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 10,150 restaurants covering over 1,400 cities primarily inChina as ofSeptember 30, 2020 . 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 ,Taiwan andMacau (the "PRC" or "China"), and own the intellectual property of the Little Sheep,Huang Ji Huang , COFFii & JOY and East Dawning concepts outright. We also partnered withLavazza Group , the world renowned family-owned Italian coffee company, and established a joint venture, 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, 2020 ,KFC operated over 6,900 restaurants in over 1,400 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, 2020 ,Pizza Hut operated over 2,200 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:
• We provide 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.
32
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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 a rate of
approximately 6% of system sales. Franchise and unconsolidated affiliate
restaurant sales are not included in Company sales in the Condensed
Consolidated Statements of Income; however, the franchise fees are
included in the Company's revenues. We believe system sales growth isuseful 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
33
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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 Net New Units
Operating Profit Operating Profit
Sales(a) (Reported) (Ex F/X)
KFC (1 ) (6 ) +10 (3 ) (5 )
Pizza Hut (6 ) (7 ) +1 +62 +59
All Other
Segments(b) NM (16 ) NM NM NM
Total +1 (6 ) +14 +86 +83
Year to date
highlights:
% Change
System Sales(a) Same-Store Net New Units Operating Profit Operating Profit
Sales(a) (Reported) (Ex F/X)
KFC (7 ) (9 ) +10 (24 ) (23 )
Pizza Hut (19 ) (16 ) +1 (58 ) (58 )
All Other
Segments(b) NM (24 ) NM +17 +15
Total (8 ) (11 ) +14 (3 ) (2 )
NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.
(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, 2020 , the Company operated 10,150 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. 34
-------------------------------------------------------------------------------- Starting in lateJanuary 2020 , the COVID-19 pandemic has significantly impacted the Company's operations. The first three weeks of January were strong, but then the pandemic led to subsequent same-store sales declines of 40-50% compared to the comparableChinese New Year holiday period in 2019. Approximately 35% of stores were closed by mid-February at the peak of the outbreak, with significant regional differences. For restaurants that remained open, same-store sales declined due to shortened operating hours and reduced traffic, with a significant portion of stores providing only delivery and takeaway services. As the first quarter progressed, sales performance recovered gradually, with same-store sales down approximately 20% in late March. Operating results improved sequentially in the second and third quarter of 2020, although sales continued to be impacted by reduced traffic at transportation and tourist locations, delayed and shortened school holidays and the other lingering effects of the COVID-19 pandemic. As compared to the third quarter of 2019, Company sales in the third quarter of 2020 increased 1%, or remained flat excluding the impact of F/X. Company sales for the year to date endedSeptember 30, 2020 decreased 12%, or 11% excluding the impact of F/X. Company sales for the quarter, excluding the impact of F/X, were affected by same-store sales decline due to the impact of the COVID-19 pandemic, partially offset by net unit growth including the acquisition of Suzhou KFC. The year to date decrease in Company sales, excluding the impact of F/X, were driven by same-store sales decline and temporary store closures due to the impact of the COVID-19 pandemic, partially offset by net unit growth including the acquisition of Suzhou KFC. The increase in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by a non-cash gain recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition, labor efficiency, utilities savings and lease concessions, partially offset by same-store sales decline due to the impact of the COVID-19 pandemic, promotion costs and wage inflation. The year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by same-store sales decline, temporary store closures, wage inflation and higher store impairment charges, partially offset by a non-cash gain recognized from the re-measurement of our previously held equity interest in Suzhou KFC at fair value upon acquisition, labor efficiency, one-time reductions in social security contributions, lease concessions and utilities savings. 35
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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)
9/30/2020 9/30/2019 Reported Ex F/X 9/30/2020 9/30/2019 Reported Ex F/X
Company sales $ 2,118 $ 2,097 1 - $ 5,358 $ 6,112 (12 ) (11 )
Franchise fees and
income 40 38 4 3 112 113 (1 ) -
Revenues from
transactions
with franchisees
and
unconsolidated
affiliates 170 172 (1 ) (2 ) 488 496 (2 ) -
Other revenues 20 12 64 57 46 26 76 77
Total revenues $ 2,348 $ 2,319 1 - $ 6,004 $ 6,747 (11 ) (9 )
Restaurant profit $ 394 $ 372 6 4 $ 790 $ 1,041 (24 ) (23 )
Restaurant Margin
% 18.6 % 17.7 % 0.9 ppts. 0.9 ppts. 14.7 % 17.0 % (2.3 ) ppts. (2.3 ) ppts.
