Yum China Reports Second Quarter 2020 Results
SHANGHAI,July 30,2020 -- Yum China Holdings,Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the secondquarter ended June 30,2020.
Impact of COVID-19 Outbreak and Mitigation Efforts
Second quarter operations improved since the COVID-19 outbreak. More than 99% of stores in China are now open,with sales and profits trending unevenly. Sales improved sequentially in April and May but softened in June. Sales were primarily impacted by significantly reduced traffic at transportation and tourist locations,delayed and shortened school holidays and resurging regional infections. These factors and the lingering effect of COVID-19 continue to impact operations in July.
The unevenness in recovery was most pronounced in the differences between regions and trade zones. Eastern China recovered faster than other regions. Northern China's recovery was notably slower,primarily due to more stringent public health measures. Transportation and tourist locations,which accounted for high single digits of sales,continue to experience significant year over year traffic declines. The pace of recovery also varies across days of the week. Weekdays recovered the fastest as people returned to work and school,followed by weekends,with holidays lagging behind.
The Company's primary focus continues to be safety,efficiency and driving traffic. The Company drove traffic during the second quarter by leveraging its digital and operating capabilities and adapting to changing consumer demand. While dine-in improved when compared to the beginning of the COVID-19 outbreak,delivery and takeaway continued to grow year over year and contributed over half of Company sales in the second quarter. Member sales also grew double digits year over year and exceeded 60% of system sales. Digital ordering grew in popularity,accounting for approximately 80% of Company sales in the quarter.
Sales deleveraging and additional costs reduced restaurant margin and operating profit compared to the prior year period. Those negative impacts were partially offset by the realignment of our cost structure and labor productivity improvements. The Company also received one-time relief from landlords and government agencies.
Second Quarter Highlights
Results for this quarter include the consolidation of the recently acquired Huang Ji Huang operations from the date of the acquisition on April 8,2020.
Total revenues declined 11% year over year to $1.90 billion from $2.12 billion (a 7% decline excluding foreign currency translation ("F/X")).
Total system sales declined 4% year over year,with declines of 6% at KFC and 12% at Pizza Hut,excluding F/X (7% decline excluding the consolidation of Huang Ji Huang).
Same-store sales declined 11% year over year,with a 10% decline at KFC and 12% decline at Pizza Hut,excluding F/X.
Opened 169 new stores during the quarter. Including 607 Huang Ji Huang restaurants,total store count reached 9,954.
Restaurant margin was 13.7%,compared with 14.7% in the prior year period.
Operating Profit declined 38% year over year to $128 million from $204 million (35% decline excluding F/X). Adjusted Operating Profit declined 36% year over year to $132 million from $204 million (33% decline excluding F/X).
Effective tax rate was 25.2%.
Net Income declined 26% to $132 million from $178 million in the prior year period,primarily due to the decline in Operating Profit partially offset by gains from our equity investment in Meituan Dianping ("Meituan").
Adjusted Net Income declined 23% to $136 million from $178 million in the prior year period (35% decline excluding the $31 million and $17 million net gains in the second quarter of 2020 and 2019,respectively,from our equity investment in Meituan,31% decline if further excluding F/X).
Diluted EPS declined 26% to $0.34 from $0.46 in the prior year period.
Adjusted Diluted EPS declined 24% to $0.35 from $0.46 in the prior year period (34% decline excluding the gains from our equity investment in Meituan in 2020 and 2019,31% decline if further excluding F/X).
The Company sold a portion of its equity investment in Meituan during the quarter. The Company currently owns 4.2 million shares of Meituan.
