SEC Filing | Yum China Holdings, Inc.

YUM CHINA HOLDINGS, INC.

/s/ Shella Ng

Chief Legal Officer and Corporate Secretary

Date: October 30, 2018

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yumc-8k_20181030.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 30, 2018

Yum China Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

001-37762

81-2421743

(State or other jurisdiction of

incorporation or organization)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

7100 Corporate Drive

Plano, Texas 75024

United States of America

Yum China Building

20 Tian Yao Qiao Road

Shanghai 200030

People’s Republic of China

(Address, including zip code, of principal executive offices)

(469) 980-2898

(Registrant's telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 2.02.

Results of Operations and Financial Condition.

On October 30, 2018, Yum China Holdings, Inc. issued a press release announcing its unaudited results for the quarter ended September 30, 2018. A copy of the press release is being furnished as Exhibit 99.1 to this Current Report on Form 8-K.

Item 9.01.

Financial Statements and Exhibits.

(d) Exhibits.

The following exhibits are furnished with this report:

Exhibit No.		Exhibit Description

99.1		Press Release of Yum China Holdings, Inc. issued October 30, 2018.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

yumc-ex991_6.htm

Exhibit 99.1

Yum China Reports Third Quarter 2018 Results

Total Revenues and Total System Sales* Grew 4% year over year
Share Repurchase Authorization Increased by $850 million to an Aggregate of $1.4 billion

Shanghai, China (October 31, 2018) – Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the third quarter ended September 30, 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.

Third Quarter Highlights

●

Total revenues increased 4% year over year to $2.2 billion from $2.1 billion (6% year over year increase excluding foreign currency translation (“F/X”)).

●

Total system sales grew 4% year over year, with 6% growth at KFC partially offset by 2% decline at Pizza Hut, excluding F/X.

●

Same-store sales declined 1% year over year, with a 1% increase at KFC and a 5% decrease at Pizza Hut, excluding F/X.

●

Restaurant margin was 17.6%, as compared with 18.0% in the prior year period.

●

Operating Profit increased 2% year over year to $269 million from $264 million (4% year over year increase excluding F/X).

●

Net Income increased 15% to $203 million from $176 million in the prior year period (17% year over year increase excluding F/X).

●

Effective tax rate was 24.2%.

●

Diluted EPS increased 16% to $0.51 from $0.44 in the prior year period (18% year over year increase excluding F/X).

●

Opened 195 new restaurants during the quarter, bringing total store count to 8,313 across more than 1,200 cities.

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 December 18, 2018 to stockholders of record as of the close of business on November 27, 2018.

●

During the third quarter, we repurchased approximately 2.7 million shares of Yum China common stock for $93.7 million at an average price of $35.14 per share.

●

In October 2018, the Board of Directors increased Yum China’s existing share repurchase authorization from $550 million to an aggregate of $1.4 billion.

Recent Development

●

As of today, the Company has repurchased approximately 11.3 million shares for $406 million, including 3.4 million shares for $110 million in October 2018. There is approximately $1 billion remaining under the new share repurchase authorization.

* System sales growth rate excludes the impact of F/X

Yum China Holdings, Inc. • Shanghai, China • Website http://ir.yumchina.com

Key Financial Results

	Third Quarter 2018									Year to Date Ended 9/30/2018
	% Change									% Change
	System Sales		Same-Store Sales			Net New Units		Operating Profit		System Sales		Same-Store Sales		Net New Units		Operating Profit

Yum China	+4		(1)			+6		+2		+4		-		+6		+17
KFC	+6		+1			+8		+3		+6		+2		+8		+11
Pizza Hut	(2)		(5)			+3		-		(1)		(5)		+3		(38)

	Third Quarter									Year to Date Ended 9/30
(in US$ million, except							% Change								% Change
for per share data and percentages)	2018			2017			Reported		Ex F/X	2018		2017			Reported		Ex F/X
Operating Profit	$	269		$	264		2		4	$	857	$	731		17			12
Adjusted Operating Profit¹	$	269		$	261		3		4	$	759	$	728		4			(1)
Net Income	$	203		$	176		15		17	$	634	$	505		26			19
Basic Earnings Per Common Share	$	0.53		$	0.46		15		15	$	1.64	$	1.30		26			20
Adjusted Basic Earnings Per Common Share¹	$	0.53		$	0.45		18		18	$	1.45	$	1.30		12			6
Diluted Earnings Per Common Share	$	0.51		$	0.44		16		18	$	1.59	$	1.27		25			19
Adjusted Diluted Earnings Per Common Share¹	$	0.51		$	0.43		19		21	$	1.41	$	1.26		12			6

¹See “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 third quarter 2018 includes July, August and September 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 the new revenue accounting standard.

