UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 001-37762
Yum China Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
81-2421743
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
101 East Park Boulevard, Suite 805
Plano, Texas 75074
United States of America
Yum China Building
20 Tian Yao Qiao Road
Shanghai 200030
People’s Republic of China
(Address, Including Zip Code, of Principal Executive Offices)
(469) 980-2898
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
YUMC
New York Stock Exchange
9987
The Stock Exchange of Hong Kong Limited
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of November 4, 2024 was 379,764,211 shares.
INDEX
Page
No.
Part I.
Financial Information
Item 1 – Financial Statements
3
Condensed Consolidated Statements of Income – Quarters and Years to Date Ended September 30, 2024 and 2023 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income – Quarters and Years to Date Ended September 30, 2024 and 2023 (Unaudited)
4
Condensed Consolidated Statements of Cash Flows – Years to Date Ended September 30, 2024 and 2023 (Unaudited)
5
Condensed Consolidated Balance Sheets – September 30, 2024 (Unaudited) and December 31, 2023
6
Condensed Consolidated Statements of Equity – Quarters and Years to Date Ended September 30, 2024 and 2023 (Unaudited)
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
9
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
43
Item 4 – Controls and Procedures
Part II.
Other Information
Item 1 – Legal Proceedings
44
Item 1A – Risk Factors
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 5 – Other Information
Item 6 – Exhibits
45
Signatures
46
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)
(in US$ millions, except per share data)
Quarter Ended
Year to Date Ended
Revenues
9/30/2024
9/30/2023
Company sales
$
2,895
2,759
8,217
8,048
Franchise fees and income
23
72
69
Revenues from transactions with franchisees
116
100
319
282
Other revenues
35
32
86
Total revenues
3,071
2,914
8,708
8,485
Costs and Expenses, Net
Company restaurants
Food and paper
918
858
2,611
2,466
Payroll and employee benefits
728
699
2,102
2,047
Occupancy and other operating expenses
755
732
2,126
2,098
Company restaurant expenses
2,401
2,289
6,839
6,611
General and administrative expenses
139
169
412
485
Franchise expenses
10
29
28
Expenses for transactions with franchisees
110
95
306
270
Other operating costs and expenses
90
77
Closures and impairment expenses, net
8
—
22
17
Other (income) expenses, net
(1
)
1
Total costs and expenses, net
2,700
2,591
7,697
7,489
Operating Profit
371
323
1,011
996
Interest income, net
31
124
Investment gain (loss)
34
(4
50
(32
Income Before Income Taxes and Equity in Net Earnings (Losses) from Equity Method Investments
436
365
1,161
1,088
Income tax provision
(119
(100
(309
(296
Equity in net earnings (losses) from equity method investments
2
Net income – including noncontrolling interests
267
854
794
Net income – noncontrolling interests
58
64
Net Income – Yum China Holdings, Inc.
297
244
796
730
Weighted-average common shares outstanding (in millions):
Basic
384
416
391
417
Diluted
385
420
393
421
Basic Earnings Per Common Share
0.77
0.59
2.04
1.75
Diluted Earnings Per Common Share
0.58
2.03
1.73
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(in US$ millions)
Other comprehensive income (loss), net of tax of nil:
Foreign currency translation adjustments
167
(29
56
(274
Comprehensive income – including noncontrolling interests
486
238
910
520
Comprehensive income – noncontrolling interests
42
20
Comprehensive Income – Yum China Holdings, Inc.
444
218
846
491
Condensed Consolidated Statements of Cash Flows (Unaudited)
Cash Flows – Operating Activities
Depreciation and amortization
355
339
Non-cash operating lease cost
305
301
Closures and impairment expenses
Investment (gain) loss
(50
Equity in net (earnings) losses from equity method investments
(2
Distributions of income received from equity method investments
Deferred income taxes
(6
Share-based compensation expense
Changes in accounts receivable
Changes in inventories
(25
Changes in prepaid expenses, other current assets and value-added tax assets
(10
Changes in accounts payable and other current liabilities
(83
112
Changes in income taxes payable
67
71
Changes in non-current operating lease liabilities
(303
(295
Other, net
(16
(46
Net Cash Provided by Operating Activities
1,252
1,334
Cash Flows – Investing Activities
Capital spending
(523
(499
Purchases of short-term investments, long-term bank deposits and notes
(3,330
(3,287
Maturities of short-term investments, long-term bank deposits and notes
3,821
2,730
Net Cash Used in Investing Activities
(28
(1,052
Cash Flows – Financing Activities
Proceeds from short-term borrowings
307
212
Repayment of short-term borrowings
(167
Repurchase of shares of common stock
(1,057
(280
Cash dividends paid on common stock
(187
(162
Dividends paid to noncontrolling interests
(36
(37
Contributions from noncontrolling interests
Payment of acquisition related holdback
(3
(19
(5
Net Cash Used in Financing Activities
(1,159
(240
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash
(41
Net Increase in Cash, Cash Equivalents and Restricted Cash
65
Cash, Cash Equivalents, and Restricted Cash - Beginning of Period
1,128
1,130
Cash, Cash Equivalents, and Restricted Cash - End of Period
1,193
1,131
Supplemental Cash Flow Data
Cash paid for income tax
263
245
Cash paid for interest
Non-cash Investing and Financing Activities
Capital expenditures included in accounts payable and other current liabilities
180
Condensed Consolidated Balance Sheets
12/31/2023
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents
Short-term investments
1,338
1,472
Accounts receivable, net
79
68
Inventories, net
359
424
Prepaid expenses and other current assets
348
Total Current Assets
3,317
3,431
Property, plant and equipment, net
2,431
2,310
Operating lease right-of-use assets
2,215
2,217
Goodwill
1,955
1,932
Intangible assets, net
150
Long-term bank deposits and notes
933
1,265
Equity investments
388
332
Deferred income tax assets
145
129
Other assets
265
Total Assets
11,801
12,031
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current Liabilities
Accounts payable and other current liabilities
2,103
2,164
Short-term borrowings
315
168
Income taxes payable
160
Total Current Liabilities
2,578
2,422
Non-current operating lease liabilities
1,880
1,899
Non-current finance lease liabilities
51
Deferred income tax liabilities
406
390
Other liabilities
158
157
Total Liabilities
5,073
4,912
Redeemable Noncontrolling Interest
13
Equity
Common stock, $0.01 par value; 1,000 million shares authorized; 382 million shares and 407 million shares issued at September 30, 2024 and December 31, 2023, respectively; 381 million shares and 407 million shares outstanding at September 30, 2024 and December 31, 2023, respectively.
Treasury stock
(18
Additional paid-in capital
4,053
4,320
Retained earnings
2,156
Accumulated other comprehensive loss
(179
(229
Total Yum China Holdings, Inc. Stockholders' Equity
6,016
6,405
Noncontrolling interests
701
Total Equity
6,715
7,106
Total Liabilities, Redeemable Noncontrolling Interest and Equity
Condensed Consolidated Statements of Equity (Unaudited)
Accumulated
Common
Additional
Other
Redeemable
Stock
Paid-in
Retained
Comprehensive
Treasury Stock
Noncontrolling
Total
Shares*
Amount
Capital
Earnings
Loss
Shares
Interests
Interest
Balance at June 30, 2024
387
4,103
2,048
(326
(17
657
6,469
Net Income
147
Comprehensive income
Cash dividends declared ($0.16 per common share)
(61
Distributions to/contributions from noncontrolling interests
Repurchase and retirement of shares
(59
(128
(188
Exercise and vesting of share-based awards
Share-based compensation
Balance at September 30, 2024
382
Balance at June 30, 2023
4,396
2,465
(316
656
7,205
12
Cash dividends declared ($0.13 per common share)
(54
(31
(129
(160
Balance at September 30, 2023
415
4,382
2,526
(341
675
7,246
Balance at December 31, 2023
407
Cash dividends declared ($0.48 per common share)
(66
(27
(284
(763
(1,065
(15
Balance at December 31, 2022
419
4,390
2,191
(103
666
7,148
(238
Cash dividends declared ($0.39 per common share)
(52
(233
(285
*: Shares may not add due to rounding.
