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Dynamic quotes 
OFFON

YUM CHINA HOLDINGS, INC.

(YUMC)
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YUM CHINA : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/06/2021 | 06:11am EDT
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.



Introduction



Yum China Holdings, Inc. is the largest restaurant company in China in terms of
system sales, with 10,725 restaurants covering over 1,500 cities primarily in
China as of March 31, 2021. Our growing restaurant base consists of our flagship
KFC 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 the KFC, Pizza Hut and, subject to
achieving certain agreed-upon milestones, Taco Bell brands in China, excluding
Hong Kong, Macau and Taiwan, 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 with Lavazza Group, the world-renowned family-owned
Italian coffee company, to explore and develop the Lavazza coffee shop concept
in China. 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 in 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.



KFC is the leading and the largest quick-service restaurant ("QSR") brand in
China in terms of system sales. As of March 31, 2021, KFC operated over 7,300
restaurants in over 1,500 cities across China. During the quarter ended
September 30, 2020, the Company completed the acquisition of an additional 25%
interest in an unconsolidated affiliate that operates KFC stores in and around
Suzhou, 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
in China in terms of system sales and number of restaurants. As of March 31,
2021, Pizza Hut operated over 2,300 restaurants in over 500 cities.



The Company's common stock is listed on the NYSE under the symbol "YUMC". On
September 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 to US$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.




                                       28
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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 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 management

measures performance internally and focuses on trends of a more stable

        base of stores.




    •   Company sales represent revenues from Company-owned restaurants. Company

Restaurant profit ("Restaurant profit") is defined as Company sales less

expenses incurred directly by our Company-owned restaurants in generating

Company sales. Company restaurant margin percentage is defined as

Restaurant profit divided by Company sales. 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 U.S. dollars except percentages and per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. References to quarters are references to the Company's fiscal quarters.




                                       29

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Quarters Ended March 31, 2021 and 2020



Results of Operations



Summary



The Company has two reportable segments: KFC and Pizza 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                               +24            +5             +11               +113                +99
Pizza Hut                         +57           +38              +5                 NM                 NM
All Other Segments(b)              NM           +14            +167                +74                +76
Total                             +34           +10             +15               +250               +227







NM refers to not meaningful.


(a) System sales and same-store sales percentages as shown in tables exclude the

impact of F/X. Effective January 1, 2018, temporary store closures are

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 of March 31, 2021, the Company operated 10,725 units, predominately KFC and
Pizza 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 reported substantial year-over-year growth in the first quarter of
2021, as the Company began to lap prior year periods that were impacted by
COVID-19. Operating results improved sequentially in the last three quarters of
2020 and the first quarter of 2021, although sales continued to be impacted by
reduced traffic at transportation and tourist locations, regional resurgences,
and other lingering effects of the COVID-19 pandemic.



As compared to the first quarter of 2020, Company sales in the first quarter of
2021 increased 51%, or 40% excluding the impact of F/X. Company sales for the
quarter, excluding the impact of F/X, were affected by net unit growth including
the acquisition of Suzhou KFC, same-store sales growth and substantially fewer
temporary store closures.



The increase in Operating profit for the quarter, excluding the impact of F/X,
was primarily driven by the increase in Company sales, commodity deflation of 7%
and higher productivity, partially offset by increased value promotions, lower
temporary relief provided by landlords and government agencies, wage inflation
and an increase in G&A expenses due to the timing shift of government incentives
received.





                                       30
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The Consolidated Results of Operations for the quarters ended March 31, 2021 and
2020 are presented below:



                                           Quarter Ended                       % B/(W) (a)
                                     3/31/2021       3/31/2020         Reported           Ex F/X
Company sales                       $     2,331     $     1,548          51                40
Franchise fees and income                    42              35          17                 9
Revenues from transactions
  with franchisees and
  unconsolidated affiliates                 171             161           6                (1 )
Other revenues                               13              10          29                20
Total revenues                      $     2,557     $     1,754          46                36
Restaurant profit                   $       435     $       165         164               147
Restaurant Margin %                        18.7 %          10.7 %       8.0   ppts.       8.0   ppts.
Operating Profit                    $       342     $        97         250               227
Interest income, net                         15               9          68                61
Investment loss                             (12 )            (8 )       (42 )             (42 )
Income tax provision                       (102 )           (32 )      (218 )            (202 )
Net Income - including
  noncontrolling interests                  243              66         268               240
Net Income
  - noncontrolling interests                 13               4         206               186
Net Income
  - Yum China Holdings, Inc.        $       230     $        62         272               244