CEO and CFO Comments

“We recorded 4% system sales growth during the third quarter, excluding foreign exchange impact, as we expanded our portfolio and delivered more value-oriented offerings to address growing competition and softer trading conditions,” said Joey Wat, CEO of Yum China. “KFC continued to perform well, posting 1% same-store sales growth during the quarter, on top of a 10% growth in the same period last year. Pizza Hut recorded a 5% decline in same-store sales during the quarter, as healthy growth in delivery was offset by lower dine-in traffic. We made further progress on the revitalization program as we launched a refreshed brand identity, improved our value proposition, expanded our digital capabilities to include tableside ordering via mobile, and generated greater delivery traffic through our own channels.”

“Looking ahead, we are excited by the opportunity to grow our portfolio in China’s western quick service restaurant and casual dining markets. We will continue to add a range of store formats across the spectrum of low and high tier cities to drive growth. We will also build out our digital and delivery eco-system so that we can better serve our customers and create a seamless online to offline experience,” said Ms. Wat.

“We are pleased to report that we effectively managed restaurant margins at both brands during the quarter, despite an increase in promotional activities,” said Jacky Lo, CFO of Yum China. “Pizza Hut maintained operating profit at the same level as the year ago period due to more targeted investments in new products and better labor efficiencies.”

“With a solid balance sheet and strong cash generation, we returned over $132 million of capital to our shareholders through a combination of share buybacks and dividends in the third quarter. We are pleased to announce that we increased our quarterly cash dividend by 20% to $0.12 per share, and expanded our share repurchase authorization by $850 million to a total of $1.4 billion. We are committed to continuing to create long-term value for our shareholders,” added Mr. Lo.

Digital and Delivery

●

As of September 30, 2018, the KFC loyalty program had over 145 million members and the Pizza Hut loyalty program had over 50 million members, an increase of 45 million and 20 million, respectively, year over year.

●

Mobile payments accounted for 64% of Company sales in the quarter, an increase of 17 percentage points year over year. Digital payments accounted for 82% of Company sales in the quarter, an increase of 18 percentage points year over year.

●

Delivery contributed to 17% of Company sales in the third quarter of 2018, an increase of 3 percentage points year over year. Delivery services are now available in 1,063 cities, up from 864 cities in the prior year period.

New-Unit Development and Asset Upgrade

●

The Company opened 195 new restaurants and remodeled 209 restaurants in the third quarter of 2018.

	New Units				Restaurant Count
	Third Quarter 2018		Year to Date Ended 9/30/2018		As of 9/30
	Third Quarter 2018		Year to Date Ended 9/30/2018		2018		2017
Yum China		195		562		8,313		7,813
KFC		139		411		5,800		5,393
Pizza Hut		38		106		2,215		2,157
Others²		18		45		298		263

²Others include Little Sheep, East Dawning, Taco Bell and COFFii & JOY, a coffee concept recently developed by Yum China.

Restaurant Margin

●

In the third quarter of 2018, Yum China restaurant margin was 17.6%, as compared with 18.0% in the prior year period, primarily attributable to same-store sales deleverage at Pizza Hut and investment in product upgrades and promotions at both KFC and Pizza Hut.

