Yum China Reports First Quarter 2019 Results
04/29/2019 at 4:30 PM EDT
Total revenues grew 4% or 10% in constant currency;
Total system sales grew 9% and same-store sales grew 4% in constant currency

SHANGHAI, April 29, 2019 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the first quarter ended March 31, 2019. 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.

First Quarter Highlights

  • Total revenues increased 4% year over year to $2.3 billion from $2.2 billion (10% year over year increase excluding foreign currency translation ("F/X")).
  • Total system sales grew 9% year over year, with growth of 11% at KFC and 3% at Pizza Hut, excluding F/X.
  • Same-store sales grew 4% year over year, with growth of 5% at KFC and 1% at Pizza Hut, excluding F/X.
  • Restaurant margin was 18.5%, as compared with 17.9% in the prior year period.
  • Operating Profit decreased 23% year over year to $303 million from $395 million (18% year over year decrease excluding F/X), primarily due to lapping the gain of $98 million from the re-measurement of our previously held equity interest at Wuxi KFC in the first quarter 2018. Excluding the gain in 2018, Adjusted Operating Profit increased 2% year over year (9% year over year increase excluding F/X).
  • Net Income decreased 23% to $222 million from $288 million in the prior year period, primarily due to the Wuxi re-measurement gain in the first quarter 2018.
  • Due to the release of final regulations regarding the transition tax under the US Tax Cuts and Jobs Act, the Company recognized a tax charge of $8 million in the first quarter 2019. Excluding the Wuxi re-measurement gain and transition tax charge, Adjusted Net Income increased 7% to $230 million.
  • Effective tax rate was 28.9%. Excluding the transition tax charge, the effective tax rate was 26.5%.
  • Diluted EPS decreased 21% to $0.57 from $0.72 in the prior year period. Adjusted Diluted EPS increased 11% to $0.59 from $0.53 in the prior year period (8% year over year increase excluding the $0.02 per share mark to market gain of our equity investment in Meituan Dianping).
  • Opened 237 new restaurants during the quarter, bringing total store count to 8,653 across more than 1,300 cities.

Key Financial Results

 

First Quarter 2019

   
 

% Change

   
 

System Sales

   

Same-Store Sales

   

Net New Units

   

Operating Profit

   

Yum China

 

+9

     

+4

     

+7

     

(23)

   

   KFC

 

+11

     

+5

     

+8

     

(3)

   

   Pizza Hut

 

+3

     

+1

     

+2

     

+48

   

 

   

First Quarter

   

(in US$ million, except

                   

% Change

   

per share data and percentages)

 

2019

     

2018

   

Reported

   

Ex F/X

   

Operating Profit

$

 

303

   

$

 

395

     

(23)

     

(18)

   

Adjusted Operating Profit[1]

$

 

303

   

$

 

297

     

+2

     

+9

   

Net Income

$

 

222

   

$

 

288

     

(23)

     

(17)

   

Adjusted Net Income[1]

$

 

230

   

$

 

214

     

+7

     

+15

   

Basic Earnings Per Common Share

$

 

0.59

   

$

 

0.75

     

(21)

     

(16)

   

Adjusted Basic Earnings Per

                                   

   Common Share[1]

$

 

0.61

   

$

 

0.55

     

+11

     

+18

   

Diluted Earnings Per Common Share

$

 

0.57

   

$

 

0.72

     

(21)

     

(15)

   

Adjusted Diluted Earnings Per

                                   

   Common Share[1]

$

 

0.59

   

$

 

0.53

     

+11

     

+19

   

 

[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.

Percentages may not recompute due to rounding.

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

CEO and CFO Comments

"We are pleased to report a very strong start to 2019 as we delivered a 9% increase in system sales in constant currency in the first quarter, our tenth consecutive quarter of system sales growth since the spin-off," said Joey Wat, CEO of Yum China. "This resilient growth was driven by another robust quarter at KFC, which successfully lapped three strong first quarters between 2016 and 2018, and a very encouraging quarter at Pizza Hut. Pizza Hut delivered positive same-store sales growth and a significant improvement in profitability in the first quarter, while continuing to make strategic investments in value offerings and multiple other initiatives to drive the ongoing revitalization of the brand."

