YUM CHINA HOLDINGS, INC. References to the Company throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A") are made using the first person notations of "we," "us" or "our." This MD&A contains forward-looking statements, including statements with respect to the ongoing transfer pricing audit, the retail tax structure reform, impacts of COVID-19, our growth plans, future capital resources to fund our operations and anticipated capital expenditures, share repurchases and dividends, and the impact of new accounting pronouncements not yet adopted. See "Cautionary Note Regarding Forward-Looking Statements" at the end of this Item 2 for information regarding forward-looking statements. IntroductionYum China Holdings, Inc. is the largest restaurant company inChina in terms of system sales, with over 11,000 restaurants covering over 1,600 cities primarily inChina as ofSeptember 30, 2021 . Our growing restaurant base consists of our flagshipKFC and Pizza Hut brands, as well as emerging brands such as Little Sheep,Huang Ji Huang , COFFii & JOY, East Dawning,Taco Bell and Lavazza. We have the exclusive right to operate and sublicense theKFC ,Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands inChina , excludingHong Kong ,Macau andTaiwan , and own the intellectual property of the Little Sheep,Huang Ji Huang , COFFii & JOY and East Dawning concepts outright. We also established a joint venture withLuigi Lavazza S.p.A . ("Lavazza Group "), the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee shop concept inChina .KFC was the first major global restaurant brand to enter China as early as 1987. With more than 30 years of operations, we have developed extensive operating experience in the China market. We have since grown to become the largest restaurant company inChina in terms of system sales. We believe that there are significant opportunities to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities.KFC is the leading and the largest quick-service restaurant ("QSR") brand inChina in terms of system sales. As ofSeptember 30, 2021 ,KFC operated over 7,900 restaurants in over 1,600 cities across China. During the quarter endedSeptember 30, 2020 , the Company completed the acquisition of an additional 25% interest in an unconsolidated affiliate that operatesKFC stores in and aroundSuzhou, China ("Suzhou KFC"), increasing our equity interest to 72% and allowing the Company to consolidate the entity.Pizza Hut is the leading and the largest casual dining restaurant ("CDR") brand inChina in terms of system sales and number of restaurants. As ofSeptember 30, 2021 ,Pizza Hut operated over 2,500 restaurants in over 500 cities. The Company's common stock is listed on the NYSE under the symbol "YUMC". OnSeptember 10, 2020 , the Company completed its secondary listing on the Main Board of the HKEX under the stock code "9987", in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company from the global offering after deducting underwriting fees and the offering expenses amounted toUS$2.2 billion . Overview We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including metrics that management uses to assess the Company's performance. Throughout this MD&A, we discuss the following performance metrics:
• 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.
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• 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 sales from
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 an average
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, excluding the period
during which stores are temporarily closed. 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, including stores
temporarily closed, and the base stores changed on a rolling basis from
month to month. This revision was made to align with how managementmeasures performance internally and focuses on trends of a more stable
base of stores.
• Company sales represent revenues from Company-owned restaurants. CompanyRestaurant 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. Within the Company sales and
Restaurant profit analysis, Store Portfolio Actions represent the net
impact of new-unit openings, acquisitions, refranchising and store
closures, and Other primarily represents the impact of same-store sales as
well as the impact of changes in restaurant operating costs such as
inflation/deflation.
All Note references in this MD&A refer to the Notes to the Condensed
Consolidated Financial Statements. Tabular amounts are displayed in millions of
32
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Quarters and Years to Date Ended
Results of Operations Summary The Company has two reportable segments:KFC andPizza Hut . Our remaining operating segments, including the operations of Little Sheep,Huang Ji Huang , COFFii & JOY, East Dawning,Taco Bell , Lavazza, Daojia 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. Additional details on our reportable operating segments are included in Note 13. Quarterly highlights: % Change System Sales(a) Same-Store Sales(a) Net New Units Operating Profit Operating Profit (Reported) (Ex F/X) KFC +1 (8 ) +14 (31 ) (36 ) Pizza Hut +1 (5 ) +10 (69 ) (71 ) All Other Segments(b) (5 ) (9 ) +6 NM NM Total +1 (7 ) +12 (68 ) (70 ) Year to date highlights: % Change System Sales(a) Same-Store Sales(a) Net New Units Operating Profit Operating Profit (Reported) (Ex F/X) KFC +12 - +14 +27 +18 Pizza Hut +20 +11 +10 +141 +124 All Other Segments(b) +51 +3 +6 (45 ) (32 ) Total +15 +2 +12 (4 ) (11 ) NM refers to not meaningful.
(a) System sales and same-store sales percentages as shown in tables exclude the
impact of F/X. Effective
normalized in the same-store sales calculation by excluding the period during
which stores are temporarily closed.
(b) Sales from non-Company-owned restaurants, for which we do not receive a
sales-based royalty, are excluded from system sales and same-store sales.
As ofSeptember 30, 2021 , the Company operated 11,415 units, predominatelyKFC andPizza Hut restaurants, which are the leading and largest QSR and CDR brands, respectively, in mainland China in terms of system sales. We believe that there are significant opportunities to expand within China, and we intend to focus our efforts on increasing our geographic footprint in both existing and new cities. The Company's third quarter results were significantly impacted by the Delta variant outbreak that started in late July. This regional outbreak was the most widely spread wave since the first quarter of 2020. Strict public health measures were implemented across the country, including closures of many tourist locations. These actions led to fewer social activities, substantially lower travel volume, and cancelled holiday trips. However, we sustained Company sales growth in the third quarter, with new unit openings more than offsetting same-store sales declines. 33
-------------------------------------------------------------------------------- As compared to the third quarter of2020, Company sales in the third quarter of 2021 increased 9%, or 2% excluding the impact of F/X. Company sales for the year to date endedSeptember 30, 2021 increased 28%, or 19% excluding the impact of F/X. The increase in Company sales for the quarter, excluding the impact of F/X, was attributable to net unit growth including the acquisition of Suzhou KFC, partially offset by same-store sales decline. The year to date increase in Company sales, excluding the impact of F/X, was attributable to net unit growth including the acquisition of Suzhou KFC, fewer temporary store closures and same-store sales growth. The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by lapping the non-cash gain recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition in the third quarter of 2020, same-store sales decline, higher promotion costs, wage inflation, increased rider cost associated with the rise in delivery volume, higher packaging costs and lower temporary relief provided by landlords and government agencies, partially offset by favorable commodity prices. The year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by lapping the non-cash gain recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition in the third quarter of 2020, lower temporary relief provided by landlords and government agencies, higher promotion costs, wage inflation and higher compensation costs, partially offset by the increase in Company sales, favorable commodity prices and lower store impairment charges.