	Third Quarter								Year to Date Ended 9/30
	2018			2017			% pts change		2018	2017	% pts change
Yum China		17.6	%		18.0	%		(0.4)	16.9%	18.3%	(1.4)
KFC		19.2	%		19.6	%	(0.4)		19.0%	19.3%	(0.3)
Pizza Hut		13.8	%		14.4	%		(0.6)	11.8%	16.3%	(4.5)

Conference Call

Yum China’s management will hold an earnings conference call at 8:00pm U.S. Eastern Time on Tuesday, October 30, 2018 (8:00am Beijing/Hong Kong Time on Wednesday, October 31, 2018). A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com

US:		+1 845 675 0437
Hong Kong:		+852 3018 6771
Mainland China:		400 620 8038 or 800 819 0121
UK:		+44 20 36214779
International:		+65 6713 5090
Passcode:		Yum China

A replay of the conference call will be available two hours after the call ends until 8:00am U.S. Eastern Time on Wednesday, November 7, 2018 (9:00pm Beijing/Hong Kong Time on Wednesday, November 7, 2018) and may be accessed by phone at the following numbers:

US:		+1 855 452 5696
International:		+61 2 8199 0299
Passcode:		8893952

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. 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 and performance of Yum China, statements regarding the revitalization of Pizza Hut, anticipated effects of population and macroeconomic trends, statements regarding the capital structure of Yum China, 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 “Forward-Looking Statements” 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 and East Dawning concepts outright. The Company had more than 8,300 restaurants in over 1,200 cities at the end of September 2018. For more information, please visit http://ir.yumchina.com

Investor Relations Contact:
		Tel: +86 21 2407 7556 IR@YumChina.com

Media Contact:
		Tel: +86 21 2407 7510 Media@YumChina.com

Yum China Holdings, Inc.

Consolidated Statements of Income

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

(unaudited)

	Quarter Ended						% Change				Year to Date Ended						% Change
	9/30/2018			9/30/2017			B/(W)				9/30/2018			9/30/2017			B/(W)
Revenues
Company sales	$	2,008		$	1,924			4			$	5,912		$	5,326			11
Franchise fees and income		36			38			(5	)			110			107			3
Revenues from transactions with franchisees and unconsolidated affiliates		159			160			(1	)			461			448			3
Other revenues		9			8			8				18			16			12
Total revenues		2,212			2,130			4				6,501			5,897			10
Costs and Expenses, Net
Company restaurants
Food and paper		610			560			(9	)			1,775			1,529			(16	)
Payroll and employee benefits		430			403			(7	)			1,296			1,137			(14	)
Occupancy and other operating expenses		615			614			—				1,841			1,683			(9	)
Company restaurant expenses		1,655			1,577			(5	)			4,912			4,349			(13	)
General and administrative expenses		119			123			3				334			339			2
Franchise expenses		18			19			8				55			54			(1	)
Expenses for transactions with franchisees and unconsolidated affiliates		156			159			2				454			443			(2	)
Other operating costs and expenses		6			8			19				17			14			(21	)
Closures and impairment (income) expenses, net		(1	)		2		NM					15			20			25
Other income, net		(10	)		(22	)		(53	)			(143	)		(53	)	NM
Total costs and expenses, net		1,943			1,866			(4	)			5,644			5,166			(9	)
Operating Profit		269			264			2				857			731			17
Interest and other income, net		10			8			34				28			16			76
Income Before Income Taxes		279			272			3				885			747			19
Income tax provision		(67	)		(87	)		22				(227	)		(220	)		(4	)
Net income – including noncontrolling interests		212			185			15				658			527			25
Net income – noncontrolling interests		9			9			(5	)			24			22			(8	)
Net Income – Yum China Holdings, Inc.	$	203		$	176			15			$	634		$	505			26
Effective tax rate		24.2	%		31.9	%		7.7		ppts.		25.7	%		29.4	%		3.7		ppts.

Basic Earnings Per Common Share	$	0.53		$	0.46						$	1.64			1.30
Weighted average shares outstanding (in millions)		384			386							386			387

Diluted Earnings Per Common Share	$	0.51		$	0.44						$	1.59		1.27
Weighted average shares outstanding (in millions)		394			398							398			397

Cash Dividends Declared Per Common Share	$	0.10		$	—						$	0.30		$	—

Company sales		100.0	%		100.0	%						100.0	%		100.0	%
Food and paper		30.4			29.1			(1.3	)	ppts.		30.0			28.7			(1.3	)	ppts.
Payroll and employee benefits		21.4			20.9			(0.5	)	ppts.		21.9			21.3			(0.6	)	ppts.
Occupancy and other operating expenses		30.6			32.0			1.4		ppts.		31.2			31.7			0.5		ppts.
Restaurant margin		17.6	%		18.0	%		(0.4	)	ppts.		16.9	%		18.3	%		(1.4	)	ppts.
Operating margin		13.4	%		13.7	%		(0.3	)	ppts.		14.5	%		13.7	%		0.8		ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

