# Yum China Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Yum China Holdings, Inc.](/companies/yumc.md) (CIK 1673358)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 11:01 ET
- Period: 2023-09-30
- Accession: 0000950170-23-061471
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1673358/000095017023061471/yumc-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1673358/000095017023061471/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $2.91bn | us-gaap:Revenues |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $8.48bn | us-gaap:Revenues |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $323.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $996.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $100.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $296.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $244.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $730.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.58 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.73 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.59 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.75 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 420,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 421,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $1.33bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $499.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $162.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $280.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $1.13bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $3.92bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $12.07bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $2.47bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $4.81bn | us-gaap:Liabilities |
| Short-term borrowings | at 2023-09-30 | $210.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $6.57bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,900 characters.

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, impacts of COVID-19, 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 2022 system sales, with over 14,000 restaurants covering over 1,900 cities primarily in China as of September 30, 2023. Our growing restaurant network consists of our flagship KFC and Pizza Hut brands, as well as emerging brands such as Taco Bell, Lavazza, Little Sheep and Huang Ji Huang. We have the exclusive right to operate and sublicense the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones amended in April 2022, 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 have since grown to become the largest restaurant company in China in terms of system sales. 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, 2023, KFC operated over 9,900 restaurants in over 1,900 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, 2023, Pizza Hut operated over 3,200 restaurants in over 700 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:

- The Company provides certain percentage changes excluding the impact of foreign currency translation (“F/X”). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
- System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned and franchise restaurants that operate our concepts, except for sales from non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise restaurants typically generate ongoing franchise fees for the Company at an average rate of approximately 6% of system sales. Franchise restaurant sales are not included in Company sales in the Condensed Consolidated Statements of Income; however, the franchise fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.
- Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year, excluding the period during which stores are temporarily closed. We refer to these as our “base” stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, including stores temporarily closed, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores.
- Company sales represent revenues from Company-owned restaurants. Company Restaurant profit (“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. Within the Company sales and Restaurant profit analysis, Store Portfolio Actions represent the net impact of new-unit openings, acquisitions, refranchising and store closures, and Other primarily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation.

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, 2023 and 2022

### Results of Operations

### Summary

The Company has two reportable segments: KFC and Pizza Hut. Our remaining operating segments, including the operations of Taco Bell, Lavazza, Little Sheep, Huang Ji Huang, our delivery operating segment and our e-commerce business, and for 2022, also including COFFii & JOY and East Dawning, 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 15.

| Quarterly highlights: KFC | % Change System Sales(a) +15 | Same-Store Sales(a) +4 | Net New Units +14 | Operating Profit (Reported) +4 | Operating Profit (Ex F/X) +10 |
| --- | --- | --- | --- | --- | --- |
| Pizza Hut | +13 | +2 | +14 | (5) | +1 |
| All Other Segments(b) | +17 | +11 | +6 | +36 | +32 |
| Total | +15 | +4 | +14 | +2 | +9 |

27

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
| Year to date highlights: |  |  |  |  |  |
|  | % Change |  |  |  |  |
|  | System Sales(a) | Same-Store Sales(a) | Net New Units | Operating Profit (Reported) | Operating Profit (Ex F/X) |
| KFC | +21 | +9 | +14 | +54 | +63 |
| Pizza Hut | +19 | +7 | +14 | +52 | +60 |
| All Other Segments(b) | +17 | +10 | +6 | +53 | +49 |
| Total | +20 | +8 | +14 | +69 | +79 |

(a) System sales and same-store sales percentages as shown in the table exclude the impact of F/X. Effective January 1, 2018, temporary store closures are normalized in the same-store sales calculation by excluding the period during which stores are temporarily closed.

(b) Sales from non-Company-owned restaurants, for which we do not receive a sales-based royalty, are excluded from system sales and same-store sales.

As compared to the third quarter of 2022, Company sales in the third quarter of 2023 increased 8%, or 14% excluding the impact of F/X. Company sales for the year to date ended September 30, 2023 increased 13%, or 20% excluding the impact of F/X. The increase in Company sales for the quarter and year to date ended September 30, 2023, excluding the impact of F/X, was driven by net unit growth in Company-owned stores, same-store sales growth and reduced temporary store closures.

The increase in Operating profit for the quarter ended September 30, 2023, excluding the impact of F/X, was primarily driven by the increase in Company sales, favorable commodity prices and the increase in VAT deductions, partially offset by lapping the austerity measures in the prior year, lower temporary relief, increased value promotions and wage inflation in the mid-single digits.

The increase in Operating profit for the year to date ended September 30, 2023, excluding the impact of F/X, was primarily driven by the increase in Company sales, favorable commodity prices and the increase in VAT deductions, partially offset by increased value promotions, wage inflation in the low single digits and lower temporary relief.

The increase in Net income for the quarter and year to date ended September 30, 2023, excluding the impact of F/X, was primarily driven by the increase in Operating profit and higher interest income, net of income tax expenses.