The Consolidated Results of Operations for the quarters and years to date ended
Quarter Ended % B/(W) (a) Year to Date Ended % B/(W) (a)
9/30/2021 9/30/2020 Reported Ex F/X 9/30/2021 9/30/2020 Reported Ex F/X
Company sales $ 2,310 $ 2,118 9 2 $ 6,874 $ 5,358 28 19
Franchise fees and income 40 40 - (7 ) 120 112 7 (1 )Revenues from transactions
with franchisees and unconsolidated affiliates 184 170 8 1 519 488 7 (1 ) Other revenues 20 20 2 (4 ) 49 46 7 (1 ) Total revenues$ 2,554 $ 2,348 9 2$ 7,562 $ 6,004 26 17 Restaurant profit$ 282 $ 394 (29 ) (33 )$ 1,071 $ 790 36 26 Restaurant Margin % 12.2 % 18.6 % (6.4 ) ppts. (6.4 ) ppts. 15.6 % 14.7 % 0.9 ppts. 0.9 ppts. Operating Profit$ 178 $ 556 (68 ) (70 )$ 753 $ 781 (4 ) (11 ) Interest income, net 16 11 58 51 47 28 69 61 Investment (loss) gain (39 ) 38 NM NM (43 ) 75 NM NM Income tax provision (44 ) (155 ) 72 73 (210 ) (232 ) 10 15 Net Income - including noncontrolling interests 111 450 (75 ) (78 ) 547 652 (16 ) (23 ) Net Income - noncontrolling interests 7 11 31 36 32 19 (73 ) (61 ) Net Income -Yum China Holdings , Inc.$ 104 $ 439 (76 ) (79 )$ 515 $ 633 (19 ) (26 ) Diluted Earnings Per Common Share$ 0.24 $ 1.10 (78 ) (81 )$ 1.19 $ 1.62 (27 ) (33 ) Effective tax rate 28.3 % 25.6 % 27.7 % 26.3 %
Supplementary information
- Non-GAAP Measures(b) Adjusted Operating Profit$ 168 $ 320 $ 750 $ 550
Adjusted Net Income -
Yum China Holdings, Inc.$ 96 $ 263 $ 514 $ 462
Adjusted Diluted Earnings
Per Common Share$ 0.22 $ 0.66 $ 1.18 $ 1.18 Adjusted Effective Tax Rate 28.8 % 25.7 % 27.6 % 26.4 % Adjusted EBITDA$ 300 $ 436 $ 1,153 $ 916 34
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(a) Represents the period-over-period change in percentage.
(b) See "Non-GAAP Measures" below for definitions and reconciliations of the
most directly comparable GAAP financial measures to the non-GAAP measures.
Performance Metrics
Quarter Ended Year to Date Ended
9/30/2021 9/30/2020 9/30/2021 9/30/2020
System Sales Growth (Decline) 8 % 3 % 24 % (9 )%
System Sales Growth (Decline), excluding F/X 1 % 1 % 15 % (8 )%
Same-Store Sales (Decline) Growth (7 )% (6 )% 2 % (11 )%
Unit Count 9/30/2021 9/30/2020 % Increase
Company-owned 8,938 7,922 13
Unconsolidated affiliates 762 666 14
Franchisees 1,715 1,562 10
11,415 10,150 12
Non-GAAP Measures
In addition to the results provided in accordance with GAAP throughout this
MD&A, the Company provides non-GAAP measures adjusted for Special Items, which
include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per
Common Share ("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, certain non-cash expenses,
consisting of depreciation and amortization as well as store impairment charges
and Special Items.
The following table sets forth the reconciliations of the most directly comparable GAAP financial measures to the non-GAAP adjusted financial measures.
35
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Quarter Ended Year to Date Ended
9/30/2021 9/30/2020 9/30/2021 9/30/2020
Non-GAAP Reconciliations
Reconciliation of Operating Profit to
Adjusted Operating Profit
Operating Profit $ 178 $ 556 $ 753 $ 781
Special Items, Operating Profit 10 236 3 231
Adjusted Operating Profit $ 168 $ 320 $ 750 $ 550
Reconciliation of Net Income to
Adjusted Net Income
Net Income - Yum China Holdings, Inc. $ 104 $ 439 $ 515 $ 633
Special Items, Net Income - Yum China
Holdings, Inc. 8 176 1 171
Adjusted Net Income - Yum China
Holdings, Inc. $ 96 $ 263 $ 514 $ 462
Reconciliation of EPS to Adjusted EPS
Basic Earnings Per Common Share $ 0.25 $ 1.13 $ 1.23 $ 1.67
Special Items, Basic Earnings Per
Common Share 0.02 0.45 0.01 0.46
Adjusted Basic Earnings Per Common
Share $ 0.23 $ 0.68 $ 1.22 $ 1.21
Diluted Earnings Per Common Share $ 0.24 $ 1.10 $ 1.19 $ 1.62
Special Items, Diluted Earnings Per
Common Share 0.02 0.44 0.01 0.44
Adjusted Diluted Earnings Per Common
Share $ 0.22 $ 0.66 $ 1.18 $ 1.18
Reconciliation of Effective Tax Rate to
Adjusted Effective Tax Rate
Effective tax rate (See Note 12) 28.3 % 25.6 % 27.7 % 26.3 %
Impact on effective tax rate as a
result of Special Items (0.5 )% (0.1 )% 0.1 % (0.1 )%
Adjusted effective tax rate 28.8 % 25.7 % 27.6 % 26.4 %
Net income, along with the reconciliation to Adjusted EBITDA, is presented
below.