Key Financial Results
Second Quarter 2020
Year to Date Ended 6/30/2020
% Change
% Change
System Sales
Same-Store Sales
Net New Units
Operating Profit
System Sales
Same-Store Sales
Net New Units
Operating Profit
Yum China
(4)
(11)
+14
(38)
(13)
(13)
+14
(56)
KFC
(6)
(10)
+9
(22)
(10)
(11)
+9
(37)
Pizza Hut
(12)
(12)
-
(48)
(25)
(22)
-
NM
Second Quarter
Year to Date Ended 6/30
(in US$ million,except
% Change
% Change
per share data and
percentages)
2020
2019
Reported
ExF/X
2020
2019
Reported
ExF/X
Operating Profit
$
128
$
204
(38)
(35)
$
225
$
507
(56)
(54)
Adjusted Operating Profit[1]
$
132
$
204
(36)
(33)
$
230
$
507
(55)
(53)
Net Income
$
132
$
178
(26)
(23)
$
194
$
400
(52)
(50)
Adjusted Net Income[1]
$
136
$
178
(23)
(20)
$
199
$
408
(51)
(49)
Basic Earnings Per
Common Share
$
0.35
$
0.47
(26)
(23)
$
0.51
$
1.06
(52)
(49)
Adjusted Basic Earnings
Per Common Share[1]
$
0.36
$
0.47
(23)
(19)
$
0.53
$
1.08
(51)
(49)
Diluted Earnings Per
Common Share
$
0.34
$
0.46
(26)
(24)
$
0.50
$
1.03
(51)
(50)
Adjusted Diluted
Earnings PerCommon Share[1]
$
0.35
$
0.46
(24)
(20)
$
0.51
$
1.05
(51)
(50)
[1] See "Reconciliation of Reported GAAP Results to non-GAAP 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. Effective January 1,2018,temporary store closures are normalized in the same-store sales calculation by excluding the period during which stores are temporarily closed.
CEO and CFO Comments
"I am proud of the results we achieved in Q2. We continue to operate in a tough environment,facing significant headwinds from reduced traffic,particularly at transportation and tourist locations,delayed and shortened school holidays and regional resurgences of COVID-19 infections. Nevertheless,we continued to operate safely,serve our communities and recover sales,and remained profitable," said Joey Wat,CEO of Yum China. "I take great pride in our employees,who are committed to serving our customers and remained responsive to the circumstances on the ground. Our business model is resilient and adaptable. We quickly adjusted our operations and marketing campaigns to meet evolving consumer preferences and market limitations. Rapid innovation,our leading digital infrastructure and our membership program supported product launches and value offers that were necessary to drive traffic. We protected margins through the flexible cost structure we have developed and optimized over the years. These,along with our other core capabilities such as supply chain and operations,make me confident in our ability to navigate the challenges ahead."
Wat continued,"Seeing this great team in action,I am optimistic about our long-term prospects. Despite the uncertainties brought about by the COVID-19 pandemic,we grew our footprint. And in July,we reached a major milestone of 10,000 stores! Our 2020 target to open 800-850 gross new stores remains unchanged. With our innovation capabilities,strong digital strategy,and resilient business model,I believe we will emerge from this pandemic stronger than ever,and ready to capture the exciting long-term market opportunity in China."
Andy Yeung,CFO of Yum China,added,"Our system sales recovered to 96% of the prior year,or 93% excluding Huang Ji Huang,in constant currency. Same-store sales also improved to 89% of the prior year,4 percentage points higher than the first quarter. We are especially encouraged by the improvement at Pizza Hut,where same-store sales recovered from 69% in the first quarter to 88% in the second quarter. At Yum China,this is achieved amid ongoing reduced traffic at transportation and tourist locations,delayed and shortened school holidays,and resurging regional infections. The recovery is non-linear and uneven with differences across regions and trade zones. These impacts,together with the lingering effects of the COVID-19 outbreak,will continue to put pressure on our sales and operations in the third quarter."
Yeung continued,"Our realigned cost structure and productivity improvements helped us achieve a $128 million operating profit and generate strong free cash flow in the quarter. However,with restaurant traffic still below pre-outbreak levels and the global pandemic still evolving,we are prudently managing our financial position. We believe our financial strength enables us to respond to contingencies and invest in our top opportunities in the future."