(Tabular amounts in US$ millions, except as otherwise noted)
Note 1 – Description of Business
Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us,” and “our”) was incorporated in Delaware on April 1, 2016.
The Company owns, franchises or has ownership in entities that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, Lavazza, Huang Ji Huang, Little Sheep and Taco Bell concepts (collectively, the “concepts”). In connection with the separation of the Company in 2016 from its former parent company, Yum! Brands, Inc. (“YUM”), a master license agreement was entered into between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of the Company and YUM, through YRI China Franchising LLC, a subsidiary of YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to December 31, 2019, for the exclusive right to use and sublicense the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China (the “PRC” or “China”), excluding Hong Kong, Macau and Taiwan. The term of the license is 50 years from October 31, 2016 for the KFC and Pizza Hut brands and, subject to achieving certain agreed-upon milestones, 50 years from April 15, 2022 for the Taco Bell brand, with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to us being in “good standing” and unless we give notice of our intent not to renew. In exchange, we pay a license fee to YUM equal to 3% of net system sales from both our Company and franchise restaurants. We own the intellectual property of Huang Ji Huang and Little Sheep and pay no license fee related to these concepts.
In 1987, KFC was the first major global restaurant brand to enter China. As of September 30, 2024, there were 11,283 KFC stores in China. We maintain a controlling interest of 58%, 70%, 83%, 92% and approximately 60% in the entities that own and operate the KFCs in and around Shanghai, Beijing, Wuxi, Suzhou and Hangzhou, respectively.
The first Pizza Hut in China opened in 1990. As of September 30, 2024, there were 3,606 Pizza Hut restaurants in China.
In the second quarter of 2020, the Company partnered with Luigi Lavazza S.p.A. (“Lavazza Group”), the world-renowned family-owned Italian coffee company, and established a joint venture (“Lavazza joint venture”), to explore and develop the Lavazza coffee concept in China. Lavazza joint venture operates both the coffee shop business and the retail business. We maintain a controlling interest of 65% equity interest in the Lavazza joint venture.
In 2017, the Company acquired a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an online food delivery service provider in China. This business was extended to also include a team managing the delivery services for restaurants, including restaurants in our system, with their results reported under our delivery operating segment.
We operated a retail brand, Shaofaner, to sell packaged foods through online and offline channels until August 2024. The operating results of Shaofaner were included in our e-commerce business operating segment.
The Company has two reportable segments: KFC and Pizza Hut. Our non-reportable operating segments, including the operations of Lavazza, Huang Ji Huang, Little Sheep and Taco Bell, our delivery operating segment and our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in the aggregate. Additional details on our segment reporting are included in Note 13.
The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “YUMC.” On September 10, 2020, the Company completed a secondary listing of its common stock on the Main Board of the Hong Kong Stock Exchange (“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 to $2.2 billion. On October 24, 2022, the Company’s voluntary conversion of its secondary listing status to a primary listing status on the HKEX became effective (“Primary Conversion”) and the Company became a dual primary listed company on the NYSE and HKEX. On the same day, the Company’s shares of common stock traded on the HKEX were included in the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. The Company’s common stock listed on the NYSE and HKEX continue to be fully fungible.
Note 2 – Basis of Presentation
Our preparation of the accompanying Condensed Consolidated Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
We have prepared the Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of September 30, 2024, and our results of operations, comprehensive income, statements of equity for the quarters and years to date ended September 30, 2024 and 2023 and cash flows for the years to date ended September 30, 2024 and 2023. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 29, 2024.
Through the acquisition of Daojia, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and is entitled to substantially all of the profits and has the obligation to absorb all of the expected losses of the VIE. The acquired VIE and its subsidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition date.
Recently Adopted Accounting Pronouncements
In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842) — Common Control Arrangements (“ASU 2023-01”). It requires all lessees, including public business entities, to amortize leasehold improvements associated with common control leases over their useful life to the common control group and account for them as a transfer of assets between entities under common control through an adjustment to equity when the lessee no longer controls the use of the underlying asset. ASU 2023-01 is effective for the Company from January 1, 2024, with early adoption permitted. We adopted this standard on January 1, 2024, and such adoption did not have a material impact on our financial statements.
Note 3 – Business Acquisitions and Equity Investments
Consolidation of Hangzhou KFC and Equity Investment in Hangzhou Catering
In the fourth quarter of 2021, the Company completed its investment in a 28% equity interest in Hangzhou Catering for cash consideration of $255 million. Hangzhou Catering holds a 45% equity interest in Hangzhou KFC, of which the Company previously held a 47% equity interest. Along with the investment, the Company also obtained two additional seats on the board of directors of Hangzhou KFC. Upon completion of the transaction, the Company directly and indirectly holds an approximately 60% equity interest in Hangzhou KFC and has majority representation on the board, and thus obtained control over Hangzhou KFC and started to consolidate its results from the acquisition date.
In addition to its equity interest in Hangzhou KFC, Hangzhou Catering operates Chinese dining restaurants under four time-honored brands and a food processing business. The Company applies the equity method of accounting to the 28% equity interest in Hangzhou Catering excluding the Hangzhou KFC business and recorded this investment in Equity investments based on its then fair value. The Company elected to report its share of Hangzhou Catering’s financial results with a one-quarter lag because its results are not available in time for the Company to record them in the concurrent period. The Company’s equity earnings (losses) from Hangzhou Catering, net of taxes, were immaterial for both quarters ended September 30, 2024 and 2023, and both years to date ended September 30, 2024 and 2023, and included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income. As of September 30, 2024 and December 31, 2023, the carrying amount of the Company’s equity method investment in Hangzhou Catering was $46 million and $41 million, respectively, exceeding the Company’s interest in Hangzhou Catering’s underlying net assets by $24 million and $24 million, respectively. Substantially all of this difference was attributable to its self-owned properties and impact of related deferred tax liabilities determined upon acquisition, which is being depreciated over a weighted-average remaining useful life of 20 years.
The purchase amount from Hangzhou Catering was immaterial for both quarters ended September 30, 2024 and 2023, and both years to date ended September 30, 2024 and 2023. The Company’s accounts payable and other current liabilities due to Hangzhou Catering were immaterial as of both September 30, 2024 and December 31, 2023.
Fujian Sunner Development Co., Ltd. (“Sunner”) Investment
In the first quarter of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange-listed company. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier. In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on the board, along with the Company being one of Sunner’s significant shareholders, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. In the quarters and years to date ended September 30, 2024 and 2023, the Company’s equity income (losses) from Sunner, net of taxes, was immaterial and was included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income.
The Company purchased inventories of $119 million and $136 million from Sunner for the quarters ended September 30, 2024 and 2023, respectively, and $366 million and $392 million for the years to date ended September 30, 2024 and 2023, respectively. The Company’s accounts payable and other current liabilities due to Sunner were $53 million and $51 million as of September 30, 2024 and December 31, 2023, respectively.
As of September 30, 2024 and December 31, 2023, the carrying amount of the Company’s investment in Sunner was both $225 million, exceeding the Company’s interest in Sunner’s underlying net assets by $153 million and $152 million, respectively. As of September 30, 2024 and December 31, 2023, $16 million and $16 million of these basis differences were related to finite-lived intangible assets determined upon acquisition, respectively, which are being amortized over the estimated useful life of 20 years. The remaining differences were related to goodwill and indefinite-lived intangible assets, which are not subject to amortization, as well as deferred tax liabilities impact. As of September 30, 2024 and December 31, 2023, the market value of the Company’s investment in Sunner was $123 million and $151 million based on its quoted closing price, respectively.
Meituan Dianping (“Meituan”) Investment
In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, a delivery aggregator in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the HKEX in September 2018. In the second quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan.
