Yum China: Reports First Quarter 2019 Results

Shanghai / CN. (yb) Yum China Holdings Inc. reported unaudited results for the first quarter ended March 31, 2019. Reported GAAP results include Special Items, which are excluded from adjusted measures. Special Items are not allocated to any segment and therefore only impact reported GAAP results of Yum China.

First Quarter Highlights

• Total revenues increased 4 percent year over year to USD 2.3 billion from USD 2.2 billion (10 percent year over year increase excluding foreign currency translation (F/X)).
• Total system sales grew 9 percent year over year, with growth of 11 percent at KFC and 3 percent at Pizza Hut, excluding F/X.
• Same-store sales grew 4 percent year over year, with growth of 5 percent at KFC and 1 percent at Pizza Hut, excluding F/X.
• Restaurant margin was 18.5 percent, as compared with 17.9 percent in the prior year period.
• Operating Profit decreased 23 percent year over year to USD 303 million from USD 395 million (18 percent year over year decrease excluding F/X), primarily due to lapping the gain of USD 98 million from the re-measurement of our previously held equity interest at Wuxi KFC in the first quarter 2018. Excluding the gain in 2018, Adjusted Operating Profit increased 2 percent year over year (9 percent year over year increase excluding F/X).
• Net Income decreased 23 percent to USD 222 million from USD 288 million in the prior year period, primarily due to the Wuxi re-measurement gain in the first quarter 2018.
• Due to the release of final regulations regarding the transition tax under the US Tax Cuts and Jobs Act, the Company recognized a tax charge of USD 8 million in the first quarter 2019. Excluding the Wuxi re-measurement gain and transition tax charge, Adjusted Net Income increased 7 percent to USD 230 million.
• Effective tax rate was 28.9 percent. Excluding the transition tax charge, the effective tax rate was 26.5 percent.
• Diluted EPS decreased 21 percent to USD 0.57 from USD 0.72 in the prior year period. Adjusted Diluted EPS increased 11 percent to USD 0.59 from USD 0.53 in the prior year period (8 percent year over year increase excluding the USD 0.02 per share mark to market gain of our equity investment in Meituan Dianping).
• Opened 237 new restaurants during the quarter, bringing total store count to 8,653 across more than 1,300 cities.

CEO and CFO Comments

«We are pleased to report a very strong start to 2019 as we delivered a 9 percent increase in system sales in constant currency in the first quarter, our tenth consecutive quarter of system sales growth since the spin-off,» said Joey Wat, CEO of Yum China. «This resilient growth was driven by another robust quarter at KFC, which successfully lapped three strong first quarters between 2016 and 2018, and a very encouraging quarter at Pizza Hut. Pizza Hut delivered positive same-store sales growth and a significant improvement in profitability in the first quarter, while continuing to make strategic investments in value offerings and multiple other initiatives to drive the ongoing revitalization of the brand.»

«During the first quarter, we opened 237 stores, led by an acceleration of KFC openings, as we continued to identify attractive opportunities to expand our presence in underserved markets. We also continued to invest in enhancing our digital and delivery capabilities, which are vital drivers of same-store sales growth across our portfolio of brands,» added Ms. Wat.

«We achieved a 9 percent increase in adjusted operating profit during the first quarter, excluding special items and F/X, as sales leverage at KFC and a notable improvement in Pizza Hut’s margin offset cost inflation and increased promotions,» said Jacky Lo, CFO of Yum China. «This enabled us to continue to generate significant cash flow and fund shareholder returns. During the quarter, we returned USD 111 million to shareholders in the form of share repurchases and cash dividends. Looking ahead, based on our current pipeline, we are confident that our 2019 gross new openings will exceed the top end of our original target of 600 to 650 stores. While we expect poultry inflation to weigh on margins for the rest of the year, and Pizza Hut’s revitalization program is still ongoing, the long-term outlook for growth remains positive and we remain committed to generating significant value for our shareholders.»

Dividend and Share Repurchase

• The Board of Directors declared a cash dividend of USD 0.12 per share on Yum China’s common stock, payable as of the close of business on June 17, 2019 to shareholders of record as of the close of business on May 28, 2019.
• During the first quarter, we repurchased approximately 1.7 million shares of Yum China common stock for USD 64.7 million at an average price of USD 37.90 per share.

Digital and Delivery

• As of March 31, 2019, the KFC loyalty program had over 175 million members and the Pizza Hut loyalty program had over 55 million members, an increase of 50 million and 15 million, respectively, year over year.
• Digital payments accounted for 87 percent of Company sales in the quarter, an increase of 13 percentage points year over year.
• Delivery contributed to 19 percent of Company sales in the first quarter of 2019, an increase of 3 percentage points year over year. Delivery services are now available in 1,160 cities, up from 972 cities in the prior year period.

New-Unit Development and Asset Upgrade

• The Company opened 237 new restaurants and remodeled 96 restaurants in the first quarter of 2019.

Restaurant Margin

• In the first quarter of 2019, Yum China restaurant margin was 18.5 percent, as compared with 17.9 percent in the prior year period, primarily attributable to sales leverage, improved utility efficiency and labor productivity, partially offset by commodity and wage inflations and increased promotional activities during the period.

Recently Adopted Accounting Pronouncement

• Effective January 01, 2019, we adopted a new accounting standard for leases using a modified retrospective method, under which prior period results were not retrospectively adjusted.
• Upon adoption, we recognized right-of-use assets and lease liabilities of approximately USD 2.0 billion and USD 2.2 billionrespectively. In addition, an impairment of USD 60 million (net of related impact on deferred taxes and noncontrolling interests) on right-of-use assets arising from existing operating leases as of January 01, 2019 was recorded as an adjustment to retained earnings, as the additional impairment charge would have been recorded before adoption had the operating lease right-of-use assets been recognized at the time of impairment. We performed an additional impairment evaluation of long-lived assets of restaurants as a result of adopting the new accounting standard and recorded an incremental impairment charge of USD 12 million in the first quarter of 2019.