KFC Operating Results

(amounts in US$ million)

(unaudited)

	Quarter Ended						% Change				Year to Date Ended						% Change
	9/30/2018			9/30/2017			B/(W)				9/30/2018			9/30/2017			B/(W)
Revenues
Company sales	$	1,452		$	1,347			8			$	4,248		$	3,705			15
Franchise fees and income		34			36			(7	)			104			102			1
Revenues from transactions with franchisees and unconsolidated affiliates		16			19			(17	)			48			51			(7	)
Total revenues		1,502			1,402			7				4,400			3,858			14
Costs and Expenses, Net
Company restaurants
Food and paper		444			400			(11	)			1,281			1,101			(16	)
Payroll and employee benefits		297			266			(12	)			879			748			(18	)
Occupancy and other operating expenses		432			416			(4	)			1,281			1,139			(12	)
Company restaurant expenses		1,173			1,082			(8	)			3,441			2,988			(15	)
General and administrative expenses		44			44			(2	)			135			121			(11	)
Franchise expenses		17			19			8				53			53			—
Expenses for transactions with franchisees and unconsolidated affiliates		16			19			15				48			51			6
Closures and impairment expenses, net		—			—			31				6			10			43
Other income, net		(12	)		(18	)		(30	)			(42	)		(48	)		(12	)
Total costs and expenses, net		1,238			1,146			(8	)			3,641			3,175			(15	)
Operating Profit	$	264		$	256			3			$	759		$	683			11
Company sales		100.0	%		100.0	%						100.0	%		100.0	%
Food and paper		30.6			29.7			(0.9	)	ppts.		30.2			29.7			(0.5	)	ppts.
Payroll and employee benefits		20.4			19.7			(0.7	)	ppts.		20.7			20.2			(0.5	)	ppts.
Occupancy and other operating expenses		29.8			31.0			1.2		ppts.		30.1			30.8			0.7		ppts.
Restaurant margin		19.2	%		19.6	%		(0.4	)	ppts.		19.0	%		19.3	%		(0.3	)	ppts.
Operating margin		18.1	%		19.0	%		(0.9	)	ppts.		17.8	%		18.4	%		(0.6	)	ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

Pizza Hut Operating Results

(amounts in US$ million)

(unaudited)

	Quarter Ended						% Change				Year to Date Ended						% Change
	9/30/2018			9/30/2017			B/(W)				9/30/2018			9/30/2017			B/(W)
Revenues
Company sales	$	548		$	568			(4	)		$	1,640		$	1,592			3
Franchise fees and income		1			1			4				2			2			17
Revenues from transactions with franchisees and unconsolidated affiliates		1			—			(7	)			1			1			(3	)
Total revenues		550			569			(3	)			1,643			1,595			3
Costs and Expenses, Net
Company restaurants
Food and paper		163			157			(4	)			486			418			(16	)
Payroll and employee benefits		130			135			3				410			381			(8	)
Occupancy and other operating expenses		179			195			8				550			534			(3	)
Company restaurant expenses		472			487			3				1,446			1,333			(9	)
General and administrative expenses		24			27			15				80			78			(1	)
Franchise expenses		1			—			13				2			1			(23	)
Expenses for transactions with franchisees and unconsolidated affiliates		1			—			5				1			1			2
Closures and impairment (income) expenses, net		(1	)		1		NM					9			9			—
Other income, net		—			—		NM					(2	)		—		NM
Total costs and expenses, net		497			515			4				1,536			1,422			(8	)
Operating Profit	$	53		$	54			—			$	107		$	173			(38	)
Company sales		100.0	%		100.0	%						100.0	%		100.0	%
Food and paper		29.7			27.6			(2.1	)	ppts.		29.6			26.2			(3.4	)	ppts.
Payroll and employee benefits		23.8			23.7			(0.1	)	ppts.		25.0			23.9			(1.1	)	ppts.
Occupancy and other operating expenses		32.7			34.3			1.6		ppts.		33.6			33.6			—		ppts.
Restaurant margin		13.8	%		14.4	%		(0.6	)	ppts.		11.8	%		16.3	%		(4.5	)	ppts.
Operating margin		9.8	%		9.4	%		0.4		ppts.		6.6	%		10.9	%		(4.3	)	ppts.