The Consolidated Results of Operations for the quarters and years to date ended September 30, 2023 and 2022 are presented below:

|  | Quarter Ended 9/30/2023 | 9/30/2022 | % B/(W)(a) Reported |  | Ex F/X |  | Year to Date Ended 9/30/2023 | 9/30/2022 | % B/(W)(a) Reported |  | Ex F/X |  |
| --- | ---: | ---: | ---: | --- | ---: | --- | ---: | ---: | ---: | --- | ---: | --- |
| Company sales | $2,759 | $2,561 | 8 |  | 14 |  | $8,048 | $7,135 | 13 |  | 20 |  |
| Franchise fees and income | 23 | 22 | 7 |  | 13 |  | 69 | 65 | 8 |  | 15 |  |
| Revenues from transactions with franchisees | 100 | 80 | 25 |  | 32 |  | 282 | 219 | 29 |  | 37 |  |
| Other revenues | 32 | 22 | 41 |  | 48 |  | 86 | 62 | 39 |  | 48 |  |
| **Total revenues** | $2,914 | $2,685 | 9 |  | 15 |  | $8,485 | $7,481 | 13 |  | 21 |  |
| Company restaurant expenses | $2,289 | $2,081 | (10) |  | (17) |  | $6,611 | $6,059 | (9) |  | (16) |  |
| **Operating Profit** | $323 | $316 | 2 |  | 9 |  | $996 | $588 | 69 |  | 79 |  |
| Interest income, net | 46 | 25 | 86 |  | 88 |  | 124 | 51 | 145 |  | 149 |  |
| Investment loss | (4) | (15) | 75 |  | 75 |  | (32) | (32) | (1) |  | (1) |  |
| Income tax provision | (100) | (97) | (3) |  | (9) |  | (296) | (183) | (62) |  | (70) |  |
| Equity in net earnings (losses) from equity method investments | 2 | (2) | NM |  | NM |  | 2 | (4) | NM |  | NM |  |
| Net Income – including noncontrolling interests | 267 | 227 | 18 |  | 26 |  | 794 | 420 | 89 |  | 100 |  |
| Net Income – noncontrolling interests | 23 | 21 | (14) |  | (21) |  | 64 | 31 | (110) |  | (122) |  |
| **Net Income – Yum China Holdings, Inc.** | $244 | $206 | 18 |  | 26 |  | $730 | $389 | 88 |  | 98 |  |
| Diluted Earnings Per Common Share | $0.58 | $0.49 | 18 |  | 27 |  | $1.73 | $0.92 | 88 |  | 99 |  |
| Effective tax rate | 27.5% | 29.9% |  |  |  |  | 27.2% | 30.1% |  |  |  |  |
| **Supplementary information – Non-GAAP Measures(b)** |  |  |  |  |  |  |  |  |  |  |  |  |
| Restaurant profit | $470 | $480 | (2) |  | 4 |  | $1,437 | $1,076 | 34 |  | 41 |  |
| Restaurant margin % | 17.0% | 18.8% | (1.8) | ppts. | (1.8) | ppts. | 17.9% | 15.1% | 2.8 | ppts. | 2.8 | ppts. |
| Adjusted Operating Profit | $327 | $318 |  |  |  |  | $1,005 | $593 |  |  |  |  |
| Adjusted Net Income – Yum China Holdings, Inc. | $248 | $208 |  |  |  |  | $739 | $394 |  |  |  |  |
| Adjusted Diluted Earnings Per Common Share | $0.59 | $0.49 |  |  |  |  | $1.75 | $0.93 |  |  |  |  |
| Adjusted Effective Tax Rate | 27.2% | 29.7% |  |  |  |  | 27.0% | 29.9% |  |  |  |  |
| Adjusted EBITDA | $441 | $475 |  |  |  |  | $1,368 | $1,097 |  |  |  |  |

NM refers to not meaningful.

(a) Represents the period-over-period change in percentage.

(b) See “Non-GAAP Measures” below for definitions and reconciliations of the most directly comparable GAAP financial measures to the non-GAAP measures.

#### Performance Metrics

|  | Quarter Ended 9/30/2023 % change | Year to Date Ended 9/30/2023 % change |
| --- | ---: | ---: |
| System Sales Growth | 8% | 13% |
| System Sales Growth, excluding F/X | 15% | 20% |
| Same-Store Sales Growth | 4% | 8% |

| Unit Count | 9/30/2023 | 9/30/2022 | % Increase |
| --- | ---: | ---: | ---: |
| Company-owned | 12,192 | 10,679 | 14 |
| Franchisees | 1,910 | 1,730 | 10 |
|  | 14,102 | 12,409 | 14 |

29

### Non-GAAP Measures

In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides non-GAAP measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Earnings Per Common Share (“EPS”), Adjusted Effective Tax Rate and Adjusted EBITDA, which we define 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, certain non-cash expenses, consisting of depreciation and amortization as well as store impairment charges, and Special Items. We also use Restaurant profit and Restaurant margin (as defined in the Overview section within MD&A above) for the purpose of internally evaluating the performance of our Company-owned restaurants and we believe Restaurant profit and Restaurant margin provide useful information to investors as to the profitability of our Company-owned restaurants.

The following table sets forth the reconciliations of the most directly comparable GAAP financial measures to the non-GAAP adjusted financial measures.