Dividends and Share Repurchases
As announced in the first quarter 2020 earnings release,the Company temporarily suspended its share repurchases and,through the end of the third quarter of 2020,cash dividends on the Company's common stock.
Digital and Delivery
As of June 30,2020,the KFC and Pizza Hut loyalty programs had over 265 million members. During the quarter,member sales represented approximately 65% of KFC's system sales and 53% of Pizza Hut's system sales.
Delivery contributed to approximately 27% of KFC's Company sales and 35% of Pizza Hut's Company sales in the second quarter of 2020,up from approximately 18% and 24% from the prior year period,respectively.
Digital orders,including delivery,mobile orders and kiosk orders,accounted for approximately 86% of KFC's Company sales and 61% of Pizza Hut's Company sales in the second quarter of 2020,up from approximately 62% and 29% from the prior year period,respectively.
New-Unit Development and Asset Upgrade
The Company opened 169 new stores in the second quarter 2020,mainly driven by development of the KFC brand.
The Company remodeled 310 stores in the second quarter 2020.
New Units
Restaurant Count
Second Quarter
Year to Date
As of 6/30
2020
Ended 6/30/2020
2020
2019
Yum China
169
348
9,954
8,751
KFC
142
307
6,749
6,179
Pizza Hut
8
19
2,258
2,252
Others[2]
19
22
947
320
[2] Others include Taco Bell,Little Sheep,Huang Ji Huang,East Dawning,COFFii & JOY and Lavazza.
Restaurant Margin
Restaurant margin was 13.7% in the second quarter of 2020,compared with 14.7% in the prior-year period,primarily attributable to same-store sales decline and value promotions,combined with wage and commodity inflation,partially offset by improved productivity and relief provided by landlords and government agencies.
Second Quarter
Year to Date Ended 6/30
2020
2019
ppts change
2020
2019
ppts change
Yum China
13.7%
14.7%
(1.0)
12.2%
16.7%
(4.5)
KFC
14.6%
16.1%
(1.5)
14.1%
18.1%
(4.0)
Pizza Hut
11.2%
11.3%
(0.1)
6.4%
12.9%
(6.5)
2020 Outlook
The Company is affirming the following fiscal year 2020 targets,subject to revision based on future development of the COVID-19 situation:
To open between 800 and 850 new stores (gross),excluding Huang Ji Huang
To make capital expenditures between $500 million and $550 million
The Company believes that the COVID-19 outbreak will continue to have a material and extended adverse impact on its operational and financial results in 2020. Future operations,as well as the Company's cash flows and financial position,may be materially and adversely influenced by further developments related to this global outbreak,including potential additional announcements and actions from governments and local authorities,disruption in our supply chain,our inability to provide safety measures to protect our employees,or other reasons.Nevertheless,the Company is well-positioned to capture future growth opportunities through its resilient business model,strong capabilities and dedicated team.
Note on Non-GAAP Adjusted Measures
Reported GAAPresults include Special Items,which are excluded from non-GAAP 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 Non-GAAP AdjustedMeasures" within this release.
Conference Call
Yum China's management will hold an earnings conference call at 8:00 p.m. U.S. Eastern Time on Wednesday,July 29,2020 (8:00 a.m. Beijing/Hong Kong Time on Thursday,2020).
Operator-assisted conference calls are not available at the moment. Please register in advance of the conference through the link provided below. Upon registering,you will be provided with participant dial-in numbers,a passcode and a unique registrant ID.
Pre-registration Link: http://apac.directeventreg.com/registration/event/7255203
Conference ID: 7255203
A live webcast of the call may also be accessed athttps://edge.media-server.com/mmc/p/ne6pumzr.
