Yum China Reports Strong First Quarter with Same-Store Sales Growth of 1%

Operating Profit Grew 22%; Restaurant Margin Expanded to 23%

Apr 6, 2017 - 12:49

Yum China Holdings, Inc. (NYSE: YUMC) today reported unaudited results for the first quarter ended February 28, 2017.

First-Quarter Highlights

Same-store sales grew 1%, including growth of 1% at KFC and 2% at Pizza Hut Casual Dining.
Total system sales grew 4%, including growth of 3% at KFC and 9% at Pizza Hut Casual Dining, excluding foreign currency translation ("F/X").
Opened 133 new restaurants during the quarter.
Total restaurant margin increased 3.7 percentage points to 23.0%, primarily aided by the impact of retail tax structure reform implemented on May 1, 2016.
Operating profit grew 22%, and 27% excluding F/X, primarily aided by the impact of retail tax structure reform. F/X negatively impacted operating profit by $12 million.
Net income increased 21% to $175 million.
Adjusted EBITDA increased 14% to $320 million.
Basic EPS increased 14% to $0.45 and diluted EPS increased 12% to $0.44.

Key Results

	% Change
	System Sales	Same-Store Sales	Net New Units	Operating Profit

Yum China	+4	+1	+6	+22
KFC	+3	+1	+5	+9
Pizza Hut Casual Dining	+9	+2	+9	+67

	First Quarter
(in US$ million, except					% Change
for per share data and percentages)	2017		2016		Reported	Ex F/X
Operating Profit	$	254	$	209	+22	+27
Net Income	$	175	$	145	+21	+27
Adjusted EBITDA	$	320	$	279	+14	+20
Basic EPS	$	0.45	$	0.40	+14	+19
Diluted EPS	$	0.44	$	0.40	+12	+17

Note: All comparisons are versus the same period a year ago.
Consistent with prior years, Yum China's fiscal first quarter includes January and February results. First quarter 2016 had an extra day resulting from leap year.
No Special Items in the first quarter 2016 or 2017.
Percentages may not recompute due to rounding.

CEO Comments

"I am very pleased with our performance in the first quarter of 2017, and at Yum China we are facing the future with increasing confidence. Both KFC and Pizza Hut Casual Dining delivered positive same-store sales in the first quarter of 2017, with KFC successfully lapping a particularly strong year ago performance. In addition to a good sales performance, our new unit builds, restaurant margin and operating profit showed strong improvement. We have over 7,600 restaurants, with a two-to-one lead over the nearest Western Quick-Service Restaurant competitor and an approximately six-to-one lead over the nearest Western Casual Dining Restaurant competitor, in China", said Micky Pant, CEO.

"We are especially gratified with the progress made on two key drivers of growth – Digital and Delivery. A network of over 4,400 restaurants in our system offer delivery services and we believe we have established an infrastructure for continued growth. In the first quarter of 2017, delivery represented about 12% of our company sales. With approximately 93 million loyalty program members between KFC and Pizza Hut Casual Dining, we believe we have unprecedented insights into consumer behavior and have been engaging with them across the digital eco-system: from pre-order to payment.

We remain confident in our ability to deliver 550-600 new builds while delivering a double digit growth in operating profit, excluding F/X, in 2017. More importantly we feel our foundation is even stronger to capitalize on the long-term potential of China, and generate strong returns for our stockholders."

New-Unit Development and Asset Upgrades

Opened 133 new restaurants during the quarter. Remodeled 32 restaurants, led by KFC.

	New Units		Restaurant Count
	First		As of First Quarter End
	Quarter			2017	2016
Yum China		133		7,663	7,205
KFC		72		5,276	5,019
Pizza Hut Casual Dining		30		1,738	1,596
Pizza Hut Home Service, Little Sheep, East Dawning and Taco Bell		31		649	590

Total Restaurant Count

	Restaurant Count
	As of First Quarter End
	2017	2016
Restaurants	7,663	7,205
Company-owned	6,080	5,779
Unconsolidated Affiliates	848	803
Franchisees	735	623

Digital and Delivery

Members in the loyalty programs increased to approximately 70 million for KFC and 23 million for Pizza Hut Casual Dining at the end of the first quarter of 2017.
Mobile payments reached about 30% of company sales in the first quarter of 2017, with over $500 million in company sales paid using cashless payment methods.
As of the end of the first quarter, over 4,400 restaurants across China offered delivery services. Delivery represented about 12% of company sales in the quarter.

Restaurant Margin

Restaurant margin for Yum China increased 3.7 percentage points to 23.0%, primarily aided by the impact of retail tax structure reform and profit generated from additional sales at KFC and Pizza Hut Casual Dining, partially offset by wage inflation and commodity inflation.

