Yum China Results

Yum China Reports First Quarter 2018 Results

Yum! Brands

Yum China Holdings, Inc. (NYSE: YUMC) today reported unaudited results for the first quarter ended March 31, 2018. Reported GAAP results include Special Items, which are excluded from adjusted measures.  Special Items are not allocated to any segment and therefore only impact reported GAAP results of Yum China.  See "Reconciliation of Reported GAAP Results to Adjusted Measures" within this release.

First Quarter Highlights

  • Total revenues increased 15% year over year to $2.2 billion from $1.9 billion (6% year over year increase excluding foreign currency translation ("F/X")).
  • Total system sales grew 6% year over year, with 9% growth at KFC partially offset by 1% decline at Pizza Hut, excluding F/X.
  • Same-store sales grew 3% year over year, with an increase of 5% at KFC partially offset by a 5% decrease at Pizza Hut, excluding F/X.
  • Restaurant margin was 17.9%, as compared with 20.4% in the prior year period.
  • Operating Profit increased 33% year over year to $395 million from $296 million (22% year over year increase excluding F/X). Excluding Special Items, Adjusted Operating Profit was $297 million for the first quarter of 2018, as compared with $296 million in the prior year period (8% year over year decrease excluding F/X).
  • Net Income increased 41% to $288 million from $204 million in the prior year period.  
  • Effective tax rate was 26.6%.
  • Diluted EPS was $0.72, as compared with $0.52 in the prior year period. Excluding Special Items, Adjusted Diluted EPS was $0.53.             
  • Completed the acquisition of an additional 36% equity interest in an unconsolidated affiliate that operates KFC stores in Wuxi, China ("Wuxi KFC"), for cash consideration of approximately $98 million, bringing Yum China's equity interest in Wuxi KFC to 83%. A gain of $98 million was recorded from the re-measurement of our previously held equity interest.
  • Opened 203 new restaurants during the quarter, bringing total store count to 8,112 across more than 1,200 cities.
  • Online delivery contributed 16% to Company sales, up from 13% in the prior year period. Delivery services now available in 970 cities, up from 700 cities in the prior year period.
  • As of March 31, 2018, the KFC loyalty program had more than 120 million members and the Pizza Hut loyalty program had over 40 million members.
  • Mobile payment accounted for approximately 56% of Company sales in the first quarter of 2018, as compared to 31% in the prior year period.

Key Financial Results

First Quarter

% Change

System

Sales

Same-Store

Sales

Net New

Units

Operating

Profit

Yum China

+6

+3

+6

+33

KFC

+9

+5

+6

+21

Pizza Hut

(1)

(5)

+5

(58)

First Quarter

(in US$ million, except

% Change

for per share data and percentages)

2018

2017

Reported

Ex F/X

Operating Profit

$

395

$

296

+33

+22

Adjusted Operating Profit1

$

297

$

296

(8)

Net Income

$

288

$

204

+41

+29

Basic Earnings Per Common Share

$

0.75

$

0.53

+42

+28

Adjusted Basic EPS Per Common Share1

$

0.55

$

0.53

+4

(6)

Diluted Earnings Per Common Share

$

0.72

$

0.52

+38

+25

Adjusted Diluted EPS Per Common Share1

$

0.53

$

0.52

+2

(6)

 

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

 

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

 

NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.

 

Yum China's fiscal first quarter 2018 includes January, February and March results.

 

Percentages may not recompute due to rounding.

 

System sales and same-store sales percentages exclude the impact of F/X.

 

Prior period results have been recast for the change of fiscal quarter, same-store sales growth definition and adoption of new revenue accounting standard.

CEO and CFO Comments

"We are pleased to start 2018 with positive system sales and same-store sales growth for the Company. The strong operational and financial performance of KFC is particularly encouraging as it successfully lapped two strong first quarters in 2017 and 2016. During the quarter, while Pizza Hut had some challenges with same-store sales growth and restaurant margin, we remain committed to our revitalization plan and key focus areas to drive sales growth. We believe our focus on food innovation and customer experience, together with the execution of strategic priorities in digital and delivery, has enabled us, and will continue to enable us, to build a stronger Yum China," said Joey Wat, CEO of Yum China.