A replay of the conference call will be available two hours after the call ends until 10:00a.m. U.S. Eastern Time on Thursday,August 6,2020 (10:00p.m. Beijing/Hong Kong Time onThursday,2020) and may be accessed by phone at the following numbers:
U.S.: +1 855 452 5696
Mainland China: 400 632 2162 or 800 870 0205
Hong Kong: +852 3051 2780
U.K.: +44 20 37014269
International: +61 2 9003 4211
Replay access code: 7255203
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 "2020 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 strategies,business plans,investment,dividend and share repurchase plans,earnings,performance and returns of Yum China,anticipated effects of population and macroeconomic trends,and the expected impact of the COVID-19 outbreak,the anticipated effects of our innovation,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,changes in public health conditions,including the COVID-19 outbreak,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 and subsequent Quarterly Reports on Form 10-Q) 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 9,954 restaurants in over 1,400 cities and towns at the end of June 2020. Yum Chinaranked # 361 on the Fortune 500 list for 2020. In 2020,Yum China was named to the Bloomberg Gender-Equality Index and was certified as a Top Employer 2020 in China by the Top Employers Institute,both for the second consecutive year. 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
6/30/2020
6/30/2019
B/(W)
6/30/2020
6/30/2019
B/(W)
Revenues
Company sales
$ 1,692
$ 1,926
(12)
$ 3,240
$ 4,015
(19)
Franchise fees and income
37
36
2
72
75
(4)
Revenues from transactions with
franchisees and unconsolidated affiliates
157
154
1
318
324
(2)
Other revenues
16
8
97
26
14
86
Total revenues
1,902
2,124
(11)
3,656
4,428
(17)
Costs and Expenses,Net
Company restaurants
Food and paper
556
607
8
1,051
1,245
16
Payroll and employee benefits
384
450
15
778
916
15
Occupancy and other operating expenses
521
586
11
1,015
1,185
14
Company restaurant expenses
1,461
1,643
11
2,844
3,346
15
General and administrative expenses
113
109
(4)
212
223
5
Franchise expenses
16
16
4
33
36
8
Expenses for transactions with
franchisees and unconsolidated affiliates
160
154
(4)
316
321
2
Other operating costs and expenses
13
6
NM
23
11
NM
Closures and impairment expenses,net
21
4
NM
29
15
(99)
Other income,net
(10)
(12)
(15)
(26)
(31)
(14)
Total costs and expenses,net
1,774
1,920
8
3,431
3,921
13
Operating Profit
128
204
(38)
225
507
(56)
Interest income,net
8
10
(8)
17
19
(8)
Investment gain
45
17
NM
37
27
40
Income Before Income Taxes
181
231
(22)
279
553
(49)
Income tax provision
(45)
(46)
1
(77)
(139)
44
Net income – including noncontrolling interests
136
185
(27)
202
414
(51)
Net income – noncontrolling interests
4
7
50
8
14
44
Net Income – Yum China Holdings,Inc.
$ 132
$ 178
(26)
$ 194
$ 400
(52)
Effective tax rate
25.2%
20.0%
(5.2)
ppts.
27.8%
25.2%
(2.6)
ppts.
Basic Earnings Per Common Share
$ 0.35
$ 0.47
$ 0.51
$ 1.06
Weighted average shares outstanding
(in millions)
377
378
376
378
Diluted Earnings Per Common Share
$ 0.34
$ 0.46
$ 0.50
$ 1.03
Weighted average shares outstanding
(in millions)
388
389
387
389
Cash Dividends Declared Per Common Share
$ —
$ 0.12
$ 0.12
$ 0.24
Company sales
100.0%
100.0%
100.0%
100.0%
Food and paper
32.9
31.5
(1.4)
ppts.
32.4
31.0
(1.4)
ppts.
Payroll and employee benefits
22.7
23.4
0.7
ppts.
24.0
22.8
(1.2)
ppts.
Occupancy and other operating expenses
30.7
30.4
(0.3)
ppts.
31.4
29.5
(1.9)
ppts.
Restaurant margin
13.7%
14.7%
(1.0)
ppts.
12.2%
16.7%
(4.5)
ppts.
Operating margin
7.5%
10.6%
(3.1)
ppts.
