Yum China Results

Yum China Full Year Operating Profit Up 31% Year-over-year

Total system sales grew 5%, including growth of 6% at KFC and 3% at Pizza Hut Casual Dining, excluding foreign currency translation

Yum! Brands

Yum China Holdings, Inc. (NYSE:  YUMC) reported unaudited results for the full year and fourth quarter ended December 31, 2016. Reported GAAP results include Special Items, which are excluded from non-GAAP measures. Special Items are not allocated to any segment and therefore only impact reported results of Yum China. See Reconciliation of Reported Results to Non-GAAP Measures within this release. 

The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock.

Full-Year Highlights

  • Total system sales grew 5%, including growth of 6% at KFC and 3% at Pizza Hut Casual Dining, excluding foreign currency translation ("F/X"). 
  • Opened 575 new restaurants for the full year, or 5% net growth, surpassing 7,500 restaurants in China. 
  • Same-store sales were flat, with an increase of 3% at KFC, offset by a decline of 7% at Pizza Hut Casual Dining. 
  • Total restaurant margin increased 2.7 percentage points to 15.3%, primarily aided by the impact of retail tax structure reform implemented on May 1, 2016. 
  • Reported operating profit grew 31%, primarily aided by the impact of retail tax structure reform. Foreign currency translation negatively impacted operating profit by $36 million. Excluding F/X and Special Items, operating profit grew 37%. 

Fourth-Quarter Highlights

  • Total system sales grew 4%, including growth of 4% at KFC and 6% at Pizza Hut Casual Dining, excluding F/X. 
  • Opened 302 new restaurants during the quarter. 
  • Same-store sales were flat, with an increase of 1% at KFC, offset by a decline of 3% at Pizza Hut Casual Dining. 
  • Foreign currency translation negatively impacted operating profit by $5 million.

Key Financial Results

 

   

Fourth Quarter

   

Full Year

 

(in US$ million, except

             

% Change

               

% Change

 

for per share data and percentages)

 

2016

 

2015

 

Reported

 

Ex F/X

   

2016

 

2015

 

Reported

 

Ex F/X

 

Reported Operating Profit

 

$

58

 

$

5

 

922%

 

1,010%

   

$

640

 

$

488

 

31%

 

38%

 

Operating Profit Before Special Items1

 

$

75

 

$

20

 

265%

 

288%

   

$

655

 

$

503

 

30%

 

37%

 

Diluted EPS

 

$

0.23

 

$

(0.08)

 

NM

 

NM

   

$

1.36

 

$

0.89

 

53%

 

62%

 

Diluted EPS Before Special Items1

 

$

0.17

 

$

(0.05)

 

NM

 

NM

   

$

1.28

 

$

0.92

 

39%

 

48%

 

1 See Reconciliation of Reported Results to Non-GAAP Measures included in the accompanying tables of this release for further details.

Note: All comparisons are versus the same period a year ago. 

Consistent with prior years, Yum China's fiscal fourth quarter includes September, October, November and December results.

CEO Comments

"This was a momentous year for Yum China. We successfully became an independent, publicly traded company while simultaneously improving our business performance and investing for future growth. At year end 2016 with over 7,500 restaurants nationwide, we extended our market-leading position in China," said Micky Pant, CEO.

"For our shareholders, we exceeded our 2016 financial targets* in operating profit, restaurant margin and adjusted EBITDA. We continue to focus on our long-term growth formula: new unit development, same-store sales growth, and continued restaurant margin improvement. Right now, our top priority is consistently delivering positive same-store sales growth. During 2016, we continued to build a foundation for long-term growth with emphasis on product innovation, investments in refurbishing our restaurants, and focus on digital engagement with our customers. 

2016 was a ground breaking year for Yum China in Digital and Delivery. Our loyalty programs have over 80 million members between KFC and Pizza Hut and are ranked #1 in the restaurant industry worldwide in terms of number of members. Total delivery sales reached approximately US$700 million, and in 2016, we were #1 among restaurant operators in terms of online sales in China. Cashless payment accounted for about 30% of our company sales.