### Non-GAAP Reconciliations

#### Reconciliation of GAAP Operating Profit to Restaurant Profit

|  | Quarter Ended 9/30/2023 KFC | Pizza Hut | All Other Segments | Corporate and Unallocated | Elimination | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| GAAP Operating Profit (Loss) | $342 | $47 | $(7) | $(59) | $— | $323 |
| Less: |  |  |  |  |  |  |
| Franchise fees and income | 16 | 2 | 5 | — | — | 23 |
| Revenues from transactions with franchisees | 12 | 1 | 20 | 67 | — | 100 |
| Other revenues | 4 | 5 | 162 | 12 | (151) | 32 |
| Add: |  |  |  |  |  |  |
| General and administrative expenses | 68 | 30 | 11 | 60 | — | 169 |
| Franchise expenses | 8 | 1 | — | — | — | 9 |
| Expenses for transactions with franchisees | 11 | 1 | 17 | 66 | — | 95 |
| Other operating costs and expenses | 3 | 4 | 160 | 12 | (150) | 29 |
| Restaurant profit (loss) | $400 | $75 | $(6) | $— | $1 | $470 |
| Company sales | 2,154 | 591 | 14 | — | — | 2,759 |
| Restaurant margin % | 18.6% | 12.7% | (36.1)% | N/A | N/A | 17.0% |

|  | Quarter Ended 9/30/2022 KFC | Pizza Hut | All Other Segments | Corporate and Unallocated | Elimination | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| GAAP Operating Profit (Loss) | $328 | $49 | $(9) | $(52) | $— | $316 |
| Less: |  |  |  |  |  |  |
| Franchise fees and income | 15 | 2 | 5 | — | — | 22 |
| Revenues from transactions with franchisees | 9 | 1 | 11 | 59 | — | 80 |
| Other revenues | 1 | 2 | 157 | 12 | (150) | 22 |
| Add: |  |  |  |  |  |  |
| General and administrative expenses | 63 | 27 | 12 | 55 | — | 157 |
| Franchise expenses | 8 | 1 | — | — | — | 9 |
| Expenses for transactions with franchisees | 8 | 1 | 9 | 58 | — | 76 |
| Other operating costs and expenses | 1 | 2 | 155 | 10 | (150) | 18 |
| Closures and impairment expenses, net | 3 | — | 1 | — | — | 4 |
| Other expenses, net | 24 | — | — | — | — | 24 |
| Restaurant profit (loss) | $410 | $75 | $(5) | $— | $— | $480 |
| Company sales | 1,992 | 556 | 13 | — | — | 2,561 |
| Restaurant margin % | 20.6% | 13.4% | (30.6)% | N/A | N/A | 18.8% |

30

|  | Year to Date Ended 9/30/2023 KFC | Pizza Hut | All Other Segments | Corporate and Unallocated | Elimination | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| GAAP Operating Profit (Loss) | $1,035 | $137 | $(20) | $(156) | $— | $996 |
| Less: |  |  |  |  |  |  |
| Franchise fees and income | 48 | 6 | 15 | — | — | 69 |
| Revenues from transactions with franchisees | 33 | 3 | 56 | 190 | — | 282 |
| Other revenues | 13 | 13 | 468 | 32 | (440) | 86 |
| Add: |  |  |  |  |  |  |
| General and administrative expenses | 203 | 89 | 32 | 161 | — | 485 |
| Franchise expenses | 24 | 3 | 1 | — | — | 28 |
| Expenses for transactions with franchisees | 29 | 3 | 50 | 188 | — | 270 |
| Other operating costs and expenses | 11 | 11 | 463 | 30 | (438) | 77 |
| Closures and impairment expenses, net | 9 | 5 | 3 | — | — | 17 |
| Other expenses (income), net | 2 | — | — | (1) | — | 1 |
| Restaurant profit (loss) | $1,219 | $226 | $(10) | $— | $2 | $1,437 |
| Company sales | 6,274 | 1,728 | 46 | — | — | 8,048 |
| Restaurant margin % | 19.4% | 13.1% | (21.6)% | N/A | N/A | 17.9% |

|  | Year to Date Ended 9/30/2022 KFC | Pizza Hut | All Other Segments | Corporate and Unallocated | Elimination | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| GAAP Operating Profit (Loss) | $670 | $90 | $(39) | $(133) | $— | $588 |
| Less: |  |  |  |  |  |  |
| Franchise fees and income | 44 | 6 | 15 | — | — | 65 |
| Revenues from transactions with franchisees | 24 | 3 | 29 | 163 | — | 219 |
| Other revenues | 6 | 6 | 407 | 31 | (388) | 62 |
| Add: |  |  |  |  |  |  |
| General and administrative expenses | 191 | 84 | 36 | 138 | — | 449 |
| Franchise expenses | 23 | 3 | 1 | — | — | 27 |
| Expenses for transactions with franchisees | 22 | 3 | 24 | 163 | — | 212 |
| Other operating costs and expenses | 4 | 5 | 406 | 28 | (390) | 53 |
| Closures and impairment expenses, net | 11 | 1 | 8 | — | — | 20 |
| Other expenses (income), net | 75 | — | — | (2) | — | 73 |
| Restaurant profit (loss) | $922 | $171 | $(15) | $— | $(2) | $1,076 |
| Company sales | 5,554 | 1,541 | 40 | — | — | 7,135 |
| Restaurant margin % | 16.6% | 11.1% | (36.3)% | N/A | N/A | 15.1% |

