Yum China Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars unless stated otherwise. Yum China operates KFC, Pizza Hut and other restaurant brands in China; it reported 11,415 units at quarter-end.
Financial results
| Metric | Q3 2021 | Q3 2020 | Year to date 2021 | Year to date 2020 |
|---|---|---|---|---|
| Total revenue | $2.554B | $2.348B | $7.562B | $6.004B |
| Operating profit | $178M | $556M | $753M | $781M |
| Net income attributable to Yum China | $104M | $439M | $515M | $633M |
| Diluted EPS | $0.24 | $1.10 | $1.19 | $1.62 |
| Restaurant profit margin | 12.2% | 18.6% | 15.6% | 14.7% |
| Operating cash flow | — | — | $1.074B | $899M |
Quarterly revenue rose 9% as reported, or 2% excluding foreign-exchange effects; year-to-date revenue rose 26% as reported, or 17% excluding foreign exchange. Quarterly system sales increased 1% excluding foreign exchange while same-store sales fell 7%. Year-to-date system sales increased 15% and same-store sales increased 2%, both excluding foreign exchange.
Quarterly company restaurant profit was $282M versus $394M. Year-to-date restaurant profit was $1.071B versus $790M. Management’s adjusted figures were Q3 operating profit of $168M versus $320M and adjusted net income attributable to Yum China of $96M versus $263M; year-to-date adjusted operating profit was $750M versus $550M and adjusted net income was $514M versus $462M. These are non-GAAP measures.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $1.278B and short-term investments were $3.099B; current assets were $5.082B against current liabilities of $2.194B.
- Year-to-date capital spending was $482M. Investing cash outflow was $743M; financing cash outflow was $220M. Cash, cash equivalents and restricted cash increased $120M to $1.278B.
- No bank borrowings were outstanding. Credit facilities totaled approximately $557M before approximately $22M of bank guarantees reduced availability.
- Lease liabilities totaled $2.506B, including $2.469B of operating lease liabilities and $37M of finance lease liabilities. The filing reports no other debt balance.
Material changes and unusual items
- Q3 operating profit and net income fell sharply year over year, partly because Q3 2020 included a $239M non-cash gain from remeasuring the previously held Suzhou KFC interest. Q3 2021 included a $10M remeasurement gain on gaining control of the Lavazza joint venture.
- The Meituan investment generated a $41M Q3 unrealized loss and a $27M year-to-date unrealized loss. The year-to-date investment loss also included a $22M pre-equity-method unrealized loss on Sunner shares.
- In September, Yum China gained control of and began consolidating its 65%-owned Lavazza joint venture. It also signed an agreement to acquire a 28% interest in Hangzhou Catering for about $250M; subject to approvals and closing conditions, the transaction was expected in Q4 2021 and would give Yum China control of Hangzhou KFC.
- The company resumed share repurchases in July. It repurchased $34M of shares year to date; $658M remained under the $1.4B authorization. It paid a $0.12-per-share quarterly dividend and declared another $0.12 dividend for payment in December 2021.
Outlook, commentary and risks
Management said Q3 was significantly affected by the Delta-variant outbreak, public-health restrictions, reduced travel and social activity, and cancelled holiday trips. It expected the same-store-sales recovery to take time and be nonlinear and uneven; sales remained below prior-year and pre-pandemic levels, particularly dine-in and transportation-hub traffic. The filing provides no specific numerical earnings or revenue guidance.
- Management cited same-store-sales declines, promotion costs, wage inflation, higher delivery-rider and packaging costs, and reduced landlord and government relief as pressures on quarterly restaurant profitability; favorable commodity prices partly offset them.
- A Chinese State Taxation Administration transfer-pricing audit, ongoing since 2016 and covering 2006–2015 related-party transactions, focuses on the franchise arrangement with YUM. Potential tax, interest and penalties cannot be reasonably estimated and could materially affect results, financial condition and cash flows.
- The filing highlights evolving China data-security, privacy and cybersecurity regulation, foreign-exchange exposure, commodity-price volatility and uncertainty from future COVID-19 outbreaks. Management estimated a 10% weakening of the RMB would reduce quarterly operating profit by about $17M, assuming other factors unchanged.
- Yum China expects available cash, operating cash flow and credit facilities to fund operations and anticipated capital spending for the next 12 months. It also noted that China rules restrict certain dividend transfers from subsidiaries.
Most important facts for investors to verify
- Whether same-store sales and restaurant margins recover as restrictions and consumer behavior change, and how costs and promotions affect profitability.
- The Hangzhou Catering/Hangzhou KFC acquisition’s closing, price, approvals and expected impact on consolidation, cash and results.
- Developments and potential exposure from the transfer-pricing audit and the separate China indirect-transfer tax indemnity disclosed in the filing.
- Current performance and valuation of Meituan and Sunner investments, and the implications of their accounting treatment for reported earnings.
- Liquidity and capital-return plans, including lease obligations, credit-facility availability, planned investment and remaining repurchase authorization.