"During the first quarter, we opened 237 stores, led by an acceleration of KFC openings, as we continued to identify attractive opportunities to expand our presence in underserved markets. We also continued to invest in enhancing our digital and delivery capabilities, which are vital drivers of same-store sales growth across our portfolio of brands," added Ms. Wat.

"We achieved a 9% increase in adjusted operating profit during the first quarter, excluding special items and F/X, as sales leverage at KFC and a notable improvement in Pizza Hut's margin offset cost inflation and increased promotions," said Jacky Lo, CFO of Yum China. "This enabled us to continue to generate significant cash flow and fund shareholder returns. During the quarter, we returned $111 million to shareholders in the form of share repurchases and cash dividends. Looking ahead, based on our current pipeline, we are confident that our 2019 gross new openings will exceed the top end of our original target of 600 to 650 stores. While we expect poultry inflation to weigh on margins for the rest of the year, and Pizza Hut's revitalization program is still ongoing, the long-term outlook for growth remains positive and we remain committed to generating significant value for our shareholders."

Dividend and Share Repurchase

  • The Board of Directors declared a cash dividend of $0.12 per share on Yum China's common stock, payable as of the close of business on June 17, 2019 to shareholders of record as of the close of business on May 28, 2019.
  • During the first quarter, we repurchased approximately 1.7 million shares of Yum China common stock for $64.7 million at an average price of $37.90 per share.

Digital and Delivery 

  • As of March 31, 2019, the KFC loyalty program had over 175 million members and the Pizza Hut loyalty program had over 55 million members, an increase of 50 million and 15 million, respectively, year over year.
  • Digital payments accounted for 87% of Company sales in the quarter, an increase of 13 percentage points year over year.
  • Delivery contributed to 19% of Company sales in the first quarter of 2019, an increase of 3 percentage points year over year. Delivery services are now available in 1,160 cities, up from 972 cities in the prior year period.

New-Unit Development and Asset Upgrade

  • The Company opened 237 new restaurants and remodeled 96 restaurants in the first quarter of 2019.

 

   

New Units

   

Restaurant Count

   
   

First Quarter

   

As of March 31

   
   

2019

   

2019

   

2018

   

Yum China

 

237

     

8,653

     

8,112

   

   KFC

 

191

     

6,078

     

5,602

   

   Pizza Hut

 

34

     

2,249

     

2,214

   

   Others2

 

12

     

326

     

296

   

 

[2] Others include Little Sheep, East Dawning, Taco Bell and COFFii & JOY.

Restaurant Margin

  • In the first quarter of 2019, Yum China restaurant margin was 18.5%, as compared with 17.9% in the prior year period, primarily attributable to sales leverage, improved utility efficiency and labor productivity, partially offset by commodity and wage inflations and increased promotional activities during the period.

 

 

First Quarter

   
   

2019

   

2018

   

% pts change

   

Yum China

   

18.5

%

   

17.9

%

   

+0.6

   

   KFC

   

20.0

%

   

20.9

%

   

(0.9)

   

   Pizza Hut

   

14.3

%

   

10.5

%

   

+3.8

   

Recently Adopted Accounting Pronouncement

  • Effective January 1, 2019, we adopted a new accounting standard for leases using a modified retrospective method, under which prior period results were not retrospectively adjusted.
  • Upon adoption, we recognized right-of-use assets and lease liabilities of approximately $2.0 billion and $2.2 billion respectively. In addition, an impairment of $60 million (net of related impact on deferred taxes and noncontrolling interests) on right-of-use assets arising from existing operating leases as of January 1, 2019 was recorded as an adjustment to retained earnings, as the additional impairment charge would have been recorded before adoption had the operating lease right-of-use assets been recognized at the time of impairment. We performed an additional impairment evaluation of long-lived assets of restaurants as a result of adopting the new accounting standard and recorded an incremental impairment charge of $12 million in the first quarter of 2019.

