Yum China Holdings, Inc. (NYSE:YUMC) Q1 2023 Earnings Conference Call May 2, 2023 8:00 PM ET Company Participants Michelle Shen - Director, IR Joey Wat - CEO & Executive Director Andy Yeung - CFO Conference Call Participants Michelle Cheng - Goldman Sachs Group Lillian Lou - Morgan Stanley Lina Yan - HSBC Chen Luo - Bank of America Merrill Lynch Anne Ling - Jefferies Yan Peng - UBS Operator Thank you for standing by, and welcome to the Yum China First Quarter 2023 Earnings Conference Call. [Operator Instru ...

Financial Performance - Total revenue for Q1 2023 reached $2.92 billion, a 9% increase from $2.67 billion in Q1 2022[2] - Operating profit was $416 million, up 118% from $191 million in the same quarter last year[5] - Net profit reached $289 million, a 189% increase compared to $100 million in Q1 2022[5] - Company restaurant revenue was $2,772 million, up 9% from $2,548 million year-over-year[19] - Operating profit surged to $416 million, representing a 118% increase compared to $191 million in the same quarter last year[19] - Net profit attributable to Yum China Holdings, Inc. was $289 million, a 189% increase from $100 million in Q1 2022[19] - Adjusted operating profit for the same period was $419 million, up from $193 million year-over-year, indicating a 117% increase[26] - Adjusted net profit for the quarter was $292 million, compared to $102 million in the same quarter of 2022, marking a 186% increase[26] - Basic earnings per share for the quarter were $0.69, up from $0.23 in the same quarter of the previous year, representing a 200% increase[26] Sales and Growth - System sales increased by 17% year-over-year, with KFC and Pizza Hut both contributing 17% growth[3] - Same-store sales rose by 8%, with KFC and Pizza Hut increasing by 8% and 7% respectively[3] - The company added a net of 233 new stores, bringing the total store count to 13,180 as of March 31, 2023[3] - The company targets to open approximately 1,100 to 1,300 new stores and plans capital expenditures between $700 million and $900 million for the fiscal year 2023[14] - KFC's total restaurant count increased from 9,094 to 9,239, reflecting a net addition of 145 restaurants[29] - Pizza Hut's total restaurant count rose from 2,903 to 2,983, with a net addition of 80 restaurants[30] Profit Margins - Restaurant profit margin improved to 20.3%, up from 13.8% in the same period last year[3] - KFC's restaurant profit margin increased to 22.2% in Q1 2023, compared to 15.2% in Q1 2022, reflecting a 7.0 percentage point increase[13] - Pizza Hut's restaurant profit margin rose to 14.2% in Q1 2023, up from 10.7% in the same period last year, marking a 3.5 percentage point increase[13] - The restaurant profit margin improved to 20.3%, up from 13.8% in Q1 2022, indicating a 6.5 percentage point increase[19] Tax and Expenses - The actual tax rate for the quarter was 28.5%[3] - The actual tax rate improved to 28.5%, down from 33.1% in the previous year, reflecting a 4.6 percentage point decrease[19] - The company incurred total costs and expenses of $2,501 million, with KFC's costs at $1,685 million and Pizza Hut's at $507 million[32] Strategic Initiatives - The company plans to focus on sales growth, expanding its store network, and strengthening its competitive advantages in 2023[6] - The CEO highlighted the importance of high-value promotions and menu innovations to drive sales during the Spring Festival[6] - The company remodeled 83 restaurants in Q1 2023 as part of its asset upgrade strategy[10] - The company continues to evaluate its restaurant profitability through restaurant profit and profit margin metrics, which are deemed effective indicators for investors[25] - The company plans to continue its centralized procurement model to enhance efficiency and profitability[36] - Future strategies include expanding market presence and developing new products and technologies[36] Membership and Digital Sales - The membership program for KFC and Pizza Hut reached over 430 million members, with member sales accounting for approximately 64% of system sales in Q1 2023[8] - Takeout sales represented about 36% of restaurant revenue, remaining stable compared to the same period last year, while digital orders accounted for approximately 89% of restaurant revenue[8] Sustainability and Corporate Responsibility - The company released its 2022 sustainability report, outlining commitments to environmental and social responsibility[14]

Financial Performance - Yum China recorded revenue of $9.6 billion in 2022, with nearly 13,000 restaurants as of December 31, 2022[6] - Total revenue for 2022 was $9.569 billion, a decrease from $9.853 billion in 2021[190] - Net profit attributable to Yum China Holdings, Inc. was $442 million in 2022, down from $990 million in 2021[190] - Operating profit in 2022 was $629 million, compared to $1.386 billion in 2021[190] - Total assets as of December 31, 2022, were $11.826 billion, down from $13.223 billion in 2021[190] - Yum China's total liabilities were $4.666 billion as of December 31, 2022, down from $5.301 billion in 2021[190] - Yum China's total equity was $7.148 billion as of December 31, 2022, compared to $7.908 billion in 2021[190] - Total revenue decreased by 3% to $9.569 billion in 2022 compared to $9.853 billion in 2021[198] - Net profit attributable to Yum China Holdings decreased by 55% to $442 million in 2022 from $990 million in 2021[198] - Restaurant profit increased by 4% to $1.281 billion in 2022, with a restaurant profit margin of 14.1%, up 0.4 percentage points[198] - System sales declined by 8% in 2022, with a 5% decline excluding foreign currency translation[200] - Same-store sales decreased by 7% in 2022[200] - Adjusted EBITDA was $1.286 billion in 2022, compared to $1.330 billion in 2021[198] - Adjusted net profit was $446 million in 2022, down from $525 million in 2021[198] - Adjusted diluted earnings per share were $1.05 in 2022, compared to $1.21 in 2021[198] Restaurant Network and Expansion - Yum China operates nearly 13,000 restaurants across over 1,800 cities