Quarter Ended Year to Date Ended
Reconciliation of Net Income to Adjusted EBITDA
$ 104 $ 439 $ 515 $ 633 Net Income - noncontrolling interests 7 11 32 19 Income tax provision 44 155 210 232 Interest income, net (16 ) (11 ) (47 ) (28 ) Investment loss (gain) 39 (38 ) 43 (75 ) Operating Profit 178 556 753 781 Special Items, Operating Profit (10 ) (236 ) (3 ) (231 ) Adjusted Operating Profit 168 320 750 550 Depreciation and amortization 128 113 380 327 Store impairment charges 4 3 23 39 Adjusted EBITDA$ 300 $ 436 $ 1,153 $ 916 36
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Details of Special Items are presented below:
Quarter Ended Year to Date Ended
Details of Special Items 9/30/2021 9/30/2020 9/30/2021 9/30/2020
Gain from re-measurement of previously
held equity interest(1) $ 10 $ 239 $ 10 $ 239
Share-based compensation expense for
Partner PSU Awards(2) - (3 ) (7 ) (5 )
Derecognition of indemnification assets
related to Daojia(3) - - - (3 )
Special Items, Operating Profit 10 236 3 231
Tax Expenses on Special Items(4) (2 ) (60 ) (2 ) (60 )
Special items, net income - including
noncontrolling interests 8 176 1 171
Special items, net income -
noncontrolling interests - - - -
Special Items, Net income - Yum China
Holdings, Inc. $ 8 $ 176 $ 1 $ 171
Weighted-average diluted shares
outstanding (in millions) 435 400 435 391
Special Items, Diluted Earnings Per
Common Share $ 0.02 $ 0.44 $ 0.01 $ 0.44 (1) In the quarters and years to date ended
result of the consolidation of the Lavazza joint venture and Suzhou KFC, the
Company recognized a gain of
from the re-measurement of our previously held equity interest at fair
value, which were not allocated to any segment for performance reporting
purposes.
(2) In February 2020 , the Company granted Partner PSU Awards to select
employees who were deemed critical to the Company's execution of its strategic
operating plan. These PSU awards will only vest if threshold performance goals
are achieved over a four-year performance period, with the payout ranging from
0% to 200% of the target number of shares subject to the PSU awards. Partner PSU
Awards were granted to address
increased competition for executive talent, motivate transformational
performance and encourage management retention. Given the unique nature of these
grants, the Compensation Committee does not intend to grant similar special
grants to the same employees during the performance period. The impact from
these special awards is excluded from metrics that management uses to assess the
Company's performance. The Company recognized share-based compensation cost of
nil and $7 million associated with the Partner PSU Awards for the quarter and
year to date ended September 30, 2021 , respectively, and $3 million and $5
million for the quarter and year to date ended September 30, 2020 , respectively.
(3) In the quarter ended June 30, 2020 , the Company derecognized a $3 million
indemnification asset previously recorded for the Daojia acquisition as the
indemnification right pursuant to the purchase agreement expired. The expense
was included in Other income, net, but was not allocated to any segment for
performance reporting purposes.
(4) The tax expense was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate.
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 and amortization, store impairment charges
and Special Items. Store impairment charges included as an adjustment item in
Adjusted EBITDA primarily resulted from our semi-annual impairment evaluation of
long-lived assets of individual restaurants, and additional impairment
evaluation whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. If these restaurant-level
assets were not impaired, depreciation of the assets would have been recorded
and included in EBITDA. Therefore, store impairment charges were a non-cash item
similar to depreciation and amortization of our long-lived assets of
restaurants. The Company believes that investors and analyst may find it useful
in measuring operating performance without regard to such non-cash item.
37
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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 provides 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.
Segment Results
KFC
Quarter Ended Year to Date Ended
% B/(W) % B/(W)
9/30/2021 9/30/2020 Reported Ex F/X 9/30/2021 9/30/2020 Reported Ex F/X
Company sales $ 1,750 $ 1,597 10 3 $ 5,220 $ 4,077 28 19
Franchise fees and income 32 32 - (7 ) 95 97 (2 ) (9 )
Revenues from transactions
with franchisees and
unconsolidated affiliates 17 16 1 (6 ) 46 47 (3 ) (11 )
Other revenues 2 1 NM NM 6 1 NM NM
Total revenues $ 1,801 $ 1,646 9 2 $ 5,367 $ 4,222 27 18
Restaurant profit $ 238 $ 310 (23 ) (28 ) $ 877 $ 659 33 23
Restaurant margin % 13.6 % 19.4 % (5.8 ) ppts. (5.8 ) ppts. 16.8 % 16.2 % 0.6 ppts. 0.6 ppts.
G&A expenses $ 62 $ 50 (25 ) (17 ) $ 175 $ 138 (27 ) (18 )
Franchise expenses $ 16 $ 16 2 8 $ 47 $ 48 2 10
Expenses for transactions
with franchisees and
unconsolidated affiliates $ 16 $ 16 1 7 $ 45 $ 47 5 12
Other operating costs
and expenses $ 2 - NM NM $ 3 - NM NM
Closures and impairment
expenses, net $ 1 $ 1 NM NM $ 7 $ 12 33 39
Other income, net $ (4 ) $ (10 ) (65 ) (68 ) $ (16 ) $ (39 ) (60 ) (63 )
Operating Profit $ 196 $ 286 (31 ) (36 ) $ 763 $ 598 27 18
Quarter Ended Year to Date Ended
9/30/2021 9/30/2020 9/30/2021 9/30/2020
System Sales Growth (Decline) 8 % 1 % 21 % (9 )%
System Sales Growth (Decline), excluding F/X 1 % (1 )% 12 % (7 )%
Same-Store Sales Decline (8 )% (6 )% - (9 )%
Unit Count 9/30/2021 9/30/2020 % Increase
Company-owned 6,450 5,672 14
Unconsolidated affiliates 762 663 15
Franchisees 696 590 18
7,908 6,925 14
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Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
Quarter Ended
Store
Portfolio
Income (Expense) 9/30/2020 Actions Other F/X 9/30/2021
Company sales $ 1,597 $ 171 $ (127 ) $ 109 $ 1,750
Cost of sales (504 ) (55 ) 28 (36 ) (567 )
Cost of labor (330 ) (47 ) (21 ) (27 ) (425 )
Occupancy and other
operating expenses (453 ) (48 ) 15 (34 ) (520 )
Restaurant profit $ 310 $ 21 $ (105 ) $ 12 $ 238
Year to Date Ended
Store
Portfolio
Income (Expense) 9/30/2020 Actions Other F/X 9/30/2021
Company sales $ 4,077 $ 752 $ 4 $ 387 $ 5,220
Cost of sales (1,315 ) (239 ) 46 (121 ) (1,629 )
Cost of labor (888 ) (165 ) (71 ) (90 ) (1,214 )
Occupancy and other
operating expenses (1,215 ) (179 ) 6 (112 ) (1,500 )
Restaurant profit $ 659 $ 169 $ (15 ) $ 64 $ 877
The increase in Company sales for the quarter, excluding the impact of F/X, was
attributable to net unit growth including the acquisition of Suzhou KFC,
partially offset by same-store sales decline. The decrease in Restaurant profit
for the quarter, excluding the impact of F/X, was primarily driven by same-store
sales decline, higher promotion costs, wage inflation of 5%, higher packaging
costs, increased rider cost associated with the rise in delivery volume and
lower temporary relief provided by landlords and government agencies, partially
offset by net unit growth including the acquisition of Suzhou KFC and favorable
commodity prices.