Operating Profit $ 556 $ 300 86 83 $ 781 $ 807 (3 ) (2 )
Interest income,
net 11 10 (1 ) (2 ) 28 29 (5 ) (4 )
Investment gain 38 12 NM NM 75 39 93 93
Income tax
provision (155 ) (87 ) (79 ) (76 ) (232 ) (226 ) (3 ) (3 )
Net Income -
including
noncontrolling
interests 450 235 91 88 652 649 - 2
Net Income
- noncontrolling
interests 11 12 7 8 19 26 27 26
Net Income - Yum
China
Holdings, Inc. $ 439 $ 223 96 93 $ 633 $ 623 2 3
Diluted Earnings
Per Common Share $ 1.10 $ 0.58 90 86 $ 1.62 $ 1.60 1 3
Effective tax rate 25.6 % 26.9 % 26.3 % 25.8 %
Supplementary
information
- Non-GAAP
Measures(a)
Adjusted Operating
Profit $ 320 $ 300 $ 550 $ 807
Adjusted Net
Income -
Yum China
Holdings, Inc. $ 263 $ 223 $ 462 $ 631
Adjusted Diluted
Earnings
Per Common Share $ 0.66 $ 0.58 $ 1.18 $ 1.62
Adjusted Effective
Tax Rate 25.7 % 26.9 % 26.4 % 24.9 %
Adjusted EBITDA $ 436 $ 407 $ 916 $ 1,156
(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
9/30/2020 9/30/2019 9/30/2020 9/30/2019
System Sales Growth (Decline) 3 % 5 % (9 )% 3 %
System Sales Growth (Decline), excluding F/X 1 % 8 % (8 )% 9 %
Same-Store Sales (Decline) Growth (6 )% 2 % (11 )% 4 %
36
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% Increase
Unit Count 9/30/2020 9/30/2019 (Decrease)
Company-owned(a) 7,922 7,171 10
Unconsolidated affiliates(a) 666 863 (23 )
Franchisees 1,562 883 77
10,150 8,917 14
(a) As a result of the acquisition of Suzhou KFC in the third quarter of 2020,
the restaurant units of Suzhou KFC have been transferred from unconsolidated
affiliates to Company-owned.
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, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define
as net income including noncontrolling interests adjusted for income tax,
interest income, net, investment gain or loss, depreciation and amortization,
and other items, including 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.
Quarter Ended Year to Date Ended
9/30/2020 9/30/2019 9/30/2020 9/30/2019
Non-GAAP Reconciliations
Reconciliation of Operating Profit to
Adjusted
Operating Profit
Operating Profit $ 556 $ 300 $ 781 $ 807
Special Items, Operating Profit(a) 236 - 231 -
Adjusted Operating Profit $ 320 $ 300 $ 550 $ 807
Reconciliation of Net Income to
Adjusted Net Income
Net Income - Yum China Holdings, Inc. $ 439 $ 223 $ 633 $ 623
Special Items, Net Income - Yum China
Holdings, Inc. (a) 176 - 171 (8 )
Adjusted Net Income - Yum China
Holdings, Inc. $ 263 $ 223 $ 462 $ 631
Reconciliation of EPS to Adjusted EPS
Basic Earnings Per Common Share $ 1.13 $ 0.59 $ 1.67 $ 1.65
Special Items, Basic Earnings Per
Common Share(a) 0.45 - 0.46 (0.02 )
Adjusted Basic Earnings Per Common
Share $ 0.68 $ 0.59 $ 1.21 $ 1.67 Diluted Earnings Per Common Share
$ 1.60 Special Items, Diluted Earnings Per Common Share(a) 0.44 - 0.44 (0.02 ) Adjusted Diluted Earnings Per Common Share$ 0.66 $ 0.58 $ 1.18 $ 1.62 Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate Effective tax rate (See Note 12) 25.6 % 26.9 % 26.3 % 25.8 % Impact on effective tax rate as a result of Special Items (0.1 )% - % (0.1 )% 0.9 % Adjusted effective tax rate 25.7 % 26.9 % 26.4 % 24.9 % 37
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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
$ 439 $ 223 $ 633 $ 623 Net Income - noncontrolling interests 11 12 19 26 Income tax provision 155 87 232 226 Interest income, net (11 ) (10 ) (28 ) (29 ) Investment gain (38 ) (12 ) (75 ) (39 ) Operating Profit 556 300 781 807 Special Items, Operating Profit(a) (236 ) - (231 ) - Adjusted Operating Profit 320 300 550 807 Depreciation and amortization 113 105 327 322 Store impairment charges 3 2 39 27 Adjusted EBITDA$ 436 $ 407 $ 916 $ 1,156
(a) Special Items for the quarter and year to date ended
consist of the gain recognized from the re-measurement of our previously
held equity interest in Suzhou KFC at fair value upon acquisition,
share-based compensation cost recognized for a special award of performance
stock units ("Partner PSU Awards") granted to select employees and
derecognition of indemnification assets related to Daojia. Special Items for
the year to date ended
Cuts and Jobs Act (the "Tax Act").