Conference Call

Yum China's management will hold an earnings conference call at 8:00p.m. U.S. Eastern Time on Monday, April 29, 2019 (8:00a.m.Beijing/Hong Kong Time on Tuesday, April 30, 2019). 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 will be available two hours after the call ends until 10:00a.m. U.S. Eastern Time on Tuesday, May 7, 2019 (10:00p.m.Beijing/Hong Kong Time on Tuesday, May 7, 2019) and may be accessed by phone at the following numbers:

US:

 

+1 855 452 5696

International:

 

+61 2 9003 4211

Passcode:

 

1893189

Additionally, a live webcast and an archived webcast of this conference call will be available at 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, performance and returns of Yum China, statements regarding the revitalization of Pizza Hut, anticipated effects of population and macroeconomic trends, the capital structure and effective tax rate of Yum China, the anticipated effects of our digital and delivery capabilities on growth 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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, East Dawning and COFFii & JOY concepts outright. The Company had more than 8,600 restaurants in over 1,300 cities at the end of March 2019. In 2019, Yum China was named to the Bloomberg Gender-Equality Index and was certified as a Top Employer 2019 in China by the Top Employers Institute. For more information, please visit http://ir.yumchina.com.

 

Investor Relations Contact:

   

Tel: +86 21 2407 7556

IR@YumChina.com

     

Media Contact:

   

Tel: +86 21 2407 7510

Media@YumChina.com  

 

 

Yum China Holdings, Inc.

Condensed Consolidated Statements of Income

(in US$ million, except per share data)

(unaudited)

 
   

Quarter Ended

   

% Change

   

3/31/2019

   

3/31/2018

   

B/(W)

Revenues

                         

Company sales

 

$

2,089

   

$

2,016

     

4

   

Franchise fees and income

   

39

     

40

     

(1)

   

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

170

     

161

     

5

   

Other revenues

   

6

     

4

     

55

   

Total revenues

   

2,304

     

2,221

     

4

   

Costs and Expenses, Net

                         

Company restaurants

                         

Food and paper

   

638

     

594

     

(7)

   

Payroll and employee benefits

   

466

     

442

     

(5)

   

Occupancy and other operating expenses

   

599

     

619

     

3

   

Company restaurant expenses

   

1,703

     

1,655

     

(3)

   

General and administrative expenses

   

114

     

114

     

1

   

Franchise expenses

   

20

     

20

     

   

Expenses for transactions with

   franchisees and unconsolidated affiliates

   

167

     

160

     

(5)

   

Other operating costs and expenses

   

5

     

4

     

(16)

   

Closures and impairment expenses (income), net

   

11

     

(1)

   

NM

   

Other income, net

   

(19)

     

(126)

     

(85)

   

Total costs and expenses, net

   

2,001

     

1,826

     

(10)

   

Operating Profit

   

303

     

395

     

(23)

   

Interest income, net

   

9

     

8

     

17

   

Investment gain

   

10

     

   

NM

   

Income Before Income Taxes

   

322

     

403

     

(20)

   

Income tax provision

   

(93)

     

(107)

     

13

   

Net income – including noncontrolling interests

   

229

     

296

     

(23)

   

Net income – noncontrolling interests

   

7

     

8

     

13

   

Net Income – Yum China Holdings, Inc.

 

$

222

   

$

288

     

(23)

   

Effective tax rate

   

28.9

%

   

26.6

%

   

(2.3)

ppts.

 
                           

Basic Earnings Per Common Share

 

$

0.59

   

$

0.75

           

Weighted average shares outstanding

    (in millions)

   

379

     

386

           
                           

Diluted Earnings Per Common Share

 

$

0.57

   

$

0.72

           

Weighted average shares outstanding

    (in millions)

   

388

     

401

           
                           

Cash Dividends Declared Per Common Share

 

$

0.12

   

$

0.10

           
                           

Company sales

   

100.0

%

   

100.0

%

         

Food and paper

   

30.5

     

29.4

     

(1.1)

ppts.

 

Payroll and employee benefits

   

22.3

     

21.9

     

(0.4)

ppts.

 

Occupancy and other operating expenses

   

28.7

     

30.8

     

2.1

ppts.

 

Restaurant margin

   

18.5

%

   

17.9

%

   

0.6

ppts.

 

Operating margin

   

14.5

%

   

19.6

%

   

(5.1)

ppts.

 
 

Percentages may not recompute due to rounding.

 

 

Yum China Holdings, Inc.