The year to date increase in Company sales and Restaurant profit, excluding the
impact of F/X, was primarily driven by net unit growth including the acquisition
of Suzhou KFC, favorable commodity prices, same-store sales growth and fewer
temporary store closures, partially offset by lower temporary relief provided by
landlords and government agencies, higher promotion costs, wage inflation of 4%,
increased rider cost associated with the rise in delivery volume and higher
packaging costs.
Franchise Fees and Income
The decrease in Franchise fees and income for the quarter, excluding the impact
of F/X, was primarily driven by the acquisition of Suzhou KFC and same-store
sales decline, partially offset by the net unit growth.
The year to date decrease in Franchise fees and income, excluding the impact of
F/X, was primarily driven by the acquisition of Suzhou KFC, partially offset by
the net unit growth and fewer temporary store closures.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs.
39
--------------------------------------------------------------------------------The year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs, the acquisition of Suzhou KFC and lapping one-time reductions in social security contributions in 2020.
Operating Profit
The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit and higher G&A expenses.
The year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower store impairment charges, partially offset by higher G&A expenses.Pizza Hut Quarter Ended Year to Date Ended % B/(W) % B/(W) 9/30/2021 9/30/2020 Reported Ex F/X 9/30/2021 9/30/2020 Reported Ex F/X Company sales$ 546 $ 508 7 -$ 1,617 $ 1,252 29 19 Franchise fees and income 2 2 20 12 6 4 41 31 Revenues from transactions with franchisees and unconsolidated affiliates 2 1 55 44 5 3 72 59 Other revenues 1 - NM NM 2 - NM NM Total revenues$ 551 $ 511 8 1$ 1,630 $ 1,259 29 20 Restaurant profit$ 44 $ 84 (47 ) (51 )$ 196 $ 132 48 37 Restaurant margin % 8.2 % 16.7 % (8.5 ) ppts. (8.5 ) ppts. 12.2 % 10.6 % 1.6 ppts. 1.6 ppts. G&A expenses$ 27 $ 24 (14 ) (6 )$ 80 $ 71 (13 ) (4 ) Franchise expenses $ 1 $ 1 (29 ) (20 ) $ 3 $ 2 (33 ) (23 ) Expenses for transactions with franchisees and unconsolidated affiliates $ 2 $ 1 (46 ) (36 ) $ 5 $ 3 (63 ) (51 ) Other operating costs and expenses $ 1 $ - NM NM $ 1 $ - (12 ) (3 ) Closures and impairment expenses, net $ - $ - NM NM $ 3$ 15 81 83 Operating Profit$ 18 $ 61 (69 ) (71 )$ 117 $ 48 141 124 Quarter Ended Year to Date Ended 9/30/2021 9/30/2020 9/30/2021 9/30/2020 System Sales Growth (Decline) 8 % (5 )% 30 % (20 )% System Sales Growth (Decline), excluding F/X 1 % (6 )% 20 % (19 )% Same-Store Sales (Decline) Growth (5 )% (7 )% 11 % (16 )% Unit Count 9/30/2021 9/30/2020 % Increase Company-owned 2,369 2,155 10 Franchisees 134 122 10 2,503 2,277 10 40
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Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
Quarter Ended
Store
Portfolio
Income (Expense) 9/30/2020 Actions Other F/X 9/30/2021
Company sales $ 508 $ 29 $ (25 ) $ 34 $ 546
Cost of sales (152 ) (9 ) - (12 ) (173 )
Cost of labor (124 ) (9 ) (17 ) (11 ) (161 )
Occupancy and other
operating expenses (148 ) (9 ) (1 ) (10 ) (168 )
Restaurant profit $ 84 $ 2 $ (43 ) $ 1 $ 44
Year to Date Ended
Store
Portfolio
Income (Expense) 9/30/2020 Actions Other F/X 9/30/2021
Company sales $ 1,252 $ 103 $ 141 $ 121 $ 1,617
Cost of sales (388 ) (31 ) (37 ) (37 ) (493 )
Cost of labor (339 ) (25 ) (52 ) (34 ) (450 )
Occupancy and other
operating expenses (393 ) (25 ) (24 ) (36 ) (478 )
Restaurant profit $ 132 $ 22 $ 28 $ 14 $ 196
The slight increase in Company sales for the quarter, excluding the impact of
F/X, was attributable to net unit growth, partially offset by same-store sales
decline. The decrease in Restaurant profit for the quarter, excluding the impact
of F/X, was primarily driven by same-store sales decline, wage inflation of 8%,
increased rider cost associated with the rise in delivery volume, higher
promotion costs, lower temporary relief provided by landlords and government
agencies and higher packaging costs, partially offset by favorable commodity
prices.
The year to date increase in Company sales and Restaurant profit, excluding the
impact of F/X, was primarily driven by same-store sales growth, favorable
commodity prices and fewer temporary store closures, partially offset by lower
temporary relief provided by landlords and government agencies, wage inflation
of 5% and higher promotion costs.
G&A Expenses
The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by higher compensation costs.
The year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs and lapping one-time reductions in social security contributions in 2020.
41
--------------------------------------------------------------------------------Operating Profit
The decrease in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit and higher G&A expenses.
