Yum China Reports Second Quarter 2019 Results

Author: Yum China Holdings, Inc. / 2023-07-23 21:10 / Source: Yum China Holdings, Inc.

Yum China Reports Second Quarter 2019 Results

SHANGHAI,July 31,2019 -- Yum China Holdings,Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the second quarter ended June 30,2019. Reported GAAPresults include Special Items,which are excluded from adjustedmeasures.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 AdjustedMeasures" within this release.

Second Quarter Highlights

Total revenues increased 3% year over year to $2.12 billion from $2.07 billion (10% year over year increase excluding foreign currency translation ("F/X")).

Total system sales grew 10% year over year,with growth of 12% at KFC and 4% at Pizza Hut,excluding F/X.

Same-store sales grew 4% year over year,with a 5% increase at KFC and a 1% increase at Pizza Hut,excluding F/X.

Restaurant margin was 14.7%,as compared with 15.1% in the prior year period.

Operating Profit increased 6% year over year to $204 million from $193 million (14% year over year increase excluding F/X).

Effective tax rate was 20.0%.

Net Income increased 24% to $178 million from $143 million in the prior year period,primarily due to the increase in operating profit and mark to market gain from our equity investment in Meituan Dianping.

Diluted EPS increased 28% to $0.46 from $0.36 in the prior year period (14% year over year increase excluding the $0.04 per share mark to market gain from our equity investment in Meituan Dianping).

Opened 178 new restaurants during the quarter,bringing total store count to 8,751 across more than 1,300 cities.

Key Financial Results

Second Quarter 2019

Year to Date Ended 6/30/2019

% Change

System Sales

Same-Store

Sales

Net New

Units

Operating

Profit

System Sales

Same-Store

Sales

Net New

Units

Operating

Profit

Yum China

+10

(14)

KFC

+12

(1)

Pizza Hut

+50

+49

Second Quarter

Year to Date Ended 6/30

(in US$ million,except

% Change

per share data and percentages)

2019

2018

Reported

Ex F/X

2019

2018

Reported

Ex F/X

Operating Profit

204

193

+14

507

588

(14)

(8)

Adjusted Operating Profit[1]

204

193

+14

507

490

+11

Net Income

178

143

+24

+33

400

431

(7)

(1)

Adjusted Net Income[1]

178

143

+24

+33

408

357

+14

+22

Basic Earnings Per Common Share

0.47

0.37

+27

+35

1.06

1.12

(5)

Adjusted Basic Earnings Per

Common Share[1]

0.47

0.37

+27

+35

1.08

0.93

+16

+24

Diluted Earnings Per Common Share

0.46

0.36

+28

+36

1.03

1.08

(5)

Adjusted Diluted Earnings Per

Common Share[1]

0.46

0.36

+28

+36

1.05

0.89

+18

+26

[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 another set of strong operating results for the second quarter,reflecting the resilience of our business model and our ability to capitalize on our digital,data and delivery capabilities," said Joey Wat,CEO of Yum China. "We delivered a 10% increase in system sales in constant currency,marking our eleventh consecutive quarter of system sales growth since the spin-off. This strong result was driven by solid second quarter sales performance at both core brands with KFC and Pizza Hut delivering 5% and 1% same-store sales growth,respectively,and an ongoing acceleration of new store openings at KFC. We are also pleased to have delivered a 14% increase in operating profit in constant currency despite margin pressure from ongoing promotions and chicken and wage inflation."

"Looking forward,we expect overall sales growth to moderate as KFC begins to lap several key sales drivers,including successful value campaigns that we initiated in the second half of 2018. However,we remain confident that our strong foundation and commitment to innovation throughout our business will power continued growth for Yum China. We will continue to create new and exciting menu items,and leverage our leadership in digital,data and delivery to meet the evolving needs of our consumers."