"As part of our capital allocation strategy to invest in and grow our core brands, we acquired an additional 36% interest in Wuxi KFC, increasing our total equity interest to 83%. In 2018, we now expect our annual new build to reach 600-650 units, increasing from the previously announced 550-600 units. We will continue to invest in digital and delivery, which we believe will drive long-term growth," remarked Jacky Lo, CFO of Yum China. 

Dividend and Share Repurchase

  • The Board of Directors declared a cash dividend of $0.10 per share on Yum China's common stock, payable as of the close of business on June 20, 2018 to stockholders of record as of the close of business on May 30, 2018.
  • Yum China did not repurchase any shares during the first quarter of 2018.

New-Unit Development and Asset Upgrade

  • We opened 203 new restaurants and remodeled 125 restaurants in the first quarter of 2018.

New Units

Restaurant Count

First

As of March 31

Quarter

2018

2017

Yum China

203

8,112

7,653

KFC

144

5,602

5,277

Pizza Hut

41

2,214

2,105

Little Sheep, East Dawning, Taco Bell

18

296

271

Restaurant Margin

  • In the first quarter of 2018, Yum China restaurant margin was 17.9%, as compared with 20.4% in the prior year period, primarily attributable to the investment in product upgrades and promotions at Pizza Hut and its sales deleveraging.

First Quarter

2018

2017

% ppts

change

Yum China

17.9

%

20.4

%

(2.5)

KFC

20.9

%

20.8

%

+0.1

Pizza Hut

10.5

%

19.7

%

(9.2)

Digital and Delivery

  • Over 120 million loyalty program members for KFC and over 40 million for Pizza Hut, an increase of 50 million and 20 million year over year, respectively.
  • Mobile payments accounted for approximately 56% of Company sales in the quarter, an increase of 25 percentage points year over year.
  • Delivery contributed to 16% of Company sales in the first quarter of 2018, an increase of 3 percentage points year over year.

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 Mexican-inspired quick-service restaurant brand. Yum China also owns the Little Sheep and East Dawning concepts outright. The Company had more than 8,100 restaurants and more than 450,000 employees in over 1,200 cities at the end of March 2018.

 

Yum China Holdings, Inc.

Consolidated Statements of Income

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

(unaudited)

Quarter Ended

% Change

3/31/2018

3/31/2017

B/(W)

Revenues

Company sales

$

2,016

$

1,738

16

Franchise fees and income

40

36

11

Revenues from transactions with

   franchisees and unconsolidated affiliates

161

147

9

Other revenues

4

5

(23)

Total revenues

2,221

1,926

15

Costs and Expenses, Net

Company restaurants

Food and paper

594

486

(22)

Payroll and employee benefits

442

368

(20)

Occupancy and other operating expenses

619

530

(17)

Company restaurant expenses

1,655

1,384

(20)

General and administrative expenses

114

98

(18)

Franchise expenses

20

18

(12)

Expenses for transactions with

   franchisees and unconsolidated affiliates

160

147

(9)

Other operating costs

4

3

(26)

Other income, net

(127)

(20)

NM

Total costs and expenses, net

1,826

1,630

(12)

Operating Profit

395

296

33

Interest income, net

8

4

99

Income Before Income Taxes

403

300

34

Income tax provision

(107)

(90)

(19)

Net income – including noncontrolling interests

296

210

41

Net income – noncontrolling interests

8

6

24

Net Income – Yum China Holdings, Inc.

$

288

$

204

41

Effective tax rate

26.6

%

30.0

%

3.4

ppts.

Basic Earnings Per Common Share

$

0.75

$

0.53

Weighted average shares outstanding (in millions)

386

388

Diluted Earnings Per Common Share

$

0.72

$

0.52

Weighted average shares outstanding (in millions)

401

395

Cash Dividends Declared Per Common Share

$

0.10

$

Company sales

100.0

%

100.0

%

Food and paper

29.4

27.9

(1.5)

ppts.