7.0%
12.6%
(5.6)
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
6/30/2020
6/30/2019
B/(W)
6/30/2020
6/30/2019
B/(W)
Revenues
Company sales
$ 1,260
$ 1,410
(11)
$ 2,480
$ 2,949
(16)
Franchise fees and income
32
33
(5)
65
69
(7)
Revenues from transactions with
franchisees and unconsolidated affiliates
15
15
1
31
32
(1)
Total revenues
1,307
1,458
(10)
2,576
3,050
(16)
Costs and Expenses,Net
Company restaurants
Food and paper
419
450
7
811
926
12
Payroll and employee benefits
271
311
13
558
631
12
Occupancy and other operating expenses
387
424
9
762
858
11
Company restaurant expenses
1,077
1,185
9
2,131
2,415
12
General and administrative expenses
42
49
15
88
98
10
Franchise expenses
16
16
8
32
35
11
Expenses for transactions with
franchisees and unconsolidated affiliates
15
15
—
31
32
1
Closures and impairment expenses,net
10
—
NM
11
7
(64)
Other income,net
(12)
(12)
(8)
(29)
(30)
—
Total costs and expenses,148
1,253
8
2,264
2,557
11
Operating Profit
$ 159
$ 205
(22)
$ 312
$ 493
(37)
Company sales
100.0%
100.0%
100.0%
100.0%
Food and paper
33.3
31.9
(1.4)
ppts.
32.7
31.4
(1.3)
ppts.
Payroll and employee benefits
21.5
22.0
0.5
ppts.
22.5
21.4
(1.1)
ppts.
Occupancy and other operating expenses
30.6
30.0
(0.6)
ppts.
30.7
29.1
(1.6)
ppts.
Restaurant margin
14.6%
16.1%
(1.5)
ppts.
14.1%
18.1%
(4.0)
ppts.
Operating margin
12.6%
14.5%
(1.9)
ppts.
12.6%
16.7%
(4.1)
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
6/30/2020
6/30/2019
B/(W)
6/30/2020
6/30/2019
B/(W)
Revenues
Company sales
$ 422
$ 507
(17)
$ 744
$ 1,048
(29)
Franchise fees and income
1
1
28
2
2
14
Revenues from transactions with
franchisees and unconsolidated affiliates
1
1
12
2
2
8
Other revenues
—
1
(32)
—
1
(25)
Total revenues
424
510
(17)
748
1,053
(29)
Costs and Expenses,Net
Company restaurants
Food and paper
134
155
14
236
314
25
Payroll and employee benefits
111
137
19
215
280
23
Occupancy and other operating expenses
130
157
17
245
319
23
Company restaurant expenses
375
449
16
696
913
24
General and administrative expenses
23
27
13
47
51
8
Franchise expenses
—
—
(8)
1
1
(3)
Expenses for transactions with
franchisees and unconsolidated affiliates
1
1
(16)
2
2
(20)
Other operating costs and expenses
—
1
32
—
1
26
Closures and impairment expenses,net
10
3
NM
15
6
NM
Total costs and expenses,net
409
481
15
761
974
22
Operating Profit (Loss)
$ 15
$ 29
(48)
$ (13)
$ 79
NM
Company sales
100.0%
100.0%
100.0%
100.0%
Food and paper
31.8
30.7
(1.1)
ppts.
31.7
30.0
(1.7)
ppts.
Payroll and employee benefits
26.1
27.0
0.9
ppts.
28.8
26.7
(2.1)
ppts.
Occupancy and other operating expenses
30.9
31.0
0.1
ppts.
33.1
30.4
(2.7)
ppts.
Restaurant margin
11.2%
11.3%
(0.1)
ppts.
6.4%
12.9%
(6.5)
ppts.
Operating margin
3.6%
5.8%
(2.2)
ppts.
(1.7)%
7.6%
(9.3)
ppts.
Percentages may not recompute due to rounding.