Jacky Lo,CFO of Yum China,added,"We continued to capitalize on market opportunities across China with aggressive,KFC-led store expansion and achieved a total store count of 8,751 at the end of the second quarter. With a strong cash payback period for new KFC stores and many untapped opportunities,we intend to continue to rapidly expand our store footprint in the second half of the year. We now expect full year 2019 gross new store openings to be between 800 and 850 units with accelerating development of new units across multiple brands."

"The ongoing expansion and strong operating performance fueled robust free cash flow generation in the second quarter,enabling us to return capital to our shareholders by repurchasing $75 million of shares and paying $45 million in dividends during the period. We are confident that our focus on profitable and sustainable growth will enable us to continue to generate significant value for our shareholders over the long term."

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 September 17,2019 to stockholders of record as of the close of business on August 27,2019.

During the second quarter,we repurchased approximately 1.8 million shares of Yum China common stock for $74.9 million at an average price of $42.60 per share.

Digital and Delivery

As of June 30,2019,the KFC loyalty program had over 185 million members and the Pizza Hut loyalty program had over 60 million members,an increase of 50 million and 15 million,year over year.

Digital payments accounted for 90% of Company sales in the quarter,an increase of 5 percentage points year over year.

Delivery contributed to 20% of Company sales in the second quarter of 2019,an increase of 4 percentage points year over year. Delivery services are now available in 1,190 cities,up from 1,010 cities in the prior year period.

New-Unit Development and Asset Upgrade

The Company opened 178 new restaurants and remodeled 238 restaurants in the second quarter of 2019.

New Units

Restaurant Count

Second Quarter

Year to Date

As of 6/30

2019

Ended 6/30/2019

2019

2018

Yum China

178

415

8,751

8,198

KFC

136

327

6,179

5,696

Pizza Hut

2,252

2,209

Others[2]

320

293

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

Restaurant Margin

Inthe second quarter of 2019,Yum China restaurant margin was 14.7%,as compared with 15.1% in the prior year period,primarily attributable to wage and commodity inflation and promotional activities,partially offset by sales leverage and other cost savings.

Second Quarter

Year to Date Ended 6/30

2019

2018

% pts change

2019

2018

% pts change

Yum China

14.7%

15.1%

(0.4)

16.7%

16.6%

+0.1

KFC

16.1%

16.8%

(0.7)

18.1%

18.9%

(0.8)

Pizza Hut

11.3%

11.1%

0.2

12.9%

10.8%

+2.1

2019 Outlook

The Company is updating its fiscal year 2019 targets as follows:

-Between 800 and 850 gross new units. The increased store count reflects the accelerating development of multiple brands with the majority of the incremental new units coming from KFC and the new inclusion of COFFii & JOY.

- Capital expenditures between $475 million and $525 million.

The Company continues to expect a fiscal year 2019 effective tax rate below 28%,excluding any impact from the Company's equity investment in Meituan Dianping.

Conference Call

Yum China's management will hold an earnings conference call at 8:00 p.m. U.S. Eastern Time on Tuesday,July 30,2019 (8:00 a.m. Beijing/Hong Kong Time on Wednesday,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 10:00 a.m. U.S. Eastern Time on Wednesday,August 7,2019 (10:00 p.m. Beijing/Hong Kong Time on Wednesday,2019) and may be accessed by phone at the following numbers:

US:

+1 855 452 5696

International:

+61 2 9003 4211

Passcode:

9567775

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,including under "2019 Outlook." 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,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 8,700 restaurants in over 1,300 cities at the end of June 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

Year to Date Ended

% Change

6/30/2019

6/30/2018

B/(W)

6/30/2019

6/30/2018

B/(W)

Revenues

Company sales

1,926

1,888

4,015

3,904

Franchise fees and income

Revenues from transactions with

franchisees and unconsolidated affiliates

154

141

324

302

Other revenues

Total revenues

2,124

2,068

4,428

4,289

Costs and Expenses,Net

Company restaurants

Food and paper

607

571

(6)

1,245

1,165

(7)

Payroll and employee benefits

450

424

(6)

916

866

(6)