Payroll and employee benefits

21.9

21.2

(0.7)

ppts.

Occupancy and other operating expenses

30.8

30.5

(0.3)

ppts.

Restaurant margin

17.9

%

20.4

%

(2.5)

ppts.

Operating margin

19.6

%

17.0

%

2.6

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

KFC Operating Results

(amounts in US$ million)

(unaudited)

Quarter Ended

% Change

3/31/2018

3/31/2017

B/(W)

Revenues

Company sales

$

1,444

$

1,199

20

Franchise fees and income

37

34

10

Revenues from transactions with

   franchisees and unconsolidated affiliates

17

17

Total revenues

1,498

1,250

20

Costs and Expenses, Net

Company restaurants

Food and paper

424

353

(20)

Payroll and employee benefits

293

241

(21)

Occupancy and other operating expenses

426

356

(20)

Company restaurant expenses

1,143

950

(20)

General and administrative expenses

46

39

(19)

Franchise expenses

19

17

(12)

Expenses for transactions with

   franchisees and unconsolidated affiliates

17

17

Other income, net

(23)

(18)

27

Total costs and expenses, net

1,202

1,005

(20)

Operating Profit

$

296

$

245

21

Company sales

100.0

%

100.0

%

Food and paper

29.3

29.4

0.1

ppts.

Payroll and employee benefits

20.3

20.1

(0.2)

ppts.

Occupancy and other operating expenses

29.5

29.7

0.2

ppts.

Restaurant margin

20.9

%

20.8

%

0.1

ppts.

Operating margin

20.6

%

20.5

%

0.1

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

Pizza Hut Operating Results

(amounts in US$ million)

(unaudited)

Quarter Ended

% Change

3/31/2018

3/31/2017

B/(W)

Revenues

Company sales

$

564

$

527

7

Franchise fees and income

1

1

25

Total revenues

565

528

7

Costs and Expenses, Net

Company restaurants

Food and paper

167

129

(29)

Payroll and employee benefits

147

124

(19)

Occupancy and other operating expenses

190

170

(12)

Company restaurant expenses

504

423

(19)

General and administrative expenses

28

25

(14)

Franchise expenses

1

1

(20)

Other income, net

(2)

(1)

NM

Total costs and expenses, net

531

448

(18)

Operating Profit

$

34

$

80

(58)

Company sales

100.0

%

100.0

%

Food and paper

29.7

24.5

(5.2)

ppts.

Payroll and employee benefits

26.1

23.5

(2.6)

ppts.

Occupancy and other operating expenses

33.7

32.3

(1.4)

ppts.

Restaurant margin

10.5

%

19.7

%

(9.2)

ppts.

Operating margin

6.0

%

15.1

%

(9.1)

ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

Consolidated Balance Sheets

(amounts in US$ million)

(unaudited)

3/31/2018

12/31/2017

ASSETS

Current Assets

Cash and cash equivalents

$

1,318

$

1,059

Short-term investments

276

205

Accounts receivable, net

63

81

Inventories, net

261

297

Prepaid expenses and other current assets

203

160

Total Current Assets

2,121

1,802

Property, plant and equipment, net

1,755

1,691

Goodwill

291

108

Intangible assets, net

161

101

Investments in unconsolidated affiliates

44

95

Other assets

412

385

Deferred income taxes

110

105

Total Assets

4,894

4,287

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY

Current Liabilities

Accounts payable and other current liabilities

1,114

985

Income taxes payable

106

39

Total Current Liabilities

1,220

1,024

Capital lease obligations

29

28

Other liabilities and deferred credits

442

388

Total Liabilities

1,691

1,440

Redeemable Noncontrolling Interest

5

5

Equity

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

  390 million shares and 389 million shares issued at March 31, 2018

  and December 31, 2017, respectively; 386 million shares and 385 million shares

  outstanding at March 31, 2018 and December 31, 2017, respectively

4

4

Treasury stock

(148)

(148)

Additional paid-in capital

2,381

2,375

Retained earnings

646

397

Accumulated other comprehensive income

224

137

Total Equity – Yum China Holdings, Inc.

