Yum China Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial amounts are in US$ millions except per-share data. The company operates KFC, Pizza Hut and other restaurant brands, primarily in China; it reported more than 11,000 restaurants.
Financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $2,451 | $1,902 | $5,008 | $3,656 |
| Operating profit | $233 | $128 | $575 | $225 |
| Net income attributable to Yum China | $181 | $132 | $411 | $194 |
| Diluted EPS | $0.42 | $0.34 | $0.95 | $0.50 |
| Operating cash flow | Not separately reported for the quarter | $773 | $452 |
- Q2 revenue increased 29% reported, or 17% excluding foreign-exchange effects; first-half revenue rose 37% reported, or 26% excluding foreign exchange. Management attributed growth to store expansion and sales recovery against COVID-affected 2020 comparisons.
- Q2 restaurant profit was $354 million, with a 15.8% restaurant margin, up 2.1 percentage points year over year. First-half restaurant profit was $789 million and margin was 17.3%, up 5.1 points.
- First-half investing cash outflow was $611 million, including $303 million of capital spending and $261 million invested in Sunner. Financing cash outflow was $119 million, including $101 million of common dividends. Cash, cash equivalents and restricted cash ended at $1.209 billion, up $51 million from year-end.
- At June 30, current assets were $5.040 billion and current liabilities $2.116 billion. Cash and short-term investments totaled $4.348 billion. No bank borrowings were outstanding; credit facilities totaled approximately $556 million, reduced by $18 million of guarantees. Lease liabilities totaled $2.416 billion and are a significant fixed obligation.
Changes and operating performance
- System sales increased 14% excluding foreign exchange in Q2 and 24% in the first half; same-store sales increased 5% and 8%, respectively. KFC Q2 same-store sales grew 4%; Pizza Hut grew 11%.
- KFC Q2 operating profit rose 50% reported to $240 million; Pizza Hut rose to $39 million from $15 million. All Other Segments reported a $6 million operating loss.
- Management cited commodity deflation, productivity gains, same-store sales growth, net new units and fewer temporary closures as supports to profit. These were partly offset by wage and compensation cost increases and reduced landlord and government relief. Q2 commodity costs fell 7% overall, according to management.
- Company-operated restaurants numbered 8,594, up 15% year over year; total system units were 11,023, up 11%. The Suzhou KFC acquisition contributed to company-owned unit growth and shifted units from unconsolidated affiliates.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management said recovery to pre-pandemic same-store sales levels would take time. Q2 recovery was interrupted by a Delta variant outbreak in southern China; in July, travel-related and regional outbreak pressures continued, including a developing outbreak centered in Nanjing.
- COVID-19, changes in consumer behavior, public-health restrictions, travel weakness, commodity prices, labor costs, RMB movements and China-U.S. relations remain material uncertainties. Management estimated a 10% RMB weakening would reduce quarterly operating profit by approximately $23 million, assuming no other changes.
- The company’s Chinese transfer-pricing audit, ongoing since 2016 and relating to 2006–2015 transactions, focuses on the franchise arrangement with YUM. Potential tax, interest and penalties cannot currently be reasonably estimated and could materially affect results, financial position and cash flows.
- Yum China acquired a 5% interest in poultry supplier Sunner for approximately $261 million. After gaining significant influence in May, it began equity-method accounting; the investment carried at $243 million versus a quoted market value of $230 million at quarter-end. Investment results also included Meituan-related gains; Q2 investment gain was $8 million versus $45 million a year earlier.
- The board approved resumption of share repurchases on July 28, 2021; no shares were repurchased in the first half. It also declared a $0.12-per-share dividend payable in September, estimated at approximately $51 million. The filing reports effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether same-store sales and traffic recover as expected, particularly at dine-in and transportation locations, amid further COVID-19 outbreaks and restrictions.
- How much reported growth reflects recovery from the unusually weak 2020 comparison, foreign exchange, new units and the Suzhou KFC consolidation.
- Progress and possible financial exposure from the Chinese transfer-pricing audit and the separate potential China indirect-transfer tax indemnity relating to the 2016 separation.
- Sunner’s market value, subsequent equity-method earnings and the effect of the investment relationship on procurement and reported investment results.
- Capital spending, lease commitments, available credit facilities, and the scale and timing of resumed repurchases and dividends.