The year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower store impairment charges, partially offset by higher G&A expenses. All Other Segments All Other Segments reflects the results of Little Sheep,Huang Ji Huang , COFFii & JOY, East Dawning,Taco Bell , Lavazza, Daojia and our e-commerce business. Quarter Ended Year to Date Ended % B/(W) % B/(W) 9/30/2021 9/30/2020 Reported Ex F/X 9/30/2021 9/30/2020 Reported Ex F/X Company sales$ 14 $ 13 7 1$ 37 $ 29 27 18 Franchise fees and income 6 6 (3 ) (9 ) 19 11 71 58 Revenues from transactions with franchisees and unconsolidated affiliates 26 18 47 38 75 34 NM NM Other revenues 88 36 NM NM 187 77 NM NM Total revenues$ 134 $ 73 84 73$ 318 $ 151 NM NM Restaurant loss $ - $ - NM NM$ (3 ) $ (3 ) (35 ) (25 ) Restaurant margin % (9.5 )% (0.4 )% (9.1 ) ppts. (9.1 ) ppts. (10.0 )% (9.4 )% (0.6 ) ppts. (0.6 ) ppts. G&A expenses$ 11 $ 11 2 8$ 30 $ 30 - 7 Expenses for transactions with franchisees and unconsolidated affiliates$ 24 $ 13 (79 ) (69 )$ 69 $ 26 NM NM Other operating costs and expenses$ 87 $ 33 NM NM$ 183 $ 69 NM NM Closures and impairment expenses, net $ 1 $ - (81 ) (68 ) $ 3 $ 3 40 45 Other expenses, net $ 3 $ 1 NM NM $ 8 $ 1 NM NM Operating (Loss) Profit$ (6 ) $ 2 NM NM$ (15 ) $ (10 ) (45 ) (32 ) Quarter Ended Year to Date Ended 9/30/2021 9/30/2020 9/30/2021 9/30/2020 Same-Store Sales (Decline) Growth (9 )% (16 )% 3 % (24 )% Total Revenues The increase in Total revenues of all other segments for the quarter, excluding the impact of F/X, was primarily driven by the revenue generated by our delivery team for services provided toKFC andPizza Hut restaurants. The year to date increase in Total revenues of all other segments, excluding the impact of F/X, was primarily driven by the revenue generated by our delivery team for services provided toKFC andPizza Hut restaurants and the consolidation ofHuang Ji Huang . Operating (Loss) Profit The Operating loss for the quarter, excluding the impact of F/X, was primarily driven by the increase of Operating loss from certain emerging brands, partially offset by Operating profit generated byHuang Ji Huang . 42 -------------------------------------------------------------------------------- The year to date increase in Operating loss, excluding the impact of F/X, was primarily driven by the increase of Operating loss from certain emerging brands, partially offset by Operating profit generated byHuang Ji Huang consolidated sinceApril 2020 . Corporate and Unallocated Quarter Ended Year to Date Ended % B/(W) % B/(W) 9/30/2021 9/30/2020 Reported Ex F/X 9/30/2021 9/30/2020 Reported Ex F/X Revenues from transactions with franchisees and unconsolidated affiliates$ 139 $ 135 3 (4 )$ 393 $ 404 (3 ) (10 ) Other revenue $ 7 $ 2 NM NM$ 11 $ 4 NM NM Expenses for transactions with franchisees and unconsolidated affiliates$ 138 $ 134 (3 ) 4$ 390 $ 404 3 11 Other operating costs and expenses $ 5 $ 1 NM NM$ 10 $ 3 NM NM Corporate G&A expenses$ 42 $ 42 (1 ) 3$ 123 $ 100 (23 ) (17 ) Other unallocated income, net$ (9 ) $ (247 ) (96 ) (96 )$ (7 ) $ (244 ) (97 ) (97 ) Interest income, net$ 16 $ 11 58 51$ 47 $ 28 69 61 Investment (loss) gain$ (39 ) $ 38 NM NM$ (43 ) $ 75 NM NM Income tax provision (See Note 12)$ (44 ) $ (155 ) 72 73$ (210 ) $ (232 ) 10 15 Effective tax rate (See Note 12) 28.3 % 25.6 % (2.7 )% (2.7 )% 27.7 % 26.3 % (1.4 )% (1.4 )%
Revenues from Transactions with Franchisees and Unconsolidated Affiliates
Revenues from transactions with franchisees and unconsolidated affiliates primarily include revenues derived from the Company's central procurement model whereby food and paper products are centrally purchased and then mainly sold toKFC andPizza Hut franchisees and unconsolidated affiliates. The quarter and year to date decrease, excluding the impact of F/X, was mainly due to the acquisition of Suzhou KFC, partially offset by increase in revenue driven by system sales growth of franchisees and unconsolidated affiliates. G&A Expenses The decrease in Corporate G&A expenses for the quarter, excluding the impact of F/X, was primarily due to the decrease of share-based compensation expense for Partner PSU awards, partially offset by merit increases.
The year to date increase in Corporate G&A expenses, excluding the impact of F/X, was primarily due to higher compensation costs and lapping one-time reductions in social security contributions in 2020.
Other Unallocated Income, net
The quarters and years to date Other unallocated income in 2021 and 2020 mainly
included the gain recorded from the re-measurement of our previously held equity
interest in connection with the consolidation of the Lavazza joint venture and
Suzhou KFC, respectively. See Note 6 for additional information.
Investment (Loss) Gain
The Investment (loss) gain mainly relates to the change in the fair value of our
investment in Meituan, as well as our unrealized investment loss in Sunner. See
Note 6 for additional information.
43
--------------------------------------------------------------------------------Income Tax Provision Our income tax provision includes tax on our earnings at the Chinese statutory tax rate of 25%, withholding tax on repatriation of earnings outside of China andU.S. corporate income tax, if any. The higher effective tax rate for the quarter endedSeptember 30, 2021 was primarily due to the impact from our investment in equity securities of Meituan, higher planned repatriation of earnings outside of China subject to foreign withholding tax and increased valuation allowance for certain underperforming subsidiaries. The higher effective tax rate for the year to date endedSeptember 30, 2021 was primarily due to higher planned repatriation of earnings outside of China subject to foreign withholding tax, increased valuation allowance for certain underperforming subsidiaries and less tax benefit from equity income from investments in unconsolidated affiliates, partially offset by lower residualU.S. tax.