in China as of December 31, 2022[192] - KFC operates over 9,000 restaurants in China, approximately double the number of its closest competitor[192] - Pizza Hut operates over 2,900 restaurants in more than 650 cities in China, making it the largest casual dining brand by system sales and restaurant count, with approximately five times the number of restaurants compared to its closest competitor[193] - The number of self-operated restaurants increased by 11% to 11,161 in 2022[200] - The number of franchise restaurants increased by 3% to 1,786 in 2022[200] - Yum China plans to focus on expanding its footprint in existing and new cities within China[5] - Accelerating store network expansion towards the milestone of 20,000 stores, with a focus on driving growth for core brands and emerging brands like Taco Bell and Lavazza[10] - Tracking over 900 cities in China without KFC or Pizza Hut coverage, aiming to expand in both existing and new cities, particularly in lower-tier cities[11] - The company aims to expand its restaurant network in China to 20,000 stores, but new stores may not achieve profitability and could cannibalize sales from existing locations[109] Digital and Delivery Services - Digital orders accounted for approximately 89% of KFC and Pizza Hut company restaurant revenue in 2022[33] - Digital payments increased from 33% of total sales in 2016 to 99% in 2022[34] - KFC and Pizza Hut loyalty programs collectively had over 410 million members as of December 31, 2022, contributing to 62% of system sales[35] - Delivery revenue as a percentage of company restaurant revenue increased from 21% in 2019 to 39% in 2022[37] - The company introduced a smart ordering system in 2022 to reduce customer wait times and display real-time order status[33] - Approximately 90% of KFC restaurants and over 95% of Pizza Hut restaurants offered delivery services by the end of 2022, contributing to about 39% of the company-owned restaurant revenue for both brands[124] - The company relies on third-party delivery platforms, and any increase in commission rates charged by these platforms could negatively impact its operating performance[123] - The company's delivery services depend on the performance of third-party platforms, and any disruptions or failures in these services could harm its business and reputation[124] Supply Chain and Operations - The company collaborates with over 800 independent suppliers, most of which are located in China, and employs more than 1,400 staff in its internal integrated supply chain management system[27] - In 2022 and 2021, the company acquired land to establish eight new logistics centers to further consolidate its supply chain network[27] - The company operates a global-class logistics management system and utilizes 33 logistics centers to distribute supplies to its self-operated and franchised restaurants, as well as third-party customers[27] - The company has a seasoning factory for its Chinese cuisine division, which produces and sells seasonings to Huang Ji Huang and Little Sheep franchisees[27] - The company adopts a centralized procurement model to enhance the efficiency and effectiveness of its purchasing process, ensuring quality control and better pricing through bulk purchasing[27] - The company's ability to maintain consistent food quality depends on the effectiveness of its and its franchisees' quality assurance systems, which are subject to various risks[99] Franchise and Brand Management - Approximately 86% of Yum China's restaurants are company-owned and operated as of December 31, 2022[5] - Approximately 14% of restaurants operated by franchisees as of December 31, 2022, with plans to further develop the franchise model in specific channels and lower-tier cities[13] - The company completed the acquisition of a controlling stake in Huang Ji Huang, a leading Chinese casual dining franchise, in April 2020, and established a Chinese cuisine division to manage its Chinese dining brands[18] - The company owns registered trademarks for brands such as Little Sheep, Huang Ji Huang, COFFii & JOY, and East Dawning, without incurring franchise fees for these brands[63] - The company pays a franchise fee equivalent to 3% of the net system sales of the franchised brands to YUM[62] - The company has exclusive franchise rights for KFC and Pizza Hut in mainland China (excluding Hong Kong, Macau, and Taiwan) for 50 years starting from October 31, 2016, with an automatic renewal option for an additional 50 years[62] - The company plans to expand the Taco Bell store network to at least 225 locations by the end of 2025, securing a 50-year exclusive franchise and sub-licensing rights in China upon achieving development milestones[62] Innovation and Product Development - Over 500 new and improved products were launched across all restaurant brands in 2022[30] - The company operates a 27,000-square-foot innovation center in Shanghai to develop new recipes and menu ideas[30] - Focusing on food innovation and value positioning, with iconic promotions like KFC's "Crazy Thursday" and Pizza Hut's "Scream Wednesday" driving customer engagement[13] - Exploring new restaurant models and formats to cater to diverse customer needs and occasions, leveraging local expertise and first-mover advantages[13] - Expanding new retail offerings, including pre-packaged foods like steak and fried rice, and developing the proprietary retail brand "Shao Fan" to capture at-home consumption opportunities[17] Regulatory and Compliance Risks - The company is subject to Chinese laws on mergers and acquisitions, including the Anti-Monopoly Law, which may impose strict regulatory approval and review requirements, potentially hindering growth through acquisitions[46] - The company must comply with Chinese cybersecurity laws, including the Cybersecurity Law, Data Security Law, and Personal Information Protection Law, which impose strict data privacy and security obligations, particularly for entities handling over 1 million users' personal information[46] - The company is subject to regulations