Percentages may not recompute due to rounding.

Yum China Holdings, Inc.

Consolidated Balance Sheets

(amounts in US$ million)

(unaudited)

	9/30/2018			12/31/2017
ASSETS
Current Assets
Cash and cash equivalents	$	1,334		$	1,059
Short-term investments		198			205
Accounts receivable, net		65			79
Inventories, net		270			297
Prepaid expenses and other current assets		179			162
Total Current Assets		2,046			1,802
Property, plant and equipment, net		1,605			1,691
Goodwill		266			108
Intangible assets, net		133			101
Investments in unconsolidated affiliates		68			95
Other assets		498			385
Deferred income taxes		75			105
Total Assets		4,691			4,287
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current Liabilities
Accounts payable and other current liabilities		1,116			985
Income taxes payable		76			39
Total Current Liabilities		1,192			1,024
Capital lease obligations		26			28
Other liabilities		385			388
Total Liabilities		1,603			1,440
Redeemable Noncontrolling Interest		5			5
Equity
Common stock, $0.01 par value; 1,000 million shares authorized; 391 million shares and 389 million shares issued at September 30, 2018 and December 31, 2017, respectively; 382 million shares and 385 million shares outstanding at September 30, 2018 and December 31, 2017, respectively		4			4
Treasury stock		(315	)		(148	)
Additional paid-in capital		2,393			2,375
Retained earnings		916			397
Accumulated other comprehensive (loss) income		(14	)		137
Total Equity – Yum China Holdings, Inc.		2,984			2,765
Noncontrolling interests		99			77
Total Equity		3,083			2,842
Total Liabilities, Redeemable Noncontrolling Interest and Equity	$	4,691		$	4,287

Yum China Holdings, Inc.

Consolidated Statements of Cash Flows

(amounts in US$ million)

(unaudited)

	Year to Date Ended
	9/30/2018			9/30/2017
Cash Flows – Operating Activities
Net income – including noncontrolling interests	$	658		$	527
Depreciation and amortization		343			301
Closures and impairment expenses		15			20
Gain from re-measurement of equity interest upon acquisition		(98	)		—
Deferred income taxes		46			(3	)
Equity income from investments in unconsolidated affiliates		(52	)		(54	)
Distributions received from unconsolidated affiliates		51			39
Share-based compensation		18			18
Changes in accounts receivable		2			12
Changes in inventories		14			18
Changes in prepaid expenses and other current assets		(13	)		(5	)
Changes in accounts payable and other current liabilities		184			89
Changes in income taxes payable		41			51
Other, net		(36	)		(28	)
Net Cash Provided by Operating Activities		1,173			985
Cash Flows – Investing Activities
Capital spending		(359	)		(295	)
Purchases of short-term investments		(513	)		(394	)
Maturities of short-term investments		513			387
Investment in equity securities		(74	)		—
Acquisition of business, net of cash acquired		(91	)		(25	)
Other, net		(3	)		—
Net Cash Used in Investing Activities		(527	)		(327	)
Cash Flows – Financing Activities
Payment of capital lease obligation		(2	)		(2	)
Repayment of short-term borrowings assumed from acquisition		(10	)		—
Repurchase of shares of common stock		(161	)		(128	)
Proceeds from exercise of stock options		—			5
Cash dividends paid on common stock		(115	)		—
Dividends paid to noncontrolling interests		(29	)		(22	)
Other, net		(1	)		—
Net Cash Used in Financing Activities		(318	)		(147	)
Effect of Exchange Rates on Cash and Cash Equivalents		(53	)		27
Net Increase in Cash and Cash Equivalents		275			538
Cash and Cash Equivalents - Beginning of Period		1,059			885
Cash and Cash Equivalents - End of Period	$	1,334		$	1,423

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 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 adjusted 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.

Reconciliation of Reported GAAP Results to Adjusted Measures

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

(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 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 and other income, net, depreciation, amortization and other items, including store impairment charges. The Special Item for the year to date ended September 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 Special Item for the quarter and year to date ended September 30, 2017 represents income from the reversal of contingent consideration. 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 and other income, net, depreciation, amortization and other items, including store impairment charges. 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 Consolidated Statements of Income and other information presented herein. A reconciliation of the most directly comparable GAAP measures to adjusted measures follows.