31

| Non-GAAP Reconciliations Reconciliation of Operating Profit to Adjusted Operating Profit | Quarter Ended 9/30/2023 | 9/30/2022 | Year to Date Ended 9/30/2023 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: |
| Operating Profit | $323 | $316 | $996 | $588 |
| Special Items, Operating Profit | (4) | (2) | (9) | (5) |
| Adjusted Operating Profit | $327 | $318 | $1,005 | $593 |
| **Reconciliation of Net Income to Adjusted Net Income** |  |  |  |  |
| Net Income – Yum China Holdings, Inc. | $244 | $206 | $730 | $389 |
| Special Items, Net Income –Yum China Holdings, Inc. | (4) | (2) | (9) | (5) |
| Adjusted Net Income – Yum China Holdings, Inc. | $248 | $208 | $739 | $394 |
| **Reconciliation of EPS to Adjusted EPS** |  |  |  |  |
| Basic Earnings Per Common Share | $0.59 | $0.49 | $1.75 | $0.92 |
| Special Items, Basic Earnings Per Common Share | (0.01) | — | (0.02) | (0.01) |
| Adjusted Basic Earnings Per Common Share | $0.60 | $0.49 | $1.77 | $0.93 |
| Diluted Earnings Per Common Share | $0.58 | $0.49 | $1.73 | $0.92 |
| Special Items, Diluted Earnings Per Common Share | (0.01) | — | (0.02) | (0.01) |
| Adjusted Diluted Earnings Per Common Share | $0.59 | $0.49 | $1.75 | $0.93 |
| **Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate** |  |  |  |  |
| Effective tax rate | 27.5% | 29.9% | 27.2% | 30.1% |
| Impact on effective tax rate as a result of Special Items | 0.3% | 0.2% | 0.2% | 0.2% |
| Adjusted effective tax rate | 27.2% | 29.7% | 27.0% | 29.9% |

Net income, along with the reconciliation to Adjusted EBITDA, is presented below.

| Reconciliation of Net Income to Adjusted EBITDA | Quarter Ended 9/30/2023 | 9/30/2022 | Year to Date Ended 9/30/2023 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: |
| Net Income – Yum China Holdings, Inc. | $244 | $206 | $730 | $389 |
| Net income – noncontrolling interests | 23 | 21 | 64 | 31 |
| Equity in net (earnings) losses from equity method investments | (2) | 2 | (2) | 4 |
| Income tax provision | 100 | 97 | 296 | 183 |
| Interest income, net | (46) | (25) | (124) | (51) |
| Investment loss | 4 | 15 | 32 | 32 |
| Operating Profit | 323 | 316 | 996 | 588 |
| Special Items, Operating Profit | 4 | 2 | 9 | 5 |
| Adjusted Operating Profit | 327 | 318 | 1,005 | 593 |
| Depreciation and amortization | 111 | 150 | 339 | 467 |
| Store impairment charges | 3 | 7 | 24 | 37 |
| Adjusted EBITDA | $441 | $475 | $1,368 | $1,097 |

Details of Special Items are presented below:

|  | Quarter Ended 9/30/2023 | 9/30/2022 | Year to Date Ended 9/30/2023 | 9/30/2022 |
| --- | ---: | ---: | ---: | ---: |
| Share-based compensation expense for Partner PSU Awards(1) | $(4) | $(2) | $(9) | $(5) |
| Special Items, Operating Profit | (4) | (2) | (9) | (5) |
| Tax effect on Special Items(2) | — | — | — | — |
| Special Items, net income – including noncontrolling interests | (4) | (2) | (9) | (5) |
| Special Items, net income – noncontrolling interests | — | — | — | — |
| Special Items, Net Income –Yum China Holdings, Inc. | $(4) | $(2) | $(9) | $(5) |
| Weighted-average Diluted Shares Outstanding (in millions) | 420 | 424 | 421 | 426 |
| Special Items, Diluted Earnings Per Common Share | $(0.01) | $— | $(0.02) | $(0.01) |

32

(1) In February 2020, the Company granted Partner PSU Awards to select employees who were deemed critical to the Company’s execution of its strategic operating plan. These PSU awards will only vest if threshold performance goals are achieved over a four-year performance period, with the payout ranging from 0% to 200% of the target number of shares subject to the PSU awards. Partner PSU Awards were granted to address increased competition for executive talent, motivate transformational performance and encourage management retention. Given the unique nature of these grants, the Compensation Committee does not intend to grant similar special grants to the same employees during the performance period. The impact from these special awards is excluded from metrics that management uses to assess the Company’s performance.

(2) Tax effect was determined based upon the nature, as well as the jurisdiction, of each Special Item at the applicable tax rate.

The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as 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 item.

These adjusted 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 adjusted 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 ongoing operations due to their nature.

### Segment Results

### KFC

|  | Quarter Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported |  | Ex F/X |  | Year to Date Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported |  | Ex F/X |  |
| --- | ---: | ---: | ---: | --- | ---: | --- | ---: | ---: | ---: | --- | ---: | --- |
| Company sales | $2,154 | $1,992 | 8 |  | 15 |  | $6,274 | $5,554 | 13 |  | 20 |  |
| Franchise fees and income | 16 | 15 | 6 |  | 13 |  | 48 | 44 | 9 |  | 16 |  |
| Revenues from transactions with franchisees | 12 | 9 | 40 |  | 48 |  | 33 | 24 | 38 |  | 47 |  |
| Other revenues | 4 | 1 | 152 |  | 166 |  | 13 | 6 | 114 |  | 129 |  |
| Total revenues | $2,186 | $2,017 | 8 |  | 15 |  | $6,368 | $5,628 | 13 |  | 21 |  |
| Company restaurant expenses | $1,754 | $1,582 | (11) |  | (17) |  | $5,055 | $4,632 | (9) |  | (16) |  |
| G&A expenses | $68 | $63 | (10) |  | (16) |  | $203 | $191 | (7) |  | (14) |  |
| Franchise expenses | $8 | $8 | 2 |  | (4) |  | $24 | $23 | — |  | (7) |  |
| Expenses for transactions with franchisees | $11 | $8 | (35) |  | (43) |  | $29 | $22 | (33) |  | (42) |  |
| Other operating costs and expenses | $3 | $1 | (201) |  | (216) |  | $11 | $4 | (159) |  | (175) |  |
| Closures and impairment expenses, net | $— | $3 | 99 |  | 99 |  | $9 | $11 | 18 |  | 14 |  |
| Other expenses, net | $— | $24 | 100 |  | 99 |  | $2 | $75 | 97 |  | 97 |  |
| Operating Profit | $342 | $328 | 4 |  | 10 |  | $1,035 | $670 | 54 |  | 63 |  |
| Restaurant profit | $400 | $410 | (2) |  | 4 |  | $1,219 | $922 | 32 |  | 40 |  |
| Restaurant margin % | 18.6% | 20.6% | (2.0) | ppts. | (2.0) | ppts. | 19.4% | 16.6% | 2.8 | ppts. | 2.8 | ppts. |