The Company accounts for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. The fair value change, to the extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax.
A summary of pre-tax gains or losses on investment in equity securities of Meituan recognized, which were included in Investment gain (loss) in our Condensed Consolidated Statements of Income, is as follows:
Unrealized gain (loss) recorded on equity securities still held as of the end of the period
33
49
(33
Note 4 – Revenue Recognition
The Company’s revenues include Company sales, Franchise fees and income, Revenues from transactions with franchisees, and Other revenues.
Company Sales
Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms. We primarily use our dedicated riders to deliver orders, and also use platform riders at select locations. When orders are fulfilled by our dedicated riders or platform riders, we control and determine the price for the delivery service and generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders are fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognize revenue, excluding delivery fees, when control of the food is transferred to the third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature.
11
We recognize revenues from prepaid stored-value products, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situations where the Company does not expect to be entitled to breakage, provided that there is no requirement for remitting balances to government agencies under unclaimed property laws. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.
Our privilege membership programs offer privilege members rights to multiple benefits, such as free delivery and discounts on certain products. For certain privilege membership programs offering a pre-defined amount of benefits that can be redeemed ratably over the membership period, revenue is ratably recognized over the period based on the elapse of time. With respect to privilege membership programs offering members a mix of distinct benefits, including a welcome gift and assorted discount coupons with pre-defined quantities, consideration collected is allocated to the benefits provided based on their relative standalone selling price and revenue is recognized when food or services are delivered or the benefits expire. In determining the relative standalone selling price of the benefits, the Company considers likelihood of future redemption based on historical redemption pattern and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.
Franchise Fees and Income
Franchise fees and income primarily include upfront franchise fees, such as initial fees and renewal fees, and continuing fees. We have determined that the services we provide in exchange for upfront franchise fees and continuing fees are highly interrelated with the franchise right. We recognize upfront franchise fees received from a franchisee as revenue over the term of the franchise agreement or the renewal agreement because the franchise rights are accounted for as rights to access our symbolic intellectual property. The franchise agreement term is generally 10 years for KFC and Pizza Hut, generally five years for Little Sheep and three to 10 years for Huang Ji Huang. We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur.
Revenues from Transactions with Franchisees
Revenues from transactions with franchisees consist primarily of sales of food and paper products, advertising services, delivery services and other services provided to franchisees.
The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees, and then sells and delivers them to the restaurants. In addition, the Company owns seasoning facilities for its Chinese dining business unit, which manufacture and sell seasoning products to Huang Ji Huang and Little Sheep franchisees. The Company also provides delivery services to franchisees. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from such services on its own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees. Revenue is recognized upon transfer of control over ordered items or services, generally upon delivery to the franchisees.
For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees. Other services provided to franchisees consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.
Other Revenues
Other revenues primarily include i) sales of products to customers through e-commerce channels, sales of Lavazza coffee retail products beyond Lavazza coffee shops, and sales of our seasoning products to distributors, and ii) revenues from logistics and warehousing services provided to third parties through our supply chain network. Our segment disclosures also include revenues relating to delivery services that were provided to our Company-owned restaurants and, therefore, were eliminated for consolidation purposes.
Other revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.
Loyalty Programs
Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities in the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.
Disaggregation of Revenue
The following tables present revenue disaggregated by types of arrangements and segments:
Quarter Ended 9/30/2024
KFC
Pizza Hut
All Other Segments
Corporate and Unallocated
Combined
Elimination
Consolidated
2,276
606
19
15
80
176
199
(164
2,311
615
97
3,235
Quarter Ended 9/30/2023
2,154
591
14
16
162
183
(151
2,186
599
201
3,065
Year to Date Ended 9/30/2024
6,452
1,723
53
41
55
219
484
48
558
(458
6,555
1,750
594
9,166
Year to Date Ended 9/30/2023
6,274
1,728
190
468
526
(440
6,368
585
222
8,925
Accounts Receivable
Accounts receivable primarily consist of trade receivables and royalties from franchisees, and are generally due within 30 days of the period in which the corresponding sales occur. Our provision of credit losses for accounts receivable is based upon the current expected credit losses (“CECL”) model. The CECL model requires an estimate of the credit losses expected over the life of accounts receivable since initial recognition, and accounts receivable with similar risk characteristics are grouped together when estimating CECL. In assessing the CECL, the Company considers both quantitative and qualitative information that is reasonable and supportable, including historical credit loss experience, adjusted for relevant factors impacting collectability and forward-looking information indicative of external market conditions. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Accounts receivable that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. As of September 30, 2024 and December 31, 2023, the ending balances of provision for accounts receivable were $1 million and $1 million, respectively, and amounts of accounts receivable past due were immaterial.
Costs to Obtain Contracts
Costs to obtain contracts consist of upfront franchise fees that we paid to YUM prior to the separation in relation to initial fees or renewal fees we received from franchisees, as well as license fees that are payable to YUM in relation to our deferred revenue of prepaid stored-value products, privilege membership programs and customer loyalty programs. They meet the requirements to be capitalized as they are incremental costs of obtaining contracts with customers and the Company expects to generate future economic benefits from such costs incurred. Such costs to obtain contracts are included in Other assets in the Condensed Consolidated Balance Sheets and are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees. The Company did not incur any impairment losses related to costs to obtain contracts during any of the periods presented. Costs to obtain contracts were $5 million and $6 million as of September 30, 2024 and December 31, 2023, respectively.
Contract Liabilities
Contract liabilities at September 30, 2024 and December 31, 2023 were as follows:
Contract liabilities
– Deferred revenue related to prepaid stored-value products
127
142
– Deferred revenue related to upfront franchise fees
37
– Deferred revenue related to customer loyalty programs
24
– Deferred revenue related to privilege membership programs
– Others
228
Contract liabilities primarily consist of deferred revenue related to prepaid stored-value products, privilege membership programs, customer loyalty programs and upfront franchise fees. Deferred revenue related to prepaid stored-value products, privilege membership programs and customer loyalty programs is included in Accounts payable and other current liabilities in the Condensed Consolidated Balance Sheets. Deferred revenue related to upfront franchise fees that we expect to recognize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities in the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $67 million and $53 million for the quarters ended September 30, 2024 and 2023, respectively, and $97 million for both years to date ended September 30, 2024 and 2023. Changes in contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any other factors during any of the periods presented.
The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with sales-based royalty promised to franchisees in exchange for franchise right and other related services. The remaining duration of the performance obligation is the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and revenues from advertising services and other services provided to franchisees based on a certain percentage of sales, as those sales occur.
Note 5 – Earnings Per Common Share (“EPS”)
The following table summarizes the components of basic and diluted EPS (in millions, except per share data):
Weighted-average common shares outstanding (for basic calculation)(a)
Effect of dilutive share-based awards(a)
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)(a)
Share-based awards excluded from the diluted EPS computation(b)
Note 6 – Equity
Share Repurchase and Retirement
As of September 30, 2024, our Board of Directors had authorized an aggregate of $3.4 billion for our share repurchase program. During the years to date ended September 30, 2024 and 2023, the Company repurchased 27.3 million shares of common stock for $1,055 million, and 4.9 million shares of common stock for $281 million, respectively, under the repurchase program. The total repurchase cost included $2 million and $2 million settled subsequent to September 30, 2024 and 2023, respectively, for shares repurchased with trade dates on and prior to September 30, 2024 and 2023. As of September 30, 2024, approximately $479 million remained available for future share repurchases under the authorization.
Of the shares repurchased for the year to date ended September 30, 2024, 26.8 million shares were retired and resumed the status of authorized and unissued shares of common stock, and 0.5 million shares repurchased on the HKEX are expected to be retired subsequent to September 30, 2024 and included in Treasury stock in the Condensed Consolidated Financial Statement.
