YUM CHINA(YUMC) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements, including income, comprehensive income, cash flows, balance sheets, and equity, with detailed notes Condensed Consolidated Statements of Income Q3 & YTD 2023 Financial Performance Highlights (in US$ millions, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,914 | $2,685 | $8,485 | $7,481 | | Operating Profit | $323 | $316 | $996 | $588 | | Net Income (Yum China) | $244 | $206 | $730 | $389 | | Diluted EPS | $0.58 | $0.49 | $1.73 | $0.92 | Condensed Consolidated Statements of Comprehensive Income Comprehensive Income (Loss) (in US$ millions) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $267 | $227 | $794 | $420 | | Foreign currency translation adjustments | $(29) | $(306) | $(274) | $(573) | | Comprehensive Income (Loss) (Yum China) | $218 | $(56) | $491 | $(101) | Condensed Consolidated Statements of Cash Flows Year-to-Date Cash Flow Summary (in US$ millions) | Cash Flow Activity | YTD Ended 9/30/2023 | YTD Ended 9/30/2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $1,334 | $1,329 | | Net Cash Used in Investing Activities | $(1,052) | $(593) | | Net Cash Used in Financing Activities | $(240) | $(583) | | Cash, Cash Equivalents, and Restricted Cash - End of Period | $1,131 | $1,211 | Condensed Consolidated Balance Sheets Balance Sheet Summary (in US$ millions) | Account | 9/30/2023 (Unaudited) | 12/31/2022 | | :--- | :--- | :--- | | Total Current Assets | $3,923 | $3,940 | | Total Assets | $12,070 | $11,826 | | Total Current Liabilities | $2,472 | $2,166 | | Total Liabilities | $4,811 | $4,666 | | Total Equity | $7,246 | $7,148 | Notes to Condensed Consolidated Financial Statements - The company operates KFC, Pizza Hut, and other brands in China under a 50-year master license agreement with YUM! Brands, paying a 3% license fee on net system sales[25] - As of September 30, 2023, the company operated over 9,900 KFC stores and over 3,200 Pizza Hut restaurants in China[26] - The company's two reportable segments are KFC and Pizza Hut. All other brands and business units are combined into "All Other Segments"[29] - The company is under a national audit on transfer pricing by the Chinese State Taxation Administration (STA) regarding related party transactions from 2006 to 2015. The potential impact cannot be reasonably estimated but could be material[113] - Subsequent to the quarter end, the Board of Directors declared a cash dividend of $0.13 per share and increased the share repurchase authorization by $1 billion to an aggregate of $3.4 billion[124][125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management analyzes financial condition and results, covering consolidated and segment performance, liquidity, capital resources, and significant trends including post-COVID recovery and tax matters Results of Operations This section details the company's financial performance, analyzing consolidated results, segment-specific sales, restaurant profit, operating profit, and corporate unallocated items Q3 2023 Performance Summary (% Change vs Q3 2022, Ex-F/X) | Segment | System Sales | Same-Store Sales | Operating Profit | | :--- | :--- | :--- | :--- | | KFC | +15% | +4% | +10% | | Pizza Hut | +13% | +2% | +1% | | Total | +15% | +4% | +9% | YTD 2023 Performance Summary (% Change vs YTD 2022, Ex-F/X) | Segment | System Sales | Same-Store Sales | Operating Profit | | :--- | :--- | :--- | :--- | | KFC | +21% | +9% | +63% | | Pizza Hut | +19% | +7% | +60% | | Total | +20% | +8% | +79% | - YTD Operating Profit growth (Ex-F/X) was driven by increased sales, favorable commodity prices, and increased VAT deductions, partially offset by increased value promotions, wage inflation, and lower temporary relief[140] - KFC's YTD Restaurant Profit (Ex-F/X) increased primarily due to higher sales, increased VAT deductions, and favorable commodity prices[170] - Pizza Hut's YTD Restaurant Profit (Ex-F/X) increased due to higher sales, favorable commodity prices, and increased VAT deductions[180] Significant Known Events, Trends or Uncertainties This section outlines key external and internal factors influencing future results, including post-pandemic recovery, softening consumer demand, tax examinations, and VAT policy uncertainties - The company observed softening consumer demand in late September through October 2023, and expects the post-pandemic economic recovery to be a "wave-like" and "non-linear" process[194][195] - The company is under a national audit on transfer pricing by the Chinese State Taxation Administration (STA) for the period 2006-2015, with a focus on the franchise arrangement with YUM. The potential impact is not yet estimable but could be material[196] - A preferential VAT policy allowing additional input VAT deductions was extended to December 31, 2023, but at a reduced rate. It is uncertain if this policy will continue upon expiration[202] Liquidity and Capital Resources This section details the company's financial position, funding sources, and capital allocation strategy, including store expansion, technology investments, shareholder returns, and borrowing capacity - Fiscal year 2023 capital expenditures are expected to be in the range of $700 million to $900 million[208] - During the nine months ended September 30, 2023, the company repurchased 4.9 million shares for $281 million and paid cash dividends of approximately $162 million[210][211] - As of September 30, 2023, the company had approximately $535 million in unused credit facilities[215] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including foreign currency exchange rate fluctuations, commodity price volatility, and investment risk from equity holdings - The company is exposed to foreign currency risk as substantially all assets are in China. A hypothetical 10% weakening of the RMB against the US$ would have decreased Q3 2023 Operating Profit by approximately $31 million[223] - The company faces investment risk from its equity investment in Meituan, which is recorded at fair value and is subject to market price volatility[225] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[227] - There were no material changes to the company's internal control over financial reporting during the third quarter of 2023[228] Part II. Other Information Item 1. Legal Proceedings The company is subject to various lawsuits but believes ultimate liability will not materially adversely affect its financial condition or results - The company believes that the ultimate liability from various lawsuits is not likely to have a material adverse effect on its financial results, condition, or cash flows[123][230] Item 1A. Risk Factors No material changes from risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022[231] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity during Q3 2023, including shares repurchased and average price paid under its program Share Repurchases in Q3 2023 | Period | Total Shares Repurchased (thousands) | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | July 2023 | 352 | $58.32 | | August 2023 | 2,001 | $54.43 | | September 2023 | 514 | $54.91 | | Total Q3 | 2,867 | $54.91 | - As of September 30, 2023, approximately $870 million remained available for future share repurchases under the authorized program[233]