

     

(1.7)

 

ppts.

Occupancy and other operating expenses

   

34.1

     

34.1

     

 

ppts.

   

33.9

     

33.1

     

(0.8)

 

ppts.

Restaurant margin

   

11.2

%

   

14.9

%

   

(3.7)

 

ppts.

   

10.8

%

   

17.4

%

   

(6.6)

 

ppts.

Operating margin

   

3.9

%

   

8.0

%

   

(4.1)

 

ppts.

   

4.9

%

   

11.7

%

   

(6.8)

 

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

Consolidated Balance Sheets

(amounts in US$ million)

(unaudited)

 
   

6/30/2018

   

12/31/2017

 

ASSETS

               

Current Assets

               

Cash and cash equivalents

 

$

1,261

   

$

1,059

 

Short-term investments

   

278

     

205

 

Accounts receivable, net

   

73

     

81

 

Inventories, net

   

276

     

297

 

Prepaid expenses and other current assets

   

205

     

160

 

Total Current Assets

   

2,093

     

1,802

 

Property, plant and equipment, net

   

1,657

     

1,691

 

Goodwill

   

276

     

108

 

Intangible assets, net

   

145

     

101

 

Investments in unconsolidated affiliates

   

53

     

95

 

Other assets

   

421

     

385

 

Deferred income taxes

   

85

     

105

 

Total Assets

   

4,730

     

4,287

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

               

Current Liabilities

               

Accounts payable and other current liabilities

   

1,147

     

985

 

Income taxes payable

   

59

     

39

 

Total Current Liabilities

   

1,206

     

1,024

 

Capital lease obligations

   

27

     

28

 

Other liabilities and deferred credits

   

396

     

388

 

Total Liabilities

   

1,629

     

1,440

 

Redeemable Noncontrolling Interest

   

5

     

5

 

Equity

               

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

   391 million shares and 389 million shares issued at June 30, 2018

   and December 31, 2017, respectively; 385 million shares and 385 million shares

   outstanding at June 30, 2018 and December 31, 2017, respectively

   

4

     

4

 

Treasury stock

   

(221)

     

(148)

 

Additional paid-in capital

   

2,388

     

2,375

 

Retained earnings

   

751

     

397

 

Accumulated other comprehensive income

   

81

     

137

 

Total Equity – Yum China Holdings, Inc.

   

3,003

     

2,765

 

Noncontrolling interests

   

93

     

77

 

Total Equity

   

3,096

     

2,842

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

4,730

   

$

4,287

 
                 

Yum China Holdings, Inc.

Consolidated Statements of Cash Flows

(amounts in US$ million)

(unaudited)

 
 

Year to Date Ended

   

6/30/2018

 

6/30/2017

Cash Flows – Operating Activities

                   

Net income – including noncontrolling interests

 

$

446

     

$

342

   

Depreciation and amortization

   

235

       

196

   

Closures and impairment expenses

   

16

       

18

   

Gain from re-measurement of equity interest upon acquisition

   

(98)

       

   

Deferred income taxes

   

42

       

(3)

   

Equity income from investments in unconsolidated affiliates

   

(35)

       

(35)

   

Distributions received from unconsolidated affiliates

   

41

       

31

   

Share-based compensation

   

13

       

11

   

Changes in accounts receivable

   

(2)

       

12

   

Changes in inventories

   

18

       

(3)

   

Changes in prepaid expenses and other current assets

   

(28)

       

(1)

   

Changes in accounts payable and other current liabilities

   

182

       

46

   

Changes in income taxes payable

   

20

       

20

   

Other, net

   

(31)

       

(30)

   

Net Cash Provided by Operating Activities

   

819

       

604

   

Cash Flows – Investing Activities

                   

Capital spending

   

(230)

       

(204)

   

Purchases of short-term investments

   

(370)

       

(318)

   

Maturities of short-term investments

   

295

       

81

   

Proceeds from refranchising of restaurants

   

3

       

3

   

Acquisition of business, net of cash acquired

   

(88)

       

(25)

   

Other, net

   

(16)

       

(2)