The Inflation Reduction Act of 2022 (“IRA”), which is discussed further in Note 12, imposes an excise tax of 1% on net share repurchases that occur after December 31, 2022. Estimated excise tax on net share repurchases, which was recognized as part of the cost of the shares repurchased, amounted to $10 million and $3 million for the years to date ended September 30, 2024 and 2023, respectively.
Note 7 – Supplemental Balance Sheet Information
Accounts Receivable, net
Accounts receivable, gross
Allowance for doubtful accounts
Prepaid Expenses and Other Current Assets
Value-added tax ("VAT") assets
91
Interest receivables
Receivables from payment processors and aggregators
78
Deposits, primarily lease deposits
Other prepaid expenses and current assets
113
99
Property, Plant and Equipment (“PP&E”)
Buildings and improvements, and construction in progress
3,226
3,073
Finance leases, primarily buildings
81
Machinery and equipment
1,890
1,742
PP&E, gross
5,197
4,883
Accumulated depreciation
(2,766
(2,573
PP&E, net
Equity Investments
Investment in equity method investees
294
287
Investment in equity securities
94
Other Assets
Land use right
115
Long-term deposits, primarily lease deposits
Prepayment for acquisition of PP&E
VAT assets
Costs to obtain contracts
Others
Accounts Payable and Other Current Liabilities
Accounts payable
775
786
Operating lease liabilities
432
426
Accrued compensation and benefits
231
299
196
Accrued capital expenditures
226
Dividends payable
40
Accrued marketing expenses
66
Other current liabilities
163
140
Other Liabilities
Accrued income tax payable
39
Other non-current liabilities
Note 8 – Goodwill and Intangible Assets
The changes in the carrying amount of goodwill are as follows:
Total Company
Balance as of December 31, 2023
Goodwill, gross
2,323
1,840
18
465
Accumulated impairment losses(a)
(391
Goodwill, net
74
Effect of currency translation adjustments
Balance as of September 30, 2024
2,346
1,862
466
75
Intangible assets, net as of September 30, 2024 and December 31, 2023 are as follows:
GrossCarrying Amount(a)
Accumulated Amortization(a)
Accumulated Impairment Losses(b)
Net Carrying Amount
GrossCarrying Amount
Accumulated Amortization
Finite-lived intangible assets
Reacquired franchise rights
272
(269
268
(265
Huang Ji Huang franchise related assets
21
Daojia platform
(12
Customer-related assets
330
(294
(14
326
(289
Indefinite-lived intangible assets
Little Sheep trademark
Huang Ji Huang trademark
76
128
Total intangible assets
458
453
Amortization expense for finite-lived intangible assets was less than $1 million and $ 1 million for the quarters ended September 30, 2024 and 2023, and $2 million and $4 million for the years to date ended September 30, 2024 and 2023, respectively. As of September 30, 2024, expected amortization expense for the unamortized finite-lived intangible assets was less than $1 million for the remainder of 2024 and $2 million in each of 2025, 2026, 2027 and 2028.
Note 9 – Short-term Borrowings
As of September 30, 2024 and December 31, 2023, we had outstanding short-term bank borrowings of $315 million and $168 million, respectively, mainly to manage working capital at our operating subsidiaries, which were secured by short-term investments of nil and $79 million, respectively. The bank borrowings are RMB denominated, bear a weighted-average interest rate of 1.8%, and are due within one year from their issuance dates.
Note 10 – Leases
As of September 30, 2024, we leased over 13,000 properties in China for our Company-owned restaurants. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant profit is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenues, respectively, within our Condensed Consolidated Statements of Income.
Supplemental Balance Sheet
Account Classification
Assets
Finance lease right-of-use assets
Total leased assets(a)
2,263
2,258
Liabilities
Current
Finance lease liabilities
Non-current
Total lease liabilities(a)
2,368
2,374
Summary of Lease Cost
Operating lease cost
130
125
386
Occupancy and other operating expenses, G&A or Franchise expenses
Finance lease cost
Amortization of leased assets
Interest on lease liabilities
Variable lease cost(b)
118
316
Occupancy and other operating expenses or Franchise expenses
Short-term lease cost
Occupancy and other operating expenses or G&A
Sub-lease income
Franchise fees and income or Other revenues
Total lease cost
249
240
719
703
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
401
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease liabilities(c):
Operating leases
281
Finance leases
Lease Term and Discount Rate
Weighted-average remaining lease term (years)
7.0
7.1
10.9
11.1
Weighted-average discount rate
4.6
%
4.9
4.7
5.0
Summary of Future Lease Payments and Lease Liabilities
Maturities of lease liabilities as of September 30, 2024 were as follows:
Amount ofOperating Leases
Amount ofFinance Leases
Remainder of 2024
2025
2026
438
445
2027
383
2028
318
325
Thereafter
932
974
Total undiscounted lease payment
2,713
2,785
Less: imputed interest(d)
Present value of lease liabilities
2,312
As of September 30, 2024, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $124 million. These leases will commence between the fourth quarter of 2024 and 2026 with lease terms of 1 year to 20 years.
Note 11 – Fair Value Measurements and Disclosures
The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, long-term bank deposits and notes, accounts receivable, accounts payable, short-term borrowings and lease liabilities, and the carrying values of these assets and liabilities approximate their fair value in general.
The Company’s financial assets also include its investment in the equity securities of Meituan, which is measured at fair value based on the closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.
The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments, long-term bank deposits and notes, and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the levels within the fair value hierarchy occurred during the quarters and years to date ended September 30, 2024 and 2023.
Fair Value Measurement or Disclosure at September 30, 2024
Level 1
Level 2
Level 3
Cash equivalents:
Time deposits
475
Fixed income debt securities(a)
298
Money market funds
Total cash equivalents
838
773
Short-term investments:
805
Structured deposits
Variable return investments
Total short-term investments
1,196
Long-term bank deposits and notes:
455
Fixed income bank notes(a)
478
Total long-term bank deposits and notes
Equity investments:
3,203
2,902
Fair Value Measurement or Disclosure at December 31, 2023
293
1,113
200
138
1,451
903
362
3,100
3,009
The Company is required to place bank deposits or purchase insurance to secure the balance of prepaid stored-value cards issued by the Company pursuant to regulatory requirements. $63 million of time deposits in Long-term bank deposits and notes were restricted for use as of September 30, 2024, and $21 million of time deposits in Short-term investments and $28 million of time deposits in Long-term bank deposits and notes were restricted for use as of December 31, 2023.
Non-Recurring Fair Value Measurements
In addition, certain of the Company’s restaurant-level assets (including operating lease ROU assets and PP&E), goodwill and intangible assets are measured at fair value based on unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired.
In determining the fair value of restaurant-level assets, the Company considered the highest and best use of the assets from a market participants’ perspective, which is represented by the higher of the forecasted discounted cash flows from operating restaurants and the price market participants would pay to sub-lease the ROU assets and acquire the remaining restaurants assets, even if that use differs from the current use by the Company. The after-tax cash flows incorporate reasonable assumptions we believe a franchisee would make, such as sales growth, and include a deduction for royalties we would receive under a franchise agreement with terms substantially at market. The discount rate used in the fair value calculation is our estimate of the required rate-of-return that a franchisee would expect to receive when purchasing a similar restaurant and the related long-lived assets. In situations where the highest and best use of restaurant-level assets are represented by sub-leasing the operating lease ROU assets and acquiring the remaining restaurant assets, the Company continues to use these assets in operating its restaurant business, which is consistent with its long-term strategy of growing revenue through operating restaurant concepts.
As of each relevant measurement date, the fair value of restaurant-level assets, if determined to be impaired, is primarily represented by a price market participant would pay to sub-lease the operating lease ROU assets and acquire the remaining restaurant assets, which reflects the highest and best use of the assets. Significant unobservable inputs used in the fair value measurement include market rental prices, which were determined with the assistance of an independent valuation specialist. The direct comparison approach is used as the valuation technique by assuming a sub-lease of each of the properties in its existing state with vacant possession. By making reference to lease transactions as available in the relevant market, comparable properties in close proximity have been selected and adjustments have been made to account for any difference in factors such as location and property size.
