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 10,725 restaurants covering over 1,500 cities primarily inChina as ofMarch 31, 2021 . Our growing restaurant base consists of our flagshipKFC and Pizza Hut brands, as well as emerging brands such as Little Sheep,Huang Ji Huang , COFFii & JOY, East Dawning,Taco Bell and Lavazza. We have the exclusive right to operate and sublicense theKFC ,Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands inChina , excludingHong Kong ,Macau andTaiwan , and own the intellectual property of the Little Sheep,Huang Ji Huang , COFFii & JOY and East Dawning concepts outright. We also established a joint venture withLavazza Group , the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee shop concept inChina .KFC was the first major global restaurant brand to enterChina as early as 1987. With more than 30 years of operations, we have developed extensive operating experience in theChina 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 withinChina , 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 ofMarch 31, 2021 ,KFC operated over 7,300 restaurants in over 1,500 cities acrossChina . 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 ofMarch 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". OnSeptember 10, 2020 , the Company completed its secondary listing on the Main Board of the HKEX under the stock code "9987", in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company from the global offering after deducting underwriting fees and the offering expenses amounted toUS$2.2 billion . Overview We intend for this MD&A to provide the reader with information that will assist in understanding our results of operations, including metrics that management uses to assess the Company's performance. Throughout this MD&A, we discuss the following performance metrics:
• The Company provides certain percentage changes excluding the impact of
foreign currency translation ("F/X"). These amounts are derived by
translating current year results at prior year average exchange rates. We
believe the elimination of the F/X impact provides better year-to-year
comparability without the distortion of foreign currency fluctuations.
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 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
29
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Quarters 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 +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
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 ofMarch 31, 2021 , the Company operated 10,725 units, predominatelyKFC andPizza Hut restaurants, which are the leading and largest QSR and CDR brands, respectively, in mainlandChina in terms of system sales. We believe that there are significant opportunities to expand withinChina , 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 of2020, 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
-------------------------------------------------------------------------------- The Consolidated Results of Operations for the quarters endedMarch 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
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 -
$ 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
$ 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 -
(1 )
Weighted-average diluted shares outstanding (in
millions) 434 386
Special Items, Diluted Earnings Per Common Share
-
(1) 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 tothe 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
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 ResultsKFC 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
--------------------------------------------------------------------------------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
-------------------------------------------------------------------------------- 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
37
--------------------------------------------------------------------------------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
Operating Loss
The decrease in Operating loss for the quarter, excluding the impact of F/X, was
primarily driven by Operating profit generated by
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 toKFC andPizza 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 ofChina andU.S. corporate income tax, if any. The lower effective tax rate for the quarter endedMarch 31, 2021 was primarily due to impact from our investment in equity securities of Meituan and lower estimated repatriation of earnings outside ofChina subject to foreign withholding tax.
Significant Known Events, Trends or Uncertainties Expected to Impact Future Results
Impact of COVID-19 Pandemic Starting in lateJanuary 2020 , the COVID-19 pandemic 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 theChinese New Year and tightened public health measures acrossChina . 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 withinChina 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 inChina regarding our related party transactions for the period from 2006 to 2015. The information and views currently exchanged with the tax authorities focus on our franchise arrangement with YUM. We continue to provide information requested by the tax authorities to the extent it is available to the Company. It is reasonably possible that there could be significant developments, including expert review and assessment by the STA, within the next 12 months. The ultimate assessment and decision of the STA will depend upon further review of the information provided, as well as ongoing technical and other discussions with the STA and in-charge local tax authorities, and therefore it is not possible to reasonably estimate the potential impact at this time. We will continue to defend our transfer pricing position. However, if the STA prevails in the assessment of additional tax due based on its ruling, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations and cash flows. 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. 39
-------------------------------------------------------------------------------- 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 ofMarch 31, 2021 , an input VAT credit asset of$271 million and payable of$4 million were recorded in Other assets and Accounts payable and other current liabilities, respectively, on the Consolidated Balance Sheets. The Company has not made an allowance for the recoverability of the input VAT credit asset, as the balance is expected to be utilized to offset against VAT payables more than one year fromMarch 31, 2021 . Any input VAT credit asset would be classified as Prepaid expenses and other current assets if the credit expected to be used within one year can be reasonably determined. We have been benefiting from the retail tax structure reform since it was implemented onMay 1, 2016 . However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, the timetable for enacting the prevailing VAT regulations into national VAT law, including ultimate enacted VAT rates, is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from quarter to quarter.
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. 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
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
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores, our franchise operations and dividend payments from our unconsolidated affiliates. Our global offering inSeptember 2020 provided us with$2.2 billion in net proceeds. 40 -------------------------------------------------------------------------------- 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,
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 ourChina 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 endedMarch 31, 2021 . During the quarter endedMarch 31, 2020 , the Company repurchased$7 million or 0.2 million shares of common stock under the repurchase program.