KFC Operating Results

(in US$ million)

(unaudited)

 
   

Quarter Ended

   

% Change

 
   

3/31/2019

   

3/31/2018

   

B/(W)

 

Revenues

                           

Company sales

 

$

1,539

   

$

1,444

     

7

     

Franchise fees and income

   

36

     

37

     

(3)

     

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

17

     

17

     

     

Total revenues

   

1,592

     

1,498

     

6

     

Costs and Expenses, Net

                           

Company restaurants

                           

Food and paper

   

476

     

424

     

(13)

     

Payroll and employee benefits

   

320

     

293

     

(9)

     

Occupancy and other operating expenses

   

434

     

426

     

(2)

     

Company restaurant expenses

   

1,230

     

1,143

     

(8)

     

General and administrative expenses

   

49

     

46

     

(5)

     

Franchise expenses

   

19

     

19

     

1

     

Expenses for transactions with

   franchisees and unconsolidated affiliates

   

17

     

17

     

1

     

Closures and impairment expenses, net

   

7

     

   

NM

     

Other income, net

   

(18)

     

(23)

     

(24)

     

Total costs and expenses, net

   

1,304

     

1,202

     

(9)

     

Operating Profit

 

$

288

   

$

296

     

(3)

     

Company sales

   

100.0

%

   

100.0

%

           

Food and paper

   

30.9

     

29.3

     

(1.6)

ppts.

   

Payroll and employee benefits

   

20.8

     

20.3

     

(0.5)

ppts.

   

Occupancy and other operating expenses

   

28.3

     

29.5

     

1.2

ppts.

   

Restaurant margin

   

20.0

%

   

20.9

%

   

(0.9)

ppts.

   

Operating margin

   

18.7

%

   

20.6

%

   

(1.9)

ppts.

   
 

Percentages may not recompute due to rounding.

 

 

Yum China Holdings, Inc.

Pizza Hut Operating Results

(in US$ million)

(unaudited)

 
   

Quarter Ended

   

% Change

 
   

3/31/2019

   

3/31/2018

   

B/(W)

 

Revenues

                           

Company sales

 

$

541

   

$

564

     

(4)

     

Franchise fees and income

   

1

     

1

     

45

     

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

1

     

   

NM

     

Total revenues

   

543

     

565

     

(4)

     

Costs and Expenses, Net

                           

Company restaurants

                           

Food and paper

   

159

     

167

     

5

     

Payroll and employee benefits

   

143

     

147

     

3

     

Occupancy and other operating expenses

   

162

     

190

     

15

     

Company restaurant expenses

   

464

     

504

     

8

     

General and administrative expenses

   

24

     

28

     

14

     

Franchise expenses

   

1

     

1

     

(50)

     

Expenses for transactions with

   franchisees and unconsolidated affiliates

   

1

     

   

NM

     

Closures and impairment expenses (income), net

   

3

     

(1)

   

NM

     

Other income, net

   

     

(1)

     

(100)

     

Total costs and expenses, net

   

493

     

531

     

7

     

Operating Profit

 

$

50

   

$

34

     

48

     

Company sales

   

100.0

%

   

100.0

%

           

Food and paper

   

29.4

     

29.7

     

0.3

ppts.

   

Payroll and employee benefits

   

26.4

     

26.1

     

(0.3)

ppts.

   

Occupancy and other operating expenses

   

29.9

     

33.7

     

3.8

ppts.

   

Restaurant margin

   

14.3

%

   

10.5

%

   

3.8

ppts.

   

Operating margin

   

9.2

%

   

6.0

%

   

3.2

ppts.

   
 

Percentages may not recompute due to rounding.

 

 

Yum China Holdings, Inc.

Condensed Consolidated Balance Sheets

(in US$ million)

 
   

3/31/2019

   

12/31/2018

 
   

(Unaudited)

         

ASSETS

               

Current Assets

               

Cash and cash equivalents

 

$

1,247

   

$

1,266

 

Short-term investments

   

284

     

122

 

Accounts receivable, net

   

77

     

80

 

Inventories, net

   

280

     

307

 

Prepaid expenses and other current assets

   

179

     

177

 

Total Current Assets

   

2,067

     

1,952

 

Property, plant and equipment, net

   

1,620

     

1,615

 

Operating lease right-of-use assets

   

2,016

     

 

Goodwill

   

