Yum China Reports Second Quarter 2019 Results

SHANGHAI, July 30, 2019 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the second quarter ended June 30, 2019. 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.

Second Quarter Highlights

• Total revenues increased 3% year over year to $2.12 billion from $2.07 billion (10% year over year increase excluding foreign currency translation ("F/X")).
• Total system sales grew 10% year over year, with growth of 12% at KFC and 4% at Pizza Hut, excluding F/X.
• Same-store sales grew 4% year over year, with a 5% increase at KFC and a 1% increase at Pizza Hut, excluding F/X.
• Restaurant margin was 14.7%, as compared with 15.1% in the prior year period.
• Operating Profit increased 6% year over year to $204 million from $193 million (14% year over year increase excluding F/X).
• Effective tax rate was 20.0%.
• Net Income increased 24% to $178 million from $143 million in the prior year period, primarily due to the increase in operating profit and mark to market gain from our equity investment in Meituan Dianping.
• Diluted EPS increased 28% to $0.46 from $0.36 in the prior year period (14% year over year increase excluding the $0.04 per share mark to market gain from our equity investment in Meituan Dianping).
• Opened 178 new restaurants during the quarter, bringing total store count to 8,751 across more than 1,300 cities.

Key Financial Results

CEO and CFO Comments

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

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

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

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

Dividend and Share Repurchase

• The Board of Directors declared a cash dividend of $0.12 per share on Yum China's common stock, payable as of the close of business on September 17, 2019 to stockholders of record as of the close of business on August 27, 2019.
• During the second quarter, we repurchased approximately 1.8 million shares of Yum China common stock for $74.9 million at an average price of $42.60 per share.

Digital and Delivery 

• As of June 30, 2019, the KFC loyalty program had over 185 million members and the Pizza Hut loyalty program had over 60 million members, an increase of 50 million and 15 million, respectively, year over year.
• Digital payments accounted for 90% of Company sales in the quarter, an increase of 5 percentage points year over year.
• Delivery contributed to 20% of Company sales in the second quarter of 2019, an increase of 4 percentage points year over year. Delivery services are now available in 1,190 cities, up from 1,010 cities in the prior year period.

New-Unit Development and Asset Upgrade

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

Restaurant Margin

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

2019 Outlook

• The Company is updating its fiscal year 2019 targets as follows:
  - Between 800 and 850 gross new units. The increased store count reflects the accelerating development of multiple brands with the majority of the incremental new units coming from KFC and the new inclusion of COFFii & JOY.
  - Capital expenditures between $475 million and $525 million.
• The Company continues to expect a fiscal year 2019 effective tax rate below 28%, excluding any impact from the Company's equity investment in Meituan Dianping.

Conference Call

Yum China's management will hold an earnings conference call at 8:00 p.m. U.S. Eastern Time on Tuesday, July 30, 2019 (8:00 a.m. Beijing/Hong Kong Time on Wednesday, July 31, 2019). A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com.

A replay of the conference call will be available two hours after the call ends until 10:00 a.m. U.S. Eastern Time on Wednesday, August 7, 2019 (10:00 p.m. Beijing/Hong Kong Time on Wednesday, August 7, 2019) and may be accessed by phone at the following numbers:

Additionally, a live webcast and an archived webcast of this conference call will be available at http://ir.yumchina.com.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including under "2019 Outlook." We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as "expect," "expectation," "believe," "anticipate," "may," "could," "intend," "belief," "plan," "estimate," "target," "predict," "project," "likely," "will," "continue," "should," "forecast," "outlook" or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements include, without limitation, statements regarding the future business plans, earnings, performance and returns of Yum China, anticipated effects of population and macroeconomic trends, the capital structure and effective tax rate of Yum China, the anticipated effects of our digital and delivery capabilities on growth and beliefs regarding the long-term drivers of Yum China's business. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks and uncertainties that are difficult to predict and could cause our actual results or events to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or assumptions will be achieved. The forward-looking statements included in this press release are only made as of the date of this press release, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. Numerous factors could cause our actual results or events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to achieve development goals at the times and in the amounts currently anticipated, if at all, the success of our marketing campaigns and product innovation, our ability to maintain food safety and quality control systems, our ability to control costs and expenses, including tax costs, as well as changes in political, economic and regulatory conditions in China. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results.