on overseas securities issuance and listing, including cybersecurity reviews for companies with over 1 million users' personal information planning to list abroad[46] - The company's Chinese subsidiaries are restricted in their ability to distribute dividends, as they must allocate at least 10% of post-tax profits to statutory reserves until reserves reach 50% of registered capital[49] - The company is subject to Chinese corporate income tax laws, requiring resident enterprises to pay taxes on taxable income from both domestic and overseas sources[50] - The company has not faced significant adverse impacts from regulatory compliance in the past, but future changes in laws or interpretations could affect capital expenditures, profitability, and competitive position[48] - The company must navigate potential delays or costs in obtaining necessary permits, approvals, or licenses, which could disrupt operations and harm its reputation[48] COVID-19 Impact - The COVID-19 pandemic has significantly impacted the company's operations, with an average of over 2,500 stores temporarily closed or offering limited services during April and May 2022, leading to a year-over-year same-store sales decline of over 20%[101] - In November 2022, the number of stores temporarily closed or offering limited services peaked at over 4,300 due to regional COVID-19 outbreaks and tightened control measures[101] - In December 2022, over 1,300 stores were temporarily closed or offered limited services due to staff shortages caused by widespread infections following the relaxation of COVID-19 restrictions[101] - The company expects continued operational impacts from COVID-19, including potential resurgences of the virus and changes in consumer behavior post-pandemic[102] - The company's insurance does not cover losses incurred due to pandemics, adding financial risk[102] - The company faces inherent risks in the food industry, including supply chain disruptions and increased raw material costs due to health crises like COVID-19[100] Labor and Employee Management - The company employs over 400,000 staff, including approximately 145,000 full-time and 261,000 part-time restaurant service team members as of December 31, 2022[66] - Female employees accounted for over 50% of the company's workforce by the end of 2022, with women holding 53% of director-level and above positions in senior management[69] - The company operates 30 "Angel Restaurants" across 27 cities, providing employment for nearly 200 individuals with special needs as of the end of 2022[70] - Total training hours for employees in 2022 amounted to approximately 9 million hours[71] - The company's "Bench Planning" program allows most operational leadership talents to grow internally, with college graduates able to become restaurant managers in as little as two years[72] - The company's digital training platform enables employees to participate in training programs conveniently, even during the pandemic[73] - By the end of 2022, approximately 5,000 employees received subsidies and obtained higher education degrees through the company's continuing education program[74] - In 2022, over 12,500 restaurant managers became shareholders of the company through the Restricted Stock Units (RSUs) plan, with a restaurant manager turnover rate of about 9%[75] - The company established a RMB 10 million relief fund to provide financial assistance to employees in need, covering emergency situations, major illnesses, or economic difficulties[77] Sustainability and Environmental Goals - The company aims to achieve net-zero emissions across the entire value chain by 2050, with a target to reduce Scope 1 and 2 greenhouse gas emissions by 63% by 2035 compared to 2020[80] - The company plans to reduce food waste by 10% per restaurant by 2030 compared to the 2020 baseline, using AI/IoT technology to improve sales forecasting and inventory management[83] - The company commits to ensuring 100% of customer-facing plastic packaging is recyclable and aims to reduce non-degradable plastic packaging by 30% by 2025 compared to 2019[84] - The company aims to achieve a "zero deforestation" supply chain and plans to source 100% RSPO-certified sustainable palm oil and 100% FSC-certified paper packaging by 2025[85] Real Estate and Leasing - The company operates 11,161 self-owned stores in China, with 11,105 located on leased properties and 56 on owned properties[87] - KFC accounts for 8,174 of the leased store properties, while Pizza Hut accounts for 2,745, and other restaurants account for 186[87] - The company leases its headquarters in Shanghai and Dallas, Texas, and operates 15 non-store properties, including logistics centers and office buildings[88] - The company has subleased over 150 properties to franchisees and third parties[88] - The company's initial lease terms for self-operated restaurants in China typically range from 10 to 20 years, with no renewal options[88] - Approximately 6% of the company's existing lease agreements will expire by the end of 2023, with potential challenges in renewing leases under favorable terms[110] - Lease agreements typically include fixed rent, a percentage of annual sales revenue, or a combination, with potential rent increases that could impact operating costs[111] - Intense competition in China's retail property market may hinder the company's ability to secure ideal restaurant locations at reasonable lease terms[112] Tax and Financial Risks - The company's Chinese subsidiaries are subject to a 10% withholding tax on dividends paid to their direct offshore parent, but under certain conditions, this rate can be reduced to 5% due to a tax arrangement between Hong Kong and mainland China[40] - The company paid a total of $202 million in dividends and repurchased $466 million worth of common shares in 2022, funded by cash held outside mainland China[40] - The company made a $95 million capital injection from a Hong Kong-registered subsidiary to its mainland Chinese subsidiaries in 2021, with no such injection in 2022[42] - The company's