Details of Special Items are presented below:
Quarter Ended Year to Date Ended
Detail of Special Items 9/30/2020 9/30/2019 9/30/2020 9/30/2019
Gain from re-measurement of equity
interest upon acquisition(1) $ 239 $ - $ 239 $ -
Share-based compensation expense for
Partner PSU Awards(2) (3 ) - (5 ) -
Derecognition of indemnification assets
related to Daojia(3) - - (3 ) -
Special Items, Operating Profit 236 - 231 -
Tax Expenses on Special Items(4) (60 ) - (60 ) -
Impact from the Tax Act(5) - - - (8 )
Special items, net income - including
noncontrolling interests 176 - 171 (8 )
Special items, net income - noncontrolling
interests - - - -
Special Items, Net income - Yum China
Holdings, Inc. $ 176 $ - $ 171 $ (8 )
Weighted-average diluted shares
outstanding (in millions) 400 388 391 389
Special Items, Diluted Earnings Per Common
Share $ 0.44 $ - $ 0.44 $ (0.02 )
(1) As a result of the acquisition of Suzhou KFC, the Company recognized a gain
of
interest at fair value, which was not allocated to any segment for
performance reporting purposes.
38
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(2) In
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
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 $3
million and $5 million associated with the Partner PSU Awards for the
quarter and year to date ended September 30, 2020 , respectively.
(3) In the quarter ended
indemnification asset previously recorded for the Daojia acquisition as the
indemnification right expired pursuant to the purchase agreement. The amount
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.
(5) We completed the evaluation of the impact on our transition tax computation
based on the final regulations that were released by the
Department and the
first quarter of 2019, and recorded an additional tax expense of
for the transition tax accordingly.
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.
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.
39
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Segment Results
KFC
Quarter Ended Year to Date Ended
% B/(W) % B/(W)
9/30/2020 9/30/2019 Reported Ex F/X 9/30/2020 9/30/2019 Reported Ex F/X
Company sales $ 1,597 $ 1,546 3 2 $ 4,077 $ 4,495 (9 ) (8 )
Franchise fees and
income 32 35 (9 ) (10 ) 97 104 (7 ) (6 )
Revenues from
transactions with
franchisees and
unconsolidated
affiliates 16 16 (4 ) (5 ) 47 48 (2 ) -
Other revenues 1 1 (27 ) (29 ) 1 1 (17 ) (15 )
Total revenues $ 1,646 $ 1,598 3 2 $ 4,222 $ 4,648 (9 ) (8 )
Restaurant profit $ 310 $ 311 - (2 ) $ 659 $ 845 (22 ) (21 )
Restaurant margin % 19.4 % 20.1 % (0.7 ) ppts. (0.7 ) ppts. 16.2 % 18.8 % (2.6 ) ppts. (2.6 ) ppts.
G&A expenses $ 50 $ 50 1 3 $ 138 $ 148 7 5
Franchise expenses $ 16 $ 18 9 10 $ 48 $ 53 10 8Expenses for transactions
with franchisees and
unconsolidated
affiliates$ 16 $ 16 4 6$ 47 $ 48 2 -
Closures and impairment
expenses, net $ 1 $ - NM NM$ 12 $ 7 (79 ) (88 ) Other income, net$ (10 ) $ (16 ) (37 ) (38 )$ (39 ) $ (46 ) (14 ) (12 ) Operating Profit$ 286 $ 295 (3 ) (5 )$ 598 $ 788 (24 ) (23 ) Quarter Ended Year to Date Ended 9/30/2020 9/30/2019 9/30/2020 9/30/2019 System Sales Growth (Decline) 1 % 6 % (9 )% 5 % System Sales (Decline) Growth, excluding F/X (1 )% 10 % (7 )% 11 % Same-Store Sales (Decline) Growth (6 )% 3 % (9 )% 4 % % Increase Unit Count 9/30/2020 9/30/2019 (Decrease) Company-owned(a) 5,672 4,925 15 Unconsolidated affiliates(a) 663 863 (23 ) Franchisees 590 536 10 6,925 6,324 10
(a) As a result of the acquisition of Suzhou KFC in the third quarter of 2020,
the restaurant units of Suzhou KFC have been transferred from unconsolidated
affiliates to Company-owned.