Yum China has a long and successful track record of doing business in China, and 2017 marks the 30th anniversary of the launch of KFC in China. While we have achieved a lot in the past three decades, our growth plans give us confidence that we are well-positioned to drive strong operating performance and generate high returns for our shareholders over the long run. We believe the majority of our restaurants in China are yet to be built."

 

As detailed in our October 2016 investor conference.

New-Unit Development and Asset Upgrades

We believe development opportunities across China will provide us with new restaurant growth for all of our brands. Increasing urban population, continued development of city clusters and new transportation hubs provide growth opportunities for our nationwide development team.

  • Opened 575 new restaurants for the year and 302 for the fourth quarter, driven by development of the KFC brand. 
  • 96 of the new restaurants were opened in 56 new cities. 
  • Remodeled 791 restaurants, focused on KFC. Over 75% of Yum China's current store portfolio has been remodeled or built in the past five years. 
  • Opened first Taco Bell restaurant in Shanghai, China.

 

     

New Units

   

Restaurant Count

 
     

Fourth

Quarter

 

Full Year

   

Full Year

 

% Change1

 

Yum China

   

302

 

575

     

7,562

 

5%

 

KFC

   

179

 

323

     

5,224

 

4%

 

Pizza Hut Casual Dining

   

87

 

178

     

1,714

 

9%

 

Pizza Hut Home Service, Little Sheep, East Dawning and Taco Bell

   

36

 

74

     

624

 

4%

 

1 Represents year-over-year change

Digital and Delivery Annual Update

Digital and delivery provide us with new growth opportunities. We are aggressively embracing leading technologies such as location-based service and mobile payment. Our delivery business has continued to grow with our own network and with the help of aggregators. 

  • Members in the loyalty programs increased to over 60 million for KFC and over 20 million for Pizza Hut Casual Dining at year end. 
  • Mobile payments reached about 17% of company sales in 2016, with over $2 billion in company sales paid using cashless payment methods. 
  • Delivery represented about 10% of company sales for 2016. 

Restaurant Margin

  • For the year, Yum China restaurant margin increased 2.7 percentage points to 15.3%, primarily aided by the impact of retail tax structure reform. This is reflected primarily in lower food and paper cost. Wage inflation of 8% partially offset these effects. 
  • For the quarter, Yum China restaurant margin increased 3.0 percentage points to 11.0%, primarily aided by the impact of retail tax structure reform. Wage inflation companywide and commodity inflation at KFC partially offset these effects.

 

     

Fourth Quarter

     

Full Year

   
     

2016

 

2015

 

% ppts

change

     

2016

 

2015

 

% ppts

change

   
 

Yum China

   

11.0%

     

8.0%

     

3.0

       

15.3%

     

12.6%

     

2.7

   
 

KFC

   

11.7%

     

9.5%

     

2.2

       

16.3%

     

13.3%

     

3.0

   
 

Pizza Hut Casual Dining

   

10.4%

     

5.6%

     

4.8

       

14.0%

     

12.3%

     

1.7

   

Diluted Share Count

Pursuant to the strategic investment agreement between Yum China, Primavera Capital Group ("Primavera"), and Zhejiang Ant Small and Micro Financial Services Group Co., Ltd. ("Ant Financial"), collectively referred to as strategic investors, Yum China issued approximately 19 million shares of common stock to Primavera and Ant Financial on November 1, 2016. The reported full year 2016 diluted share count of 369 million is based on the weighted average number of days for the period that the shares or dilutive equity awards were outstanding, and includes only two months of impact from the shares issued to our two strategic investors on November 1, 2016 and public company stock compensation programs. On a pro forma basis, assuming all shares and dilutive equity awards were issued and outstanding on January 1, 2016, the total diluted share count would be 395 million. This would have reduced diluted EPS to $1.27 from $1.36.

 

 

(in US$ million, except for per share data)

 

Reported

 

Pro Forma

Adjustments

 

Pro Forma

 
 

Net Income – Yum China

 

$

502

     

   

$

502

   
 

Weighted average diluted shares outstanding

   

369,143,838

     

26,208,256

     

395,352,094

   
 

Diluted Earnings Per Share

 

$

1.36

     

   

$

1.27

   

Share Repurchase Program

The Board of Directors authorized Yum China to repurchase up to $300 million of shares of common stock. These shares may be repurchased from time to time in the open market, through privately negotiated transactions or other programs, subject to market conditions and other factors. 

