SEC Filing | Yum China Holdings, Inc.

YUM CHINA HOLDINGS, INC.

/s/ Shella Ng

Chief Legal Officer and Corporate Secretary

Date: August 1, 2018

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yumc-8k_20180801.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): August 1, 2018

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

001-37762

81-2421743

(State or other jurisdiction of

incorporation or organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

7100 Corporate Drive

Plano, Texas 75024

United States of America

Yum China Building

20 Tian Yao Qiao Road

Shanghai 200030

People’s Republic of China

(Address, including zip code, of principal executive offices)

(469) 980-2898

(Registrant's telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 2.02.

Results of Operations and Financial Condition.

On August 1, 2018, Yum China Holdings, Inc. issued a press release announcing its unaudited results for the quarter ended June 30, 2018. A copy of the press release is being furnished as Exhibit 99.1 to this Current Report on Form 8-K.

Item 9.01.

Financial Statements and Exhibits.

(d) Exhibits.

The following exhibits are furnished with this report:

Exhibit No.		Exhibit Description

99.1		Press Release of Yum China Holdings, Inc. issued August 1, 2018.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

yumc-ex991_6.htm

Exhibit 99.1

Yum China Reports Second Quarter 2018 Results

Shanghai, China (August 2, 2018) – 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.

Yum China Holdings, Inc. • Shanghai, China • Website http://ir.yumchina.com

Key Financial Results

Second Quarter 2018

Year to Date Ended 6/30/2018

% Change

System

Sales

Same-Store

Sales

Net New Units

Operating

Profit

System

Sales

Same-Store

Sales

Net New Units

Operating

Profit

Yum China

(1)

+13

+26

KFC

+10

+16

Pizza Hut

(1)

(4)

(49)

(1)

(5)

(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)

¹See “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
	Second Quarter 2018	Year to Date Ended 6/30/2018		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.