	First Quarter
	2017	2016	% ppts change

Yum China	23.0%	19.3%	3.7
KFC	23.6%	21.2%	2.4
Pizza Hut Casual Dining	23.0%	15.8%	7.2

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'sleading 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 7,600 restaurants and more than 420,000 employees in over 1,100 cities at the end of February 2017. 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 Elaine Lai, Director - Finance, Investor Relations, at +86 21 2407 8278

Members of the media are invited to contact:
		Forest Liu, Director, Public Affairs, at +86 21 2407 7505

Yum China Holdings, Inc.
Condensed Consolidated and Combined Summary of Results
(amounts in US$ million, except for number of shares and per share amounts)
(unaudited)

	Quarter ended						% Change
	2/28/2017			2/29/2016			B/(W)
Revenues
Company sales	$	1,257		$	1,278			(2)
Franchise fees and income		27			25			5
Total revenues		1,284			1,303			(2)
Costs and Expenses, Net
Company restaurants
Food and paper		345			385			10
Payroll and employee benefits		257			245			(5)
Occupancy and other operating expenses		366			402			9
Company restaurant expenses		968			1,032			6
General and administrative expenses		67			66			-
Franchise expenses		13			14			10
Refranchising gain, net		(1)			(3)			(64)
Other income, net		(17)			(15)			12
Total costs and expenses, net		1,030			1,094			6
Operating Profit		254			209			22
Interest income, net		2			2			47
Income Before Income Taxes		256			211			22
Income tax provision		(76)			(62)			(23)
Net income - including noncontrolling interests		180			149			21
Net income - noncontrolling interests		5			4			10
Net Income - Yum China Holdings, Inc.	$	175		$	145			21
Effective tax rate		29.9	%		29.5	%		(0.4)	ppts.

Basic Earnings Per Common Share	$	0.45		$	0.40			14
Weighted average shares outstanding		387,525,034			363,758,219		NM

Diluted Earnings Per Common Share	$	0.44		$	0.40			12
Weighted average shares outstanding		395,347,021			363,758,219		NM

Company sales		100.0	%		100.0	%
Food and paper		27.5			30.1			2.6	ppts.
Payroll and employee benefits		20.5			19.2			(1.3)	ppts.
Occupancy and other operating expenses		29.0			31.4			2.4	ppts.
Restaurant margin		23.0	%		19.3	%		3.7	ppts.
Operating margin		20.2	%		16.4	%		3.9	ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.
KFC Operating Results
(amounts in US$ million)
(unaudited)

	Quarter ended						% Change
	2/28/2017			2/29/2016			B/(W)
Revenues
Company sales	$	870		$	897			(3)
Franchise fees and income		26			24			3
Total revenues		896			921			(3)
Costs and Expenses, Net
Company restaurants
Food and paper		251			275			9
Payroll and employee benefits		167			159			(6)
Occupancy and other operating expenses		247			272			10
Company restaurant expenses		665			706			6
General and administrative expenses		25			24			(7)
Franchise expenses		13			14			10
Closures and impairment expenses, net		1			-		NM
Other income, net		(15)			(14)			13
Total costs and expenses, net		689			730			6
Operating Profit	$	207		$	191			9
Company sales		100.0	%		100.0	%
Food and paper		28.9			30.7			1.8	ppts.
Payroll and employee benefits		19.3			17.7			(1.6)	ppts.
Occupancy and other operating expenses		28.2			30.4			2.2	ppts.
Restaurant margin		23.6	%		21.2	%		2.4	ppts.
Operating margin		23.8	%		21.3	%		2.5	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
	2/28/2017			2/29/2016			B/(W)
Revenues
Company sales	$	339		$	328			3
Franchise fees and income		-			-		NM
Total revenues		339			328			3
Costs and Expenses, Net
Company restaurants
Food and paper		80			92			13
Payroll and employee benefits		75			71			(6)
Occupancy and other operating expenses		106			113			6
Company restaurant expenses		261			276			6
General and administrative expenses		14			13			-
Closures and impairment expenses, net		(1)			-		NM
Total costs and expenses, net		274			289			5
Operating Profit	$	65		$	39			67
Company sales		100.0	%		100.0	%
Food and paper		23.7			28.2			4.5	ppts.
Payroll and employee benefits		22.2			21.7			(0.5)	ppts.
Occupancy and other operating expenses		31.1			34.3			3.2	ppts.
Restaurant margin		23.0	%		15.8	%		7.2	ppts.
Operating margin		19.3	%		12.0	%		7.3	ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.
Condensed Consolidated Balance Sheets
(amounts in US$ million, except for number of shares)
(unaudited)

	2/28/2017		12/31/2016
ASSETS
Current Assets
Cash and cash equivalents	$	1,074	$	885
Short-term investments		180		79
Accounts receivable, net		68		74
Inventories, net		231		268
Prepaid expenses and other current assets		169		120
Total Current Assets		1,722		1,426
Property, plant and equipment, net		1,627		1,647
Goodwill		80		79
Intangible assets, net		87		88
Investments in unconsolidated affiliates		37		71
Other assets		261		254
Deferred income taxes		163		162
Total Assets		3,977		3,727
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and other current liabilities		984		971
Income taxes payable		84		33
Total Current Liabilities		1,068		1,004
Capital lease obligations		28		28
Other liabilities and deferred credits		251		252
Total Liabilities		1,347		1,284

