Yum China Reports Q2 Same-Store Sales Growth of 3% and Operating Profit Growth of 64%; Loyalty Members Surpassed 100 Million; Mobile Payment Exceeded 40% of Total Company Sales

SHANGHAI, July 5, 2017 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the second quarter ended May 31, 2017.

Second Quarter Highlights

• Total system sales grew 7%, including growth of 8% at KFC and 7% at Pizza Hut¹, excluding foreign currency translation ("F/X").
• Same-store sales grew 3%, including growth of 4% at KFC, flat at Pizza Hut.
• Opened 90 new restaurants during the quarter.
• Total restaurant margin increased 2.7 percentage points to 15.3%, primarily due to the impact of retail tax structure reform and also driven by same-store sales leverage, partially offset by wage inflation and commodity inflation.
• Operating profit increased 64%, and 73% excluding F/X, primarily due to the impact of retail tax structure reform and also driven by same-store sales leverage. F/X negatively impacted reported operating profit by $8 million.
• Net income increased 39% to $107 million.
• Adjusted EBITDA increased 15% to $259 million.
• Basic EPS increased 33% to $0.28 and diluted EPS increased 29% to $0.27.

Key Results

CEO Comments

"I am pleased with our overall performance during the quarter, with same-store sales up 3% and system sales up 7%, on the back of continued strength at KFC. Operating profit, restaurant margin and net income all showed robust improvement." said Micky Pant, CEO. 

"We are committed to building one of the world's leading restaurant companies, and are executing against a plan that we have developed towards this goal. We are making progress in the key themes we are investing in – loyalty programs, digital and delivery capabilities, and continued upgrade of restaurant assets and optimization of store formats.  We are pleased to report some encouraging results: loyalty members for KFC and Pizza Hut have surpassed 100 million in total, and mobile payment exceeded 40% of our company sales in the second quarter.  Over 4,900 of our restaurants offered delivery service. Delivery sales accounted for 13% of company sales in the second quarter.

We also completed the acquisition of an 80% stake, on a fully diluted basis, in Daojia, an online aggregator platform with two brands focusing on higher-end delivery market segment, for a cash consideration of $36.7 million to the selling shareholders and a capital contribution of $25 million to Daojia.  We see this acquisition as complementary to our existing delivery business, and it provides valuable operational and technological expertise."

New-Unit Development and Asset Upgrade

• Opened 90 new restaurants during the second quarter, and 223 year to date.
• Remodeled 197 restaurants during the second quarter, and 229 year to date, led by KFC.

Total Restaurant Count

Restaurant Margin

• For the second quarter, restaurant margin for Yum China increased 2.7 percentage points to 15.3%. Year to date, restaurant margin for Yum China increased 3.1 percentage points to 18.7%. Margin expansion was primarily due to the impact of retail tax structure reform and also driven by same-store sales leverage, partially offset by wage inflation and commodity inflation.

Digital and Delivery

• Driven by our digital initiatives, we continued to strengthen our loyalty membership programs. By the end of the second quarter, total members in our loyalty programs surpassed 100 million, including 83 million members for KFC and 26 million for Pizza Hut.
• Mobile payments exceeded 40% of company sales in the second quarter of 2017. Over $900 million in company sales were settled by cashless payment methods during the quarter.
• Over 4,900 restaurants across China offered delivery services as of the end of the second quarter. Delivery contributed about 13% of company sales in the second quarter.

Completed Acquisition of Daojia

• During the second quarter, Yum China completed the acquisition of a controlling interest in the holding company of DAOJIA.com.cn ("Daojia"), an established online food delivery service provider. Founded in 2010, Daojia targets higher-end orders in four Tier 1 cities. Daojia also operates Sherpa's, a leading premium food delivery platform specializing in English speaking services.  
• Yum China agreed to pay cash consideration of $36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the acquisition, Yum China held 90% of Daojia's outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis. Mr. Hank Sun, founder of Daojia, will continue to lead the business.
• The acquisition marks another step in executing Yum China's strategy to accelerate growth by building know-how and expertise in delivery. Daojia is complementary to Yum China's existing delivery business, and it provides valuable operational and technological expertise.

 Share Repurchase Update

• Year to date ended May 31, 2017, we repurchased approximately 1 million shares for $39 million at an average price of $36.27 per share. 

Conference Call

Yum China Holdings, Inc. will host a conference call to review the Company's financial performance and strategies at 8:00 p.m. U.S. Eastern Time on Wednesday, July 5, 2017 (8:00 a.m. Beijing/Hong Kong Time on Thursday, July 6, 2017).  A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com.

A live webcast of the call may also be accessed at http://edge.media-server.com/m/p/kdojo9ry.

A replay of the conference call may be accessed by phone at the following numbers two hours after the call ends until 9:00 a.m. U.S. Eastern Time on Thursday, July 13, 2017 (9:00 p.m. Beijing/Hong Kong Time on Thursday, July 13, 2017):

The webcast and the playback can be accessed via the internet by visiting the Yum China Holdings, Inc. website, 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," "likely," "will," "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 and earnings and performance of Yum China, anticipated effects of population and macroeconomic trends, the capital structure of Yum China, and statements regarding the anticipated synergies from the acquisition 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 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 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, changes in political, economic and regulatory conditions in China, the fact that the integration of Daojia may require significant time, attention and resources, potentially diverting attention from the conduct of our core businesses, as well as the fact that the expected synergies from the acquisition may not be realized. 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, 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 May 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.

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 non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings Per Common Share before Special Items, Effective tax rate before Special Items 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. Special Items consist of provision for losses associated with the sale of the aircraft and impact of the redemption of the Little Sheep noncontrolling interest which are described in (a), (b) and (c) in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that we do not believe are indicative of our ongoing operations due to their nature. These non-GAAP measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Condensed Consolidated and Combined Summary of Results and other information presented herein. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures follows.

SOURCE Yum China Holdings, Inc