|  | Quarter Ended 9/30/2023 % change | Year to Date Ended 9/30/2023 % change |
| --- | ---: | ---: |
| System Sales Growth | 9% | 13% |
| System Sales Growth, excluding F/X | 15% | 21% |
| Same-Store Sales Growth | 4% | 9% |

33

| Unit Count | 9/30/2023 | 9/30/2022 | % Increase |
| --- | ---: | ---: | ---: |
| Company-owned | 8,915 | 7,852 | 14 |
| Franchisees | 1,002 | 823 | 22 |
|  | 9,917 | 8,675 | 14 |

### Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:

| Income (Expense) | Quarter Ended 9/30/2022 | Store Portfolio Actions | Other | F/X | 9/30/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Company sales | $1,992 | $214 | $76 | $(128) | $2,154 |
| Cost of sales | (607) | (73) | (26) | 40 | (666) |
| Cost of labor | (449) | (59) | (51) | 31 | (528) |
| Occupancy and other operating expenses | (526) | (46) | (20) | 32 | (560) |
| Restaurant profit | $410 | $36 | $(21) | $(25) | $400 |

| Income (Expense) | Year to Date Ended 9/30/2022 | Store Portfolio Actions | Other | F/X | 9/30/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Company sales | $5,554 | $649 | $479 | $(408) | $6,274 |
| Cost of sales | (1,712) | (214) | (114) | 126 | (1,914) |
| Cost of labor | (1,363) | (151) | (127) | 103 | (1,538) |
| Occupancy and other operating expenses | (1,557) | (114) | (38) | 106 | (1,603) |
| Restaurant profit | $922 | $170 | $200 | $(73) | $1,219 |

The increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by net unit growth, same-store sales growth and reduced temporary store closures. The increase in Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Company sales, favorable commodity prices and the increase in VAT deductions, partially offset by lapping the austerity measures in the prior year, increased value promotions, lower temporary relief and wage inflation in the mid-single digits.

The year to date increase in Company sales, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth and significantly reduced temporary store closures. The year to date increase in Restaurant profit, excluding the impact of F/X, was primarily driven by the increase in Company sales, the increase in VAT deductions and favorable commodity prices, partially offset by increased value promotions, wage inflation in the low single digits and lower temporary relief.

### 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 net unit growth and same-store sales growth.

### G&A Expenses

The quarter and year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher performance-based compensation, merit increases and higher travel expenses from the resumption of business travel.

### Other Expenses, net

The quarter and year to date decrease in Other expenses, net, excluding the impact of F/X, was primarily due to intangible assets related to reacquired franchise rights of Hangzhou KFC, Suzhou KFC and Wuxi KFC being substantially amortized as of December 31, 2022. See Note 8 for detail.

### Operating Profit

The quarter and year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit and decrease in Other expenses, net, partially offset by higher G&A expenses.

### Pizza Hut

|  | Quarter Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported |  | Ex F/X |  | Year to Date Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported |  | Ex F/X |  |
| --- | ---: | ---: | ---: | --- | ---: | --- | ---: | ---: | ---: | --- | ---: | --- |
| Company sales | $591 | $556 | 6 |  | 13 |  | $1,728 | $1,541 | 12 |  | 19 |  |
| Franchise fees and income | 2 | 2 | 15 |  | 22 |  | 6 | 6 | 5 |  | 12 |  |
| Revenues from transactions with franchisees | 1 | 1 | 11 |  | 17 |  | 3 | 3 | 11 |  | 19 |  |
| Other revenues | 5 | 2 | 126 |  | 138 |  | 13 | 6 | 132 |  | 147 |  |
| Total revenues | $599 | $561 | 7 |  | 13 |  | $1,750 | $1,556 | 13 |  | 20 |  |
| Company restaurant expenses | $516 | $481 | (7) |  | (14) |  | $1,502 | $1,370 | (10) |  | (17) |  |
| G&A expenses | $30 | $27 | (13) |  | (19) |  | $89 | $84 | (6) |  | (13) |  |
| Franchise expenses | $1 | $1 | (13) |  | (20) |  | $3 | $3 | (7) |  | (14) |  |
| Expenses for transactions with franchisees | $1 | $1 | (12) |  | (18) |  | $3 | $3 | (11) |  | (19) |  |
| Other operating costs and expenses | $4 | $2 | (127) |  | (138) |  | $11 | $5 | (129) |  | (143) |  |
| Closures and impairment expenses, net | $— | $— | 19 |  | 20 |  | $5 | $1 | NM |  | NM |  |
| Operating Profit | $47 | $49 | (5) |  | 1 |  | $137 | $90 | 52 |  | 60 |  |
| Restaurant profit | $75 | $75 | — |  | 7 |  | $226 | $171 | 32 |  | 40 |  |
| Restaurant margin % | 12.7% | 13.4% | (0.7) | ppts. | (0.7) | ppts. | 13.1% | 11.1% | 2.0 | ppts. | 2.0 | ppts. |

|  | Quarter Ended 9/30/2023 % change | Year to Date Ended 9/30/2023 % change |
| --- | ---: | ---: |
| System Sales Growth | 6% | 12% |
| System Sales Growth, excluding F/X | 13% | 19% |
| Same-Store Sales Growth | 2% | 7% |

| Unit Count | 9/30/2023 | 9/30/2022 | % Increase |
| --- | ---: | ---: | ---: |
| Company-owned | 3,047 | 2,666 | 14 |
| Franchisees | 155 | 140 | 11 |
|  | 3,202 | 2,806 | 14 |