For the quarters ended
OnApril 27, 2021 , the Board of Directors declared a cash dividend of$0.12 per share, payable onJune 18, 2021 , to stockholders of record as of the close of business onMay 25, 2021 . The total estimated cash dividend payable is approximately$50 million . 41
-------------------------------------------------------------------------------- Our ability to declare and pay any dividends on our stock may be restricted by our earnings available for distribution under applicable Chinese laws. The laws, rules and regulations applicable to our Chinese subsidiaries permit payments of dividends only out of their accumulated profits, if any, determined in accordance with applicable Chinese accounting standards and regulations. Under Chinese law, an enterprise incorporated inChina is required to set aside at least 10% of its after-tax profits each year, after making up previous years' accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. At the discretion of the Board of Directors, as an enterprise incorporated inChina , each of our Chinese subsidiaries may allocate a portion of its after-tax profits based on Chinese accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Borrowing Capacity As ofMarch 31, 2021 , the Company had credit facilities ofRMB3,611 million (approximately$551 million ), comprised of onshore credit facilities ofRMB2,300 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 ofMarch 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 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 ofMarch 31, 2021 , we had outstanding bank guarantees ofRMB 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 ofMarch 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
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. 42
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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
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 commerciallyreasonable 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 theperformance of, and our long-term relationships with, third-party mobile
payment processors, internet infrastructure operators, internet service
providers and delivery aggregators, (s) failure to provide timely and
reliable delivery services by our restaurants, (t) our growth strategy
with respect to COFFii & JOY and Lavazza may not be successful, (u) the
anticipated benefits of our acquisitions may not be realized in a timelymanner or at all, (v) challenges and risks related to our e-commerce
business, (w) our inability or failure to recognize, respond to and
effectively manage the impact of social media, (x) failure to comply with
anti-bribery or anti-corruption laws, (y)
changes in tax rates, disagreements with tax authorities and imposition of
new taxes, (z) changes in consumer discretionary spending and general
economic conditions, (aa) the fact that the restaurant industry in which
we operate is highly competitive, (bb) loss of or failure to obtain or
renew any or all of the approvals, licenses and permits to operate our
business, (cc) our inability to adequately protect the intellectualproperty we own or have the right to use, (dd) our licensor's failure to
protect its intellectual property, (ee) seasonality and certain major
events in China , (ff) our failure to detect, deter and prevent all
instances of fraud or other misconduct committed by our employees,customers or other third parties, (gg) the fact that our success depends
on the continuing efforts of our key management and experienced and
capable personnel as well as our ability to recruit new talent, (hh) our
strategic investments or acquisitions may be unsuccessful; (ii) our
investment in technology and innovation may not generate the expected
level of returns, (jj) fair value changes for our investment in equity
securities and lower yields of our short-term investments may adversely
affect our financial condition and results of operations, and (kk) our
operating results may be adversely affected by our investment in
unconsolidated affiliates;
43
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• Risks related to doing business in China , such as (a) changes in Chinesepolitical policies and economic and social policies or conditions, (b)
uncertainties with respect to the interpretation and enforcement of
Chinese laws, rules and regulations, (c) changes in political, business,
economic and trade relations between
audit reports are prepared by auditors who are not currently inspected by
the Public Company Accounting Oversight Board and, as such, our
stockholders are deprived of the benefits of such inspection and our
common stock is subject to the risk of delisting from the New York Stock
Exchange in the future, (e) fluctuation in the value of the ChineseRenminbi, (f) the fact that we face increasing focus on environmental
sustainability issues, (g) limitations on our ability to utilize our cash
balances effectively due to governmental control of currency conversion
and payments of foreign currency and the Chinese Renminbi out of mainland
with applicable laws and regulations, (i) reliance on dividends and other
distributions on equity paid by our principal subsidiaries in China to
fund offshore cash requirements, (j) potential unfavorable tax
consequences resulting from our classification as a China residententerprise for Chinese enterprise income tax purposes, (k) uncertainty
regarding indirect transfers of equity interests in China resident
enterprises and enhanced scrutiny by Chinese tax authorities, (l)
difficulties in effecting service of legal process, conducting
investigations, collecting evidence, enforcing foreign judgments or
bringing original actions in
may determine that the variable interest entity structure of Daojia does
not comply with Chinese laws on foreign investment in restricted
industries, (n) inability to use properties due to defects caused by
non-registration of lease agreements related to certain properties, (o)
risk in relation to unexpected land acquisitions, building closures or
demolitions, (p) potential fines and other legal or administrative
sanctions for failure to comply with Chinese regulations regarding our
employee equity incentive plans and various employee benefit plans, (q)
proceedings instituted by the
firms, including our independent registered public accounting firm, could
result in our financial statements being determined to not be in
compliance with the requirements of the Exchange Act, (r) restrictions on
our ability to make loans or additional capital contributions to our
Chinese subsidiaries due to Chinese regulation of loans to, and direct
investment in, Chinese entities by offshore holding companies and
governmental control of currency conversion, and (s) difficulties in
pursuing growth through acquisitions due to regulations regarding
acquisitions;
• Risks related to the separation and related transactions, such as (a)
incurring significant tax liabilities if the distribution does not qualify
as a transaction that is generally tax-free for
purposes and the Company could be required to indemnify YUM for material
taxes and other related amounts pursuant to indemnification obligations
under the tax matters agreement, (b) being obligated to indemnify YUM for
material taxes and related amounts pursuant to indemnification obligations
under the tax matters agreement if YUM is subject to Chinese indirect
transfer tax with respect to the distribution, (c) potential
indemnification liabilities owing to YUM pursuant to the separation and
distribution agreement, (d) the indemnity provided by YUM to us with
respect to certain liabilities in connection with the separation may beinsufficient to insure us against the full amount of such liabilities, (e)
the possibility that a court would require that we assume responsibility
for obligations allocated to YUM under the separation and distribution
agreement, and (f) potential liabilities due to fraudulent transfer
considerations;
• General risks, such as (a) potential legal proceedings, (b) changes in
accounting standards and subjective assumptions, estimates and judgments
by management related to complex accounting matters, (c) failure of our
insurance policies to provide adequate coverage for claims associated with
our business operations, (d) unforeseeable business interruptions, and (e)
failure by us to maintain effective disclosure controls and procedures and
internal control over financial reporting in accordance with the rules of
the SEC .
44
-------------------------------------------------------------------------------- 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 theSEC (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 endedDecember 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. 45
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