   

Net Cash Used in Investing Activities

   

(406)

       

(465)

   

Cash Flows – Financing Activities

                   

Payment of capital lease obligation

   

(1)

       

(1)

   

Repayment of short-term borrowings assumed from acquisition

   

(10)

       

   

Repurchase of shares of common stock

   

(70)

       

(96)

   

Proceeds from exercise of stock options

   

       

4

   

Cash dividends paid

   

(77)

       

   

Dividends paid to noncontrolling interests

   

(27)

       

(17)

   

Other, net

   

(1)

       

   

Net Cash Used in Financing Activities

   

(186)

       

(110)

   

Effect of Exchange Rates on Cash and Cash Equivalents

   

(25)

       

12

   

Net Increase in Cash and Cash Equivalents

   

202

       

41

   

Cash and Cash Equivalents - Beginning of Period

   

1,059

       

885

   

Cash and Cash Equivalents - End of Period

 

$

1,261

     

$

926

   

Reconciliation of Reported GAAP Results to Adjusted Measures 
(amounts in US$ million, except for per share amounts)
(unaudited)

In this press release:

  • The Company provides certain percentage changes excluding the impact of foreign currency translation ("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 restaurant 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 Consolidated 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.
  • Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year. We refer to these as our "base" stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores. Prior period results have been recast accordingly.
  • 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 measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Diluted Earnings Per Common Share, Adjusted Effective Tax Rate 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. The Special Item for the year to date ended June 30, 2018 represents a gain recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition, as described 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. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, depreciation, amortization and other items, including store impairment charges. These adjusted 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 adjusted measures provide additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to its nature.  These adjusted measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Consolidated Statements of Income and other information presented herein. A reconciliation of the most directly comparable GAAP measures to adjusted measures follows.

   

Quarter Ended

   

Year to Date Ended

 
   

6/30/2018

   

6/30/2017

   

6/30/2018

   

6/30/2017

 

Detail of Special Items

                               

Gain from re-measurement of equity interest upon acquisition(b)

 

$

   

$

   

$

98

   

$

 

Special Items Income - Operating Profit

   

     

     

98

     

 

Tax Expenses on Special Items(c)

   

     

     

(24)

     

 

Special Items Income, net of tax – including noncontrolling interests

   

     

     

74

     

 

Special Items Income, net of tax – noncontrolling interests

   

     

     

     

 

Special Items Income, net of tax –Yum China Holdings, Inc.

 

$

   

$

   

$

74

   

$

 

Weighted Average Diluted Shares Outstanding

   

398

     

399

     

400

     

397

 

Special Items Diluted Earnings Per Common Share

 

$

   

$

   

$

0.19

   

$

 

Reconciliation of Operating Profit to Adjusted Operating Profit

                               

Operating Profit

 

$

193

   

$

171

   

$

588

   

$

467

 

Special Items Income - Operating Profit

   

     

     

98

     

 

Adjusted Operating Profit

 

$

193

   

$

171

   

$

490

   

$

467

 

Reconciliation of EPS to Adjusted EPS

                               

Diluted Earnings Per Common Share

 

$

0.36

   

$

0.31

   

$

1.08

   

$

0.83

 

Special Items Diluted Earnings Per Common Share

   

     

     

0.19

     

 

Adjusted Diluted Earnings Per Common Share

 

$

0.36

   

$

0.31

   

$

0.89

   

$

0.83

 

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

                               

Effective Tax Rate

   

26.0

%

   

24.3

%

   

26.4

%

   

27.9

%

Impact on Effective Tax Rate as a result of Special Items

   

%

   

%

   

(0.2)

%

   

%

Adjusted Effective Tax Rate

   

26.0

%

   

24.3

%

   

26.6

%

   

27.9

%

 

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

 
   

6/30/2018

   

6/30/2017

   

6/30/2018

   

6/30/2017

 

Reconciliation of Net Income to Adjusted EBITDA

                               

Net Income – Yum China Holdings, Inc.