Yum China Holdings,Inc.
Condensed Consolidated Balance Sheets
(in US$ million)
6/30/2020
12/31/2019
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents
$ 674
$ 1,046
Short-term investments
1,034
611
Accounts receivable,net
83
88
Inventories,net
346
380
Prepaid expenses and other current assets
166
134
Total Current Assets
2,303
2,259
Property,plant and equipment,504
1,594
Operating lease right-of-use assets
1,886
1,985
Goodwill
309
254
Intangible assets,net
183
94
Deferred income taxes
99
95
Investments in unconsolidated affiliates
68
89
Other assets
611
580
Total Assets
6,963
6,950
LIABILITIES,REDEEMABLE NONCONTROLLING INTEREST
AND EQUITY
Current Liabilities
Accounts payable and other current liabilities
1,660
1,691
Income taxes payable
63
45
Total Current Liabilities
1,723
1,736
Non-current operating lease liabilities
1,677
1,803
Non-current finance lease obligations
24
26
Other liabilities
252
210
Total Liabilities
3,676
3,775
Redeemable Noncontrolling Interest
12
—
Equity
Common stock,$0.01 par value; 1,000 million shares authorized; 397 million
shares and 395 million shares issued at June 30,2020 and December 31,
2019,respectively; 377 million shares and 376 million shares outstanding at
June 30,2019,respectively
4
4
Treasury stock
(728)
(721)
Additional paid-in capital
2,444
2,427
Retained earnings
1,565
1,416
Accumulated other comprehensive loss
(82)
(49)
Total Equity – Yum China Holdings,Inc.
3,203
3,077
Noncontrolling interests
72
98
Total Equity
3,275
3,175
Total Liabilities,Redeemable Noncontrolling Interest and Equity
$ 6,963
$ 6,950
Yum China Holdings,Inc.
Condensed Consolidated Statements of Cash Flows
(in US$ million)
(unaudited)
Year to Date Ended
6/30/2020
6/30/2019
Cash Flows – Operating Activities
Net income – including noncontrolling interests
$ 202
$ 414
Depreciation and amortization
214
217
Non-cash operating lease cost
178
167
Closures and impairment expenses
29
15
Investment gain
(37)
(27)
Equity income from investments in unconsolidated affiliates
(34)
(37)
Distributions of income received from unconsolidated affiliates
25
38
Deferred income taxes
6
6
Share-based compensation expense
17
15
Changes in accounts receivable
6
(5)
Changes in inventories
35
(1)
Changes in prepaid expenses and other current assets
17
—
Changes in accounts payable and other current liabilities
(16)
70
Changes in income taxes payable
17
3
Changes in non-current operating lease liabilities
(194)
(188)
Other,net
(13)
(30)
Net Cash Provided by Operating Activities
452
657
Cash Flows – Investing Activities
Capital spending
(185)
(212)
Purchases of short-term investments
(1,093)
(409)
Purchase of long-term time deposits
(57)
—
Maturities of short-term investments
662
248
Contribution to unconsolidated affiliates
(13)
—
Acquisition of business,net of cash acquired
(177)
—
Disposal of equity securities
54
—
Other,net
48
5
Net Cash Used in Investing Activities
(761)
(368)
Cash Flows – Financing Activities
Repurchase of shares of common stock
(8)
(143)
Cash dividends paid on common stock
(45)
(91)
Dividends paid to noncontrolling interests
(7)
(25)
Other,net
1
—
Net Cash Used in Financing Activities
(59)
(259)
Effect of Exchange Rates on Cash,Cash Equivalents and Restricted Cash
(6)
—
Net (Decrease) Increase in Cash,Cash Equivalents and Restricted Cash
(374)
30
Cash,Cash Equivalents and Restricted Cash - Beginning of Period
1,055
1,266
Cash,Cash Equivalents and Restricted Cash - End of Period
681
1,296
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,excluding the period during which stores are temporarily closed. 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,including stores temporarily closed,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.