The following table presents amounts recognized from all non-recurring fair value measurements based on unobservable inputs (Level 3) during the quarters and years to date ended September 30, 2024 and 2023. These amounts exclude fair value measurements made for restaurants that were subsequently closed or refranchised prior to those respective period-end dates.
Restaurant-level impairment(a)
Closure and impairment expenses, net
Note 12 – Income Taxes
119
309
296
Effective tax rate
27.3
27.5
26.6
27.2
The lower effective tax rate for the quarter ended September 30, 2024 was primarily due to the impact from fair value change of our investment in Meituan.
The lower effective tax rate for the year to date ended September 30, 2024 was primarily due to the favorable impact from the reduction of certain non-deductible items and the impact from fair value change of our investment in Meituan.
In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which included a broad range of tax reforms. The Tax Act requires a U.S. shareholder to be subject to tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries. We have elected the option to account for current year GILTI tax as a period cost as incurred, and therefore included it in estimating the annual effective tax rate.
In August 2022, the IRA was signed into law in the U.S., which contains certain tax measures, including a Corporate Alternative Minimum Tax (“CAMT”) of 15% on certain large corporations. On December 27, 2022, the U.S. Treasury Department and the Internal Revenue Services (the “IRS”) released Notice 2023-7, announcing their intention to issue proposed regulations addressing the application of the new CAMT. In 2023 and 2024, additional notices or proposed regulations were released to continue to provide interim guidance regarding certain CAMT issues before proposed regulations are published. The Company will monitor the regulatory developments and continue to evaluate the impact on our financial statements, if any.
In December 2022, a refined Foreign Sourced Income Exemption (“FSIE”) regime was published in Hong Kong and took effect from January 1, 2023. Under the new FSIE regime, certain foreign sourced income would be deemed as being sourced from Hong Kong and chargeable to Hong Kong Profits Tax, if the recipient entity fails to meet the prescribed exception requirements. Certain dividends, interests and disposal gains, if any, received by us and our Hong Kong subsidiaries may be subject to the new tax regime. Based on our preliminary analysis, this legislation did not have a material impact on our financial statements. The Company will monitor the developments and continue to evaluate the impact, if any.
The Organization for Economic Cooperation and Development (the “OECD”), the European Union and other jurisdictions (including jurisdictions in which we have operations or presence) have committed to enacting substantial changes to numerous long-standing tax principles impacting how large multinational enterprises are taxed. In particular, the OECD’s Pillar Two initiative introduced a 15% global minimum tax applied on a jurisdiction-by-jurisdiction basis and for which many jurisdictions have now committed to an effective enactment date starting January 1, 2024. The Company will monitor the regulatory developments and continue to evaluate the impact, if any.
We are subject to reviews, examinations and audits by Chinese tax authorities, the IRS 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 Chinese State Taxation Administration (the “STA”) in China 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.
Note 13 – Segment Reporting
We have two reportable segments: KFC and Pizza Hut. Our non-reportable operating segments, including the operations of Lavazza, Huang Ji Huang, Little Sheep and Taco Bell, our delivery operating segment and our e-commerce business, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in the aggregate.
Corporate and Unallocated(a)
Revenue from external customers
Inter-segment revenue
164
151
136
440
Operating Profit (Loss)
364
342
1,000
1,035
52
47
137
(7
(20
Unallocated revenues from transactions with franchisees(b)
Unallocated other revenues
Unallocated expenses for transactions with franchisees(b)
(79
(217
Unallocated other operating costs and expenses
(47
(30
Unallocated and corporate G&A expenses
(42
(60
(120
(161
Unallocated other income, net
Interest income, net(a)
Investment gain (loss)(a)
Impairment Charges
KFC(c)
Pizza Hut(c)
All Other Segments(c)
5,472
5,371
940
904
322
347
Corporate and Unallocated(d)
5,067
5,409
As substantially all of the Company’s revenue is derived from the PRC and substantially all of the Company's long-lived assets are located in the PRC, no geographical information is presented. In addition, revenue derived from and long-lived assets located in the U.S., the Company’s country of domicile, are immaterial.
Note 14 – Contingencies
Indemnification of China Tax on Indirect Transfers of Assets
In February 2015, the STA issued Bulletin 7 on Income arising from Indirect Transfers of Assets by Non-Resident Enterprises. Pursuant to Bulletin 7, an “indirect transfer” of Chinese taxable assets, including equity interests in a Chinese resident enterprise, by a non-resident enterprise, may be recharacterized and treated as a direct transfer of Chinese taxable assets, if such arrangement does not have reasonable commercial purpose and the transferor has avoided payment of Chinese enterprise income tax. As a result, gains derived from such an indirect transfer may be subject to Chinese enterprise income tax at a rate of 10%.
YUM concluded and we concurred that it is more likely than not that YUM will not be subject to this tax with respect to the distribution. However, there are significant uncertainties regarding what constitutes a reasonable commercial purpose, how the safe harbor provisions for group restructurings are to be interpreted, and how the taxing authorities will ultimately view the distribution. As a result, YUM’s position could be challenged by Chinese tax authorities resulting in a 10% tax assessed on the difference between the fair market value and the tax basis of the separated China business. As YUM’s tax basis in the China business is minimal, the amount of such a tax could be significant.
Any tax liability arising from the application of Bulletin 7 to the distribution is expected to be settled in accordance with the tax matters agreement between the Company and YUM. Pursuant to the tax matters agreement, to the extent any Chinese indirect transfer tax pursuant to Bulletin 7 is imposed, such tax and related losses will be allocated between YUM and the Company in proportion to their respective share of the combined market capitalization of YUM and the Company during the 30 trading days after the separation. Such a settlement could be significant and have a material adverse effect on our results of operations and our financial condition. At the inception of the tax indemnity being provided to YUM, the fair value of the non-contingent obligation to stand ready to perform was insignificant and the liability for the contingent obligation to make payment was not probable or estimable.
Legal Proceedings
The Company is subject to various lawsuits covering a variety of allegations from time to time. The Company believes that the ultimate liability, if any, in excess of amounts already provided for these matters in the Condensed Consolidated Financial Statements, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. Matters faced by the Company from time to time include, but are not limited to, claims from landlords, employees, customers and others related to operational, contractual or employment issues.
Note 15 – Subsequent Events
Cash Dividend
On November 4, 2024, the Company announced that the Board of Directors declared a cash dividend of $0.16 per share on Yum China’s common stock, payable on December 17, 2024, to stockholders of record as of the close of business on November 26, 2024. Total estimated cash dividend payable is approximately $61 million.
Share Repurchase Authorization
On November 4, 2024, the Company’s Board of Directors increased the Company’s share repurchase authorization by $1 billion, bringing total authorization since 2017 to $4.4 billion. With the increase of share repurchase authorization, approximately $1.4 billion remained available for future share repurchases under the authorization.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 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.
Introduction
Yum China Holdings, Inc. is the largest restaurant company in China in terms of 2023 system sales, with 15,861 restaurants covering around 2,200 cities primarily in China as of September 30, 2024. Our growing restaurant network consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Lavazza, Huang Ji Huang, Little Sheep and Taco Bell. We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China (excluding Hong Kong, Macau and Taiwan), and own the intellectual property of the Little Sheep and Huang Ji Huang concepts outright. We also established a joint venture with Lavazza Group, the world-renowned family-owned Italian coffee company, to explore and develop the Lavazza coffee concept in China. KFC was the first major global restaurant brand to enter China in 1987. With more than 35 years of operations, we have developed extensive operating experience in the China market. We believe that there are significant opportunities to further expand within China, 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 in China in terms of system sales. As of September 30, 2024, KFC operated 11,283 restaurants in around 2,200 cities across China.
Pizza Hut is the leading and the largest casual dining restaurant (“CDR”) brand in China in terms of system sales and number of restaurants. As of September 30, 2024, Pizza Hut operated 3,606 restaurants in over 800 cities.