 

$

143

   

$

125

   

$

431

   

$

329

 

Net income – noncontrolling interests

   

7

     

7

     

15

     

13

 

Income tax provision

   

53

     

43

     

160

     

133

 

Interest income, net

   

(10)

     

(4)

     

(18)

     

(8)

 

Operating Profit

   

193

     

171

     

588

     

467

 

Depreciation and amortization

   

117

     

100

     

235

     

196

 

Store impairment charges

   

19

     

19

     

21

     

23

 

Special Items Income - Operating Profit

   

     

     

(98)

     

 

Adjusted EBITDA

 

$

329

   

$

290

   

$

746

   

$

686

 

 

Unit Count by Brand

                           

KFC

                         
 

12/31/2017

 

New Builds

 

Acquired

 

Closures

 

Refranchised

 

Others

 

6/30/2018

Company-owned

4,112

 

205

 

1

 

(48)

 

(6)

 

157

 

4,421

Unconsolidated affiliates

891

 

61

 

 

(11)

 

 

(157)

 

784

Franchise

485

 

6

 

(1)

 

(5)

 

6

 

 

491

Total

5,488

 

272

 

 

(64)

 

 

 

5,696

                           

Pizza Hut

                         
 

12/31/2017

 

New Builds

     

Closures

 

Refranchised

     

6/30/2018

Company-owned

2,166

 

67

     

(53)

 

(1)

     

2,179

Franchise

29

 

1

     

(1)

 

1

     

30

Total

2,195

 

68

     

(54)

 

     

2,209

                           

All Other Segments

                         
 

12/31/2017

 

New Builds

     

Closures

 

Refranchised

     

6/30/2018

Company-owned

29

 

1

     

(3)

 

(1)

     

26

Franchise

271

 

26

     

(31)

 

1

     

267

Total

300

 

27

     

(34)

 

     

293

 

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

 

Quarter Ended 6/30/18

 

KFC

   

Pizza Hut

   

All Other 
Segments

   

Corporate

and

Unallocated(1)

   

Elimination

   

Total

 

Company sales

 

$

1,352

   

$

528

   

$

8

   

$

   

$

   

$

1,888

 

Franchise fees and income

   

33

     

     

1

     

     

     

34

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

15

     

     

4

     

122

     

     

141

 

Other revenues

   

     

     

5

     

1

     

(1)

     

5

 

Total revenues

 

$

1,400

   

$

528

   

$

18

   

$

123

   

$

(1)

   

$

2,068

 

Company restaurant expenses

   

1,125

     

470

     

8

     

     

(1)

     

1,602

 

General and administrative expenses

   

45

     

28

     

9

     

19

     

     

101

 

Franchise expenses

   

17

     

     

     

     

     

17

 

Expenses for transactions with

  franchisees and unconsolidated affiliates

   

15

     

     

3

     

120

     

     

138

 

Other operating costs

   

     

     

6

     

1

     

     

7

 

Closures and impairment expenses, net

   

6

     

11

     

     

     

     

17

 

Other (income) expense, net

   

(7)

     

(1)

     

(1)

     

2

     

     

(7)

 
     

1,201

     

508

     

25

     

142

     

(1)

     

1,875

 

Operating Profit (Loss)

 

$

199

   

$

20

   

$

(7)

   

$

(19)

   

$

   

$

193

 

Quarter Ended 6/30/17

 

KFC

   

Pizza Hut

   

All Other 
Segments

   

Corporate

and

Unallocated(1)

   

Total

 

Company sales

 

$

1,159

   

$

497

   

$

8

   

$

   

$

1,664

 

Franchise fees and income

   

32

     

     

1

     

     

33

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

15

     

1

     

4

     

121

     

141

 

Other revenues

   

     

     

3

     

     

3

 

Total revenues

 

$

1,206

   

$

498

   

$

16

   

$

121

   

$

1,841

 

Company restaurant expenses

   

956

     

423

     

9

     

     

1,388

 

General and administrative expenses

   

38

     

26

     

4

     

50

     

118

 

Franchise expenses

   

17

     

     

     

     

17

 

Expenses for transactions with

  franchisees and unconsolidated affiliates

   