273

     

266

 

Intangible assets, net

   

111

     

116

 

Deferred income taxes

   

104

     

89

 

Investments in unconsolidated affiliates

   

44

     

81

 

Other assets

   

527

     

491

 

Total Assets

   

6,762

     

4,610

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

               

Current Liabilities

               

Accounts payable and other current liabilities

   

1,507

     

1,199

 

Income taxes payable

   

80

     

54

 

Total Current Liabilities

   

1,587

     

1,253

 

Non-current operating lease liabilities

   

1,869

     

 

Capital lease obligations

   

23

     

25

 

Other liabilities

   

220

     

355

 

Total Liabilities

   

3,699

     

1,633

 

Redeemable Noncontrolling Interest

   

1

     

1

 

Equity

               

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

  394 million shares and 392 million shares issued at March 31, 2019 and December 31,

  2018, respectively; 379 million shares and 379 million shares outstanding at March 31,

  2019 and December 31, 2018, respectively

   

4

     

4

 

Treasury stock

   

(525)

     

(460)

 

Additional paid-in capital

   

2,408

     

2,402

 

Retained earnings

   

1,060

     

944

 

Accumulated other comprehensive income (loss)

   

39

     

(17)

 

Total Equity – Yum China Holdings, Inc.

   

2,986

     

2,873

 

Noncontrolling interests

   

76

     

103

 

Total Equity

   

3,062

     

2,976

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

6,762

   

$

4,610

 
                 

 

 

Yum China Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in US$ million)

(unaudited)

 
   

Quarter Ended

   

3/31/2019

 

3/31/2018

Cash Flows – Operating Activities

                   

Net income – including noncontrolling interests

 

$

229

     

$

296

   

Depreciation and amortization

   

111

       

118

   

Amortization of operating lease right-of-use assets

   

83

       

   

Closures and impairment expenses (income)

   

11

       

(1)

   

Gain from re-measurement of equity interest upon acquisition

   

       

(98)

   

Investment gain

   

(10)

       

   

Equity income from investments in unconsolidated affiliates

   

(23)

       

(23)

   

Distributions of income received from unconsolidated affiliates

   

28

       

36

   

Deferred income taxes

   

6

       

23

   

Share-based compensation expense

   

6

       

6

   

Changes in accounts receivable

   

5

       

11

   

Changes in inventories

   

34

       

48

   

Changes in prepaid expenses and other current assets

   

(3)

       

(7)

   

Changes in accounts payable and other current liabilities

   

(39)

       

85

   

Changes in income taxes payable

   

24

       

63

   

Changes in non-current operating lease liabilities

   

(103)

       

   

Other, net

   

(15)

       

(6)

   

Net Cash Provided by Operating Activities

   

344

       

551

   

Cash Flows – Investing Activities

                   

Capital spending

   

(110)

       

(111)

   

Purchases of short-term investments

   

(235)

       

(160)

   

Maturities of short-term investments

   

76

       

93

   

Acquisition of business, net of cash acquired

   

       

(88)

   

Other, net

   

2

       

(1)

   

Net Cash Used in Investing Activities

   

(267)

       

(267)

   

Cash Flows – Financing Activities

                   

Repayment of short-term borrowings assumed from acquisition

   

       

(10)

   

Repurchase of shares of common stock

   

(68)

       

   

Cash dividends paid on common stock

   

(46)

       

(39)

   

Other, net

   

1

       

(2)

   

Net Cash Used in Financing Activities

   

(113)

       

(51)

   

Effect of Exchange Rates on Cash and Cash Equivalents

   

17

       

26

   

Net (Decrease) Increase in Cash and Cash Equivalents

   

(19)

       

259

   

Cash and Cash Equivalents - Beginning of Period

   

1,266

       

1,059

   

Cash and Cash Equivalents - End of Period

 

$

1,247

     

$

1,318

   

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 in the Condensed 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.
  • 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.

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

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 Net Income, Adjusted EPS, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, depreciation, amortization and other items, including store impairment charges and Special Items. The Special Item for the quarter ended March 31, 2019 represents impact from the US Tax Cuts and Jobs Act (the "Tax Act") , as described in the accompanying notes. The Special Item for the quarter ended March 31, 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, net, investment gain or loss, 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 their 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 Condensed Consolidated Statements of Income and other information presented herein. A reconciliation of the most directly comparable GAAP measures to adjusted measures follows.