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) 9/30/2019 Actions Other F/X 9/30/2020
Company sales $ 1,546 $ 136 $ (103 ) $ 18 $ 1,597
Cost of sales (477 ) (46 ) 25 (6 ) (504 )
Cost of labor (311 ) (30 ) 15 (4 ) (330 )
Occupancy and other
operating expenses (447 ) (40 ) 39 (5 ) (453 )
Restaurant profit $ 311 $ 20 $ (24 ) $ 3 $ 310
Year to Date Ended
Store
Portfolio
Income (Expense) 9/30/2019 Actions Other F/X 9/30/2020
Company sales $ 4,495 $ 83 $ (429 ) $ (72 ) $ 4,077
Cost of sales (1,403 ) (34 ) 99 23 (1,315 )
Cost of labor (942 ) (45 ) 83 16 (888 )
Occupancy and other
operating expenses (1,305 ) (64 ) 132 22 (1,215 )
Restaurant profit $ 845 $ (60 ) $ (115 ) $ (11 ) $ 659
The increase in Company sales for the quarter, excluding the impact of F/X, was
primarily driven by the net unit growth including the acquisition of Suzhou KFC,
partially offset by the same-store sales decline due to the impact of the
COVID-19 pandemic. The decrease in Restaurant profit for the quarter, excluding
the impact of F/X, was primarily driven by higher promotion costs and wage
inflation of 3%, partially offset by the increase in Company sales, utility
savings, labor efficiency and lease concessions.
The year to date decrease in Company sales and Restaurant profit, excluding the
impact of F/X, was primarily driven by the same-store sales decline and
temporary store closures due to the impact of the COVID-19 pandemic, higher
promotion costs and wage inflation of 3%, partially offset by one-time
reductions in social security contributions, lease concessions, utility savings
and labor efficiency.
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 of restaurants operated by unconsolidated affiliates and
franchisees due to the impact of the COVID-19 pandemic, 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 same-store sales decline and temporary closure of
restaurants operated by unconsolidated affiliates and franchisees due to the
impact of the COVID-19 pandemic, and the acquisition of Suzhou KFC, partially
offset by the net unit growth.
G&A Expenses
The decrease in G&A expenses for the quarter, excluding the impact of F/X, was
primarily driven by a decrease in performance-based compensation, realignment of
cost structure and higher government incentives received, partially offset by
merit increases.
41
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The year to date decrease in G&A expenses, excluding the impact of F/X, was primarily driven by one-time reductions in social security contributions, a decrease in performance-based compensation, realignment of cost structure and higher government incentives received, partially offset by merit increases.