Occupancy and other operating expenses

586

607

1,185

1,226

Company restaurant expenses

1,643

1,602

(3)

3,346

3,257

(3)

General and administrative expenses

109

101

(9)

223

215

(4)

Franchise expenses

Expenses for transactions with

franchisees and unconsolidated affiliates

154

138

(11)

321

298

(8)

Other operating costs and expenses

(1)

Closures and impairment expenses,net

Other income,net

(12)

(7)

(31)

(133)

(77)

Total costs and expenses,net

1,920

1,875

(2)

3,921

3,701

(6)

Operating Profit

204

193

507

588

(14)

Interest income,net

(8)

Investment gain

—

Income Before Income Taxes

231

203

553

606

(9)

Income tax provision

(46)

(53)

(139)

(160)

Net income – including noncontrolling interests

185

150

414

446

(7)

Net income – noncontrolling interests

—

Net Income – Yum China Holdings,Inc.

178

143

400

431

(7)

Effective tax rate

20.0

26.0

6.0

ppts.

25.2

26.4

1.2

ppts.

Basic Earnings Per Common Share

0.47

0.37

1.06

1.12

Weighted average shares outstanding

(in millions)

378

386

378

386

Diluted Earnings Per Common Share

0.46

0.36

1.03

1.08

Weighted average shares outstanding

(in millions)

389

398

389

400

Cash Dividends Declared Per Common Share

0.12

0.10

0.24

0.20

Company sales

100.0

Food and paper

31.5

30.3

(1.2)

ppts.

31.0

29.8

(1.2)

ppts.

Payroll and employee benefits

23.4

22.5

(0.9)

ppts.

22.8

22.2

(0.6)

ppts.

Occupancy and other operating expenses

30.4

32.1

1.7

ppts.

29.5

31.4

1.9

ppts.

Restaurant margin

14.7

15.1

(0.4)

ppts.

16.7

16.6

0.1

ppts.

Operating margin

10.6

10.2

0.4

ppts.

12.6

15.1

(2.5)

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings,Inc.

KFC Operating Results

(in US$ million)

(unaudited)

Quarter Ended

% Change

Year to Date Ended

% Change

6/30/2019

6/30/2018

B/(W)

6/30/2019

6/30/2018

B/(W)

Revenues

Company sales

1,410

1,352

2,949

2,796

Franchise fees and income

—

Revenues from transactions with

franchisees and unconsolidated affiliates

Total revenues

1,458

1,400

3,050

2,898

Costs and Expenses,Net

Company restaurants

Food and paper

450

413

(9)

926

837

(11)

Payroll and employee benefits

311

289

(7)

631

582

(8)

Occupancy and other operating expenses

424

423

—

858

849

(1)

Company restaurant expenses

1,125

(5)

2,415

2,268

(6)

General and administrative expenses

(11)

(8)

Franchise expenses

Expenses for transactions with

franchisees and unconsolidated affiliates

(1)

—

Closures and impairment expenses,net

—

(23)

Other income,net

(12)

(7)

(30)

(4)

Total costs and expenses,253

1,201

(4)

2,557

2,403

(7)

Operating Profit

205

199

493

495

(1)

Company sales

100.0

Food and paper

31.9

30.5

(1.4)

ppts.

31.4

29.9

(1.5)

ppts.

Payroll and employee benefits

22.0

21.4

(0.6)

ppts.

21.4

20.8

(0.6)

ppts.

Occupancy and other operating expenses

30.0

31.3

1.3

ppts.

29.1

30.4

1.3

ppts.

Restaurant margin

16.1

16.8

(0.7)

ppts.

18.1

18.9

(0.8)

ppts.

Operating margin

14.5

14.7

(0.2)

ppts.

16.7

17.7

(1.0)

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings,Inc.

