Yum China (YUMC) Tops Q3 EPS by 17c, Revenues Beat

Yum China (NYSE: YUMC) reported Q3 EPS of $0.66, $0.17 better than the analyst estimate of $0.49. Revenue for the quarter came in at $2.35 billion versus the consensus estimate of $2.3 billion.

Third Quarter Highlights

• Completed our secondary listing on the main board of the Hong Kong Stock Exchange and global offering on September 10, 2020, with net proceeds of $2.2 billion.
• Completed the acquisition of an additional 25% equity interest in an unconsolidated affiliate that operates KFC stores in and around Suzhou, China ("Suzhou KFC"), for cash consideration of $149 million, bringing Yum China's equity interest in Suzhou KFC to 72%. In connection with the acquisition, a non-cash gain of $239 million was recorded from the re-measurement of our previously held equity interest in Suzhou KFC at fair value.
• Results include the consolidation of Huang Ji Huang since April 2020, and Suzhou KFC since August 2020.
• Total revenues increased 1% year over year to $2.35 billion from $2.32 billion (flat excluding foreign currency translation ("F/X")).
• Total system sales increased 1% year over year, with declines of 1% at KFC and 6% at Pizza Hut, excluding F/X.
• Same-store sales declined 6% year over year, with a 6% decline at KFC and 7% decline at Pizza Hut, excluding F/X.
• Opened 312 new stores during the quarter; total store count reached 10,150 as of September 30, 2020.
• Restaurant margin was 18.6%, compared with 17.7% in the prior year period.
• Operating Profit increased 86% year over year to $556 million from $300 million (83% increase excluding F/X), primarily due to the re-measurement gain of Suzhou KFC acquisition.
• Adjusted Operating Profit increased 7% year over year to $320 million from $300 million (5% increase excluding F/X).
• Effective tax rate was 25.6%.
• Net Income increased 96% to $439 million from $223 million in the prior year period, primarily due to the increase in Operating Profit and gains from our equity investment in Meituan Dianping ("Meituan").
• Adjusted Net Income increased 17% to $263 million from $223 million in the prior year period (10% increase excluding the $29 million and $12 million net gains in the third quarter of 2020 and 2019, respectively, from our equity investment in Meituan; 8% increase if further excluding F/X).
• Diluted EPS increased 90% to $1.10 from $0.58 in the prior year period.
• Adjusted Diluted EPS increased 14% to $0.66 from $0.58 in the prior year period (5% increase excluding the gains from our equity investment in Meituan in 2020 and 2019; 4% increase if further excluding F/X).

CEO and CFO Comments

Joey Wat, CEO of Yum China, commented, "Our strong third quarter performance again demonstrated our resilience and world-class execution capabilities. Thanks to the hard work and commitment of our employees and business partners, and the trust of our customers, system sales returned to year-over-year growth, while same-store sales recovered to 94% of the prior year period. Despite the COVID-19 pandemic, we continued to generate meaningful profit. Our profitability allowed us to preserve jobs during this difficult period. We accelerated our store expansion and exceeded 10,000 stores, a significant milestone. With new and more flexible store models supported by our strong financial position, we are well-positioned to capture market opportunities in China."

"We are also excited by our secondary listing on the main board of the Hong Kong Stock Exchange in September. This listing enables us to broaden our investor base and provide an additional access point for our stakeholders to invest in our company, in a market that is closer to where we operate, and where our customers and communities thrive," continued Ms. Wat. "Looking ahead, we are confident in our ability to capture long-term growth opportunities due to our resilient business model, culture of innovation, digital and delivery capabilities and financial strength."

Andy Yeung, CFO of Yum China, added, "Third quarter operations overall improved sequentially. As we entered the quarter, sales were pressured by reduced travel, a shortened school holiday and some regional outbreaks, but our compelling value proposition and effective digital initiatives drove a sales recovery. We expanded restaurant margin by realigning our cost structure and improving productivity. Labor productivity improvement was partially due to the shortage in part-time workers. We intend to increase staffing levels in coming months to balance service and efficiency."

Andy continued, "Looking ahead, we now expect to open more than 900 gross new stores in 2020. We remain cautiously optimistic and continue to expect the recovery to be non-linear and uneven. Although the COVID-19 outbreak in China has improved over the past months, we are not out of the woods yet. The lingering effect remains unpredictable. However, given our strong liquidity position, we will resume our quarterly cash dividend in the fourth quarter. We remain committed to driving sustainable growth and creating long-term value to our shareholders."

2020 Outlook

The Company is updating the following fiscal year 2020 targets:

• To open more than 900 new stores (gross), an increase compared to the previous target of 800 to 850, primarily due to the acceleration of KFC store expansion, and the inclusion of Huang Ji Huang new builds
• To make capital expenditures between $500 million and $550 million

The Company believes that the COVID-19 outbreak will continue to have a material adverse impact on its operational and financial results in 2020. Future operations, as well as the Company's cash flows and financial position, may be materially and adversely influenced by further developments related to this global outbreak, including potential additional announcements and actions from governments and local authorities, disruption in our supply chain, our inability to provide safety measures to protect our employees, or other reasons. Nevertheless, the Company believes that it is well-positioned to capture future growth opportunities through its resilient business model, strong capabilities and dedicated team.

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