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, which opened its first restaurant in China at the end of 2016. Yum China also owns the Little Sheep and East Dawning concepts outright. Yum China is well positioned for growth thanks to its strong competitive position, integration of its brands into Chinese popular culture and consumers' daily lives, expanding geographic footprint in China and existing operational expertise. It has a strong capital position, no external debt and expects to continue growing its system sales and profit by adding new restaurants and through growing same-store sales. Yum China had more than 7,500 restaurants and more than 420,000 employees in over 1,100 cities at 2016 year end. A new generation of younger consumers who are digitally sophisticated and brand driven are fueling growth in consumption in China. The ongoing growth of the middle class and urban population in China is expected to create the world's largest market for restaurant brands, with Yum China poised to be the market leader.

 

Analysts are invited to contact:

   

Christie Ju, Vice President – Finance, Investor Relations, at +86 21 2407 8090

   

Michelle Shen, Director – Finance, Investor Relations, at +86 21 2407 8260

Members of the media are invited to contact:

   

Forest Liu, Director, Public Affairs, at +86 21 2407 7505

 

 

Yum China Holdings, Inc.

Consolidated and Combined Summary of Results

(amounts in US$ million, except for number of shares and per share amounts)

(unaudited)

 
     
   

Quarter ended

   

% Change

 

Year ended

 

% Change

   

12/31/16

 

12/31/15

 

B/(W)

 

12/31/16

 

12/31/15

 

B/(W)

Revenues

                                           

Company sales

 

$

1,938

 

$

2,011

   

(4)

   

$

6,622

   

$

6,789

     

(2)

 

Franchise fees and income

   

40

   

37

   

8

     

130

     

120

     

8

 

Total revenues

   

1,978

   

2,048

   

(3)

     

6,752

     

6,909

     

(2)

 

Costs and Expenses, Net

                                           

Company restaurants

                                           

Food and paper

   

558

   

641

   

13

     

1,919

     

2,159

     

11

 

Payroll and employee benefits

   

469

   

453

   

(3)

     

1,432

     

1,386

     

(3)

 

Occupancy and other operating expenses

   

697

   

754

   

8

     

2,259

     

2,386

     

5

 

Company restaurant expenses

   

1,724

   

1,848

   

7

     

5,610

     

5,931

     

5

 

General and administrative expenses

   

153

   

137

   

(12)

     

424

     

395

     

(7)

 

Franchise expenses

   

20

   

21

   

3

     

71

     

70

     

(1)

 

Closures and impairment expenses, net

   

42

   

42

   

     

78

     

64

     

(22)

 

Refranchising gain, net

   

(7)

   

(6)

   

     

(15)

     

(13)

     

9

 

Other (income) expense, net

   

(12)

   

1

   

NM

     

(56)

     

(26)

     

113

 

Total costs and expenses, net

   

1,920

   

2,043

   

6

     

6,112

     

6,421

     

5

 

Operating Profit

   

58

   

5

   

922

     

640

     

488

     

31

 

Interest income, net

   

4

   

4

   

19

     

11

     

8

     

50

 

Changes in fair value of financial instruments 

   

21

   

   

NM

     

21

     

     

NM

 

Income Before Income Taxes

   

83

   

9

   

830

     

672

     

496

     

36

 

Income tax benefit (provision)

   

7

   

(38)

   

NM

     

(158)

     

(168)

     

6

 

Net income (loss) – including noncontrolling interests

   

90

   

(29)

   

NM

     

514

     

328

     

57

 

Net income – noncontrolling interests

   

2

   

   

NM

     

12

     

5

     

154

 

Net Income (Loss) – Yum China Holdings, Inc.

 

$

88

 

$

(29)

   

NM

   

$

502

   

$

323

     

55

 

Effective tax rate

   

(8.4)%

   

437.4%

   

NM

     

23.5%

     

33.9%

     

10.4

ppts.