Pizza Hut Operating Results

(in US$ million)

(unaudited)

Quarter Ended

% Change

Year to Date Ended

% Change

6/30/2019

6/30/2018

B/(W)

6/30/2019

6/30/2018

B/(W)

Revenues

Company sales

507

528

(4)

1,048

1,092

(4)

Franchise fees and income

—

Revenues from transactions with

franchisees and unconsolidated affiliates

—

Other revenues

—

Total revenues

510

528

(4)

1,053

1,093

(4)

Costs and Expenses,Net

Company restaurants

Food and paper

155

156

—

314

323

Payroll and employee benefits

137

133

(3)

280

—

Occupancy and other operating expenses

157

182

319

372

Company restaurant expenses

449

471

913

975

General and administrative expenses

Franchise expenses

—

(21)

Expenses for transactions with

franchisees and unconsolidated affiliates

—

Other operating costs and expenses

—

Closures and impairment expenses,net

Other income,net

—

(1)

(93)

—

(2)

Total costs and expenses,net

481

509

974

1,040

Operating Profit

Company sales

100.0

Food and paper

30.7

29.5

(1.2)

ppts.

30.0

29.6

(0.4)

ppts.

Payroll and employee benefits

27.0

25.2

(1.8)

ppts.

26.7

25.7

(1.0)

ppts.

Occupancy and other operating expenses

31.0

34.2

3.2

ppts.

30.4

33.9

3.5

ppts.

Restaurant margin

11.3

11.1

0.2

ppts.

12.9

10.8

2.1

ppts.

Operating margin

5.8

3.7

2.1

ppts.

7.6

4.9

2.7

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings,Inc.

Condensed Consolidated Balance Sheets

(in US$ million)

6/30/2019

12/31/2018

(Unaudited)

ASSETS

Current Assets

Cash and cash equivalents

1,296

1,266

Short-term investments

284

122

Accounts receivable,net

Inventories,net

309

307

Prepaid expenses and other current assets

163

177

Total Current Assets

2,137

1,952

Property,plant and equipment,571

1,615

Operating lease right-of-use assets

1,954

—

Goodwill

266

Intangible assets,net

105

116

Deferred income taxes

Investments in unconsolidated affiliates

Other assets

535

491

Total Assets

6,725

4,610

LIABILITIES,REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

Current Liabilities

Accounts payable and other current liabilities

1,569

1,199

Income taxes payable

Total Current Liabilities

1,626

1,253

Non-current operating lease liabilities

1,795

—

Capital lease obligations

Other liabilities

201

355

Total Liabilities

3,646

1,633

Redeemable Noncontrolling Interest

Equity

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

394 million shares and 392 million shares issued at June 30,2019 and December 31,

2018,respectively; 377 million shares and 379 million shares outstanding at June 30,

2019 and December 31,2018,respectively

Treasury stock

(600)

(460)

Additional paid-in capital

2,417

2,402

Retained earnings

1,193

944

Accumulated other comprehensive loss

(17)

Total Equity – Yum China Holdings,Inc.

2,997

2,873

Noncontrolling interests

103

Total Equity

3,078

2,976

Total Liabilities,Redeemable Noncontrolling Interest and Equity

6,725

4,610

Yum China Holdings,Inc.

Condensed Consolidated Statements of Cash Flows

(in US$ million)

(unaudited)

Year to Date Ended

6/30/2019

6/30/2018

Cash Flows – Operating Activities

Net income – including noncontrolling interests

414

446

Depreciation and amortization

217

235

Amortization of operating lease right-of-use assets

167

—

Closures and impairment expenses

Gain from re-measurement of equity interest upon acquisition

—

(98)

Investment gain

(27)

—

Equity income from investments in unconsolidated affiliates

(37)

(35)

Distributions of income received from unconsolidated affiliates

Deferred income taxes

Share-based compensation expense

Changes in accounts receivable

(5)

(2)

Changes in inventories

(1)

Changes in prepaid expenses and other current assets

—

(28)

Changes in accounts payable and other current liabilities

182

Changes in income taxes payable

Changes in non-current operating lease liabilities

(188)

—

Other,net

(30)

(31)