About Yum China Holdings, Inc.

Yum China Holdings, Inc. is a licensee of Yum! Brands in mainland China. It has exclusive rights in mainland China to KFC, China's leading quick-service restaurant brand, Pizza Hut, the leading casual dining restaurant brand in China, and Taco Bell, a California-based restaurant chain serving innovative Mexican-inspired food. Yum China also owns the Little Sheep, East Dawning and COFFii & JOY concepts outright. The Company had more than 8,700 restaurants in over 1,300 cities at the end of June 2019. In 2019, Yum China was named to the Bloomberg Gender-Equality Index and was certified as a Top Employer 2019 in China by the Top Employers Institute. For more information, please visit http://ir.yumchina.com.

Percentages may not recompute due to rounding.

Percentages may not recompute due to rounding.

Percentages may not recompute due to rounding.

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, 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.
• Company Restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales.

Reconciliation of Reported GAAP Results to Adjusted Measures
(in millions, except per share data)
(unaudited)

In addition to the results provided in accordance with US Generally Accepted Accounting Principles ("GAAP") in this press release, the Company provides measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted EPS, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment gain or loss, depreciation, amortization and other items, including store impairment charges and Special Items. The Special Item for the year to date ended June 30, 2019 represents the impact from the US Tax Cuts and Jobs Act (the "Tax Act"), as described in the accompanying notes. The Special Item for the year to date ended June 30, 2018 represents a gain recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition, as described in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment gain or loss, depreciation, amortization and other items, including store impairment charges and Special Items. These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of these adjusted measures provide additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature.  These adjusted measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Condensed Consolidated Statements of Income and other information presented herein. A reconciliation of the most directly comparable GAAP measures to adjusted measures follows.

Notes to the Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets,
Condensed Consolidated Statements of Cash Flows and Reconciliation of Reported GAAP Results to Adjusted Measures
(in US$ million)
(unaudited)

(a) Amounts presented as of and for the quarters and years to date ended June 30, 2019 and 2018 are unaudited.

(b) As a result of the acquisition of Wuxi KFC in the first quarter of 2018, the Company recognized a gain of $98 million from the re-measurement of our previously held 47% equity interest at fair value, which was not allocated to any segment for performance reporting purposes.

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

(d) We completed the evaluation of the impact on our transition tax computation based on the final regulations released by the US Treasury Department and the IRS in the first quarter of 2019 and recorded an additional amount of $8 million for the transition tax accordingly.

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

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

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

⁽¹⁾ Starting from the first quarter of 2019, our newly developed COFFii & JOY concept and e-commerce business became operating segments, as their financial results started being regularly reviewed by the Company's chief operating decision maker. Accordingly, our six non-reportable operating segments, reflecting the operations of East Dawning, Little Sheep, Taco Bell, Daojia, COFFii & JOY and our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. Segment financial information for prior quarters has been recast to align with this change in segment reporting. There was no impact on the condensed consolidated financial statements of the Company as a result of this change.

⁽²⁾ Corporate and unallocated expenses comprise items that are not allocated to segments for performance reporting purposes. Amount includes revenues and expenses associated with transactions with franchisees and unconsolidated affiliates such as inventory procurement and other services provided to franchisees and unconsolidated affiliates. The Corporate and Unallocated column in the above tables includes, among other amounts, all amounts that we have deemed Special Items. See "Reconciliation of Reported GAAP Results to Adjusted Measures".

SOURCE Yum China Holdings, Inc.

Related Links

http://ir.yumchina.com