   

Quarter Ended

   
   

3/31/2019

   

3/31/2018

   

Detail of Special Items

                 
                   

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

 

$

   

$

98

   

Special Items, Operating Profit

   

     

98

   

Tax effect on Special Items(c)

   

     

(24)

   

Impact from the Tax Act(d)

   

(8)

     

   

Special Items, net income – including noncontrolling interests

   

(8)

     

74

   

Special Items, net income – noncontrolling interests

   

     

   

Special Items, Net Income –Yum China Holdings, Inc.

 

$

(8)

   

$

74

   

Weighted Average Diluted Shares Outstanding

   

388

     

401

   

Special Items, Diluted Earnings Per Common Share

 

$

(0.02)

   

$

0.19

   

Reconciliation of Operating Profit to Adjusted Operating Profit

                 

Operating Profit

 

$

303

   

$

395

   

Special Items, Operating Profit

   

     

98

   

Adjusted Operating Profit

 

$

303

   

$

297

   

Reconciliation of Net Income to Adjusted Net Income

                 

Net Income – Yum China Holdings, Inc.

 

$

222

   

$

288

   

Special Items, Net Income –Yum China Holdings, Inc.

   

(8)

     

74

   

Adjusted Net Income – Yum China Holdings, Inc.

 

$

230

   

$

214

   

Reconciliation of EPS to Adjusted EPS

                 

Basic Earnings Per Common Share

 

$

0.59

   

$

0.75

   

Special Items, Basic Earnings Per Common Share

   

(0.02)

     

0.20

   

Adjusted Basic Earnings Per Common Share

 

$

0.61

   

$

0.55

   

Diluted Earnings Per Common Share

 

$

0.57

   

$

0.72

   

Special Items, Diluted Earnings Per Common Share

   

(0.02)

     

0.19

   

Adjusted Diluted Earnings Per Common Share

 

$

0.59

   

$

0.53

   

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

                 

Effective tax rate

   

28.9

%

   

26.6

%

 

Impact on effective tax rate as a result of Special Items

   

2.4

%

   

(0.5)

%

 

Adjusted effective tax rate

   

26.5

%

   

27.1

%

 

 

 

Reconciliation of Net Income  to Adjusted EBITDA

(in US$ million)

(unaudited)

 

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

   

Quarter Ended

   
   

3/31/2019

   

3/31/2018

   

Reconciliation of Net Income to Adjusted EBITDA

                 

Net Income – Yum China Holdings, Inc.

 

$

222

   

$

288

   

Net income – noncontrolling interests

   

7

     

8

   

Income tax provision

   

93

     

107

   

Interest income, net

   

(9)

     

(8)

   

Investment gain

   

(10)

     

   

Operating Profit

   

303

     

395

   

Special Items, Operating Profit

   

     

(98)

   

Adjusted Operating Profit

   

303

     

297

   

Depreciation and amortization

   

111

     

118

   

Store impairment charges

   

14

     

2

   

Adjusted EBITDA

 

$

428

   

$

417

   

 

 

Unit Count by Brand

 

KFC

 
   

12/31/2018

   

New Builds

   

Closures

   

Refranchised

   

3/31/2019

 

Company-owned

   

4,597

     

153

     

(17)

     

(1)

     

4,732

 

Unconsolidated affiliates

   

811

     

27

     

(4)

     

     

834

 

Franchise

   

502

     

11

     

(2)

     

1

     

512

 

Total

   

5,910

     

191

     

(23)

     

     

6,078

 
 

Pizza Hut

 
   

12/31/2018

   

New Builds

   

Closures

   

Refranchised

   

3/31/2019

 

Company-owned

   

2,188

     

33

     

(24)

     

(7)

     

2,190

 

Franchise

   

52

     

1

     

(1)

     

7

     

59

 

Total

   

2,240

     

34

     

(25)

     

     

2,249

 
 

Others

 
   

12/31/2018

   

New Builds

   

Closures

   

Refranchised

   

3/31/2019

 

Company-owned

   

47

     

6

     

(1)

     

     

52

 

Franchise

   

287

     

6

     

(19)

     

     

274

 

Total

   

334

     

12

     

(20)

     

     

326

 

 

 

Yum China Holdings, Inc.