Significant Known Events, Trends or Uncertainties Expected to Impact Future Results
Impact of COVID-19 Pandemic Starting in lateJanuary 2020 , the COVID-19 pandemic significantly impacted the Company's operations and financial results. The results of third quarter of 2021 were significantly impacted by the Delta variant outbreak that started in late July. This regional outbreak was the most widely spread wave since the first quarter of 2020. Strict public health measures were implemented across the country, including closures of many tourist locations. These actions led to fewer social activities, substantially lower travel volume, and cancelled holiday trips. Going into the fourth quarter, strict public health measures remain in effect nationwide. Continuing effects of COVID-19 persist, such as fewer social activities, cautious consumer spending and subdued travel volume. With the latest regional outbreaks resurging across approximately 20 provinces and rigorous preventative health measures remaining in force across the country, the Company continues to expect the recovery of same-store sales to take time, with a nonlinear and uneven path. Same-store sales are gradually recovering but remain below the prior year and pre-COVID-19 levels, since overall dine-in volume as well as traffic at transportation hubs are still significantly impacted. Management at this time cannot ascertain the extent to which our operations will continue to be impacted by the COVID-19 pandemic, which depends largely on future developments that are uncertain, including resurgences and the actions by government authorities to contain the impact, changes in consumer behavior, the economic recovery within China and globally and other related factors.
Tax Examination on Transfer Pricing
We are subject to reviews, examinations and audits by Chinese tax authorities, the Internal Revenue Service and other tax authorities with respect to income and non-income based taxes. Since 2016, we have been under a national audit on transfer pricing by the STA inChina regarding our related party transactions for the period from 2006 to 2015. The information and views currently exchanged with the tax authorities focus on our franchise arrangement with YUM. We continue to provide information requested by the tax authorities to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment and decision of the STA will depend upon further review of the information provided, as well as ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact at this time. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows.
Evolving Regulatory Landscape in
Our business is subject to a complex and rapidly evolving set of laws and regulations in theU.S. , China and elsewhere. In recent months, new laws, regulations and decisions have passed, and active proposals are being considered inChina , in a variety of areas, including, for example, data security, privacy and cybersecurity, 44
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indicating heightened scrutiny and tightened regulation by the authorities in these areas which can have a material impact on our business.
The PRC Data Security Law, which took effect onSeptember 1, 2021 , imposes data security and privacy obligations on entities and individuals carrying out data activities (including activities outside of the PRC), requires a national security review of data activities that may affect national security, and imposes restrictions on data transmissions. In addition, many specific requirements of the PRC Personal Information Protection Law, which took effect onNovember 1, 2021 , and sets out the regulatory framework for handling and protection of personal information and transmission of personal information, remain to be clarified by theCyberspace Administration of China and other regulatory authorities. The Company expects that data security, privacy and cybersecurity will continue to be a focus of the regulators inChina , and that the regulatory requirements will continue to evolve. Complying with any additional or new regulatory requirements may impose significant burdens and costs on our operations, or require us to alter certain aspects of our business practices, and could adversely affect our business operations and financial results.
PRC Value-Added Tax ("VAT")
EffectiveMay 1, 2016 , a 6% output VAT replaced the 5% business tax ("BT") previously applied to certain restaurant sales. Input VAT would be creditable to the aforementioned 6% output VAT. The latest VAT rates imposed on our purchase of materials and services included 13%, 9% and 6%, which were gradually changed from 17%, 13%, 11% and 6% since 2017. These rate changes impact our input VAT on all materials and certain services, mainly including construction, transportation and leasing. However, the impact on our operating results is not expected to be significant. Entities that are VAT general taxpayers are permitted to offset qualified input VAT paid to suppliers against their output VAT upon receipt of appropriate supplier VAT invoices on an entity-by-entity basis. When the output VAT exceeds the input VAT, the difference is remitted to tax authorities, usually on a monthly basis; whereas when the input VAT exceeds the output VAT, the difference is treated as an input VAT credit asset which can be carried forward indefinitely to offset future net VAT payables. VAT related to purchases and sales which have not been settled at the balance sheet date is disclosed separately as an asset and liability, respectively, on the Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any input VAT credit asset for recoverability, giving consideration to the indefinite life of the input VAT credit assets as well as its forecasted operating results and capital spending, which inherently includes significant assumptions that are subject to change. As ofSeptember 30, 2021 , an input VAT credit asset of$281 million and payable of$6 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year fromSeptember 30, 2021 . Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the credit expected to be used within one year can be reasonably determined. We have been benefiting from the retail tax structure reform since it was implemented onMay 1, 2016 . However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter. 45 --------------------------------------------------------------------------------
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. Most of the revenues, costs,
assets and liabilities of the Company are denominated in Chinese Renminbi
("RMB"). Any significant change in the exchange rate between US$ and RMB may
materially affect the Company's business, results of operations, cash flows and
financial condition, depending on the weakening or strengthening of RMB against
the US$. See "Item 3. Quantitative and Qualitative Disclosures About Market
Risk" for further discussion.
Consolidated Cash Flows
Our cash flows for the years to date ended
Net cash provided by operating activities was$1,074 million in 2021 as compared to$899 million in 2020. The increase was primarily driven by the increase in net income, excluding the non-cash gain of$239 million recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition in 2020, along with working capital changes. Net cash used in investing activities was$743 million in 2021 as compared to$2,333 million in 2020. The decrease was mainly due to the net impact on cash flow resulting from purchases and maturities of short-term investments and less spending on acquisition of businesses, partially offset by the investment in Sunner and the increase in capital spending. Net cash used in financing activities was$220 million in 2021 as compared to net cash provided by financing activities of$2,144 million in 2020. The change was primarily due to lapping the impact of$2.2 billion in proceeds raised from issuance of common stock in connection with our global offering and secondary listing on the MainBoard of HKEX inSeptember 2020 , the increase in dividends paid on common stock and to noncontrolling interests and the increase in share repurchases in the year to date endedSeptember 30, 2021 .