                                             

Basic Earnings (Loss) Per Share

 

$

0.23

 

$

(0.08)

   

NM

   

$

1.36

   

$

0.89

     

54

 

Weighted average shares outstanding

   

375,718,539

   

363,758,219

   

NM

     

367,744,992

     

363,758,219

     

NM

 
                                             

Diluted Earnings (Loss) Per Share

 

$

0.23

 

$

(0.08)

   

NM

   

$

1.36

   

$

0.89

     

53

 

Weighted average shares outstanding

   

379,915,075

   

363,758,219

   

NM

     

369,143,838

     

363,758,219

     

NM

 

Percentages may not recompute due to rounding.

 

Yum China Holdings, Inc.

KFC Operating Results

(amounts in US$ million)

(unaudited)

 
   

Quarter ended

 

% Change

 

Year ended

   

% Change

   

12/31/16

 

12/31/15

 

B/(W)

 

12/31/16

 

12/31/15

   

B/(W)

Revenues

                                               

Company sales

 

$

1,334

   

$

1,395

     

(4)

   

$

4,572

 

$

4,652

       

(2)

 

Franchise fees and income

   

37

     

35

     

6

     

124

   

116

       

7

 

Total revenues

   

1,371

     

1,430

     

(4)

     

4,696

   

4,768

       

(2)

 

Costs and Expenses, Net

                                               

Company restaurants

                                               

Food and paper

   

401

     

454

     

12

     

1,368

   

1,512

       

10

 

Payroll and employee benefits

   

308

     

298

     

(3)

     

933

   

903

       

(3)

 

Occupancy and other operating expenses

   

469

     

509

     

8

     

1,525

   

1,617

       

6

 

Company restaurant expenses

   

1,178

     

1,261

     

7

     

3,826

   

4,032

       

5

 

General and administrative expenses

   

60

     

54

     

(11)

     

161

   

150

       

(7)

 

Franchise expenses

   

18

     

21

     

14

     

68

   

70

       

2

 

Closures and impairment expenses, net

   

16

     

33

     

51

     

41

   

50

       

18

 

Other income, net

   

(7)

     

(7)

     

(1)

     

(45)

   

(33)

       

37

 

Total costs and expenses, net

   

1,265

     

1,362

     

7

     

4,051

   

4,269

       

5

 

Operating Profit

 

$

106

   

$

68

     

60

   

$

645

 

$

499

       

29

 

Company sales

   

100.0%

     

100.0%

             

100.0%

   

100.0%

           

Food and paper

   

30.1

     

32.5

     

2.4

ppts.

   

29.9

   

32.5

       

2.6

ppts.

Payroll and employee benefits

   

23.1

     

21.3

     

(1.8)

ppts.

   

20.4

   

19.4

       

(1.0)

ppts.

Occupancy and other operating expenses

   

35.1

     

36.7

     

1.6

ppts.

   

33.4

   

34.8

       

1.4

ppts.

Restaurant margin

   

11.7%

     

9.5%

     

2.2

ppts.

   

16.3%

   

13.3%

       

3.0

ppts.

Operating margin

   

7.9%

     

4.7%

     

3.2

ppts.

   

14.1%

   

10.7%

       

3.4

ppts.

Percentages may not recompute due to rounding.

 

Yum China Holdings, Inc.

Pizza Hut Casual Dining Operating Results

(amounts in US$ million)

(unaudited)

 
   
   

Quarter ended

 

% Change

 

Year ended

   

% Change

   

12/31/16

 

12/31/15

 

B/(W)

 

12/31/16

 

12/31/15

 

B/(W)

Revenues

                                               

Company sales

 

$

520

     

523

     

   

$

1,772

     

1,824

     

(3)

 

Franchise fees and income

   

1

     

1

     

57

     

2

     

1

     

142

 

Total revenues

   

521

     

524

     

     

1,774

     

1,825

     

(3)

 

Costs and Expenses, Net

                                               

Company restaurants

                                               

Food and paper

   

131

     

156

     

16

     

464

     

543

     

14

 

Payroll and employee benefits

   

135

     

126

     

(7)

     

415

     

391

     

(6)

 

Occupancy and other operating expenses

   

200

     

212

     

5

     

645

     

665

     

3

 

Company restaurant expenses

   

466

     

494

     

5

     

1,524

     

1,599

     

5

 

General and administrative expenses

   

26

     

24

     

(10)

     

80

     

73

     

(10)

 

Franchise expenses

   

2

     

     

NM

     

3

     

     

NM

 

Closures and impairment expenses, net

   

7

     

7

     

15

     

17

     

8

     

(112)

 

Total costs and expenses, net

   

501

     

525

     

5

     

1,624

     

1,680

     

3

 

Operating Profit

 

$

20

   

$

(1)

     

NM

   

$

150

   

$

145

     

4

 

Company sales

   

100.0%

     

100.0%

             

100.0%

     

100.0%

         

Food and paper

   

25.2

     

29.8

     

4.6

ppts.