Operating Profit The quarter and year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit and lower equity income due to the acquisition of Suzhou KFC, partially offset by lower G&A expenses.Pizza Hut Quarter Ended Year to Date Ended % B/(W) % B/(W) 9/30/2020 9/30/2019 Reported Ex F/X 9/30/2020 9/30/2019 Reported Ex F/X Company sales$ 508 $ 540 (6 ) (7 )$ 1,252 $ 1,588 (21 ) (20 )
Franchise fees and income 2 1 18 16 4 3 16 17 Revenues from transactions with franchisees and unconsolidated affiliates 1 1 (4 ) (6 ) 3 3 3 4 Other revenues - - (56 ) (58 ) - 1 (37 ) (36 ) Total revenues$ 511 $ 542 (6 ) (7 )$ 1,259 $ 1,595 (21 ) (20 ) Restaurant profit$ 84 $ 62 37 35$ 132 $ 197 (33 ) (31 ) Restaurant margin % 16.7 % 11.4 % 5.3 ppts. 5.3 ppts. 10.6 % 12.4 % (1.8 ) ppts. (1.8 ) ppts. G&A expenses$ 24 $ 25 5 6$ 71 $ 76 7 5 Franchise expenses $ 1 $ 1 (16 ) (15 )$ 2 $ 2 (7 ) (9 )
Expenses for transactions
with franchisees and
unconsolidated
affiliates $ 1 $ 1 (3 ) (1 )$ 3 $ 3 (13 ) (15 )
Closures and impairment
expenses, net $ -$ (1 ) NM NM$ 15 $ 5 NM NM Operating Profit$ 61 $ 38 62 59$ 48 $ 117 (58 ) (58 ) Quarter Ended Year to Date Ended 9/30/2020 9/30/2019 9/30/2020 9/30/2019 System Sales Decline (5 )% - % (20 )% (2 )% System Sales (Decline) Growth, excluding F/X (6 )% 3 % (19 )% 3 % Same-Store Sales (Decline) Growth (7 )% 1 % (16 )% 1 % Unit Count 9/30/2020 9/30/2019 % Increase (Decrease) Company-owned 2,155 2,165 - Franchisees 122 90 36 2,277 2,255 1 42
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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) 9/30/2019 Actions Other F/X 9/30/2020
Company sales $ 540 $ (4 ) $ (34 ) $ 6 $ 508
Cost of sales (170 ) 2 18 (2 ) (152 )
Cost of labor (140 ) 2 15 (1 ) (124 )
Occupancy and other
operating expenses (168 ) 2 20 (2 ) (148 )
Restaurant profit $ 62 $ 2 $ 19 $ 1 $ 84
Year to Date Ended
Store
Portfolio
Income (Expense) 9/30/2019 Actions Other F/X 9/30/2020
Company sales $ 1,588 $ (79 ) $ (234 ) $ (23 ) $ 1,252
Cost of sales (484 ) 24 65 7 (388 )
Cost of labor (420 ) 16 59 6 (339 )
Occupancy and other
operating expenses (487 ) 16 71 7 (393 )
Restaurant profit $ 197 $ (23 ) $ (39 ) $ (3 ) $ 132
The decrease in Company sales for the quarter, excluding the impact of F/X, was
primarily driven by same store sales decline, partially offset by the net unit
growth. The increase in Restaurant profit for the quarter, excluding the impact
of F/X, was primarily driven by labor efficiency, lower promotion costs, and
savings in utilities and other restaurant operating costs including lease
concessions, partially offset by the decrease of Company sales, and commodity
inflation and wage inflation of 2% each.
The year to date decrease in Company sales and Restaurant profit, excluding the
impact of F/X, was primarily driven by same-store sales decline and temporary
store closures due to the impact of the COVID-19 pandemic, and commodity and
wage inflation of 3% each, partially offset by labor efficiency, one-time
reductions in social security contributions, and savings in utilities and other
restaurant operating costs including lease concessions.
G&A Expenses
The decrease in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by the realignment of cost structure and lower performance-based compensation.
The year to date decrease in G&A expenses, excluding the impact of F/X, was primarily driven by one-time reductions in social security contributions and the realignment of cost structure.
Operating Profit
The increase in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower G&A expenses.
43
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The year to date decrease in Operating profit, excluding the impact of F/X, was
primarily driven by the decrease in Restaurant profit mainly due to the impact
of the COVID-19 pandemic and higher store impairment charges, partially offset
by lower 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)
9/30/2020 9/30/2019 Reported Ex F/X 9/30/2020 9/30/2019 Reported Ex F/X
Company sales $ 13 $ 11 16 14 $ 29 $ 29 (2 ) -
Franchise fees and income 6 2 NM NM 11 6 NM NM
Revenues from transactions
with franchisees and
unconsolidated affiliates 15 8 NM NM 31 20 59 61
Other revenues 24 19 23 19 65 49 31 33
Total revenues $ 58 $ 40 49 46 $ 136 $ 104 31 33
Restaurant loss $ - $ (1 ) 66 64 $ (3 ) $ (2 ) (25 ) (28 )
Restaurant margin % (1.9 )% (6.6 )% 4.7 ppts. 4.7 ppts. (9.4 )% (7.4 )% (2.0 ) ppts. (2.0 ) ppts.