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores, our franchise operations and dividend payments from our unconsolidated affiliates. Our global offering inSeptember 2020 provided us with$2.2 billion in net proceeds. Our ability to fund our future operations and capital needs will primarily depend on our ongoing ability to generate cash from operations. We believe our principal uses of cash in the future will be primarily to fund our operations and capital expenditures for accelerating store network expansion and store remodeling, to step up investments in digitalization, automation and logistics infrastructure, to provide returns to our stockholders, as well as to explore opportunities for acquisitions or investments that build and support our ecosystem. We believe that our future cash from operations, together with our funds on hand and access to the capital markets, will provide adequate resources to fund these uses of cash, and that our existing cash, net cash from operations and credit facilities will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months. 46 --------------------------------------------------------------------------------
If our cash flows from operations are less than we require, we may need to access the capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future or at all will be impacted by many factors, including, but not limited to:
• our financial performance; • our credit ratings; • the liquidity of the overall capital markets; and
• the state of the Chinese,
between the Chinese and U.S. governments.
There can be no assurance that we will have access to the capital markets on terms acceptable to us or at all.
Generally our income is subject to the Chinese statutory tax rate of 25%.
However, to the extent our cash flows from operations exceed our China cash
requirements, the excess cash may be subject to an additional 10% withholding
tax levied by the Chinese tax authority, subject to any reduction or exemption
set forth in relevant tax treaties or tax arrangements.
47
--------------------------------------------------------------------------------Share Repurchases and Dividends
Our Board of Directors has authorized an aggregate of$1.4 billion for our share repurchase program.Yum China may repurchase shares under this program from time to time in open market or privately negotiated transactions, including block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. Starting in the second quarter of 2020 throughJuly 2021 , our share repurchases were suspended due to the impacts of the COVID-19 pandemic. During the years to date endedSeptember 30, 2021 and 2020, the Company repurchased$34 million or 0.6 million shares and$7 million or 0.2 million shares of common stock, respectively, under the repurchase program. For the quarter endedSeptember 30, 2021 , the Company paid cash dividends of approximately$51 million to stockholders through a quarterly dividend payment of$0.12 per share. OnOctober 27, 2021 , the Board of Directors declared a cash dividend of$0.12 per share, payable onDecember 16, 2021 , to stockholders of record as of the close of business onNovember 24, 2021 . The total estimated cash dividend payable is approximately$51 million . Our ability to declare and pay any dividends on our stock may be restricted by our earnings available for distribution under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated inChina is required to set aside at least 10% of its after-tax profits each year, after making up previous years' accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the Board of Directors, as an enterprise incorporated inChina , each of our Chinese subsidiaries may allocate a portion of its after-tax profits based on Chinese accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Borrowing Capacity As ofSeptember 30, 2021 , the Company had credit facilities ofRMB3,589 million (approximately$557 million ), comprised of onshore credit facilities ofRMB2,300 million (approximately$357 million ) in aggregate and offshore credit facilities of$200 million in aggregate. The credit facilities had remaining terms ranging from less than one year to three years as ofSeptember 30, 2021 . Each credit facility bears interest based on the Loan Prime Rate ("LPR") published by the National Interbank Funding Centre of the PRC or London Interbank Offered Rate ("LIBOR") administered by theICE Benchmark Administration . Each credit facility contains a cross-default provision whereby our failure to make any payment on a principal amount from any credit facility will constitute a default on other credit facilities. Some of the credit facilities contain covenants limiting, among other things, certain additional indebtedness and liens, and certain other transactions specified in the respective agreement. Some of the onshore credit facilities contain sublimits for overdrafts, non-financial bonding, standby letters of credit and guarantees. As ofSeptember 30, 2021 , we had outstanding bank guarantees ofRMB 142 million (approximately$22 million ) mainly to secure our lease payment to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the same amount, while there were no bank borrowings outstanding as ofSeptember 30, 2021 .
Off-Balance Sheet Arrangements
See the Guarantees section of Note 14 for discussion of our off-balance sheet arrangements.
48
--------------------------------------------------------------------------------New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
See Note 2 for details of recently adopted accounting pronouncements.
New Accounting Pronouncements Not Yet Adopted
InAugust 2020 , the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"), which eliminates two of the three models in ASC 470-20 that require separate accounting for embedded conversion features and eliminates some of the conditions for equity classification in ASC 815-40 for contracts in an entity's own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and generally requires them to include the effect of share settlement for instruments that may be settled in cash or shares. ASU 2020-06 is effective for the Company fromJanuary 1, 2022 , with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements. InMay 2021 , the FASB issued ASU 2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options ("ASU 2021-04"). It requires issuers to account for a modification or exchange of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. ASU 2021-04 is effective for the Company fromJanuary 1, 2022 , with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements. InJuly 2021 , the FASB issued ASU 2021-05, Lessors-Certain Leases with Variable Lease ("ASU 2021-05"). It requires lessors to classify leases as operating leases if they have variable lease payments that do not depend on an index or rate and would have selling losses if they were classified as sales-type or direct financing leases. ASU 2021-05 is effective for the Company fromJanuary 1, 2022 , with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements.