Diluted Earnings Per Common Share $ 0.53 $ 0.16 231

              206
Effective tax rate                         29.6 %          32.7 %
Supplementary information
  - Non-GAAP Measures(b)
Adjusted Operating Profit           $       345     $        98
Adjusted Net Income -
  Yum China Holdings, Inc.          $       233     $        63
Adjusted Diluted Earnings
  Per Common Share                  $      0.54     $      0.16
Adjusted Effective Tax Rate                29.3 %          32.4 %
Adjusted EBITDA                     $       476     $       219



(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
                                                3/31/2021         3/31/2020
System Sales Growth (Decline)                           44 %             (23 )%
System Sales Growth (Decline), excluding F/X            34 %             (20 )%
Same-Store Sales Growth (Decline)                       10 %             (15 )%




                                       31
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                                                                % Increase
Unit Count                      3/31/2021       3/31/2020       (Decrease)
Company-owned(a)                     8,371           7,432               13
Unconsolidated affiliates(a)           709             924              (23 )
Franchisees(b)                       1,645             939               75
                                    10,725           9,295               15



(a) As a result of the acquisition of Suzhou KFC in the third quarter of 2020,

    the restaurant units of Suzhou KFC were transferred from unconsolidated
    affiliates to Company-owned.



(b) Increase in franchise stores primarily resulted from the acquisition of Huang

    Ji Huang.




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.



                                                               Quarter Ended
                                                         3/31/2021        3/31/2020
Non-GAAP Reconciliations
Reconciliation of Operating Profit to Adjusted
Operating Profit
Operating Profit                                       $         342     $  

97

Special Items, Operating Profit                                   (3 )             (1 )
Adjusted Operating Profit                              $         345     $  

98

Reconciliation of Net Income to Adjusted Net Income Net Income - Yum China Holdings, Inc.

                  $         230     $  

62

Special Items, Net Income - Yum China Holdings, Inc.              (3 )             (1 )
Adjusted Net Income - Yum China Holdings, Inc.         $         233     $  

63

Reconciliation of EPS to Adjusted EPS
Basic Earnings Per Common Share                        $        0.55     $  

0.16

Special Items, Basic Earnings Per Common Share                     -            (0.01 )
Adjusted Basic Earnings Per Common Share               $        0.55     $  

0.17

Diluted Earnings Per Common Share                      $        0.53     $  

0.16

Special Items, Diluted Earnings Per Common Share               (0.01 )      

-

Adjusted Diluted Earnings Per Common Share             $        0.54     $  

0.16

Reconciliation of Effective Tax Rate to Adjusted
Effective Tax Rate
Effective tax rate (See Note 12)                                29.6 %           32.7 %
Impact on effective tax rate as a result of Special
Items                                                            0.3 %            0.3 %
Adjusted effective tax rate                                     29.3 %           32.4 %




                                       32
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Net income, along with the reconciliation to Adjusted EBITDA, is presented below.




                                                         Quarter Ended

Reconciliation of Net Income to Adjusted EBITDA 3/31/2021 3/31/2020 Net Income - Yum China Holdings, Inc.

             $      230      $        

62

Net Income - noncontrolling interests                     13                4
Income tax provision                                     102               32
Interest income, net                                     (15 )             (9 )
Investment loss                                           12                8
Operating Profit                                         342               97
Special Items, Operating Profit                            3                1
Adjusted Operating Profit                                345               98
Depreciation and amortization                            128              109
Store impairment charges                                   3               12
Adjusted EBITDA                                   $      476      $       219





Details of Special Items are presented below:



                                                                Quarter Ended
Details of Special Items                                 3/31/2021         3/31/2020
Share-based compensation expense for Partner PSU
Awards(1)                                                         (3 )              (1 )
Special Items, Operating Profit                                   (3 )              (1 )
Tax Expenses on Special Items(2)                                   -        

-

Special items, net income - including noncontrolling interests

                                                         (3 )              (1 )
Special items, net income - noncontrolling interests               -        

-

Special Items, Net income - Yum China Holdings, Inc. $ (3 ) $

         (1 )
Weighted-average diluted shares outstanding (in
millions)                                                        434        

386

Special Items, Diluted Earnings Per Common Share $ (0.01 ) $

         -



(1) 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 $3 million and $1 million associated with the Partner PSU Awards for the

     quarters ended March 31, 2021 and 2020, respectively.