### Company Sales and Restaurant Profit

The changes in Company sales and Restaurant profit were as follows:

| Income (Expense) | Quarter Ended 9/30/2022 | Store Portfolio Actions | Other | F/X | 9/30/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Company sales | $556 | $65 | $7 | $(37) | $591 |
| Cost of sales | (176) | (21) | (2) | 12 | (187) |
| Cost of labor | (149) | (17) | (10) | 9 | (167) |
| Occupancy and other operating expenses | (156) | (15) | (1) | 10 | (162) |
| Restaurant profit | $75 | $12 | $(6) | $(6) | $75 |

| Income (Expense) | Year to Date Ended 9/30/2022 | Store Portfolio Actions | Other | F/X | 9/30/2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Company sales | $1,541 | $201 | $98 | $(112) | $1,728 |
| Cost of sales | (481) | (64) | (27) | 35 | (537) |
| Cost of labor | (437) | (52) | (40) | 33 | (496) |
| Occupancy and other operating expenses | (452) | (43) | (5) | 31 | (469) |
| Restaurant profit | $171 | $42 | $26 | $(13) | $226 |

35

The increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by net unit growth, reduced temporary store closures and same-store sales growth. The increase in Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by the increase in Company sales, favorable commodity prices, decreased rider cost associated with an increase in dine-in sales mix from the prior year period and the increase in VAT deductions, partially offset by lower temporary relief, lapping the austerity measures in the prior year, increased value promotions and wage inflation in the low single digits.

The year to date increase in Company sales, excluding the impact of F/X, was primarily driven by net unit growth, same-store sales growth and significantly reduced temporary store closures. The year to date increase in Restaurant profit, excluding the impact of F/X, was primarily driven by the increase in Company sales, favorable commodity prices and the increase in VAT deductions, partially offset by lower temporary relief, increased value promotions and wage inflation in the low single digits.

### G&A Expenses

The quarter and year to date increase in G&A expenses, excluding the impact of F/X, was primarily driven by higher performance-based compensation, merit increases and higher travel expenses from the resumption of business travel.

### Operating Profit

The quarter and year to date increase in Operating profit, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit, partially offset by higher G&A expenses.

### All Other Segments

All Other Segments reflects the results of Taco Bell, Lavazza, Little Sheep, Huang Ji Huang, our delivery operating segment and our e-commerce business, and for 2022, also includes COFFii & JOY and East Dawning.

|  | Quarter Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported |  | Ex F/X |  | Year to Date Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported |  | Ex F/X |  |
| --- | ---: | ---: | ---: | --- | ---: | --- | ---: | ---: | ---: | --- | ---: | --- |
| Company sales | $14 | $13 | 8 |  | 14 |  | $46 | $40 | 16 |  | 24 |  |
| Franchise fees and income | 5 | 5 | 7 |  | 13 |  | 15 | 15 | 4 |  | 11 |  |
| Revenues from transactions with franchisees | 20 | 11 | 75 |  | 85 |  | 56 | 29 | 94 |  | 107 |  |
| Other revenues | 162 | 157 | 3 |  | 9 |  | 468 | 407 | 15 |  | 22 |  |
| Total revenues | $201 | $186 | 8 |  | 14 |  | $585 | $491 | 19 |  | 27 |  |
| Company restaurant expenses | $20 | $18 | (13) |  | (19) |  | $56 | $55 | (4) |  | (11) |  |
| G&A expenses | $11 | $12 | 14 |  | 9 |  | $32 | $36 | 13 |  | 8 |  |
| Franchise expenses | $— | $— | 1 |  | (5) |  | $1 | $1 | 14 |  | 8 |  |
| Expenses for transactions with franchisees | $17 | $9 | (87) |  | (97) |  | $50 | $24 | (108) |  | (122) |  |
| Other operating costs and expenses | $160 | $155 | (3) |  | (9) |  | $463 | $406 | (14) |  | (21) |  |
| Closures and impairment expenses, net | $— | $1 | NM |  | NM |  | $3 | $8 | 62 |  | 59 |  |
| Operating Loss | $(7) | $(9) | 36 |  | 32 |  | $(20) | $(39) | 53 |  | 49 |  |
| Restaurant loss | $(6) | $(5) | (28) |  | (36) |  | $(10) | $(15) | 31 |  | 25 |  |
| Restaurant margin % | (36.1)% | (30.6)% | (5.5) | ppts. | (5.5) | ppts. | (21.6)% | (36.3)% | 14.7 | ppts. | 14.7 | ppts. |

|  | Quarter Ended 9/30/2023 % change | Year to Date Ended 9/30/2023 % change |
| --- | ---: | ---: |
| Same-Store Sales Growth | 11% | 10% |

### 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, as well as revenue generated from delivery services provided to franchisees.