Cautionary Note Regarding Forward-Looking Statements
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These statements often include words such as "may," "will," "estimate," "intend," "seek," "expect," "project," "anticipate," "believe," "plan," "could," "target," "predict," "likely," "should," "forecast," "outlook," "model," "continue," "ongoing" or other similar terminology. Forward-looking statements are based on our expectations, estimates, assumptions or projections concerning future results or events as of the date of the filing of this Form 10-Q. Forward -looking statements are neither predictions nor guarantees of future events, circumstances or performance and are inherently subject to known and unknown risks, uncertainties and assumptions that could cause our actual results and events to differ materially from those indicated by those statements. We cannot assure you that any of our assumptions are correct or any of our expectations, estimates or projections will be achieved. Numerous factors could cause our actual results to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the following:
• Risks related to our business and industry, such as (a) food safety and
foodborne illness concerns, (b) significant failure to maintain effective
quality assurance systems for our restaurants, (c) significant liability
claims, food contamination complaints from our customers or reports of
incidents of food tampering, (d) health concerns arising from outbreaks of
viruses or other illnesses, including the COVID-19 pandemic, (e) the fact
that the operation of our restaurants is subject to the terms of the
master license agreement with YUM, (f) the fact that substantially all of
our revenue is derived from our operations in
success is tied to the success of YUM's brand strength, marketing
campaigns and product innovation, (h) shortages or interruptions in the
availability and delivery of food products and other supplies, (i)
fluctuation of raw materials prices, (j) our inability to attain our
target development goals, the potential cannibalization of existing sales
by aggressive development and the possibility that new restaurants will
not be profitable, (k) risks associated with leasing real estate, (l)
inability to obtain desirable restaurant locations on commercially
reasonable terms, (m) labor shortages or increases in labor
49
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costs, (n) the fact that our success depends substantially on our
corporate reputation and on the value and perception of our brands, (o)
the occurrence of security breaches and cyber-attacks, (p) failure toprotect the integrity and security of our customer or employee personal,
financial or other data or our proprietary or confidential information
that is stored in our information systems or by third parties on our
behalf, (q) failures or interruptions of service or security breaches in
our information technology systems, (r) the fact that our business depends
on the performance of, and our long-term relationships with, third-party
mobile payment processors, internet infrastructure operators, internet
service providers and delivery aggregators, (s) failure to provide timely
and reliable delivery services by our restaurants, (t) our growth strategy
with respect to COFFii & JOY and Lavazza may not be successful, (u) the
anticipated benefits of our acquisitions may not be realized in a timelymanner or at all, (v) challenges and risks related to our e-commerce
business, (w) our inability or failure to recognize, respond to and
effectively manage the impact of social media, (x) failure to comply with
anti-bribery or anti-corruption laws, (y)
changes in tax rates, disagreements with tax authorities and imposition of
new taxes, (z) changes in consumer discretionary spending and general
economic conditions, (aa) the fact that the restaurant industry in which
we operate is highly competitive, (bb) loss of or failure to obtain or
renew any or all of the approvals, licenses and permits to operate our
business, (cc) our inability to adequately protect the intellectualproperty we own or have the right to use, (dd) our licensor's failure to
protect its intellectual property, (ee) seasonality and certain major
events in China , (ff) our failure to detect, deter and prevent all
instances of fraud or other misconduct committed by our employees,customers or other third parties, (gg) the fact that our success depends
on the continuing efforts of our key management and experienced and
capable personnel as well as our ability to recruit new talent, (hh) our
strategic investments or acquisitions may be unsuccessful; (ii) our
investment in technology and innovation may not generate the expected
level of returns, (jj) fair value changes for our investment in equity
securities and lower yields of our short-term investments may adversely
affect our financial condition and results of operations, and (kk) our
operating results may be adversely affected by our investment in
unconsolidated affiliates;
• Risks related to doing business in
political policies and economic and social policies or conditions, (b)
uncertainties with respect to the interpretation and enforcement of
Chinese laws, rules and regulations, (c) changes in political, business,
economic and trade relations between
audit reports are prepared by auditors who are not currently inspected by
the Public Company Accounting Oversight Board and, as such, our
stockholders are deprived of the benefits of such inspection and our
common stock is subject to the risk of delisting from the New York Stock
Exchange in the future, (e) fluctuation in the value of the ChineseRenminbi, (f) the fact that we face increasing focus on environmental
sustainability issues, (g) limitations on our ability to utilize our cash
balances effectively due to governmental control of currency conversion
and payments of foreign currency and the Chinese Renminbi out of mainland
China, (h) changes in the laws and regulations of China or noncompliance
with applicable laws and regulations, (i) reliance on dividends and other
distributions on equity paid by our principal subsidiaries in China to
fund offshore cash requirements, (j) potential unfavorable tax
consequences resulting from our classification as a China residententerprise for Chinese enterprise income tax purposes, (k) uncertainty
regarding indirect transfers of equity interests in China resident
enterprises and enhanced scrutiny by Chinese tax authorities, (l)
difficulties in effecting service of legal process, conducting
investigations, collecting evidence, enforcing foreign judgments or
bringing original actions in
may determine that the variable interest entity structure of Daojia does
not comply with Chinese laws on foreign investment in restricted
industries, (n) inability to use properties due to defects caused by
non-registration of lease agreements related to certain properties, (o)
risk in relation to unexpected land acquisitions, building closures or
demolitions, (p) potential fines and other legal or administrative
sanctions for failure to comply with Chinese regulations regarding our
employee equity incentive plans and various employee benefit plans, (q)
proceedings instituted by the
firms, including our independent registered public accounting firm, could
result in our financial statements being determined to not be in
compliance with the requirements of the Exchange Act, (r) restrictions on
our ability to make loans or additional capital contributions to our
Chinese subsidiaries due to Chinese regulation of loans to, and direct
investment in, Chinese entities by offshore holding companies and
governmental control of currency conversion, and (s) difficulties in
pursuing growth through acquisitions due to regulations regarding
acquisitions;
50
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• Risks related to the separation and related transactions, such as (a)incurring significant tax liabilities if the distribution does not qualify
as a transaction that is generally tax-free for
purposes and the Company could be required to indemnify YUM for material
taxes and other related amounts pursuant to indemnification obligations
under the tax matters agreement, (b) being obligated to indemnify YUM for
material taxes and related amounts pursuant to indemnification obligations
under the tax matters agreement if YUM is subject to Chinese indirect
transfer tax with respect to the distribution, (c) potential
indemnification liabilities owing to YUM pursuant to the separation and
distribution agreement, (d) the indemnity provided by YUM to us with
respect to certain liabilities in connection with the separation may beinsufficient to insure us against the full amount of such liabilities, (e)
the possibility that a court would require that we assume responsibility
for obligations allocated to YUM under the separation and distribution
agreement, and (f) potential liabilities due to fraudulent transfer
considerations;
• General risks, such as (a) potential legal proceedings, (b) changes in
accounting standards and subjective assumptions, estimates and judgments
by management related to complex accounting matters, (c) failure of our
insurance policies to provide adequate coverage for claims associated with
our business operations, (d) unforeseeable business interruptions, and (e)
failure by us to maintain effective disclosure controls and procedures and
internal control over financial reporting in accordance with the rules of
the SEC .
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 SEC (including the information set forth under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors" included in the Company's Annual Report on Form
10-K for the year ended December 31, 2020 ) for additional information regarding
factors that could affect our financial and other results. You should not place
undue reliance on forward-looking statements, which speak only as of the date of
the filing of this Form 10-Q. We are not undertaking to update any of these
statements, except as required by law.
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