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:
All Note references in this MD&A refer to the Notes to the Condensed Consolidated Financial Statements. Tabular amounts are displayed in millions of U.S. dollars except percentages and per share and unit count amounts, or as otherwise specifically identified. Percentages may not recompute due to rounding. References to quarters are references to the Company’s fiscal quarters.
Quarters and Years to Date Ended September 30, 2024 and 2023
Results of Operations
Summary
The Company has two reportable segments: KFC and Pizza Hut. Our non-reportable operating segments, including the operations of Lavazza, Huang Ji Huang, Little Sheep and Taco Bell, our delivery operating segment 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.
%/ppts Change
Reported
Ex F/X
System Sales Growth(a) (%)
NM
Same-Store Sales (Decline) Growth(a) (%)
+15
+14
+1
+5
Adjusted Operating Profit(b)
327
+13
1,005
+4
Core Operating Profit(b)
369
312
+18
1,040
951
+10
OP Margin(c) (%)
12.1
+1.0
11.6
11.7
(0.1
Core OP Margin(b) (%)
10.7
+1.4
11.2
+0.5
+22
+21
+9
+12
Adjusted Net Income(b)
248
+20
+19
739
+8
+11
+33
+32
+17
Adjusted Diluted Earnings Per Common Share(b)
+31
+30
+16
NM refers to not meaningful.
As compared to the third quarter of 2023, Total revenues in the third quarter of 2024 increased 5%, or 4% excluding the impact of F/X. Total revenues for the year to date ended September 30, 2024 increased 3%, or 5% excluding the impact of F/X. The increase in Total revenues for the quarter and year to date ended September 30, 2024, excluding the impact of F/X, was driven by 7% and 8% net new unit contribution, respectively, partially offset by same-store sales decline, resulting from lower ticket average and same-store transaction growth.
Operating profit for the third quarter increased 15%, or 14% excluding the impact of F/X. Operating profit for the year to date ended September 30, 2024 increased 1%, or 5% excluding the impact of F/X. Further excluding the lapping impact from the VAT deductions and temporary relief from landlords and government agencies received in prior year, the increase in Operating profit for the quarter and year to date ended September 30, 2024 was primarily driven by the increase in Total revenues, operational efficiency improvement, favorable commodity prices, lower advertising expenses and lower performance-based compensation costs, offset by increased value-for-money offerings and wage inflation in the low single digits.
26
The Consolidated Results of Operations for the quarters and years to date ended September 30, 2024 and 2023 and other data are presented below:
% B/(W)(a)
OP Margin %
1.0
ppts.
(11
(13
Net Income – including noncontrolling interests
Net Income – noncontrolling interests
Supplementary information – Non-GAAP Measures(b)
Restaurant profit
494
470
1,378
1,437
Restaurant margin %
17.0
16.8
17.9
(1.1
Adjusted Operating Profit
Core Operating Profit
Core OP Margin %
Adjusted Net Income – Yum China Holdings, Inc.
Adjusted Diluted Earnings Per Common Share
Adjusted Effective Tax Rate
27.0
Adjusted EBITDA
501
441
1,395
1,368
Performance Metrics
% change
System Sales Growth
System Sales Growth, excluding F/X
Same-Store Sales (Decline)
)%
Unit Count
% Increase
Company-owned
13,571
12,192
Franchisees
2,290
1,910
15,861
14,102
27
Non-GAAP Measures
In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides the following non-GAAP measures:
These non-GAAP 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 non-GAAP 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 core operations.
With respect to non-GAAP measures adjusted for Special Items, the Company excludes impact from Special Items for the purpose of evaluating performance internally and uses them as factors in determining compensation for certain employees. Special Items are not included in any of our segment results.
Adjusted EBITDA is defined as net income including noncontrolling interests adjusted for equity in net earnings (losses) from equity method investments, 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 analysts may find it useful in measuring operating performance without regard to such non-cash items.
Restaurant profit is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales, including cost of food and paper, restaurant-level payroll and employee benefits, rent, depreciation and amortization of restaurant-level assets, advertising expenses, and other operating expenses. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales. We also use Restaurant profit and Restaurant margin for the purpose of internally evaluating the performance of our Company-owned restaurants and we believe they provide useful information to investors as to the profitability of our Company-owned restaurants.
Core Operating Profit is defined as Operating Profit adjusted for Special Items, and further excluding Items Affecting Comparability and the impact of F/X. We consider quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Items such as charges, gains and accounting changes, which are viewed by management as significantly impacting the current period or the comparable period, due to changes in policy or other external factors, or non-cash items pertaining to underlying activities that are different from or unrelated to our core operations, are generally considered “Items Affecting Comparability.” Examples of Items Affecting Comparability include, but are not limited to: temporary relief from landlords and government agencies; VAT deductions due to tax policy changes; and amortization of reacquired franchise rights recognized upon acquisitions. We believe presenting Core Operating Profit provides additional information to further enhance comparability of our operating results and we use this measure for purposes of evaluating the performance of our core operations. Core OP margin is defined as Core Operating Profit divided by Total revenues, excluding the impact of F/X.
The following table sets forth the reconciliations of the most directly comparable GAAP financial measures to the non-GAAP financial measures:
Reconciliation of Operating Profit to Adjusted Operating Profit
Special Items, Operating Profit
(9
Reconciliation of Net Income to Adjusted Net Income
Special Items, Net Income –Yum China Holdings, Inc.
Reconciliation of EPS to Adjusted EPS
Special Items, Basic Earnings Per Common Share
(0.01
(0.02
Adjusted Basic Earnings Per Common Share
0.60
1.77
Special Items, Diluted Earnings Per Common Share
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate
Impact on effective tax rate as a result of Special Items
0.3
0.2
Adjusted effective tax rate
Net income, along with the reconciliation to Adjusted EBITDA, is presented below:
(124
(34
120
111
Store impairment charges
Details of Special Items are presented below:
Share-based compensation expense for Partner PSU Awards(1)
Tax effect on Special Items(2)
Special Items, net income – including noncontrolling interests
Special Items, net income – noncontrolling interests
Weighted-average Diluted Shares Outstanding (in millions)
Reconciliation of GAAP Operating Profit to Restaurant Profit is as follows:
CorporateandUnallocated
GAAP Operating Profit (Loss)
Less:
Add:
62
172
(163
Restaurant profit (loss)
18.3
12.8
(13.2
N/A
30
60
(150
400
18.6
12.7
(36.1
(116
36
217
476
(456
Other income, net
1,159
220
18.0
(11.8
(156
203
89
161
188
463
(438
Other expenses (income), net
1,219
19.4
13.1
(21.6
Reconciliation of GAAP Operating Profit to Core Operating Profit is as follows:
Quarter ended
% Change
B/(W)
Operating profit
Items Affecting Comparability
Temporary relief from landlords(a)
Temporary relief from government agencies(b)
VAT deductions(c)
Amortization of reacquired franchise rights(d)
F/X impact
208
Total revenues, excluding the impact of F/X
3,040
8,916
Core OP margin %
1.4
0.5
Details of Items Affecting Comparability are presented below:
Reconciliation of GAAP Operating Profit to Core Operating Profit by segment is as follows:
Adjusted Operating Profit (Loss)
Core Operating Profit (Loss)
(55
Temporary relief from landlords
Temporary relief from government agencies
VAT deductions
(8
1,027
143
(118
(147
Amortization of reacquired franchise rights
991
(22
Segment Results
% B/(W)
(63
1,859
1,754
5,293
5,055
G&A expenses
(21
(23
(35
Other expenses, net
(146
15.7
15.6
0.1
15.2
16.3
(1.0
(0.3
(1.4
9,958
8,915
1,325
1,002
11,283
9,917
Company Sales and Restaurant Profit
The changes in Company sales and Restaurant profit were as follows:
Income (Expense)
Store Portfolio Actions
F/X
135
Cost of sales
(666
(713
Cost of labor
(528
(558
(560
(588
446
(114
(154
(1,914
(2,033
(1,538
(121
(1,613
(1,603
(112
38
(1,647
59
(88
As compared to the third quarter of 2023, the increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by net unit growth, partially offset by same-store sales decline. Restaurant profit increased for the quarter, excluding the impact of F/X. Further excluding the lapping impact from the VAT deductions and temporary relief from landlords and government agencies received in prior year, the increase in Restaurant profit for the quarter was primarily driven by the increase in Company sales, operational efficiency improvement, favorable commodity prices and lower advertising expenses, partially offset by increased value-for-money offerings and wage inflation in the low single digits.