ability to declare and pay dividends may be limited by Chinese laws governing distributable profits[43] - The company's Chinese subsidiaries are required to obtain various approvals and licenses, including food business permits, environmental protection assessments, and fire safety inspections[44] - The transfer of cash from the company's Chinese subsidiaries to offshore subsidiaries is subject to Chinese government currency exchange controls, which could limit the ability to pay dividends or service foreign currency-denominated debts[44] - The company is subject to Chinese regulations limiting loans and direct investments from overseas holding companies to Chinese entities, with loans to wholly-owned Chinese subsidiaries capped at statutory limits and requiring registration with the State Administration of Foreign Exchange (SAFE)[46] - The company's Chinese subsidiaries are subject to a unified corporate income tax rate of 25% on global income, with potential reductions based on specific qualifications[52] - The company's new retail business is subject to a VAT rate ranging from 9% to 13%, with input VAT rates for materials and services adjusted to 13%, 9%, and 6% since 2017[52] - Dividends paid by the company's Chinese subsidiaries to their direct overseas parent companies are subject to a 10% withholding tax, which can be reduced to 5% under the Hong Kong-Mainland tax arrangement[53] - Gains from the direct sale of equity in the company's Chinese subsidiaries are subject to a 10% withholding tax, with a 0.05% stamp duty on the transfer value[55] - Indirect transfers of equity in the company's Chinese subsidiaries may be recharacterized as direct transfers and subject to a 10% corporate income tax if deemed to lack reasonable commercial purpose[55] - The company's Hong Kong subsidiary, which holds equity in the majority of KFC and Pizza Hut restaurants in China, is expected to continue qualifying for a 5% withholding tax reduction on dividends under the Hong Kong-Mainland tax arrangement[53] - The company expects that transfers of its shares by non-individual shareholders in public market transactions will not be subject to taxation under China's indirect transfer rules due to the listed company exception[57] - The Tax Cuts and Jobs Act (TCJA) in the US, enacted in December 2017, set a unified corporate income tax rate of 21% and impacted the company by exempting foreign-source dividends received from foreign subsidiaries starting from the tax year beginning after December 31, 2017[57] - The Inflation Reduction Act (IRA) in the US, signed into law in August 2022, includes a 15% Corporate Alternative Minimum Tax (CAMT) for certain large corporations and a 1% excise tax on net stock repurchases made after December 31, 2022[58] - Hong Kong subsidiaries are generally subject to a profits tax rate of 16.5%, with the first HK$2 million of profits taxed at 8.25% for entities established in Hong Kong from 2018 onwards[58] Legal and Regulatory Challenges - The company is subject to evolving and increasingly stringent laws and regulations on data privacy and cybersecurity, including the Cybersecurity Law, Data Security Law, and Personal Information Protection Law[119] - The company may incur additional costs to update existing information technology systems to comply with data privacy and cybersecurity regulations[120] - The company's ability to manage risks related to information security and protection is critical to avoiding penalties, including fines, business suspension, and license revocation[120] - The company faces risks related to new retail and e-commerce operations, including challenges in predicting customer demand, managing inventory, and handling complex logistics, which could lead to increased inventory write-offs and higher product return rates[127] - Social media can significantly impact the company's brand and reputation, with negative comments or inaccurate information potentially causing severe damage to its business and financial performance[127] - The company is exposed to risks from non-compliance with anti-bribery and anti-corruption laws, which could result in significant penalties, reputational damage, and adverse effects on business operations[129] - The company is subject to both U.S. federal income tax and Chinese corporate income tax, with a standard Chinese corporate tax rate of 25% and an additional 10% withholding tax on profits remitted outside China[129] - The company is impacted by global tax reforms, including the U.S. Tax Cuts and Jobs Act of 2017 and the Inflation Reduction Act of 2022, which could increase its tax liabilities and affect its financial performance[131] - The company's operating performance is highly dependent on consumer discretionary spending, which is influenced by factors such as unemployment rates, disposable income levels, gasoline prices, stock market performance, and consumer confidence levels[132] - The company faces intense competition in the food and beverage industry, including competition from food delivery platforms, shared kitchens, and grocery stores offering convenient meal options[133] - The company must obtain and maintain various licenses and permits to operate its restaurants in China, and failure to do so could adversely affect its business and operating performance[134] - The company's intellectual property, including trademarks and proprietary recipes, is crucial to its success, but may not be adequately protected under Chinese law[135] -