3,107

2,765

Noncontrolling interests

91

77

Total Equity

3,198

2,842

Total Liabilities, Redeemable Noncontrolling Interest and Equity

$

4,894

$

4,287

Yum China Holdings, Inc.

Consolidated Statements of Cash Flows

(amounts in US$ million)

(unaudited)

Quarter Ended

3/31/2018

3/31/2017

Cash Flows - Operating Activities

Net income – including noncontrolling interests

$

296

$

210

Depreciation and amortization

118

96

Gain from re-measurement of equity interest upon acquisition

(98)

Deferred income taxes

23

(1)

Equity income earned from investments in unconsolidated affiliates

(23)

(21)

Distributions received from unconsolidated affiliates

36

27

Share-based compensation

6

5

Changes in accounts receivable

11

14

Changes in inventories

48

26

Changes in prepaid expenses and other current assets

(7)

4

Changes in accounts payable and other current liabilities

85

(63)

Changes in income taxes payable

63

58

Other, net

(7)

(19)

Net Cash Provided by Operating Activities

551

336

Cash Flows - Investing Activities

Capital spending

(111)

(112)

Purchases of short-term investments

(160)

(100)

Maturities of short-term investments

93

Proceeds from refranchising of restaurants

1

2

Acquisition of business, net of cash acquired

(88)

Other, net

(2)

(1)

Net Cash Used in Investing Activities

(267)

(211)

Cash Flows - Financing Activities

Payment of capital lease obligation

(1)

Payment of short-term borrowings assumed from acquisition

(10)

Cash dividends paid

(39)

Other, net

(2)

(10)

Net Cash Used in Financing Activities

(51)

(11)

Effect of Exchange Rates on Cash and Cash Equivalents

26

4

Net Increase in Cash and Cash Equivalents

259

118

Cash and Cash Equivalents – Beginning of Period

1,059

885

Cash and Cash Equivalents – End of Period

$

1,318

$

1,003

 

Reconciliation of Reported GAAP Results to Adjusted Measures

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

(unaudited)

In this press release:

  • The Company provides certain percentage changes excluding the impact of foreign currency translation ("F/X"). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
  • System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our Concepts, except for non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise fees are included in the Company's revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.
  • Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year. We refer to these as our "base" stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores. Prior period results have been recast accordingly.
  • Company Restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales.

In addition to the results provided in accordance with US Generally Accepted Accounting Principles ("GAAP") in this press release, the Company provides measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Diluted Earnings Per Common Share, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, depreciation, amortization and other items, including store impairment charges. The Special Item for the quarter ended March 31, 2018 represents a gain recognized from the re-measurement of our previously held equity interest at fair value upon acquisition, as described in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of these adjusted measures provide additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to its nature.  These adjusted measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Consolidated Statements of Income and other information presented herein. A reconciliation of the most directly comparable GAAP measures to adjusted measures follows.

Quarter Ended

3/31/2018

3/31/2017

Detail of Special Items

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

98

Special Items Income - Operating Profit

98

Tax Expenses on Special Items(c)

(24)

Special Items Income, net of tax – including noncontrolling interests

74

Special Items Income, net of tax – noncontrolling interests

Special Items Income, net of tax –Yum China Holdings, Inc.

74

Weighted Average Diluted Shares Outstanding

401

395

Special Items Diluted Earnings Per Common Share

0.19

Reconciliation of Operating Profit to Adjusted Operating Profit

Operating Profit

395

296

Special Items Income - Operating Profit

98

Adjusted Operating Profit

297

296

Reconciliation of EPS to Adjusted EPS

Diluted Earnings Per Common Share

0.72

0.52

Special Items Diluted Earnings Per Common Share

0.19

Adjusted Diluted Earnings Per Common Share

0.53

0.52

Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate

Effective Tax Rate

26.6

%

30.0

%

Impact on Effective Tax Rate as a result of Special Items

(0.5)

%

(0.0)

%

Adjusted Effective Tax Rate

27.1

%

30.0

%

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

3/31/2018

3/31/2017

Reconciliation of Net Income to Adjusted EBITDA

Net Income – Yum China Holdings, Inc.