The increase in Company sales for the year to date ended September 30, 2024, excluding the impact of F/X, was primarily driven by net unit growth, partially offset by same-store sales decline. Restaurant profit decreased for the year to date, excluding the impact of F/X. Further excluding the lapping impact from the VAT deductions and temporary relief from landlords and government agencies received in prior year, Restaurant profit increased for the year to date, primarily driven by the increase in Company sales, favorable commodity prices, operational efficiency improvement and lower advertising expenses, offset by increased value-for-money offerings and wage inflation in the low single digits.
Franchise Fees and Income/Revenues from Transactions with Franchisees
The quarter and year to date increase in Franchise fees and income and Revenues from transactions with franchisees, excluding the impact of F/X, was primarily driven by acceleration of franchise store openings.
G&A Expenses
The quarter and year to date decrease in G&A expenses, excluding the impact of F/X, was primarily driven by lower performance-based compensation costs.
The increase in Operating profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and lower G&A expenses.
The year to date decrease in Operating profit, excluding the impact of F/X, was primarily driven by the decrease in Restaurant profit, partially offset by lower G&A expenses.
529
516
1,503
1,502
(43
8.6
7.8
0.8
8.0
3,428
3,047
178
155
3,606
3,202
(202
(92
(40
(537
(567
(496
(479
(469
(457
As compared to the third quarter of 2023, the increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by net unit growth, partially offset by same-store sales decline. Restaurant profit increased for the quarter, excluding the impact of F/X. Further excluding the lapping impact from the VAT deductions and temporary relief from landlords and government agencies received in prior year, the increase in Restaurant profit for the quarter was primarily driven by the increase in Company sales, operational efficiency improvement, favorable commodity prices, lower advertising expenses and lower performance-based compensation, partially offset by increased value-for-money offerings, increased rider cost associated with higher delivery sales mix in the current period and wage inflation in the low single digits.
The increase in Company sales for the year to date ended September 30, 2024, excluding the impact of F/X, was primarily driven by net unit growth, partially offset by same-store sales decline. Restaurant profit remained flat for the year to date, excluding the impact of F/X. Further excluding the lapping impact from the VAT deductions and temporary relief from landlords and government agencies received in prior year, Restaurant profit increased for the year to date, primarily driven by the increase in Company sales, operational efficiency improvement, favorable commodity prices, lower advertising expenses and lower performance-based compensation, offset by increased value-for-money offerings and wage inflation in the low single digits.
The year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by lower G&A expenses.
All Other Segments reflects the results of Lavazza, Huang Ji Huang, Little Sheep and Taco Bell, our delivery operating segment and our e-commerce business.
Operating Loss
(1.9
(3.1
1.2
(2.1
(3.2
1.1
Restaurant loss
22.9
9.8
Total Revenues
The quarter and year to date increase in Total revenues of All other segments, excluding the impact of F/X, was primarily driven by inter-segment revenue generated by our delivery team for services provided to Company-owned restaurants as a result of increased delivery sales, partially offset by same-store sales decline.
The quarter and year to date decrease in Operating loss, excluding the impact of F/X, was primarily driven by the decrease in Operating loss from certain emerging brands.
(49
(58
Corporate G&A expenses
Other unallocated income, net
Income tax provision (See Note 12)
Effective tax rate (See Note 12)
0.6
Revenues from transactions with franchisees primarily include revenues derived from the Company’s central procurement model, whereby food and paper products are centrally purchased and then mainly sold to KFC and Pizza Hut franchisees. The quarter and year to date increase, excluding the impact of F/X, was mainly due to the increase in system sales for franchisees primarily driven by acceleration of franchise store openings.
The quarter and year to date decrease in Corporate G&A expenses, excluding the impact of F/X, was primarily due to lower performance-based compensation costs and improvement in operational efficiency.
Interest Income, Net
The quarter and year to date decrease in interest income, excluding the impact of F/X, was primarily driven by lower investment balance during the year.
Investment Gain (Loss)
The investment gain (loss) mainly relates to the change in fair value of our investment in Meituan. See Note 3 for additional information.
Income Tax Provision
Our income tax provision primarily includes tax on our earnings generally at the Chinese statutory tax rate of 25% with certain Chinese subsidiaries qualified for preferential tax rates, withholding tax on planned or actual repatriation of earnings outside of China, Hong Kong profits tax, and U.S. corporate income tax, if any. The lower effective tax rate for the quarter ended September 30, 2024 was primarily due to the impact from fair value change of our investment in Meituan. The lower effective tax rate for the year to date ended September 30, 2024 was primarily due to the favorable impact from the reduction of certain non-deductible items and the impact from fair value change of our investment in Meituan.
Significant Known Events, Trends or Uncertainties Expected to Impact Future Results
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 in China 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”)
Effective May 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. Our new retail business is generally subject to VAT rates at 9% or 13%. 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.
Entities that are general VAT 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 a VAT 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, in the Condensed Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any VAT asset for recoverability, giving consideration to the indefinite life of VAT assets as well as its forecasted operating results and capital spending, which inherently includes significant assumptions that are subject to change. As of September 30, 2024, the Company has not made an allowance for the recoverability of VAT assets, as the balance is expected to be utilized to offset against VAT payables or be refunded in the future.
On June 7, 2022, the Chinese Ministry of Finance (“MOF”) and the STA jointly issued Circular [2022] No. 21, to extend full VAT credit refunds to more sectors and increase the frequency for accepting taxpayers’ applications. Beginning on July 1, 2022, entities engaged in providing catering services in China are allowed to apply for a lump sum refund of VAT assets accumulated prior to March 31, 2019. In addition, VAT assets accumulated after March 31, 2019 can be refunded on a monthly basis.
As of September 30, 2024, VAT assets of $110 million, VAT assets of $7 million and net VAT payable of $7 million were recorded in Prepaid expenses and other current assets, Other assets and Accounts payable and other current liabilities, respectively, in the Condensed Consolidated Balance Sheets.
The Company will continue to review the classification of VAT assets at each balance sheet date, giving consideration to different local implementation practices of refunding VAT assets and the outcome of potential administrative reviews.
Pursuant to Circular [2019] No. 39, Circular [2019] No. 87 and Circular [2022] No. 11 jointly issued by relevant government authorities, including the MOF and the STA, from April 1, 2019 to December 31, 2022, general VAT taxpayers in certain industries that meet certain criteria were allowed to claim an additional 10% or 15% input VAT, which were used to offset their VAT payables. Pursuant to Circular [2023] No. 1 jointly issued by the MOF and the STA in January 2023, such VAT policy was further extended to December 31, 2023 but the additional deduction was reduced to 5% or 10% respectively. Accordingly, we recognized such VAT deductions of $42 million in the year to date ended September 30, 2023. The VAT deductions were recorded as a reduction to the related expense item, primarily in Company restaurant expenses included in the Condensed Consolidated Statements of Income. Such preferential VAT policy was not extended in 2024.
We have been benefiting from the retail tax structure reform since it was implemented on May 1, 2016. However, the amount of our expected benefit from this VAT regime depends on a number of factors, some of which are outside of our control. The interpretation and application of the new VAT regime are not settled at some local governmental levels. In addition, China is in the process of enacting the prevailing VAT regulations into a national VAT law. However, the timetable for enacting the national VAT law is not clear. As a result, for the foreseeable future, the benefit of this significant and complex VAT reform has the potential to fluctuate from period to period.