Financial Performance - Yum China reported revenues of $9.6 billion in 2022, operating nearly 13,000 restaurants across over 1,800 cities in China[7]. - For the year ended December 31, 2022, the Company's China subsidiaries distributed approximately $453 million in dividends to the Company's Hong Kong-incorporated holding companies[56]. - Yum China paid cash dividends to stockholders totaling $202 million and repurchased $466 million of its common stock in 2022[57]. - Net cash provided by operating activities was $1,413 million in 2022, an increase from $1,131 million in 2021, primarily driven by VAT asset refunds[422]. - Net cash used in investing activities decreased to $522 million in 2022 from $855 million in 2021, mainly due to the prior year's acquisition impacts[422]. - Net cash used in financing activities increased to $844 million in 2022 from $313 million in 2021, attributed to resumed share repurchases and acquisition costs[422]. - The company generated $2.2 billion in net proceeds from its global offering in September 2020[423]. - The company anticipates that existing cash, net cash from operations, and credit facilities will be sufficient to fund operations for the next 12 months[425]. - The board of directors increased the share repurchase authorization by $1 billion to a total of $2.4 billion, with $466 million or 10.5 million shares repurchased in 2022[428]. - The company paid cash dividends of $0.12 per share for each quarter in 2021 and 2022, totaling $202 million in 2022 and $203 million in 2021[428]. Business Expansion and Strategy - The company aims to expand its restaurant network to 20,000 stores, currently tracking over 900 cities without a KFC or Pizza Hut[15]. - Yum China plans to open 1,000 Lavazza stores in the next few years, targeting the underserved coffee market in China[28]. - The company aims to expand the Taco Bell store network to at least 225 stores by the end of 2025, having satisfied the development milestones for the brand[85]. - The company expanded its restaurant count from 7,562 at the end of 2016 to 12,947 at the end of 2022, representing a compound annual growth rate (CAGR) of approximately 9%[33]. Digital Transformation - Digital orders exceeded $8 billion in 2022, accounting for approximately 89% of KFC and Pizza Hut Company sales[24]. - Digital orders accounted for approximately 89% of KFC and Pizza Hut Company sales in 2022, reflecting a strong shift towards digitalization[44]. - Digital payments accounted for 99% of Company sales in 2022, up from 33% in 2016, indicating a significant consumer preference for mobile payment options[45]. - Delivery services contributed approximately 39% of Company sales in 2022, highlighting significant growth potential in the delivery market[25]. - Delivery sales accounted for approximately 39% of total Company sales in 2022, up from 21% in 2019, driven by increased delivery orders during the COVID-19 pandemic[49]. Customer Engagement and Loyalty - The loyalty programs had over 380 million members as of December 31, 2022, enhancing guest loyalty and order frequency[24]. - As of December 31, 2022, KFC and Pizza Hut loyalty programs exceeded 410 million members combined, with member sales accounting for approximately 62% of system sales in 2022[47]. Innovation and Product Development - The company launched over 500 new and improved products across all restaurant brands in 2022, showcasing its commitment to menu innovation[42]. - Yum China is focused on food innovation and value propositions to enhance unit-level performance and drive sales growth[20]. - Approximately 73% of KFC restaurant units and 87% of Pizza Hut restaurant units were remodeled or built in the past five years, reflecting ongoing investment in restaurant format innovation[50]. Corporate Governance and Compliance - Yum China is classified as a Commission-Identified Issuer under the Holding Foreign Companies Accountable Act, requiring annual documentation to the SEC[81]. - The PCAOB's ability to inspect registered public accounting firms in mainland China and Hong Kong remains uncertain, impacting the potential delisting of Yum China's common stock from the New York Stock Exchange[83]. - The Company faces uncertainties regarding compliance with Chinese laws and regulations, which may adversely affect its business and financial condition[54]. - The ability to declare and pay dividends may be restricted by earnings available for distribution under applicable Chinese laws[60]. Environmental and Social Responsibility - The company has set a target to reduce absolute Scope 1 and 2 GHG emissions by 63% by 2035 from a 2020 base year[108]. - The company is committed to achieving a 10% reduction in food waste per restaurant by 2030 compared to a 2020 baseline[109]. - The company aims for 100% of customer-facing, plastic-based packaging to be recyclable and targets a 30% reduction in non-degradable plastic packaging weight by 2025 compared to a 2019 baseline[110]. - The company has opened 30 "Angel Restaurants" by the end of 2022, providing jobs for nearly 200 individuals with special needs[95]. - The company provided around 9 million total training hours in 2022 to enhance employee competencies[96]. Taxation and Financial Regulations - The Company is subject to a 10% withholding income tax on dividends paid by China subsidiaries, which can be reduced to 5% under certain conditions due to a tax arrangement with Hong Kong[56]. - The Company's China subsidiaries are regarded as China resident enterprises and are subject to a 25% enterprise income tax on their worldwide income[68]. - Gains from the sale of equity interests in a China resident enterprise are subject to a 10% withholding income tax, with a stamp duty of 0.05% on the transfer value[71]. - Indirect transfers of Chinese taxable assets may be treated as direct transfers, potentially subjecting gains to a 10% withholding income tax if deemed to lack reasonable commercial purpose[71]. - The estimated total temporary difference for which the company has not provided foreign withholding taxes is approximately $3 billion as of December 31, 2022[463]. Employee and Workforce Management - As of December 31, 2022, the company employed over 400,000 individuals, including approximately 145,000 full-time employees[90]. - By the end of 2022, female employees represented more than 50% of the total workforce, with women holding director and above positions making up 53% of senior management[95]. - The company has launched equity incentive schemes, granting RSUs valued at $3,000 to approximately 4,000 eligible RGMs starting in February 2021[101].