Net Cash Provided by Operating Activities

657

819

Cash Flows – Investing Activities

Capital spending

(212)

(230)

Purchases of short-term investments

(409)

(370)

Maturities of short-term investments

248

295

Acquisition of business,net of cash acquired

—

(88)

Other,net

(13)

Net Cash Used in Investing Activities

(368)

(406)

Cash Flows – Financing Activities

Repayment of short-term borrowings assumed from acquisition

—

(10)

Repurchase of shares of common stock

(143)

(70)

Cash dividends paid on common stock

(91)

(77)

Dividends paid to noncontrolling interests

(25)

(27)

Other,net

—

(2)

Net Cash Used in Financing Activities

(259)

(186)

Effect of Exchange Rates on Cash and Cash Equivalents

—

(25)

Net Increase in Cash and Cash Equivalents

202

Cash and Cash Equivalents - Beginning of Period

1,266

1,059

Cash and Cash Equivalents - End of Period

1,261

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,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 millions,except 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 year to date ended June 30,2019 represents the impact from the US Tax Cuts and Jobs Act (the "Tax Act"),as described in the accompanying notes. 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,including store impairment charges and Special Items. 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

Year to Date Ended

6/30/2019

6/30/2018

6/30/2019

6/30/2018

Detail of Special Items

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

—

Special Items,Operating Profit

—

Tax effect on Special Items(c)

—

(24)

Impact from the Tax Act(d)

—

(8)

—

Special Items,net income – including noncontrolling interests

—

(8)

Special Items,net income – noncontrolling interests

—

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

—

(8)

Weighted Average Diluted Shares Outstanding

389

398

389

400

Special Items,Diluted Earnings Per Common Share

—

(0.02)

0.19

Reconciliation of Operating Profit to Adjusted Operating Profit

Operating Profit

204

193

507

588

Special Items,Operating Profit

—

Adjusted Operating Profit

204

193

507

490

Reconciliation of Net Income to Adjusted Net Income

Net Income – Yum China Holdings,Inc.

178

143

400

431

Special Items,Inc.

—

(8)

Adjusted Net Income – Yum China Holdings,Inc.

178

143

408

357

Reconciliation of EPS to Adjusted EPS

Basic Earnings Per Common Share

0.47

0.37

1.06

1.12

Special Items,Basic Earnings Per Common Share

—

(0.02)

0.19

Adjusted Basic Earnings Per Common Share

0.47

0.37

1.08

0.93

Diluted Earnings Per Common Share

0.46

0.36

1.03

1.08

Special Items,Diluted Earnings Per Common Share

—

(0.02)

0.19

Adjusted Diluted Earnings Per Common Share

0.46

0.36

1.05

0.89

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

Effective tax rate

20.0

26.0

25.2

26.4

Impact on effective tax rate as a result of Special Items

—

1.4

(0.2)

Adjusted effective tax rate

20.0

26.0

23.8

26.6

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 quarters and years to date ended June 30,2019 and 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.

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

Year to Date Ended

6/30/2019

6/30/2018

6/30/2019

6/30/2018

Reconciliation of Net Income to Adjusted EBITDA

Net Income – Yum China Holdings,Inc.

178

143

400

431

Net income – noncontrolling interests

Income tax provision

139

160

Interest income,net

(10)

(19)

(18)

Investment gain

(17)

—

(27)

—

Operating Profit

204

193

507

588

Special Items,Operating Profit

—

(98)

Adjusted Operating Profit

204

193

507

490

Depreciation and amortization

106

117

217

235

Store impairment charges

Adjusted EBITDA

321

329

749

746

Unit Count by Brand

KFC

12/31/2018

NewBuilds

Closures

Refranchised

6/30/2019

Company-owned

4,597

258

(42)

(2)

4,811

Unconsolidated affiliates

811

(9)

853

Franchisees

502

(7)

515

Total

5,910

327

(58)

—

6,179

Pizza Hut

12/31/2018

NewBuilds

Closures

Refranchised

6/30/2019

Company-owned

2,188

(47)

(16)

2,178

Franchisees

(1)

Total

2,240

(48)

—

2,252

Others

12/31/2018

NewBuilds

Closures

Refranchised

6/30/2019

Company-owned

(2)

—

Franchisees

287

(40)

—

260

Total

334

(42)

—

320

Yum China Holdings,Inc.