   

26.2

     

29.8

     

3.6

ppts.

Payroll and employee benefits

   

25.9

     

24.1

     

(1.8)

ppts.

   

23.4

     

21.5

     

(1.9)

ppts.

Occupancy and other operating expenses

   

38.5

     

40.5

     

2.0

ppts.

   

36.4

     

36.4

     

ppts.

Restaurant margin

   

10.4%

     

5.6%

     

4.8

ppts.

   

14.0%

     

12.3%

     

1.7

ppts.

Operating margin

   

4.1%

     

(0.1)%

     

4.2

ppts.

   

8.5%

     

7.9%

     

0.5

ppts.

Percentages may not recompute due to rounding.

 

Yum China Holdings, Inc.

Consolidated and Combined Balance Sheets

(amounts in US$ million, except for number of shares)

(unaudited)

 
   

12/31/16

 

12/31/15

ASSETS

               

Current Assets

               

Cash and cash equivalents

 

$

885

   

$

425

 

Short-term investments

   

79

     

 

Accounts receivable, net

   

74

     

33

 

Inventories, net

   

268

     

189

 

Prepaid expenses and other current assets

   

120

     

152

 

Total Current Assets

   

1,426

     

799

 

Property, plant and equipment, net

   

1,647

     

1,841

 

Goodwill

   

79

     

85

 

Intangible assets, net

   

88

     

107

 

Investments in unconsolidated affiliates

   

71

     

61

 

Other assets

   

254

     

192

 

Deferred income taxes

   

162

     

116

 

Total Assets

   

3,727

     

3,201

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

               

Current Liabilities

               

Accounts payable and other current liabilities

   

971

     

926

 

Income taxes payable

   

33

     

22

 

Total Current Liabilities

   

1,004

     

948

 

Capital lease obligations

   

28

     

34

 

Other liabilities and deferred credits

   

252

     

234

 

Total Liabilities

   

1,284

     

1,216

 

Redeemable Noncontrolling Interest

   

     

6

 

Equity

               

Common stock, $0.01 par value; 1,000,000,000 shares authorized; 383,344,835.42 shares

and nil shares issued and outstanding at December 31, 2016 and 2015, respectively

   

4

     

 

Treasury stock

   

(20)

     

 

Additional paid-in capital

   

2,352

     

 

Retained earnings(a)

   

40

     

 

Parent Company Investment(b)

   

     

1,791

 

Accumulated other comprehensive income

   

1

     

130

 

Total Equity – Yum China Holdings, Inc.

   

2,377

     

1,921

 

Noncontrolling interests

   

66

     

58

 

Total Equity

   

2,443

     

1,979

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

 

$

3,727

   

$

3,201

 
 

(a) Retained earnings represent the Company's earnings after taxes generated from November 1, 2016 to December 31, 2016.

(b) Parent Company Investment represents Yum! Brands, Inc.'s ("YUM") historical investment in the Company, the Company's accumulated net earnings after taxes, and the net effect of transactions with and allocations from YUM. Upon the spin-off, Parent Company Investment was reclassified into the Company's common stock and additional paid-in capital. 

 

Yum China Holdings, Inc.