288

204

Net income – noncontrolling interests

$

8

$

6

Income tax provision

107

90

Interest income, net

(8)

(4)

Operating Profit

395

296

Depreciation and amortization

118

96

Store impairment charges

2

4

Special Items Income - Operating Profit

(98)

Adjusted EBITDA

$

417

$

396

Unit Count by Brand

KFC

2017

New Builds

Closures

Refranchised

Others

2018

Company-owned

4,112

108

(22)

(2)

157

4,353

Unconsolidated affiliates

891

33

(5)

(157)

762

Franchise

485

3

(3)

2

487

Total

5,488

144

(30)

5,602

Pizza Hut

2017

New Builds

Closures

Refranchised

2018

Company-owned

2,166

40

(22)

(1)

2,183

Franchise

29

1

1

31

Total

2,195

41

(22)

2,214

All Other Segments

2017

New Builds

Closures

2018

Company-owned

29

1

(3)

27

Franchise

271

17

(19)

269

Total

300

18

(22)

296

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

Quarter Ended 3/31/18

KFC

Pizza Hut

All Other

Segments

Corporate

and

Unallocated(1)

Total

Company sales

$

1,444

$

564

$

8

$

$

2,016

Franchise fees and income

37

1

2

40

Revenues from transactions with

   franchisees and unconsolidated affiliates

17

7

137

161

Other revenues

3

1

4

Total revenues

$

1,498

$

565

$

20

$

138

$

2,221

Company restaurant expenses

1,143

504

8

1,655

General and administrative expenses

46

28

7

33

114

Franchise expenses

19

1

20

Expenses for transactions with

  franchisees and unconsolidated affiliates

17

6

137

160

Other operating costs

3

1

4

Other income, net

(23)

(2)

(102)

(127)

1,202

531

24

69

1,826

Operating Profit (Loss)

$

296

$

34

$

(4)

$

69

$

395

Quarter Ended 3/31/17

KFC

Pizza Hut

All Other

Segments

Corporate

and

Unallocated(1)

Total

Company sales

$

1,199

$

527

$

12

$

$

1,738

Franchise fees and income

34

1

1

36

Revenues from transactions with

   franchisees and unconsolidated affiliates

17

5

125

147

Other revenues

5

5

Total revenues

$

1,250

$

528

$

23

$

125

$

1,926

Company restaurant expenses

950

423

11

1,384

General and administrative expenses

39

25

3

31

98

Franchise expenses

17

1

18

Expenses for transactions with

  franchisees and unconsolidated affiliates

17

5

125

147

Other operating costs

3

3

Other income, net

(18)

(1)

(1)

(20)

Total costs and expenses, net

1,005

448

22

155

1,630

Operating Profit (Loss)

$

245

$

80

$

1

$

(30)

$

296

The above tables reconcile segment information, which is based on management responsibility, with our Consolidated Statements of Income.  

(1)

Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes. Amount includes revenues and expenses associated with transactions with franchisees and unconsolidated affiliates such as inventory procurement and other services provided to franchisees and unconsolidated affiliates. The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See "Reconciliation of Reported GAAP Results to Adjusted Measures".

 

Notes to the Consolidated Statements of Income, Consolidated Balance Sheets

and Consolidated Statements of Cash Flows

(amounts in US$ million)

(unaudited)

(a)

Amounts presented as of and for the quarter ended March 31, 2018 are unaudited.

(b)

As a result of the acquisition of Wuxi KFC, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes.

(c)

The tax expense was determined based upon the nature as well as the jurisdiction of each Special Item at the applicable tax rate.



Logos, product and company names mentioned are the property of their respective owners.