	Quarter Ended						Year to Date Ended
	9/30/2018			9/30/2017			9/30/2018			9/30/2017
Detail of Special Items
Gain from re-measurement of equity interest upon acquisition^(b)	$	—		$	—		$	98		$	—
Income from the reversal of contingent consideration^(c)		—			3			—			3
Special Items Income - Operating Profit		—			3			98			3
Tax Expenses on Special Items^(d)		—			—			(24	)		—
Special Items Income, net of tax – including noncontrolling interests		—			3			74			3
Special Items Income, net of tax – noncontrolling interests		—			—			—			—
Special Items Income, net of tax –Yum China Holdings, Inc.	$	—		$	3		$	74		$	3
Weighted Average Diluted Shares Outstanding		394			398			398			397
Special Items Diluted Earnings Per Common Share	$	—		$	0.01		$	0.18		$	0.01
Reconciliation of Operating Profit to Adjusted Operating Profit
Operating Profit	$	269		$	264		$	857		$	731
Special Items Income - Operating Profit		—			3			98			3
Adjusted Operating Profit	$	269		$	261		$	759		$	728
Reconciliation of EPS to Adjusted EPS
Diluted Earnings Per Common Share	$	0.51		$	0.44		$	1.59		$	1.27
Special Items Diluted Earnings Per Common Share		—			0.01			0.18			0.01
Adjusted Diluted Earnings Per Common Share	$	0.51		$	0.43		$	1.41		$	1.26
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate
Effective Tax Rate		24.2	%		31.9	%		25.7	%		29.4	%
Impact on Effective Tax Rate as a result of Special Items		—	%		(0.5	)%		(0.1	)%		(0.1	)%
Adjusted Effective Tax Rate		24.2	%		32.4	%		25.8	%		29.5	%

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						Year to Date Ended
	9/30/2018			9/30/2017			9/30/2018			9/30/2017
Reconciliation of Net Income to Adjusted EBITDA
Net Income – Yum China Holdings, Inc.	$	203		$	176		$	634		$	505
Net income – noncontrolling interests		9			9			24			22
Income tax provision		67			87			227			220
Interest and other income, net		(10	)		(8	)		(28	)		(16	)
Operating Profit		269			264			857			731
Depreciation and amortization		108			105			343			301
Store impairment charges		2			5			23			28
Special Items Income - Operating Profit		—			(3	)		(98	)		(3	)
Adjusted EBITDA	$	379		$	371		$	1,125		$	1,057

Unit Count by Brand

KFC

	12/31/2017		New Builds		Acquired			Closures			Refranchised			Others			9/30/2018
Company-owned		4,112		313		2			(75	)		(9	)		157			4,500
Unconsolidated affiliates		891		82		—			(14	)		—			(157	)		802
Franchisees		485		16		(2	)		(10	)		9			—			498
Total		5,488		411		—			(99	)		—			—			5,800

Pizza Hut

	12/31/2017		New Builds		Closures			Refranchised			9/30/2018
Company-owned		2,166		100		(85	)		(1	)		2,180
Franchisees		29		6		(1	)		1			35
Total		2,195		106		(86	)		—			2,215

Others

	12/31/2017		New Builds		Closures			Refranchised			9/30/2018
Company-owned		29		7		(3	)		(2	)		31
Franchisees		271		38		(44	)		2			267
Total		300		45		(47	)		—			298

Yum China Holdings, Inc.