Equity
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 384,311,143 shares and 383,344,835.42 shares issued and outstanding at February 28, 2017 and December 31, 2016, respectively		4		4
Treasury stock		(20)		(20)
Additional paid-in capital		2,359		2,352
Retained earnings		215		40
Accumulated other comprehensive income		22		1
Total Equity - Yum China Holdings, Inc.		2,580		2,377
Noncontrolling interests		50		66
Total Equity		2,630		2,443
Total Liabilities and Equity	$	3,977	$	3,727

Yum China Holdings, Inc.
Condensed Consolidated and Combined Statements of Cash Flows
(amounts in US$ million)
(unaudited)

	Quarter ended
	2/28/2017		2/29/2016
Cash Flows - Operating Activities
Net income - including noncontrolling interests	$	180	$	149
Depreciation and amortization		64		68
Refranchising gain		(1)		(3)
Deferred income taxes		(1)		(19)
Equity income from investments in unconsolidated affiliates		(17)		(16)
Share-based compensation expense		3		3
Changes in accounts receivable		8		(8)
Changes in inventories		40		17
Changes in prepaid expenses and other current assets		5		7
Changes in accounts payable and other current liabilities		31		113
Changes in income taxes payable		51		56
Other, net		(6)		6
Net Cash Provided by Operating Activities		357		373
Cash Flows - Investing Activities
Capital spending		(74)		(80)
Purchase of short-term investments		(100)		(54)
Proceeds from refranchising of restaurants		2		7
Other, net		(1)		(1)
Net Cash Used in Investing Activities		(173)		(128)
Cash Flows - Financing Activities
Net transfers from Parent		-		7
Payment of capital lease obligations		(1)		-
Net Cash (Used in) Provided by Financing Activities		(1)		7
Effect of Exchange Rates on Cash and Cash Equivalents		6		(5)
Net Increase in Cash and Cash Equivalents		189		247
Cash and Cash Equivalents - Beginning of Period		885		425
Cash and Cash Equivalents - End of Period	$	1,074	$	672

Reconciliation of Reported Results to Non-GAAP Measures
(amounts in US$ million)
(unaudited)

In this press release:

The Company provides certain percentage changes excluding the impact of 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 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 Condensed 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 percentage is defined as Restaurant profit divided by Company sales.

In addition to the results provided in accordance with US Generally Accepted Accounting Principles ("GAAP") in this press release, the Company provides Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, depreciation, amortization and other items. This non-GAAP measure is not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of this non-GAAP measure provides additional information to investors to facilitate the comparison of past and present results. This non-GAAP measure 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 and Combined Summary of Results and other information presented herein. A reconciliation of this non-GAAP measure to its most directly comparable GAAP measure follows.

Reconciliation of Net Income to Adjusted EBITDA
(amounts in US$ million)
(unaudited)

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

	Quarter ended
	2/28/2017		2/29/2016
Reconciliation of Net Income to Adjusted EBITDA
Net Income - Yum China Holdings, Inc.	$	175	$	145
Net income - noncontrolling interests		5		4
Income tax provision		76		62
Interest income, net		(2)		(2)
Operating Profit		254		209
Depreciation and amortization		64		68
Store impairment charges		2		2
Adjusted EBITDA	$	320	$	279

Yum China Holdings, Inc.
Segment Results
(amounts in US$ million)
(unaudited)

Quarter Ended 2/28/2017	KFC		Pizza Hut Casual Dining		Others		Corporate and Unallocated		Total
Total revenues	$	896	$	339	$	49	$	-	$	1,284
Company restaurant expenses		665		261		42		-		968
General and administrative expenses		25		14		5		23		67
Franchise expenses		13		-		-		-		13
Closures and impairment expenses, net		1		(1)		-		-		-
Refranchising gain, net		-		-		-		(1)		(1)
Other income, net		(15)		-		(2)		-		(17)
		689		274		45		22		1,030
Operating Profit (Loss)	$	207	$	65	$	4	$	(22)	$	254


Quarter Ended 2/29/2016	KFC		Pizza Hut Casual Dining		Others		Corporate and Unallocated		Total
Total revenues	$	921	$	328	$	54	$	-	$	1,303
Company restaurant expenses		706		276		50		-		1,032
General and administrative expenses		24		13		5		24		66
Franchise expenses		14		-		-		-		14
Refranchising gain, net		-		-		-		(3)		(3)
Other income, net		(14)		-		(1)		-		(15)
		730		289		54		21		1,094
Operating Profit (Loss)	$	191	$	39	$	-	$	(21)	$	209

Yum China Reports Strong First Quarter with Same-Store Sales Growth of 1%

Operating Profit Grew 22%; Restaurant Margin Expanded to 23%

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