Yum China Reports Second Quarter 2018 Results PDF Version 08/01/2018 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) 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