G&A expenses $ 11 $ 8 (33 ) (32 ) $ 30 $ 24 (24 ) (26 )
Expenses for transactions
with franchisees and
unconsolidated affiliates $ 10 $ 5 (97 ) (95 ) $ 23 $ 16 (41 ) (44 )
Other operating costs
and expenses $ 21 $ 17 (24 ) (19 ) $ 57 $ 43 (34 ) (36 )
Closures and impairment
expenses, net $ - $ - NM NM $ 3 $ 2 (75 ) (81 )
Operating Profit (Loss) $ 2 $ (2 ) NM NM $ (10 ) $ (12 ) 17 15
Quarter Ended Year to Date Ended
9/30/2020 9/30/2019 9/30/2020 9/30/2019
Same-Store Sales Decline (16 )% (10 )% (24 )% (11 )%
Total Revenues
The quarter and year to date increase in Total revenues, excluding the impact of
F/X, was primarily driven by the consolidation of Huang Ji Huang and the
increase in demand of online orders of certain product categories (mainly fresh
grocery products) from our e-commerce business, partially offset by the
same-store sales decline due to the impact of the COVID-19 pandemic.
44
--------------------------------------------------------------------------------G&A Expenses
The quarter and year to date increase in G&A expenses, excluding the impact of
F/X, was primarily driven by the consolidation of
Operating Profit (Loss)
The increase in Operating profit for the quarter, excluding the impact of F/X,
was primarily driven by operating profit generated by
The year to date decrease in Operating loss, excluding the impact of F/X, was primarily driven by the consolidation of operating profit generated byHuang Ji Huang , partially offset by higher store impairment charges. Corporate and Unallocated Quarter Ended Year to Date Ended % B/(W) % B/(W) 9/30/2020 9/30/2019 Reported Ex
F/X 9/30/2020 9/30/2019 Reported Ex F/X Revenues from transactions with franchisees and unconsolidated affiliates$ 138 $ 147 (6 ) (7 ) 407 425 (4 ) (3 ) Other revenue 14 1 NM NM 16 3 NM NM Expenses for transactions with franchisees and unconsolidated affiliates 137 145 5 7 407 421 3 2 Other operating costs and expenses 13 1 NM NM 15 3 NM NM Corporate G&A expenses 42 34 (23 ) (22 ) 100 92 (8 ) (9 ) Other unallocated income 247 1 NM NM 244 2 NM NM Interest income, net 11 10 (1 ) (2 ) 28 29 (5 ) (4 ) Investment gain 38 12 NM NM 75 39 93 93 Income tax provision (See Note 12) (155 ) (87 ) (79 ) (76 ) (232 ) (226 ) (3 ) (3 ) Effective tax rate (See Note 12) 25.6 % 26.9 % 1.3 % 1.3 % 26.3 % 25.8 % (0.5 )% (0.5 )%
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. G&A Expenses
The increase in Corporate G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by lapping of prior year government incentives received and merit increases, partially offset by lower performance-based compensation.
The year to date increase in Corporate G&A expenses, excluding the impact of
F/X, was primarily driven by the lapping of prior year government incentives
received and merit increases, partially offset by lower performance-based
compensation, the realignment of cost structure and one-time reductions in
social security contributions.
45
--------------------------------------------------------------------------------Other Unallocated Income The quarter and year to date Other unallocated income mainly included a gain recorded in the third quarter of 2020 from the re-measurement of our previously held equity interest in connection with the acquisition of Suzhou KFC recorded in the third quarter of 2020. See Note 6 for additional information. Investment Gain
The Investment gain relates to our investment in equity securities of Meituan Dianping ("Meituan"). See Note 6 for additional information.
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 lower effective tax rate for the quarter endedSeptember 30, 2020 was primarily due to lower estimated repatriation of earnings outside of China subject to foreign withholding tax. The higher effective tax rate for the year to date endedSeptember 30, 2020 was primarily due to theU.S. tax related to the gain recognized on our investment in equity securities of Meituan during the year to date endedSeptember 30, 2020 and prior years, offset by lower estimated repatriation of earnings outside of China subject to foreign withholding tax. See Note 6 for additional information.