Consolidated and Combined Statements of Cash Flows

(amounts in US$ million)

(unaudited)

 
   

Year ended

   

12/31/16

 

12/31/15

Cash Flows - Operating Activities

           

Net income - including noncontrolling interests

 

$

514

 

$

328

Depreciation and amortization

   

402

   

425

Closures and impairment expenses

   

78

   

64

Refranchising gain

   

(15)

   

(13)

Deferred income taxes

   

(40)

   

29

Equity income from investments in unconsolidated affiliates

   

(54)

   

(41)

Distributions of income received from unconsolidated affiliates

   

35

   

21

Excess tax benefit from share-based compensation

   

(2)

   

(3)

Share-based compensation expense

   

16

   

14

Gain from changes in fair value of financial instruments

   

(21)

   

Changes in accounts receivable

   

(54)

   

(5)

Changes in inventories

   

(96)

   

61

Changes in prepaid expenses and other current assets

   

7

   

(8)

Changes in accounts payable and other current liabilities

   

123

   

31

Changes in income taxes payable

   

6

   

(14)

Other, net

   

(35)

   

21

Net Cash Provided by Operating Activities

   

864

   

910

Cash Flows - Investing Activities

           

Capital spending

   

(436)

   

(512)

Changes in short-term investments, net

   

(83)

   

Proceeds from refranchising of restaurants

   

32

   

27

Proceeds from disposal of aircraft

   

19

   

Other, net

   

(3)

   

(8)

Net Cash Used in Investing Activities

   

(471)

   

(493)

Cash Flows - Financing Activities

           

Net transfers to Parent

   

(357)

   

(214)

Payment of capital lease obligations

   

(3)

   

(2)

Excess tax benefit from share-based compensation

   

2

   

3

Proceeds from issuance of common stock and warrants

   

460

   

Other, net

   

(7)

   

Net Cash Provided by (Used in) Financing Activities

   

95

   

(213)

Effect of Exchange Rate on Cash and Cash Equivalents

   

(28)

   

(17)

Net Increase in Cash and Cash Equivalents

   

460

   

187

Cash and Cash Equivalents – Beginning of Year

   

425

   

238

Cash and Cash Equivalents – End of Year

 

$

885

 

$

425

 

Reconciliation of Reported Results to Non-GAAP Measures (amounts in US$ million, except for number of shares and 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 foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations. 
  • System sales growth includes the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our 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 and Combined 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. 
  • Same-store sales growth is the estimated percentage change in sales of all restaurants that have been open and in the Company system one year or more. 
  • 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 as a percentage of sales 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 non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings (Loss) Per Common Share before Special Items, effective tax rate before Special Items and Adjusted EBITDA. Included in Special Items are reversal of (provision for) losses associated with planned sales of aircraft, incremental restaurant-level impairment upon spin-off, changes in fair value of financial instruments and impact of the redemption of the Little Sheep noncontrolling interest. These amounts are described in (b), (c), (d), (e) and (f) 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. These non-GAAP 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 non-GAAP measures provides 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 size and/or nature. These non-GAAP 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 and Combined Summary of Results and other information presented herein. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures follows.

 

   

Quarter ended

 

Year ended

   

12/31/16

 

12/31/15

 

12/31/16

 

12/31/15

Detail of Special Items

                             

Reversal of (provision for) losses associated with sales of aircraft(b)

   

     

(15)

     

2

     

(15)

Incremental restaurant-level impairment upon spin-off(c)

   

(17)

     

     

(17)

     

Special Items Expense - Operating Profit

   

(17)

     

(15)

     

(15)

     

(15)

Changes in fair value of financial instruments(d)

   

21

     

     

21

     

Tax benefit on Special Items(e)

   

17

     

4

     

16

     

4

Special items income (expense), net of tax – including

noncontrolling interests

   

21

     

(11)

     

22

     

(11)

Special items income (expense), net of tax –

noncontrolling interests(f)

   

     

     

(8)

     

Special Items Income (Expense), net of tax –

Yum China Holdings, Inc.

   

21

     

(11)

     

30

     

(11)

Weighted average diluted shares outstanding 

   

379,915,075

     

363,758,219

     

369,143,838

     

363,758,219

Special Items Diluted Earnings (Loss) Per Common Share

   

0.06

     

(0.03)

     

0.08

     

(0.03)

Reconciliation of Reported Operating Profit

to Operating Profit Before Special Items

                             

Reported Operating Profit

   

58

     

5

     

640

     

488

Special Items Expense - Operating Profit

   

(17)

     

(15)

     

(15)

     

(15)

Operating Profit before Special Items

   

75

     

20

     

655

     

503

Reconciliation of Reported EPS to EPS Before Special Items

                             

Reported Diluted Earnings (Loss) Per Common Share

 