(2) The tax expense was determined based upon the nature, as well as the

    jurisdiction, of each Special Item at the applicable tax rate.




                                       33
--------------------------------------------------------------------------------




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.



Segment Results



KFC



                                                      Quarter Ended
                                                                         % B/(W)
                               3/31/2021       3/31/2020        Reported         Ex F/X
Company sales                 $     1,783     $     1,220        46              36
Franchise fees and income              33              33        (2 )            (9 )
Revenues from transactions
  with franchisees and
  unconsolidated affiliates            15              16        (6 )           (12 )
Other revenues                          1               -        NM              NM
Total revenues                $     1,832     $     1,269        44              34

Restaurant profit             $       355     $       166       113              99
Restaurant margin %                  19.9 %          13.6 %     6.3   ppts.     6.3   ppts.

G&A expenses                  $        55     $        46       (19 )           (11 )
Franchise expenses            $        16     $        16         3              10
Expenses for transactions
  with franchisees and
  unconsolidated affiliates   $        15     $        16         7              13
Closures and impairment
  expenses, net               $         -     $         1        NM              NM
Other income, net             $        (9 )   $       (17 )     (45 )           (49 )
Operating Profit              $       327     $       153       113              99




                                                       Quarter Ended
                                                3/31/2021         3/31/2020
System Sales Growth (Decline)                           33 %             (18 )%
System Sales Growth (Decline), excluding F/X            24 %             (15 )%
Same-Store Sales Growth (Decline)                        5 %             (11 )%


                                       34
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                                                                % Increase
Unit Count                      3/31/2021       3/31/2020       (Decrease)
Company-owned(a)                     6,030           5,174               17
Unconsolidated affiliates(a)           704             924              (24 )
Franchisees                            639             563               13
                                     7,373           6,661               11



(a) As a result of the acquisition of Suzhou KFC in the third quarter of 2020,

the restaurant units of Suzhou KFC were transferred from unconsolidated

affiliates to Company-owned.

Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:



                                                  Quarter Ended
                                              Store
                                            Portfolio
Income (Expense)        3/31/2020            Actions       Other       F/X       3/31/2021
Company sales          $     1,220         $       359     $   77     $ 127     $     1,783
Cost of sales                 (392 )              (111 )        1       (38 )          (540 )
Cost of labor                 (287 )               (66 )      (18 )     (27 )          (398 )
Occupancy and other
  operating expenses          (375 )               (74 )       (6 )     (35 )          (490 )
Restaurant profit      $       166         $       108     $   54     $  27     $       355






The increase in Company sales and Restaurant profit for the quarter, excluding
the impact of F/X, was primarily driven by fewer temporary store closures,
same-store sales growth, net unit growth including the acquisition of Suzhou
KFC, commodity deflation of 7% and higher productivity, partially offset by
increased value promotions, lower temporary relief provided by landlords and
government agencies and wage inflation of 2%.



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, partially offset
by the net unit growth, fewer temporary store closures and same-store sales
growth.



G&A Expenses



The increase in G&A expenses for the quarter, excluding the impact of F/X, was
primarily driven by lapping one-time reductions in social security contributions
in the first quarter of 2020 and merit increases.



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.

                                       35

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Pizza Hut



                                                       Quarter Ended
                                                                      % B/(W)
                               3/31/2021       3/31/2020         Reported          Ex F/X
Company sales                 $       538     $       322         67               56
Franchise fees and income               2               1         90               77
Revenues from transactions
  with franchisees and
  unconsolidated affiliates             1               1         91               77
Total revenues                $       541     $       324         67               55

Restaurant profit             $        82     $         1         NM               NM
Restaurant margin %                  15.3 %           0.3 %     15.0   ppts.     15.0   ppts.