Significant Known Events, Trends or Uncertainties Expected to Impact Future Results
Impact of COVID-19 Pandemic Starting in lateJanuary 2020 , the COVID-19 pandemic has significantly impacted the Company's operations. The pace of recovery is uneven with recent sales and traffic still below pre-outbreak levels as people continue to avoid going out and practice social distancing. Operating results improved sequentially in the second and third quarters of 2020, although sales continued to be impacted by reduced traffic at transportation and tourist locations, delayed and shortened school holidays and the other lingering effects of the COVID-19 pandemic. These factors are expected to continue to impact operations in the fourth quarter of 2020. Management 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 highly uncertain and cannot be accurately predicted, including the possible reemergence and further spread of COVID-19 and the actions by government authorities to contain or treat its impact, the economic recovery within China and globally, the impact on consumer behavior and other related factors. The Company expects that further developments related to the COVID-19 pandemic may continue to have a material and extended adverse impact on the Company's results of operations, as well as the Company's cash flows and financial condition. For further information on the risks associated with the COVID-19 pandemic, see "Item 1A. Risk Factors." 46 --------------------------------------------------------------------------------
Tax Examination on Transfer Pricing
We are subject to reviews, examinations and audits by Chinese tax authorities, theIRS and other taxing 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 currently exchanged with the tax authorities focuses on our franchise arrangement with YUM. We have submitted information 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 will depend upon further review of the information provided and 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. 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. 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, 2020 , an input VAT credit asset of$252 million and payable of$7 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year fromSeptember 30, 2020 . Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the Company expected to use the credit within one year. We have been benefiting from the retail tax structure reform since it was implemented onMay 1, 2016 . However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter. 47 --------------------------------------------------------------------------------
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. 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$899 million in 2020 as compared to$1,045 million in 2019. The decrease was primarily driven by the decrease in net income, excluding a 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, along with the working capital changes. Net cash used in investing activities was$2,333 million in 2020 as compared to$553 million in 2019. The increase is mainly due to the net impact on cash flow resulting from purchases and maturities of short-term investments and long-term time deposits, and cash consideration paid for the acquisition ofHuang Ji Huang and Suzhou KFC, partially offset by cash proceeds from the partial disposal of our investment in equity securities of Meituan. Net cash provided by financing activities was$2,144 million in 2020 as compared to net cash used in financing activities of$368 million in 2019. The change was primarily attributable to the proceeds of$2.2 billion (net of issuance costs paid) raised from issuance of common stock in connection with our global offering and secondary listing on the MainBoard of HKEX , a decrease in the number of shares repurchased due to the suspension of our share repurchase program and a decrease in the amount of dividends paid due to the temporary suspension of dividends through the end of the third quarter of 2020.
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores and from our franchise operations and dividend payments from our unconsolidated affiliates.
Our ability to fund our future operations and capital needs will 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 to make capital expenditures, distributions to our stockholders and share repurchases as well as any acquisition or investment we may make. As a result of the COVID-19 pandemic, we have taken, and continue to take, certain actions to provide additional liquidity and flexibility, which include suspending our share repurchase program and, through the end of the third quarter of 2020, dividends, partial disposal of our investment in Meituan equity securities, as well as increasing our credit facilities. Our global offering inSeptember 2020 provided us with$2.2 billion in net proceeds. We believe that our future cash from operations, together with our funds on hand and access to 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. 48 --------------------------------------------------------------------------------
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.
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. During the years to date endedSeptember 30, 2020 and 2019, the Company repurchased$7 million or 0.2 million shares and$204 million or 4.9 million shares of common stock, respectively, under the repurchase program.
For the quarter ended
Due to the unprecedented effects of the COVID-19 pandemic and associated economic uncertainty, the Company suspended its share repurchases and, through the end of the third quarter of 2020, dividend payments.
OnOctober 28, 2020 , the Board of Directors declared a cash dividend of$0.12 per share, payable onDecember 16, 2020 , to stockholders of record as of the close of business onNovember 25, 2020 . The total estimated cash dividend payable is approximately$50 million . Our ability to declare and pay any dividends on our stock may be restricted by 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. 49 --------------------------------------------------------------------------------
Borrowing Capacity As ofSeptember 30, 2020 , the Company had credit facilities ofRMB3,458 million (approximately$509 million ), comprised of onshore credit facilities ofRMB2,100 million (approximately$309 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, 2020 . 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, 2020 , we had outstanding bank guarantees ofRMB 104 million (approximately$15 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, 2020 .
Off-Balance Sheet Arrangements
See the Guarantees section of Note 14 for discussion of our off-balance sheet arrangements.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
See Note 2 for details of recently adopted accounting pronouncements.