Reconciliationof Reported GAAP Results to Non-GAAP Adjusted Measures
(in millions,except per share data)
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 Non-GAAP Adjusted Measures
(in US$ million)
(unaudited)
(a) Amounts presented as of and for the quarters and years to date ended June 30,2020 and 2019 are unaudited.
(b) In the quarter ended June 30,the Company derecognized a $3 million indemnification asset previously recorded for the Daojia acquisition as the indemnification right expired pursuant to the purchase agreement. The amount was included in Other income,as a deduction item,but was not allocated to any segment for performance reporting purposes.
(c) In February 2020,the Company granted Partner PSU Awards to select employees who were deemed critical to the Company's execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period,with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address increased competition for executive talent,motivate transformational performance and encourage management retention. Given the unique nature of these grants,the Compensation Committee does not intend to grant similar,special grants during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company's performance. The Company recognized share-based compensation cost of $1 million and $2 million associated with the Partner PSU Awards for the quarter and year to date ended June 30,respectively.
(d) The tax expense was determined based upon the nature,as well as the jurisdiction,of each Special Item at the applicable tax rate.
(e) We completed the evaluation of the impact on our transition tax computation based on the final regulations released by the U.S. Treasury Department and the U.S. Internal Revenue Service became effective in the first quarter of 2019,and recorded an additional tax expense 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
6/30/2020
6/30/2019
6/30/2020
6/30/2019
Reconciliation of Net Income to Adjusted EBITDA
Net Income – Yum China Holdings,Inc.
$ 132
$ 178
$ 194
$ 400
Net income – noncontrolling interests
4
7
8
14
Income tax provision
45
46
77
139
Interest income,net
(8)
(10)
(17)
(19)
Investment gain
(45)
(17)
(37)
(27)
Operating Profit
128
204
225
507
Special Items,Operating Profit
4
—
5
—
Adjusted Operating Profit
132
204
230
507
Depreciation and amortization
105
106
214
217
Store impairment charges
24
11
36
25
Adjusted EBITDA
$ 261
$ 321
$ 480
$ 749
Unit Count by Brand
KFC
12/31/2019
NewBuilds
Closures
6/30/2020
Company-owned
5,083
227
(79)
5,231
Unconsolidated affiliates
896
63
(12)
947
Franchisees
555
17
(1)
571
Total
6,534
307
(92)
6,749
Pizza Hut
12/31/2019
NewBuilds
Closures
Refranchised
6/30/2020
Company-owned
2,178
17
(42)
(3)
2,150
Franchisees
103
2
—
3
108
Total
2,281
19
(42)
—
2,258
Others
12/31/2019
NewBuilds
Closures
Acquired(1)
6/30/2020
Company-owned
94
7
(6)
3
98
Franchisees
291
14
(80)
623
848
Other
—
1
—
—
1
Total
385
22
(86)
626
947
(1) On April 8,the Company completed the acquisition of Huang Ji Huang.
Yum China Holdings,Inc.