Segment Results

(in US$ million)

(unaudited)

 

Quarter Ended 3/31/2019

 

KFC

   

Pizza Hut

   

All Other
Segments(1)

   

Corporate

and

Unallocated(2)

   

Elimination

   

Total

 

Company sales

 

$

1,539

   

$

541

   

$

9

   

$

   

$

   

$

2,089

 

Franchise fees and income

   

36

     

1

     

2

     

     

     

39

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

17

     

1

     

7

     

145

     

     

170

 

Other revenues

   

     

     

14

     

1

     

(9)

     

6

 

Total revenues

 

$

1,592

   

$

543

   

$

32

   

$

146

   

$

(9)

   

$

2,304

 

Company restaurant expenses

   

1,230

     

464

     

10

     

     

(1)

     

1,703

 

General and administrative expenses

   

49

     

24

     

8

     

33

     

     

114

 

Franchise expenses

   

19

     

1

     

     

     

     

20

 

Expenses for transactions with

  franchisees and unconsolidated affiliates

   

17

     

1

     

6

     

143

     

     

167

 

Other operating costs and expenses

   

     

     

12

     

1

     

(8)

     

5

 

Closures and impairment expenses, net

   

7

     

3

     

1

     

     

     

11

 

Other income, net

   

(18)

     

     

     

(1)

     

     

(19)

 

Total costs and expenses, net

   

1,304

     

493

     

37

     

176

     

(9)

     

2,001

 

Operating Profit (Loss)

 

$

288

   

$

50

   

$

(5)

   

$

(30)

   

$

   

$

303

 
 
 

Quarter Ended 3/31/2018

 

KFC

   

Pizza Hut

   

All Other
Segments(1)

   

Corporate

and

Unallocated(2)

   

Elimination

   

Total

 

Company sales

 

$

1,444

   

$

564

   

$

8

   

$

   

$

   

$

2,016

 

Franchise fees and income

   

37

     

1

     

2

     

     

     

40

 

Revenues from transactions with

   franchisees and unconsolidated affiliates

   

17

     

     

7

     

137

     

     

161

 

Other revenues

   

     

     

4

     

1

     

(1)

     

4

 

Total revenues

 

$

1,498

   

$

565

   

$

21

   

$

138

   

$

(1)

   

$

2,221

 

Company restaurant expenses

   

1,143

     

504

     

8

     

     

     

1,655

 

General and administrative expenses

   

46

     

28

     

7

     

33

     

     

114

 

Franchise expenses

   

19

     

1

     

     

     

     

20

 

Expenses for transactions with

  franchisees and unconsolidated affiliates

   

17

     

     

6

     

137

     

     

160

 

Other operating costs and expenses

   

     

     

4

     

1

     

(1)

     

4

 

Closures and impairment income, net

   

     

(1)

     

     

     

     

(1)

 

Other income, net

   

(23)

     

(1)

     

     

(102)

     

     

(126)

 

Total costs and expenses, net

   

1,202

     

531

     

25

     

69

     

(1)

     

1,826

 

Operating Profit (Loss)

 

$

296

   

$

34

   

$

(4)

   

$

69

   

$

   

$

395

 

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

(1)     Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company's chief operating decision maker. Accordingly, our six non-reportable operating segments, including the operations of East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior quarters has been recast to align with this change in segment reporting. There was no impact on the condensed consolidated financial statements of the Company as a result of this change.

(2)     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 Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets,
Condensed Consolidated Statements of Cash Flows and Reconciliation of Reported GAAP Results to Adjusted Measures
(in US$ million)
(unaudited)

(a)      Amounts presented as of and for the quarter ended March 31, 2019 and March 31, 2018 are unaudited.

(b)      As a result of the acquisition of Wuxi KFC in the first quarter of 2018, 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.

(d)      We completed the evaluation of the impact on our transition tax computation based on the final regulations released by the US Treasury Department and the IRS in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly.

Cision View original content:http://www.prnewswire.com/news-releases/yum-china-reports-first-quarter-2019-results-300839636.html

SOURCE Yum China Holdings, Inc.