Yum China Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter, comprising the two months ended February 28, 2017. Comparatives are for the two months ended February 29, 2016. The 2016 figures are combined results from when the China business was part of Yum! Brands; Yum China separated in October 2016.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1,284 million | $1,303 million | Down 2% reported |
| Operating profit | $254 million | $209 million | Up 22% |
| Net income attributable to Yum China | $175 million | $145 million | Up 21% |
| Diluted EPS | $0.44 | $0.40 | Up 12% |
| Restaurant profit margin | 23.0% | 19.3% | Up 3.7 percentage points |
| Adjusted EBITDA | $320 million | $279 million | Up 15% |
Company sales fell 2% in reported dollars but increased 3% excluding foreign exchange. System sales increased 4% excluding foreign exchange; same-store sales rose 1%. Restaurant count increased 6% to 7,663. Segment operating profit was $207 million for KFC (up 9%) and $65 million for Pizza Hut Casual Dining (up 67%).
Management attributed improved restaurant profitability primarily to China’s retail VAT reform, alongside same-store sales growth and new units. KFC and Pizza Hut margins also benefited from lower restaurant operating costs. Offsetting pressures included commodity inflation, higher labor costs and wage inflation. The 2016 leap-year calendar contributed an estimated $4 million of incremental operating profit.
Cash flow, liquidity and obligations
- Operating cash flow was $357 million, versus $373 million; management cited increased compensation and benefits payments, partly offset by higher net income and inventory-payment timing.
- Investing cash outflow was $173 million, including $74 million of capital spending and $100 million of short-term investment purchases. Financing cash outflow was $1 million.
- Cash and cash equivalents were $1,074 million and short-term investments were $180 million at February 28, 2017. Current assets were $1,722 million and current liabilities were $1,068 million.
- Total liabilities were $1,347 million. The balance sheet reports $28 million of capital lease obligations and no conventional borrowings. The company had RMB2.3 billion (approximately $330 million) of available credit facilities, with no amounts drawn.
- Operating lease minimum payments were approximately $3 billion; more than 6,000 restaurants leased underlying land and/or buildings. Management expects the new lease accounting standard to materially affect the financial statements.
Outlook, risks and notable items
- Management said cash on hand and expected operating cash flow should fund operations and anticipated capital expenditures for the next 12 months. It authorized a $300 million share-repurchase program in February 2017. No numerical earnings guidance was provided.
- The company expects a continuing benefit from VAT reform but cautioned that its size may fluctuate as implementation and interpretation develop. An $86 million input VAT credit asset was recorded; its recoverability depends on future operations and capital spending.
- Substantially all revenue and assets are in China and denominated in RMB. The company does not hedge foreign-currency earnings; management estimated a 10% RMB weakening would reduce quarter operating profit by approximately $26 million, assuming no other changes.
- A potential Chinese tax on the indirect transfer associated with the separation could be significant. Any liability is to be allocated between Yum China and Yum! Brands under their tax matters agreement; the contingent payment obligation was not considered probable or estimable at period end.
- Legal matters include routine claims; management did not expect any liability beyond amounts provided to have a material adverse effect. No guarantees of unconsolidated affiliates were outstanding.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period. It reported no material changes to the risk factors in its 2016 Form 10-K.
Key facts for investors to verify
- Confirm the two-month fiscal-quarter basis and the comparability limitations between pre-separation combined results and post-separation consolidated results.
- Assess whether margin gains from VAT reform persist and how commodity inflation, wage costs and sales trends evolve.
- Review RMB exposure, VAT credit recoverability, and developments in the potential indirect-transfer tax matter.
- Track cash deployment, the $300 million repurchase authorization, capital spending and the effect of operating leases and new lease accounting.