Segment Results
(in US$ million)
(unaudited)
Quarter Ended 6/30/2020
KFC
Pizza Hut
All Other
Segments
Corporate
and
Unallocated(1)
Elimination
Total
Company sales
$ 1,260
$ 422
$ 10
$ —
$ —
$ 1,692
Franchise fees and income
32
1
4
—
—
37
Revenues from transactions with
franchisees and unconsolidated affiliates
15
1
11
130
—
157
Other revenues
—
—
25
1
(10)
16
Total revenues
$ 1,307
$ 424
$ 50
$ 131
$ (10)
$ 1,902
Company restaurant expenses
1,077
375
10
—
(1)
1,461
General and administrative expenses
42
23
11
37
—
113
Franchise expenses
16
—
—
—
—
16
Expenses for transactions with
franchisees and unconsolidated affiliates
15
1
9
135
—
160
Other operating costs and expenses
—
—
21
1
(9)
13
Closures and impairment income,net
10
10
1
—
—
21
Other (income) expenses,net
(12)
—
—
2
—
(10)
Total costs and expenses,148
409
52
175
(10)
1,774
Operating Profit (Loss)
$ 159
$ 15
$ (2)
$ (44)
$ —
$ 128
Quarter Ended 6/30/2019
KFC
Pizza Hut
All Other
Segments
Corporate
and
Unallocated(1)
Elimination
Total
Company sales
$ 1,410
$ 507
$ 9
$ —
$ —
$ 1,926
Franchise fees and income
33
1
2
—
—
36
Revenues from transactions with
franchisees and unconsolidated affiliates
15
1
5
133
—
154
Other revenues
—
1
16
1
(10)
8
Total revenues
$ 1,458
$ 510
$ 32
$ 134
$ (10)
$ 2,124
Company restaurant expenses
1,185
449
9
—
—
1,643
General and administrative expenses
49
27
8
25
—
109
Franchise expenses
16
—
—
—
—
16
Expenses for transactions with
franchisees and unconsolidated affiliates
15
1
5
133
—
154
Other operating costs and expenses
—
1
14
1
(10)
6
Closures and impairment income,net
—
3
1
—
—
4
Other income,net
(12)
—
—
—
—
(12)
Total costs and expenses,253
481
37
159
(10)
1,920
Operating Profit (Loss)
$ 205
$ 29
$ (5)
$ (25)
$ —
$ 204
Year to Date Ended 6/30/2020
KFC
Pizza Hut
All Other
Segments
Corporate
and
Unallocated(1)
Elimination
Total
Company sales
$ 2,480
$ 744
$ 16
$ —
$ —
$ 3,240
Franchise fees and income
65
2
5
—
—
72
Revenues from transactions with
franchisees and unconsolidated affiliates
31
2
16
269
—
318
Other revenues
—
—
41
2
(17)
26
Total revenues
$ 2,576
$ 748
$ 78
$ 271
$ (17)
$ 3,656
Company restaurant expenses
2,131
696
19
—
(2)
2,844
General and administrative expenses
88
47
19
58
—
212
Franchise expenses
32
1
—
—
—
33
Expenses for transactions with
franchisees and unconsolidated affiliates
31
2
13
270
—
316
Other operating costs and expenses
—
—
36
2
(15)
23
Closures and impairment expenses,net
11
15
3
—
—
29
Other income,net
(29)
—
—
3
—
(26)
Total costs and expenses,net
2,264
761
90
333
(17)
3,431
Operating Profit (Loss)
$ 312
$ (13)
$ (12)
$ (62)
$ —
$ 225
Year to Date Ended 6/30/2019
KFC
Pizza Hut
All Other
Segments
Corporate
and
Unallocated(1)
Elimination
Total
Company sales
$ 2,949
$ 1,048
$ 18
$ —
$ —
$ 4,015
Franchise fees and income
69
2
4
—
—
75
Revenues from transactions with
franchisees and unconsolidated affiliates
32
2
12
278
—
324
Other revenues
—
1
30
2
(19)
14
Total revenues
$ 3,050
$ 1,053
$ 64
$ 280
$ (19)
$ 4,428
Company restaurant expenses
2,415
913
19
—
(1)
3,346
General and administrative expenses
98
51
16
58
—
223
Franchise expenses
35
1
—
—
—
36
Expenses for transactions with
franchisees and unconsolidated affiliates
32
2
11
276
—
321
Other operating costs and expenses
—
1
26
2
(18)
11
Closures and impairment expenses,net
7
6
2
—
—
15
Other income,net
(30)
—
—
(1)
—
(31)
Total costs and expenses,557
974
74
335
(19)
3,921
Operating Profit (Loss)
$ 493
$ 79
$ (10)
$ (55)
$ —
$ 507
The above tables reconcile segment information,which is based on management responsibility,with our Condensed 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 Non-GAAP Adjusted Measures".
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