### Operating Loss

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.

### Corporate and Unallocated

|  | Quarter Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported | Ex F/X | Year to Date Ended 9/30/2023 | 9/30/2022 | % B/(W) Reported | Ex F/X |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues from transactions with franchisees | $67 | $59 | 14 | 21 | $190 | $163 | 16 | 24 |
| Other revenues | $12 | $12 | 3 | 9 | $32 | $31 | 3 | 10 |
| Expenses for transactions with franchisees | $66 | $58 | (13) | (20) | $188 | $163 | (15) | (23) |
| Other operating costs and expenses | $12 | $10 | (22) | (30) | $30 | $28 | (10) | (17) |
| Corporate G&A expenses | $60 | $55 | (9) | (13) | $161 | $138 | (18) | (23) |
| Other unallocated income, net | $— | $— | (62) | (61) | $(1) | $(2) | (41) | (34) |
| Interest income, net | $46 | $25 | 86 | 88 | $124 | $51 | 145 | 149 |
| Investment loss | $(4) | $(15) | 75 | 75 | $(32) | $(32) | (1) | (1) |
| Income tax provision (See Note 14) | $(100) | $(97) | (3) | (9) | $(296) | $(183) | (62) | (70) |
| Equity in net earnings (losses) from equity method investments | $2 | $(2) | NM | NM | $2 | $(4) | NM | NM |
| Effective tax rate (See Note 14) | 27.5% | 29.9% | 2.4% | 2.4% | 27.2% | 30.1% | 2.9% | 2.9% |

### Revenues from Transactions with Franchisees

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.

### G&A Expenses

The quarter and year to date increase in Corporate G&A expenses, excluding the impact of F/X, was primarily due to higher performance-based compensation and merit increases.

### Interest Income, Net

The quarter and year to date increase in interest income, net, excluding the impact of F/X, was primarily driven by higher interest rates and higher investment balance.

### Investment Loss

The investment 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 at 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, 2023 was primarily due to a reduction in valuation allowance for improved performance at certain subsidiaries and an increase in benefits from preferential tax treatment at qualified subsidiaries. The lower effective tax rate for the year to date ended September 30, 2023 was primarily due to a reduction in valuation allowance for improved performance at certain subsidiaries, an increase in benefits from preferential tax treatment at qualified subsidiaries and the impact of higher pre-tax income.

### Significant Known Events, Trends or Uncertainties Expected to Impact Future Results

#### Impact of COVID-19 Pandemic

Starting in late January 2020, the COVID-19 pandemic significantly impacted the Company’s operations and financial results and caused significant volatility in our operations. The Company’s tremendous efforts in seizing opportunities as the country pivoted from strict COVID-19 measures drove strong sales growth in 2023. Same-store sales growth was solid on a year-over-year basis, and maintained at approximately 90% of the 2019 level in the quarter. But we observed softening consumer demand emerged in late September through October. For the fourth quarter of 2023, the temporary relief we received last year is not expected to recur, and we are returning to more normalized operations and staffing levels at our restaurants compared to last year when we faced widespread COVID-19 infections.

The post-pandemic economic recovery is shaping up to be a “wave-like” and “non-linear” process. We continue to expect uncertain macroeconomic conditions, wage inflation over the coming quarters, lapping of prior year temporary relief and potential phase-out of VAT deductions. As such, we are staying alert with vigorous scenario planning, more flexible cost structures and operational agility to capture growth opportunities and mitigate risks when needed.

#### 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, on 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, 2023, 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 the benefits of certain VAT assets are expected to be realized within one year pursuant to Circular \[2022\] No. 21, $303 million of VAT assets as of June 30, 2022 were reclassified from Other assets to Prepaid expenses and other current assets. As of September 30, 2023, VAT assets of $84 million, VAT assets of $6 million and net VAT payable of $6 million were recorded in Prepaid expenses and other current assets, Other assets and Accounts payable and other current liabilities, respectively, on 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 are allowed to claim an additional 10% or 15% input VAT, which will be 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. It is uncertain whether such preferential policy will continue to be applicable upon expiration. Subsequent to the lump sum refund of VAT assets beginning on July 1, 2022 pursuant to Circular \[2022\] No. 21, the number of subsidiaries meeting required criteria for additional VAT deductions increased. Accordingly, we recognized such VAT deductions of $8 million in each of the third and fourth quarters of 2022, and $19 million, $9 million and $14 million in the first, second and third quarters of 2023, respectively. 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.

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 years to date ended September 30, 2023 and 2022 were as follows:

**Net cash provided by operating activities** was $1,334 million in 2023 as compared to $1,329 million in 2022. The increase was primarily driven by the increase in net income, partially offset by lapping of refunds of VAT assets in 2022.

**Net cash used in investing activities** was $1,052 million in 2023 as compared to $593 million in 2022. The increase was mainly due to net impact on cash flow resulting from purchases and maturities of short-term investments, long-term bank deposits and notes.

**Net cash used in financing activities** was $240 million in 2023 as compared to $583 million in 2022. The decrease was primarily driven by the proceeds from short-term bank borrowings and the decrease in share repurchases.

### Liquidity and Capital Resources

Historically we have funded our operations through cash generated from the operation of our Company-owned stores, our franchise operations and dividend payments from our former unconsolidated affiliates. 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 2023 capital expenditures to be in the range of approximately $700 million to $900 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:

- our financial performance;
- our credit ratings;
- the liquidity of the overall capital markets and our access to the U.S. capital markets; and
- the state of the Chinese, U.S. and global economies, as well as relations between the Chinese and U.S. governments.