Financial Data and Key Metrics - Total revenue declined 9% YoY in reported currency to $2.1 billion in Q4 2022, but grew 2% in constant currency [18] - System sales and same-store sales both declined 4% YoY in Q4 2022 [19] - Restaurant margin improved by 290 basis points YoY to 10.4% in Q4 2022, driven by labor productivity, operational efficiency, and temporary relief [19] - Free cash flow for 2022 was $734 million, with $668 million returned to shareholders through dividends and share repurchases [23] - Cash and short-term investments decreased to $3.2 billion from $4 billion in Q3 2022, mainly due to reclassification of $600 million to long-term deposits [23] Business Line Performance - KFC same-store sales were 97% of prior year levels in Q4 2022, with same-store traffic at 84% and ticket average up 16% due to higher delivery mix [19] - Pizza Hut same-store sales were 92% of prior year levels, with same-store traffic at 98% and ticket average at 95% [19] - Delivery sales mix doubled from 20% in 2019 to 39% in 2022, with off-premise sales reaching almost two-thirds of total sales in Q4 2022 [5] - Digital ordering increased from 55% of sales in 2019 to 89% in 2022, generating over $20 billion in digital sales over three years [6] - Packaged food sales grew 90% in 2022, reaching nearly CNY 900 million [14] Market Performance - KFC entered 200 new cities in 2022, focusing on white space in lower-tier cities and increasing density in higher-tier cities [37] - Pizza Hut opened a record 300+ stores in 2022, with a focus on satellite and smaller store formats [70][72] - Lavazza expanded to 85 stores by the end of Q4 2022, with loyalty members more than doubling to 1 million [15] - Taco Bell doubled its store count to 91 stores in 2022, with a focus on menu localization and improving unit economics [15] Strategy and Industry Competition - The company plans to open 1,100 to 1,300 new stores in 2023, with capital expenditure of $700 million to $900 million [26] - Focus on driving sales through product innovation, value promotions, and digital initiatives, while maintaining disciplined store expansion [52][53] - Continued investment in supply chain, digital, and automation to enhance operational efficiency and resilience [7][81] - The company remains committed to returning capital to shareholders, with a raised cash dividend from $0.12 to $0.13 per share [27] Management Commentary on Operating Environment and Future Outlook - The company faced significant challenges in Q4 2022 due to COVID-related labor shortages and temporary store closures, but managed to improve restaurant margins despite lower sales [17][19] - Management is cautiously optimistic about the recovery in 2023, but expects it to be gradual and uneven due to macroeconomic uncertainties and cautious consumer spending [25][45] - The company plans to focus on driving sales growth while maintaining operational efficiency and cost control [25][53] Other Important Information - The company hosted its 2023 Investor Day in Shanghai in September, with plans to share more details about the event [4] - The company has maintained profitability every quarter since the start of the pandemic in 2020, generating $1.9 billion in free cash flow and returning over $1 billion to shareholders [8] Q&A Session Summary Question: New store performance and margins post-COVID [30] - New stores opened during the pandemic have shown strong performance, with KFC stores breaking even within three months and Pizza Hut stores achieving a payback period of two to three years [31][32] - The company has focused on smaller store formats and flexible rent terms, reducing CapEx per store and improving unit economics [33][36] Question: Restaurant margin recovery potential in 2023 [41] - Management expects restaurant margins to improve with sales recovery, but cautions that inflationary pressures and the end of temporary relief measures could impact margins [43][44] - Cost of sales and labor are expected to remain stable, with a focus on reducing occupancy and other operating expenses [46][47] Question: Competitive landscape and promotion strategy [58] - The company has gained market share during the pandemic and plans to continue driving sales through effective promotions and product innovation [59][60] - Pricing strategy includes a mix of lower entry-point products and high-end offerings to cater to different customer segments [61] Question: Recovery pace for KFC and Pizza Hut [63] - KFC performed slightly better than Pizza Hut during the Chinese New Year period, with off-premise sales playing a key role in protecting margins [64][67] - Pizza Hut is focusing on increasing store count and improving resiliency through satellite and smaller store formats [70][72] Question: Regional recovery differences [74] - Recovery has been strong across regions, with lower-tier cities performing better during the Chinese New Year period [75] - Management remains cautious about post-holiday consumer spending and plans to focus on value promotions to drive traffic [76] Question: Supply chain and ESG initiatives [80] - The company plans to continue investing in supply chain infrastructure and automation, with a focus on reducing carbon footprint and working with suppliers to achieve net-zero emissions by 2050 [81][82] - Supply chain innovations, such as the use of rail and sea freight, have improved resilience during disruptions [86] Question: New store opening targets for 2023 [88] - The company plans to open 1,100 to 1,300 new stores in 2023, with a focus on quality of growth over quantity [89][90] - Store expansion will depend on market conditions and unit economics, with a disciplined approach to investment [91]

Fourth Quarter and Fiscal Year 2022 Results 8 February 2023 NYSE: YUMC and HKEX: 9987 Cautionary Statement on Forward-Looking Statements & Non-GAAP Measures Thispresentation contains“forward-lookingstatements” withinthemeaningof Section 27Aof the SecuritiesAct of 1933and Section 21E ofthe SecuritiesExchangeActof1934.Weintendallforward-lookingstatementstobecovered bythesafe harbor provisionsofthePrivateSecurities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fac ...

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, 2022 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) Delawa ...