G&A expenses                  $        25     $        24         (6 )              2
Franchise expenses            $         1     $         1        (38 )            (28 )
Expenses for transactions
  with franchisees and
  unconsolidated affiliates   $         1     $         1        (75 )            (63 )
Closures and impairment
  expenses, net               $        (2 )   $         5         NM               NM
Operating Profit              $        60     $       (28 )       NM               NM




                                                       Quarter Ended
                                                3/31/2021         3/31/2020
System Sales Growth (Decline)                           68 %             (40 )%
System Sales Growth (Decline), excluding F/X            57 %             (38 )%
Same-Store Sales Growth (Decline)                       38 %             (31 )%




Unit Count       3/31/2021       3/31/2020       % Increase
Company-owned         2,255           2,166                4
Franchisees             127             105               21
                      2,382           2,271                5



Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:



                                                 Quarter Ended
                                          Store
                                        Portfolio
Income (Expense)        3/31/2020        Actions        Other       F/X       3/31/2021
Company sales          $       322     $         53     $  126     $  37     $       538
Cost of sales                 (102 )            (15 )      (32 )     (11 )          (160 )
Cost of labor                 (104 )            (10 )      (18 )     (11 )          (143 )
Occupancy and other
  operating expenses          (115 )            (11 )      (17 )     (10 )          (153 )
Restaurant profit      $         1     $         17     $   59     $   5     $        82






                                       36
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The increase in Company sales and Restaurant profit for the quarter, excluding
the impact of F/X, was primarily driven by same-store sales growth, fewer
temporary store closures, commodity deflation of 5% and higher productivity,
partially offset by increased value promotions, lower temporary relief provided
by landlords and government agencies and wage inflation of 3%.



Operating Profit



The change in Operating profit for the quarter, excluding the impact of F/X, was
primarily driven by the increase in Restaurant profit and lower store impairment
charges.



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
                                                                                % B/(W)
                                     3/31/2021        3/31/2020        Reported            Ex F/X
Company sales                       $        10      $         6              76                63
Franchise fees and income                     7                1              NM                NM
Revenues from transactions
  with franchisees and
  unconsolidated affiliates                  26                5              NM                NM
Other revenues                               35               16              NM                NM
Total revenues                      $        78      $        28              NM                NM

Restaurant loss                     $        (2 )    $        (3 )            50                54
Restaurant margin %                       (13.3 )%         (46.9 )%        

33.6 ppts. 33.6 ppts.

G&A expenses                        $         9      $         8             (22 )             (13 )
Expenses for transactions
  with franchisees and
  unconsolidated affiliates         $        24      $         4              NM                NM
Other operating costs
  and expenses                      $        33      $        15              NM                NM
Closures and impairment
  expenses, net                     $         -      $         2             100               100
Other expenses, net                 $         3      $         -              NM                NM
Operating Loss                      $        (3 )    $       (10 )            74                76




                                            Quarter Ended
                                     3/31/2021         3/31/2020
Same-Store Sales Growth (Decline)            14 %             (30 )%






Total Revenues


The increase in Total revenues for the quarter, excluding the impact of F/X, was primarily driven by the revenue generated from our delivery team and the consolidation of Huang Ji Huang.

                                       37

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G&A Expenses


The increase in G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by the consolidation of Huang Ji Huang.



Operating Loss


The decrease in Operating loss for the quarter, excluding the impact of F/X, was primarily driven by Operating profit generated by Huang Ji Huang and the improvement in operating results of our other operating segments.



Corporate and Unallocated



                                                  Quarter Ended
                                                                     % B/(W)
                               3/31/2021       3/31/2020       Reported      Ex F/X
Revenues from transactions
  with franchisees and
  unconsolidated affiliates   $       129     $       139             (8 )       (14 )
Other revenue                 $         2     $         1             NM          NM
Expenses for transactions
  with franchisees and
  unconsolidated affiliates   $       129     $       135              5          11
Other operating
  costs and expenses          $         3     $         1             NM          NM
Corporate G&A expenses        $        41     $        21            (94 )       (84 )
Other unallocated expenses    $         -     $        (1 )           96          95
Interest income, net          $        15     $         9             68          61
Investment loss               $       (12 )   $        (8 )          (42 )       (42 )
Income tax provision
 (See Note 12)                $      (102 )   $       (32 )         (218 )      (202 )
Effective tax rate
 (See Note 12)                       29.6 %          32.7 %          3.1 %       3.1 %







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 to
KFC and Pizza Hut franchisees and unconsolidated affiliates. The decrease for
the quarter, 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 due to the timing shift of government incentives received and
higher compensation costs.