$

0.23

   

$

(0.08)

   

$

1.36

   

$

0.89

Special Items Diluted Earnings (Loss) Per Common Share

   

0.06

     

(0.03)

     

0.08

     

(0.03)

Diluted Earnings (Loss) Per Common Share before Special Items

 

$

0.17

   

$

(0.05)

   

$

1.28

   

$

0.92

Reconciliation of Reported Effective Tax Rate

to Effective Tax Rate Before Special Items

                             

Reported effective tax rate

   

(8.4)%

     

437.4%

     

23.5%

     

33.9%

Impact on tax rate as a result of Special Items

   

(20.6)%

     

257.1%

     

(2.7)%

     

0.2%

Effective tax rate before Special Items

   

12.2%

     

180.3%

     

26.2%

     

33.7%

 

Reconciliation of Reported Net Income (Loss) to Adjusted EBITDA

(amounts in US$ million, except per share amounts)

(unaudited)

 
   

Reported net income (loss), along with the reconciliation to Adjusted EBITDA, is presented below.

 
 
   

Quarter ended

 

Year ended

   

12/31/16

 

12/31/15

 

12/31/16

 

12/31/15

Reconciliation of Reported Net Income (Loss) to Adjusted

EBITDA

                               

Net Income (Loss) – Yum China Holdings, Inc.

 

$

88

   

$

(29)

   

$

502

   

$

323

 

Net income – noncontrolling interests

   

2

     

     

12

     

5

 

Income tax (benefit) provision

   

(7)

     

38

     

158

     

168

 

Interest income, net

   

(4)

     

(4)

     

(11)

     

(8)

 

Change in fair value of financial instruments

   

(21)

     

     

(21)

     

 

Reported Operating Profit

   

58

     

5

     

640

     

488

 

Depreciation and amortization

   

130

     

140

     

402

     

425

 

Store impairment charges

   

27

     

43

     

70

     

70

 

Special Items Expense – Operating Profit

   

17

     

15

     

15

     

15

 

Adjusted EBITDA

 

$

232

   

$

203

   

$

1,127

   

$

998

 

 

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

 

Quarter Ended 12/31/16

 

KFC

 

Pizza Hut

Casual Dining

 

Others

 

Corporate

and

Unallocated

 

Total

Total revenues

 

$

1,371

 

$

521

 

$

86

 

$

 

$

1,978

 

Company restaurant expenses

   

1,178

   

466

   

80

   

   

1,724

 

General and administrative expenses

   

60

   

26

   

10

   

57

   

153

 

Franchise expenses

   

18

   

2

   

   

   

20

 

Closures and impairment expenses, net

   

16

   

7

   

2

   

17

   

42

 

Refranchising gain, net

   

   

   

   

(7)

   

(7)

 

Other income, net

   

(7)

   

   

(5)

   

   

(12)

 
     

1,265

   

501

   

87

   

67

   

1,920

 

Operating Profit (Loss)

 

$

106

 

$

20

 

$

(1)

 

$

(67)

 

$

58

 
 
 

Quarter Ended 12/31/15

 

KFC

 

Pizza Hut

Casual Dining

 

Others

 

Corporate

and

Unallocated

 

Total

Total revenues

 

$

1,430

 

$

524

 

$

94

 

$

 

$

2,048

 

Company restaurant expenses

   

1,261

   

494

   

93

   

   

1,848

 

General and administrative expenses

   

54

   

24

   

9

   

50

   

137

 

Franchise expenses

   

21

   

   

   

   

21

 

Closures and impairment expenses, net

   

33

   

7

   

2

   

   

42

 

Refranchising gain, net

   

   

   

   

(6)

   

(6)

 

Other income, net

   

(7)

   

   

(3)

   

11

   

1

 
     

1,362

   

525

   

101

   

55

   

2,043

 

Operating Profit (Loss)

 

$

68

 

$

(1)

 

$

(7)

 

$

(55)

 

$

5

 

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated and Combined Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

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 Results to Non-GAAP Measures.