Yum China Holdings, Inc. (NYSE:YUMC) Q3 2022 Earnings Conference Call November 1, 2022 8:00 PM ET Company Participants Michelle Shen - Director, Investor Relations Joey Wat - CEO & Director Andy Yeung - CFO Conference Call Participants Chen Luo - Bank of America Merrill Lynch Lillian Lou - Morgan Stanley Xiaopo Wei - Citigroup Michelle Cheng - Goldman Sachs Anne Ling - Jefferies LLC, Research Division Veronica Song - Crédit Suisse Christine Peng - UBS Operator Thank you for standing by, and welcome to the Y ...

Financial Performance - Total revenue for Q3 2022 was $2.68 billion, a 5% increase from $2.55 billion in the same period last year[6]. - Operating profit rose by 77% to $316 million, compared to $178 million in Q3 2021[6]. - Net profit reached $206 million, a 98% increase from $104 million in the same quarter last year[6]. - Adjusted net profit was $208 million, a 117% increase from $96 million in Q3 2021[7]. - Diluted earnings per share were $0.49, a 104% increase from $0.24 in the same quarter last year[7]. - Company restaurant revenue reached $2,561 million, up 11% from $2,310 million in the same quarter of the previous year[24]. - Operating profit for the quarter was $316 million, representing a 77% increase compared to $178 million in the same quarter of 2021[24]. - Net profit attributable to Yum China Holdings, Inc. was $206 million, a 98% increase from $104 million in the same quarter of the previous year[24]. - The company reported a restaurant profit margin of 18.8%, up from 12.2% in the same quarter of 2021, reflecting a 6.6 percentage point increase[24]. - The operating profit margin improved to 12.3%, compared to 7.7% in the same quarter of the previous year, marking a 4.6 percentage point increase[24]. Restaurant Operations - System sales increased by 5% year-over-year, with KFC and Pizza Hut growing by 5% and 7% respectively, excluding foreign exchange impacts[6]. - The company added a net of 239 new restaurants in Q3, bringing the total to 12,409 locations as of September 30, 2022[6]. - Same-store sales remained flat year-over-year, with KFC unchanged and Pizza Hut increasing by 2%[6]. - The company opened 403 new stores in Q3 2022, resulting in a net increase of 239 stores, primarily driven by KFC and Pizza Hut brand development[12]. - Yum China operates 12,409 restaurants across over 1,700 cities in China as of September 2022[22]. - As of September 30, 2022, the total number of self-operated restaurants for KFC was 7,437, and for Pizza Hut, it was 2,590, resulting in a total of 10,027 restaurants[39]. - The company reported a net increase of 1,030 restaurants from new openings and closures as of September 30, 2022[41]. Market Strategy and Expansion - The company aims to add between 1,000 to 1,200 new stores by the end of the fiscal year[3]. - The company expects to open approximately 1,000 to 1,200 new stores in 2022, with capital expenditures estimated between $800 million and $1 billion[16]. - The company plans to continue expanding its market presence and investing in new product development to drive future growth[25]. - The company plans to continue expanding its market presence through new restaurant openings and potential acquisitions[40]. - The company is focusing on enhancing its product offerings and technology development to drive future growth[40]. - Future outlook includes continued expansion and potential new product development to drive revenue growth[45]. Membership and Sales Channels - The membership program now has over 400 million members, with member sales accounting for approximately 62% of system sales in Q3 2022[10]. - Takeout revenue represented about 38% of restaurant income, an increase of approximately 4 percentage points year-over-year[10]. - Digital orders, including takeout, mobile orders, and self-service kiosk orders, accounted for around 91% of restaurant income in Q3 2022[10]. Financial Health and Investments - The company repurchased approximately 270,000 shares for a total of $13 million at an average price of $48.05 per share in Q3 2022[9]. - The board declared a cash dividend of $0.12 per share, to be paid on December 20, 2022[9]. - The effective tax rate for the quarter was 29.9%, an increase of 1.6 percentage points from 28.3% in the same quarter of 2021[24]. - Total costs and expenses for the quarter were $2,369 million, a slight decrease from $2,376 million in the same quarter of 2021[24]. - The company reported a decrease in inventory from $432 million to $321 million, a reduction of approximately 25.7%[28]. - The company's cash and cash equivalents increased to $1,211 million from $1,136 million, reflecting a growth of about 6.6%[28]. - Total liabilities decreased to $4,528 million from $5,301 million, a reduction of about 14.5%[29]. - The total equity attributable to shareholders was $6,418 million, down from $7,056 million, representing a decline of approximately 9.0%[30]. Sustainability and Recognition - Yum China was ranked 359th on the Fortune 500 list in 2022[22]. - The company has been included in the Bloomberg Gender-Equality Index for four consecutive years[22]. - Yum China was selected for the Dow Jones Sustainability Index in 2021[22]. - The company has received certification as an outstanding employer in China[22]. Future Outlook and Guidance - The company continues to face uncertainties in the market, with expectations of potential negative impacts on sales and profits due to economic pressures and inflation[8]. - Forward-looking statements regarding 2022 performance outlook are included in the press release[21]. - The earnings conference call is scheduled for November 1, 2022, at 8 PM ET[19]. - The earnings report and related materials will be available on the investor relations website[19].