Segment Results

(in US$ million)

(unaudited)

Quarter Ended 6/30/2019

KFC

Pizza Hut

All Other

Segments(1)

Corporate

and

Unallocated(2)

Elimination

Total

Company sales

1,410

507

—

1,926

Franchise fees and income

—

Revenues from transactions with

133

—

154

franchisees and unconsolidated affiliates

Other revenues

—

(10)

Total revenues

1,458

510

134

(10)

2,124

Company restaurant expenses

1,185

449

—

1,643

General and administrative expenses

—

109

Franchise expenses

—

Expenses for transactions with

133

—

154

franchisees and unconsolidated affiliates

Other operating costs and expenses

—

(10)

Closures and impairment expenses,net

—

Other income,net

(12)

—

(12)

Total costs and expenses,253

481

159

(10)

1,920

Operating Profit (Loss)

205

(5)

(25)

—

204

Quarter Ended 6/30/2018

KFC

Pizza Hut

All Other

Segments(1)

Corporate

and

Unallocated(2)

Elimination

Total

Company sales

1,352

528

—

1,888

Franchise fees and income

—

Revenues from transactions with

—

122

—

141

franchisees and unconsolidated affiliates

Other revenues

—

(2)

Total revenues

1,400

528

122

(2)

2,068

Company restaurant expenses

1,125

471

—

(2)

1,602

General and administrative expenses

—

101

Franchise expenses

—

Expenses for transactions with

—

120

—

138

franchisees and unconsolidated affiliates

Other operating costs and expenses

—

Closures and impairment income,net

—

Other income,net

(7)

(1)

—

(7)

Total costs and expenses,201

509

141

(2)

1,875

Operating Profit (Loss)

199

(6)

(19)

—

193

Year to Date Ended 6/30/2019

KFC

Pizza Hut

All Other

Segments(1)

Corporate

and

Unallocated(2)

Elimination

Total

Company sales

2,949

1,048

—

4,015

Franchise fees and income

—

Revenues from transactions with

278

—

324

franchisees and unconsolidated affiliates

Other revenues

—

(19)

Total revenues

3,050

1,053

280

(19)

4,428

Company restaurant expenses

2,415

913

—

(1)

3,346

General and administrative expenses

—

223

Franchise expenses

—

Expenses for transactions with

276

—

321

franchisees and unconsolidated affiliates

Other operating costs and expenses

—

(18)

Closures and impairment expenses,net

—

Other income,net

(30)

—

(31)

Total costs and expenses,net

2,557

974

335

(19)

3,921

Operating Profit (Loss)

493

(10)

(55)

—

507

Year to Date Ended 6/30/2018

KFC

Pizza Hut

All Other

Segments(1)

Corporate

and

Unallocated(2)

Elimination

Total

Company sales

2,796

1,092

—

3,904

Franchise fees and income

—

Revenues from transactions with

—

259

—

302

franchisees and unconsolidated affiliates

Other revenues

—

(3)

Total revenues

2,898

1,093

260

(3)

4,289

Company restaurant expenses

2,268

975

—

(2)

3,257

General and administrative expenses

—

215

Franchise expenses

—

Expenses for transactions with

—

257

—

298

franchisees and unconsolidated affiliates

Other operating costs and expenses

—

(1)

Closures and impairment income,net

—

Other income,net

(30)

(2)

(1)

(100)

—

(133)

Total costs and expenses,403

1,040

210

(3)

3,701

Operating Profit (Loss)

495

(10)

—

588

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,reflecting the operations of East Dawning,Little Sheep,Taco Bell,Daojia,COFFii & JOY and our 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".