Investment Loss



The Investment loss mainly relates to our investment in equity securities of
Sunner partially offset by investment gain in Meituan. See Note 6 for additional
information.

                                       38
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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
and U.S. corporate income tax, if any. The lower effective tax rate for the
quarter ended March 31, 2021 was primarily due to impact from our investment in
equity securities of Meituan and lower estimated repatriation of earnings
outside of China subject to foreign withholding tax.



Significant Known Events, Trends or Uncertainties Expected to Impact Future Results




Impact of COVID-19 Pandemic



Starting in late January 2020, the COVID-19 pandemic has significantly impacted
the Company's operations and financial results. While the lingering effects of
the pandemic continue to impact our operations, the Company reported substantial
year-over-year growth in the first quarter of 2021, as we began to lap prior
year periods that were impacted by COVID-19. Sales in the first quarter of 2021
were impacted by regional resurgences of COVID-19 before the Chinese New Year
and tightened public health measures across China.



While the impacts of COVID-19 are subsiding, the Company expects a full recovery
of same-store sales to pre-COVID-19 levels to take time, and the unevenness of
recovery to linger for several reasons. Public health measures and social
distancing behaviors persist as occasional outbreaks remind people of the
lingering risks. Dine-in traffic, as well as sales at our transportation
locations, remains well below 2019 levels. 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 or treat its impact, the economic recovery within China and globally,
the impact on consumer behavior 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 in China 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.



PRC Value-Added Tax ("VAT")



Effective May 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.



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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 of March 31, 2021, an input VAT credit asset of $271 million and payable of
$4 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 from March 31, 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 on May 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.



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 quarters ended March 31, 2021 and 2020 were as follows:




Net cash provided by operating activities was $331 million in 2021 as compared
to $60 million in 2020. The increase was primarily driven by the increase in net
income along with the working capital changes.



Net cash used in investing activities was $347 million in 2021 as compared to $2
million net cash provided by investing activities in 2020. The change is mainly
due to cash consideration for the acquisition of a 5% equity interest in Sunner
and higher capital expenditure.



Net cash used in financing activities was $55 million in 2021, remaining relatively flat as compared to $52 million in 2020.

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 in September
2020 provided us with $2.2 billion in net proceeds.

                                       40

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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.



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, U.S. and global economies, as well as relations

        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. Starting in the second quarter of 2020, our share repurchases
have been suspended due to the impacts of the COVID-19 pandemic. No shares were
repurchased during the quarter ended March 31, 2021. During the quarter ended
March 31, 2020, the Company repurchased $7 million or 0.2 million shares of
common stock under the repurchase program.



For the quarters ended March 31, 2021 and 2020, the Company paid cash dividends of approximately $50 million and $45 million, respectively, to stockholders through quarterly dividend payments of $0.12 per share.




On April 27, 2021, the Board of Directors declared a cash dividend of $0.12 per
share, payable on June 18, 2021, to stockholders of record as of the close of
business on May 25, 2021. The total estimated cash dividend payable is
approximately $50 million.



                                       41
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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 in China 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 in China, 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 of March 31, 2021, the Company had credit facilities of RMB3,611 million
(approximately $551 million), comprised of onshore credit facilities of RMB2,300
million (approximately $351 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 of March 31, 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 the ICE
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 of March 31, 2021, we had outstanding bank guarantees of RMB 112
million (approximately $17 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 of March 31, 2021.



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




In August 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 from January 1, 2022, with
early adoption permitted. We are currently evaluating the impact the adoption of
this standard will have on our financial statements.





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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 China, (g) the fact that our

        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 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 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, (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 timely

manner 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) U.S. federal income taxes,

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 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 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;




                                       43
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    •   Risks related to doing business in China, such as (a) changes in Chinese

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 the United States and China, (d) our

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 Chinese

Renminbi, (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 resident

enterprise 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 China against us, (m) the Chinese government

        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 SEC against certain China-based accounting

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;



• 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 U.S. federal income tax

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 be

insufficient 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.




                                       44
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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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