Financial Performance - Total revenue for Q2 2022 was $2,128 million, a decrease of 13.2% compared to $2,451 million in Q2 2021[2] - Net profit for Q2 2022 was $83 million, down from $193 million in Q2 2021, representing a decline of 57.0%[3] - The basic earnings per share for Q2 2022 was $0.20, compared to $0.43 in Q2 2021, reflecting a decrease of 53.5%[2] - The company reported a net income of $193 million for the first half of 2022, compared to $436 million in the same period of 2021, indicating a decline of 55.7%[3] - The company’s total revenue for the six months ended June 30, 2022, was $5,034 million, with KFC generating $3,611 million and Pizza Hut $995 million[31] - The company reported a net profit of $83 million for the quarter ending March 31, 2022, compared to a net profit of $181 million for the same quarter in 2021[40] - The company’s total income for the first half of 2022 was $995 million, down from $1,079 million in the same period of 2021, reflecting an 8% decline[123] - The company’s net profit for the six months ending June 30, 2022, was $272 million, down from $575 million for the same period in 2021[42] Revenue Sources - Company restaurant revenue for the first half of 2022 was $4,574 million, slightly up from $4,564 million in the same period of 2021[2] - KFC and Pizza Hut generated total restaurant revenue of $2,026 million for the quarter ended June 30, 2022, with KFC contributing $1,571 million and Pizza Hut $443 million[29] - Franchise fee income amounted to $19 million, including $13 million from KFC and $2 million from Pizza Hut, for the same quarter[29] - The company’s revenue from transactions with franchisees and joint ventures reached $62 million, primarily from food and packaging sales[26] - The company’s other income for the quarter was $133 million, with significant contributions from various service offerings[29] Costs and Expenses - Total costs and expenses for Q2 2022 were $2,047 million, down from $2,218 million in Q2 2021, a reduction of 7.7%[2] - The operating profit for the second quarter of 2022 was $81 million, a decrease from $233 million in the same quarter of 2021, primarily due to the impact of COVID-19[42] - The company reported a restaurant-level impairment of $15 million for the quarter ended June 30, 2022, compared to $13 million for the same period in 2021[74] - The company experienced a 4% increase in labor costs and a rise in utility rates, contributing to the decrease in restaurant profit[119] - Management expenses increased to $63 million for the quarter ended June 30, 2022, up 7% from $58 million in the same quarter of 2021[116] Assets and Liabilities - Total assets as of June 30, 2022, amounted to $12,054 million, a decrease from $13,223 million at the end of 2021[6] - Total liabilities decreased to $4,752 million from $5,301 million at the end of 2021, reflecting a reduction of 10.4%[6] - Cash and cash equivalents at the end of the period were $1,147 million, slightly up from $1,136 million at the beginning of the period[6] - The total equity attributable to shareholders decreased to $6,529 million from $7,056 million, a decline of 7.4%[6] - The company’s total current liabilities were $2,099 million as of June 30, 2022, compared to $2,332 million as of December 31, 2021, marking a decrease of about 10.0%[53] Investments and Acquisitions - The company is exploring potential acquisitions to strengthen its market position and expand its footprint[1] - The company invested $255 million in Q4 2021 for a 28% stake in Hangzhou Catering Group, increasing its ownership in the Hangzhou KFC joint venture to approximately 60%[9] - The company acquired a 5% stake in Shengnong for approximately $261 million, making Shengnong the largest poultry supplier[17] - The company reported unrealized gains of $20 million and losses of $18 million from its investment in Meituan as of June 30, 2022[20] - The company completed an investment of $255 million in Hangzhou Yingfu, acquiring a 28% stake, which resulted in a total ownership of approximately 60% in Hangzhou KFC[15] Market and Operational Challenges - In Q2 2022, same-store sales decreased by over 20% year-on-year due to the severe impact of COVID-19, with an average of over 2,500 restaurants temporarily closed in April and May[103] - The company expects that the future development of the COVID-19 pandemic may continue to have a significant and lasting adverse impact on its operational performance, cash flow, and financial condition[144] - The company anticipates challenges related to its growth strategies for Lavazza and COFFii& JOY, which may not yield the expected benefits[166] - The company is subject to ongoing tax audits by various tax authorities, which may impact its financial position and operating results[76] - The company is exposed to fluctuations in raw material prices, which could adversely impact its financial condition and operating results[165] Shareholder Returns - The company declared a cash dividend of $0.12 per share for the quarter ending March 31, 2022, totaling $50 million[39] - The company repurchased $400 million worth of shares or 9 million common shares under its buyback plan during the first half of 2022[156] - The board has authorized a total share repurchase plan of $2.4 billion, with no expiration date for the authorization[186] - The estimated dollar value of shares yet to be repurchased under the plan is approximately $1.2 billion[186] - The company’s ability to pay dividends may be restricted by applicable Chinese laws regarding distributable profits[157] Strategic Initiatives - The company plans to continue investing in technology and innovation to enhance customer experience and operational efficiency[1] - The company aims to expand the Taco Bell network to at least 100 stores by the end of 2022 and to at least 225 stores by the end of 2025, supported by capital from Yum[97] - The company is currently evaluating the impact of new accounting standards effective from January 1, 2023, on its financial statements[161][162][163] - The company plans to invest in digitalization, automation, and logistics infrastructure as part of its future capital expenditures[154] - The company aims to expand its business footprint in existing and new cities, believing there is significant growth potential in the Chinese market[103]