New Accounting Pronouncements Not Yet Adopted
InDecember 2019 , the FASB issued ASU 2019-12, Income Tax (Topic 740), Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company fromJanuary 1, 2021 , with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements. InJanuary 2020 , the FASB issued ASU 2020-01,Investments-Equity Securities (Topic 321),Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) ("ASU 2020-01"), which clarifies the interaction for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company fromJanuary 1, 2021 , with early adoption permitted. We are currently evaluating the impact the adoption of this standard will have on our financial statements. 50 -------------------------------------------------------------------------------- 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. InOctober 2020 , the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs ("ASU 2020-08"), which clarifies that an entity should reevaluate for each reporting period whether a callable debt security is within the scope of certain guidance in ASC 310-20 that was issued in ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20):Premium Amortization onPurchased Callable Debt Securities . ASU 2020-08 is effective for the Company fromJanuary 1, 2021 , and early adoption is not 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 our success is tiedto the success of YUM's brand strength, marketing campaigns and product
innovation, (g) shortages or interruptions in the availability and
delivery of food products and other supplies, (h) fluctuation of raw
materials prices, (i) 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, (j) risks associated with leasing real estate, (k) inability
to obtain desirable restaurant locations on commercially reasonable terms,
(l) labor shortages or increases in labor costs, (m) the fact that oursuccess depends substantially on our corporate reputation and on the value
and perception of our brands, (n) the occurrence of security breaches and
cyber-attacks, (o) failure to protect 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, (p) failures or interruptions of service
or security breaches in our information technology systems, (q) 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 deliveryaggregators, (r) failure to provide timely and reliable delivery services
by our restaurants, (s) the fact that our growth strategy with respect to
COFFii & JOY may not be successful, (t) challenges and risks
51
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related to our e-commerce business, (u) the anticipated benefits of the
acquisition of Daojia and Huang Ji Huang may not be realized in a timely
manner or at all, (v) the Chinese government may determine that the VIE
structure of Daojia does not comply with Chinese laws on foreign
investment in restricted industries, (w) our inability or failure to
recognize, respond to and effectively manage the impact of social media,(x) litigation and failure to comply with anti-bribery or anti-corruption
laws, (y)
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 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 intellectual property 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
deter and prevent all instances of fraud or other misconduct committed by
our employees, customers or other third parties, (gg) changes in
accounting standards and subjective assumptions, estimates and judgments
by management related to complex accounting matters, (hh) failure of our
insurance policies to provide adequate coverage for claims associated with
our business operations, (ii) unforeseeable business interruptions, (jj)
failure by us to maintain effective disclosure controls and procedures and
internal control over financial reporting in accordance with the rules of
the
of our key management and experienced and capable personnel as well as our
ability to recruit new talent, (ll) the fact that our investment in
technology and innovation may not generate the expected level of returns,
(mm) fair value changes for our investment in equity securities and
short-term investments may adversely affect our financial condition and
results of operations, (nn) the fact that our operating results may be
adversely affected by our investment in unconsolidated affiliates, and
(oo) the fact that our strategic investments or acquisitions may be
unsuccessful;
• 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
including the imposition of new or higher taxes on goods imported from the
limitations on our ability to utilize our cash balances effectively due to
governmental control of currency conversion and payments of foreign
currency and the Renminbi out of mainland China, (f) changes in laws and
regulations of China or non-compliance with applicable laws and
regulations, (g) reliance on dividends and other distributions on equity
paid by our principal subsidiaries in China to fund offshore cash
requirements, (h) potential unfavorable tax consequences resulting fromour classification as a China resident enterprise for Chinese enterprise
income tax purposes, (i) uncertainty regarding indirect transfers of
equity interests in
Chinese tax authorities, (j) difficulties in effecting service of legal
process, enforcing foreign judgments or bringing original actions in
against us, (k) inability to use properties due to defects caused by
non-registration of lease agreements related to certain properties, (l)
risk in relation to unexpected land acquisitions, building closures or
demolitions, (m) 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, (n)our audit reports are prepared by auditors who are not currently inspected
by the
stockholders are deprived of the benefits of such inspection, (o)
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 Securities Exchange Act of 1934,
(p) restrictions on our ability to make loans or additional capital
contributions to our Chinese subsidiaries due to Chinese regulation ofloans to, and direct investment in, Chinese entities by offshore holding
companies and governmental control of currency conversion and (q)
difficulties in pursuing growth through acquisitions due to regulations
regarding acquisitions;
52
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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 and there being no assurance that the indemnity
provided by YUM with respect to certain liabilities in connection with the
separation will be sufficient to insure us against the full amount of such
liabilities, (d) the possibility that a court would require that we assume
responsibility for obligations allocated to YUM under the separation and
distribution agreement and (e) potential liabilities due to fraudulent
transfer considerations.
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, 2019 and this Form 10-Q) 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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