15

     

1

     

3

     

118

     

137

 

Other operating costs

   

     

     

3

     

     

3

 

Closures and impairment expenses, net

   

9

     

9

     

     

     

18

 

Other income, net

   

(11)

     

     

     

     

(11)

 

Total costs and expenses, net

   

1,024

     

459

     

19

     

168

     

1,670

 

Operating Profit (Loss)

 

$

182

   

$

39

   

$

(3)

   

$

(47)

   

$

171

 

Year to Date Ended 6/30/18

 

KFC

   

Pizza Hut

   

All Other 
Segments

   

Corporate

and

Unallocated(1)

   

Elimination

   

Total

 

Company sales

 

$

2,796

   

$

1,092

   

$

16

   

$

   

$

   

$

3,904

 

Franchise fees and income

   

70

     

1

     

3

     

     

     

74

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

32

     

     

11

     

259

     

     

302

 

Other revenues

   

     

     

8

     

2

     

(1)

     

9

 

Total revenues

 

$

2,898

   

$

1,093

   

$

38

   

$

261

   

$

(1)

   

$

4,289

 

Company restaurant expenses

   

2,268

     

974

     

16

     

     

(1)

     

3,257

 

General and administrative expenses

   

91

     

56

     

16

     

52

     

     

215

 

Franchise expenses

   

36

     

1

     

     

     

     

37

 

Expenses for transactions with

  franchisees and unconsolidated affiliates

   

32

     

     

9

     

257

     

     

298

 

Other operating costs

   

     

     

9

     

2

     

     

11

 

Closures and impairment expenses, net

   

6

     

10

     

     

     

     

16

 

Other income, net

   

(30)

     

(2)

     

(1)

     

(100)

     

     

(133)

 
     

2,403

     

1,039

     

49

     

211

     

(1)

     

3,701

 

Operating Profit (Loss)

 

$

495

   

$

54

   

$

(11)

   

$

50

   

$

   

$

588

 

Year to Date Ended 6/30/17

 

KFC

   

Pizza Hut

   

All Other 
Segments

   

Corporate

and

Unallocated(1)

   

Total

 

Company sales

 

$

2,358

   

$

1,024

   

$

20

   

$

   

$

3,402

 

Franchise fees and income

   

66

     

1

     

2

     

     

69

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

32

     

1

     

9

     

246

     

288

 

Other revenues

   

     

     

8

     

     

8

 

Total revenues

 

$

2,456

   

$

1,026

   

$

39

   

$

246

   

$

3,767

 

Company restaurant expenses

   

1,906

     

846

     

20

     

     

2,772

 

General and administrative expenses

   

77

     

51

     

7

     

81

     

216

 

Franchise expenses

   

34

     

1

     

     

     

35

 

Expenses for transactions with

  franchisees and unconsolidated affiliates

   

32

     

1

     

8

     

243

     

284

 

Other operating costs

   

     

     

6

     

     

6

 

Closures and impairment expenses, net

   

10

     

8

     

     

     

18

 

Other income, net

   

(30)

     

     

     

(1)

     

(31)

 
     

2,029

     

907

     

41

     

323

     

3,300

 

Operating Profit (Loss)

 

$

427

   

$

119

   

$

(2)

   

$

(77)

   

$

467

 

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated Statements of Income.  

(1)        Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes. Amount includes revenues and expenses associated with transactions with franchisees and unconsolidated affiliates such as inventory procurement and other services provided to franchisees and unconsolidated affiliates. The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See "Reconciliation of Reported GAAP Results to Adjusted Measures".

Notes to the Consolidated Statements of Income, Consolidated Balance Sheets 
and Consolidated Statements of Cash Flows 
(amounts in US$ million)
(unaudited)

(a)      Amounts presented as of and for the quarter and year to date ended June 30, 2018 are unaudited.

(b)      As a result of the acquisition of Wuxi KFC, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes.

(c)      The tax expense was determined based upon the nature as well as the jurisdiction of each Special Item at the applicable tax rate.

SOURCE Yum China Holdings, Inc