Segment Results

(amounts in US$ million)

(unaudited)

Quarter Ended 9/30/2018	KFC			Pizza Hut			All Other Segments			Corporate and Unallocated⁽¹⁾			Elimination			Total
Company sales	$	1,452		$	548		$	8		$	—		$	—		$	2,008
Franchise fees and income		34			1			1			—			—			36
Revenues from transactions with franchisees and unconsolidated affiliates		16			1			6			136			—			159
Other revenues		—			—			10			2			(3	)		9
Total revenues	$	1,502		$	550		$	25		$	138		$	(3	)	$	2,212
Company restaurant expenses		1,173			472			9			—			1			1,655
General and administrative expenses		44			24			9			42			—			119
Franchise expenses		17			1			—			—			—			18
Expenses for transactions with franchisees and unconsolidated affiliates		16			1			4			135			—			156
Other operating costs and expenses		—			—			9			1			(4	)		6
Closures and impairment income, net		—			(1	)		—			—			—			(1	)
Other (income) expense, net		(12	)		—			—			2			—			(10	)
		1,238			497			31			180			(3	)		1,943
Operating Profit (Loss)	$	264		$	53		$	(6	)	$	(42	)	$	—		$	269

Quarter Ended 9/30/2017	KFC			Pizza Hut		All Other Segments			Corporate and Unallocated⁽¹⁾			Total
Company sales	$	1,347		$	568	$	9		$	—		$	1,924
Franchise fees and income		36			1		1			—			38
Revenues from transactions with franchisees and unconsolidated affiliates		19			—		5			136			160
Other revenues		—			—		8			—			8
Total revenues	$	1,402		$	569	$	23		$	136		$	2,130
Company restaurant expenses		1,082			487		8			—			1,577
General and administrative expenses		44			27		9			43			123
Franchise expenses		19			—		—			—			19
Expenses for transactions with franchisees and unconsolidated affiliates		19			—		4			136			159
Other operating costs and expenses		—			—		8			—			8
Closures and impairment expenses, net		—			1		1			—			2
Other income, net		(18	)		—		—			(4	)		(22	)
Total costs and expenses, net		1,146			515		30			175			1,866
Operating Profit (Loss)	$	256		$	54	$	(7	)	$	(39	)	$	264

Year to Date Ended 9/30/2018	KFC			Pizza Hut			All Other Segments			Corporate and Unallocated⁽¹⁾			Elimination			Total
Company sales	$	4,248		$	1,640		$	24		$	—		$	—		$	5,912
Franchise fees and income		104			2			4			—			—			110
Revenues from transactions with franchisees and unconsolidated affiliates		48			1			17			395			—			461
Other revenues		—			—			18			4			(4	)		18
Total revenues	$	4,400		$	1,643		$	63		$	399		$	(4	)	$	6,501
Company restaurant expenses		3,441			1,446			25			—			—			4,912
General and administrative expenses		135			80			25			94			—			334
Franchise expenses		53			2			—			—			—			55
Expenses for transactions with franchisees and unconsolidated affiliates		48			1			13			392			—			454
Other operating costs and expenses		—			—			18			3			(4	)		17
Closures and impairment expenses, net		6			9			—			—			—			15
Other income, net		(42	)		(2	)		(1	)		(98	)		—			(143	)
		3,641			1,536			80			391			(4	)		5,644
Operating Profit (Loss)	$	759		$	107		$	(17	)	$	8		$	—		$	857

Year to Date Ended 9/30/2017	KFC			Pizza Hut		All Other Segments			Corporate and Unallocated⁽¹⁾			Total
Company sales	$	3,705		$	1,592	$	29		$	—		$	5,326
Franchise fees and income		102			2		3			—			107
Revenues from transactions with franchisees and unconsolidated affiliates		51			1		14			382			448
Other revenues		—			—		16			—			16
Total revenues	$	3,858		$	1,595	$	62		$	382		$	5,897
Company restaurant expenses		2,988			1,333		28			—			4,349
General and administrative expenses		121			78		16			124			339
Franchise expenses		53			1		—			—			54
Expenses for transactions with franchisees and unconsolidated affiliates		51			1		12			379			443
Other operating costs and expenses		—			—		14			—			14
Closures and impairment expenses, net		10			9		1			—			20
Other income, net		(48	)		—		—			(5	)		(53	)
		3,175			1,422		71			498			5,166
Operating Profit (Loss)	$	683		$	173	$	(9	)	$	(116	)	$	731

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,

Consolidated Statements of Cash Flows and Reconciliation of Reported GAAP Results to Adjusted Measures

(amounts in US$ million)

(unaudited)

(a)

Amounts presented as of and for the quarter and year to date ended September 30, 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)

During the third quarter of 2017, we recognized income from the reversal of contingent consideration previously recorded for a business combination as the likelihood of making payment became remote.

(d)

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