Foreign Currency Exchange Rate
The reporting currency of the Company is the US$. 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.
Condensed Consolidated Cash Flows
Our cash flows for the years to date ended September 30, 2024 and 2023 were as follows:
Net cash provided by operating activities was $1,252 million in 2024 as compared to $1,334 million in 2023. The decrease was primarily driven by working capital changes.
Net cash used in investing activities was $28 million in 2024 as compared to $1,052 million in 2023. The decrease was mainly due to the net impact on cash flows resulting from purchases and maturities of short-term investments, and long-term bank deposits and notes.
Net cash used in financing activities was $1,159 million in 2024 as compared to $240 million in 2023. The increase was primarily driven by the increase in share repurchases and repayment of short-term bank borrowings.
Liquidity and Capital Resources
Historically we have funded our operations through cash generated from the operation of our Company-owned stores and our franchise operations. Our global offering in September 2020 provided us with $2.2 billion in net proceeds.
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. We currently expect our fiscal year 2024 capital expenditures to be in the range of approximately $700 million to $850 million.
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:
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 our China 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
On November 2, 2023, our Board of Directors increased the share repurchase authorization to an aggregate of $3.4 billion. During the years to date ended September 30, 2024 and 2023, the Company repurchased 27.3 million shares of common stock for $1,055 million and 4.9 million shares of common stock for $281 million, respectively, under the repurchase program.
On November 4, 2024, the Board of Directors further increased the Company’s share repurchase authorization by $1 billion, bringing total authorization since 2017 to $4.4 billion. With the increase of share repurchase authorization, approximately $1.4 billion remained available for future share repurchases under the authorization. Yum China may repurchase shares under the authorization from time to time in the open market or, subject to applicable regulatory requirements, through privately negotiated transactions, block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans.
For the quarters ended September 30, 2024 and 2023, the Company paid cash dividends of approximately $61 million and $54 million, respectively, and for the years to date ended September 30, 2024 and 2023, the Company paid aggregate cash dividends of approximately $187 million and $162 million, respectively, to stockholders through a quarterly dividend payment of $0.16 and $0.13 per share, respectively.
On November 4, 2024, the Board of Directors declared a cash dividend of $0.16 per share, payable on December 17, 2024, to stockholders of record as of the close of business on November 26, 2024. The total estimated cash dividend payable is approximately $61 million.
The Company plans to step up the capital returns to shareholders from $3 billion to $4.5 billion between 2024 and 2026, representing an increase of 50%. As part of the enlarged capital returns program, the Company plans to return a total of $1.5 billion in share repurchases and dividends for the full year 2024.
Our capital returns plan is based on current expectations, which may change based on market conditions, capital needs or otherwise. In addition, 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 laws, an enterprise incorporated in China 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 in China, 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 of September 30, 2024, the Company had credit facilities of RMB8,006 million (approximately $1,141 million), comprised of onshore credit facilities in the aggregate amount of RMB5,900 million (approximately $841 million), offshore credit facilities in the aggregate amount of $100 million and a credit facility of $200 million that can be used for either onshore or offshore.
The credit facilities had remaining terms ranging from less than one year to three years as of September 30, 2024. Our credit facilities mainly include term loans, overdrafts, letters of credit, banker’s acceptance notes and bank guarantees. The credit facilities in general bear interest based on the Loan Prime Rate (“LPR”) published by the National Interbank Funding Centre of the PRC, or Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York. 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 agreements. As of September 30, 2024, we had outstanding short-term bank borrowings of RMB2,211 million (approximately $315 million), mainly to manage working capital at our operating subsidiaries. Such bank borrowings are due within one year from their issuance dates. As of September 30, 2024, we also had outstanding bank guarantees of RMB244 million (approximately $35 million) mainly to secure our lease payments to landlords for certain Company-owned restaurants. Our credit facilities were therefore reduced by outstanding short-term bank borrowings, adjusted for unamortized interest and collateral, and outstanding guarantees. As of September 30, 2024, the Company had unused credit facilities of approximately $789 million.
New Accounting Pronouncements
See Note 2 for details of recently adopted accounting pronouncements.
New Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) — Improvements to Reportable Segment Disclosures (“ASU 2023-07”), requiring public business entities to provide disclosures of significant expenses and other segment items. The guidance also requires public entities to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. ASU 2023-07 is effective for the Company for annual periods from January 1, 2024, and for interim periods from January 1, 2025, with early adoption permitted. We are currently evaluating the impact the adoption of this standard may have on our financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) — Improvements to Income Tax Disclosures (“ASU 2023-09”), requiring public business entities to provide additional information in the rate reconciliation and additional disclosures about income taxes paid. ASU 2023-09 is effective for the Company from January 1, 2025, with early adoption permitted. We are currently evaluating the impact the adoption of this standard may have on our financial statements.
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,” “aim,” “commit,” “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. Our plan of capital returns to shareholders is based on current expectations, which may change based on market conditions, capital needs or otherwise. 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:
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 the SEC (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 ended December 31, 2023) 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rate Risk
Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations, virtually all of which are denominated in RMB. While substantially all of our supply purchases are denominated in RMB, from time to time, we enter into agreements with third parties to purchase certain amount of goods and services sourced overseas and make payments in the corresponding local currencies at predetermined exchange rates when practical, to minimize the related foreign currency exposure with immaterial impact on our financial statements.
As substantially all of the Company’s operations are located in China, the Company is exposed to movements in the RMB foreign currency exchange rate. For the quarter and year to date ended September 30, 2024, the Company’s Operating profit would have decreased by approximately $36 million and $96 million, respectively, if the RMB weakened 10% relative to the U.S. dollar. This estimated reduction assumes no changes in sales volumes or local currency sales or input prices.
Commodity Price Risk
We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements with our vendors.
Investment Risk
In September 2018, we invested $74 million in 8.4 million of Meituan’s ordinary shares. The Company sold 4.2 million of its ordinary shares of Meituan in the second quarter of 2020 for proceeds of approximately $54 million. Equity investment in Meituan is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. See Note 3 for further discussion on our investment in Meituan.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and the CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
There were no changes with respect to the Company’s internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PART II – Other Information
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference from Note 14 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.
Item 1A. Risk Factors
We face a variety of risks that are inherent in our business and our industry, including operational, legal and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. There have been no material changes from the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 29, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of September 30, 2024, our Board of Directors had authorized an aggregate of $3.4 billion for our share repurchase program. The authorization does not have an expiration date.
The following table provides information as of September 30, 2024 with respect to shares of Yum China common stock repurchased on the NYSE and HKEX by the Company during the quarter then ended:
Period
Total Number of Shares Repurchased(thousands)
Average Price Paid Per Share(a)
Total Number of SharesRepurchased as Part ofPublicly AnnouncedPlans or Programs(thousands)
Approximate DollarValue of Shares thatMay Yet BeRepurchased underthe Plans or Programs(millions)
7/1/24-7/31/24
2,148
30.67
600
8/1/24-8/31/24
1,925
33.04
536
9/1/24-9/30/24
1,591
35.98
479
5,664
32.97
Item 5. Other Information
During the quarter ended September 30, 2024, none of the Company’s officers (as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) or directors adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (each as defined in Item 408 of Regulation S-K under the Exchange Act).
Item 6. Exhibits
Exhibit
Number
Description of Exhibits
10.1
Transition and Advisor Agreement, dated August 4, 2024, by and between Yum China Holdings, Inc. and Andy Yeung (incorporated by reference to Exhibit 10.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on August 5, 2024). †
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document *
101.SCH
Inline XBRL Taxonomy Extension Schema Document *
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document *
104
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document *
* Filed or furnished herewith.
† Indicates a management contract or compensatory plan.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Date:
November 8, 2024
/s/ Xueling Lu
Controller and Principal Accounting Officer