 

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

 

Year ended 12/31/16

 

KFC

 

Pizza Hut

Casual Dining

 

Others

 

Corporate

and

Unallocated

 

Total

Total revenues

 

$

4,696

   

$

1,774

   

$

282

   

$

   

$

6,752

Company restaurant expenses

   

3,826

     

1,524

     

261

     

(1)

     

5,610

General and administrative expenses

   

161

     

80

     

30

     

153

     

424

Franchise expenses

   

68

     

3

     

     

     

71

Closures and impairment expenses, net

   

41

     

17

     

3

     

17

     

78

Refranchising gain, net

   

     

     

     

(15)

     

(15)

Other income, net

   

(45)

     

     

(6)

     

(5)

     

(56)

     

4,051

     

1,624

     

288

     

149

     

6,112

Operating Profit (Loss)

 

$

645

   

$

150

   

$

(6)

   

$

(149)

   

$

640

 
 

Year ended 12/31/15

 

KFC

 

Pizza Hut

Casual Dining

 

Others

 

Corporate

and

Unallocated

 

Total

Total revenues

 

$

4,768

   

$

1,825

   

$

316

   

$

   

$

6,909

Company restaurant expenses

   

4,032

     

1,599

     

300

     

     

5,931

General and administrative expenses 

   

150

     

73

     

28

     

144

     

395

Franchise expenses

   

70

     

     

     

     

70

Closures and impairment expenses, net

   

50

     

8

     

6

     

     

64

Refranchising gain, net

   

     

     

     

(13)

     

(13)

Other income, net

   

(33)

     

     

(4)

     

11

     

(26)

     

4,269

     

1,680

     

330

     

142

     

6,421

Operating Profit (Loss)

 

$

499

   

$

145

   

$

(14)

   

$

(142)

   

$

488

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated and Combined Summary of Results. Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes.

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 Results to Non-GAAP Measures.

 

Notes to the Consolidated and Combined Summary of Results, Consolidated and 

Combined Balance Sheets

and Consolidated and Combined Statements of Cash Flows

(amounts in US$ million)

(unaudited)

   

(a) 

Amounts presented as of and for the quarter and year ended December 31, 2016 are unaudited, and the Company's Annual Report on Form 10-K for the year ended December 31, 2016 may contain updates to the information disclosed in this press release.

   

(b) 

During 2015, we made the decision to dispose of a corporate aircraft in China and recognized a loss of $15 million associated with the planned sale of the aircraft for the year ended December 31, 2015. We completed the sale during 2016. The sale proceeds of $19 million was greater than the net book value of $17 million of the aircraft at the time of disposal, which resulted in the reversal of $2 million of the previously recognized loss.

   

(c) 

Incremental restaurant-level impairment represents additional impairment as a result of including the impact from the license fee paid to YUM on the individual restaurants future cash flow, which is equal to 3% of net system sales. Such license fee did not impact the impairment assessment prior to the spin-off as it was considered an intercompany charge at the time, whereas it became a charge from a third party after the spin-off and therefore should be considered in the impairment assessment.

   

(d) 

In connection with the investment agreement with strategic investors entered into on September 1, 2016, the Company issued 19,145,169 shares of common stock on November 1, 2016, subject to post-closing adjustment by December 30, 2016, and warrants to purchase additional shares of common stock. The post-closing adjustment and the warrants were accounted for as derivative instruments and liability-classified equity contracts, respectively. These financial instruments were initially measured at fair value on the date of issuance, with subsequent changes in fair value of $21 million recognized in earnings during the year ended December 31, 2016. No subsequent fair value measurements were recognized after December 30, 2016. 

   

(e) 

The tax benefit was determined based upon the impact of the nature of each Special Item tax effected at the 25% China tax rate or the 35% US tax rate, except for the $21 million changes in fair value of financial instruments associated with the strategic investment which resulted in no income tax expense. Additionally, during the year ended December 31, 2016, we recognized a tax benefit of $26 million related to the legal entity restructuring of our Little Sheep business. $12 million of this benefit was attributed to previous Little Sheep impairment losses recognized within Special Items in 2013 and 2014 and as such was classified as a Special Item consistent with the classification of those historical impairments.

   

(f) 

During the year ended December 31, 2016, the Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to the Company pursuant to their redemption rights. The difference between the purchase price of less than $1 million, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable noncontrolling interests was recorded as an $8 million loss attributable to noncontrolling interests.



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