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 March 17, 2022, our Board of Directors increased the share repurchase authorization by $1 billion to an aggregate of $2.4 billion. Yum China may repurchase shares under this program 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. During the years to date ended September 30, 2023 and 2022, the Company repurchased 4.9 million shares of common stock for $281 million and 9.3 million shares of common stock for $413 million, respectively, under the repurchase program.

For the quarters ended September 30, 2023 and 2022, the Company paid cash dividends of approximately $54 million and $51 million, respectively, and for the years to date ended September 30, 2023 and 2022, the Company paid cash dividends of approximately $162 million and $152 million, respectively, to stockholders through a quarterly dividend payment of $0.13 and $0.12 per share, respectively.

On October 31, 2023, the Board of Directors declared a cash dividend of $0.13 per share, payable on December 19, 2023, to stockholders of record as of the close of business on November 28, 2023. The total estimated cash dividend payable is approximately $54 million.

On November 2, 2023, the Company announced that the Board of Directors increased the share repurchase authorization by $1 billion to an aggregate of $3.4 billion. With the increase of share repurchase authorization, approximately $1.8 billion remained available for future share repurchases under the authorization.

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 law, 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, 2023, the Company had credit facilities of RMB4,906 million (approximately $672 million), comprised of onshore credit facilities in the aggregate amount of RMB3,300 million (approximately $452 million) and offshore credit facilities in the aggregate amount of $220 million.

The credit facilities had remaining terms ranging from less than one year to three years as of September 30, 2023. 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, 2023, we had outstanding short-term bank borrowings of RMB1,532 million (approximately $210 million), mainly to manage working capital at our operating subsidiaries. Such bank borrowings were secured by $106 million short-term investments, and are due within one year from their issuance dates. As of September 30, 2023, we also had outstanding bank guarantees of RMB229 million (approximately $31 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, 2023, the Company had unused credit facilities of approximately $535 million.

### Off-Balance Sheet Arrangements

See the Guarantees section of Note 16 for discussion of our off-balance sheet arrangements.

### New Accounting Pronouncements

#### Recently Adopted Accounting Pronouncements

See Note 2 for details of recently adopted accounting pronouncements.

#### New Accounting Pronouncements Not Yet Adopted

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 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. 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:

- Risks related to our business and industry, such as (a) food safety and foodborne illness concerns, (b) significant failure to maintain effective quality assurance systems for our restaurants, (c) significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering, (d) health concerns arising from outbreaks of viruses or other illnesses, including the COVID-19 pandemic, (e) the fact that the operation of our restaurants is subject to the terms of the master license agreement with YUM, (f) the fact that substantially all of our revenue is derived from our operations in China, (g) the fact that our success is tied to the success of YUM’s brand strength, marketing campaigns and product innovation, (h) shortages or interruptions in the availability and delivery of food products and other supplies, (i) fluctuation of raw materials prices, (j) our inability to attain our target development goals, the potential cannibalization of existing sales by aggressive development and the possibility that new restaurants will not be profitable, (k) risks associated with leasing real estate, (l) inability to obtain desirable restaurant locations on commercially reasonable terms, (m) labor shortages or increases in labor costs, (n) the fact that our success depends substantially on our corporate reputation and on the value and perception of our brands, (o) the occurrence of security breaches and cyber-attacks, (p) failure to protect the integrity and security of our customer or employee personal, financial or other data or our proprietary or confidential information that is stored in our information systems or by third parties on our behalf, (q) failures or interruptions of service or security breaches in our information technology systems, (r) the fact that our business depends on the performance of, and our long-term relationships with, third-party mobile payment processors, internet infrastructure operators, internet service providers and delivery aggregators, (s) failure to provide timely and reliable delivery services by our restaurants, (t) our growth strategy with respect to Lavazza may not be successful, (u) the anticipated benefits of our acquisitions may not be realized in a timely manner or at all, (v) challenges and risks related to our new retail and e-commerce businesses, (w) our inability or failure to recognize, respond to and effectively manage the impact of social media, (x) failure to comply with anti-bribery or anti-corruption laws, (y) U.S. federal income taxes, changes in tax rates, disagreements with tax authorities and imposition of new taxes, (z) changes in consumer discretionary spending and general economic conditions, (aa) the fact that the restaurant industry in which we operate is highly competitive, (bb) loss of or failure to obtain or renew any or all of the approvals, licenses and permits to operate our business, (cc) our inability to adequately protect the intellectual property we own or have the right to use, (dd) our licensor’s failure to protect its intellectual property, (ee) seasonality and certain major events in China, (ff) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, (gg) the fact that our success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to recruit new talent, (hh) our strategic investments or acquisitions may be unsuccessful; (ii) our investment in technology and innovation may not generate the expected level of returns, and (jj) fair value changes for our investment in equity securities and lower yields of our short-term investments may adversely affect our financial condition and results of operations;
- Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations, which may be subject to change from time to time with little advance notice, and the risk that the PRC government may intervene or influence our operations at any time, which could result in a material change in our operations and/or the value of our securities to decline, (c) audit reports included in our annual reports prepared by auditors who are located in China, and in the event the PCAOB is unable to inspect our auditors, our common stock will be subject to potential delisting from the New York Stock Exchange, (d) changes in political, business, economic and trade relations between the United States and China, (e) fluctuation in the value of the Chinese Renminbi, (f) the fact that we face increasing focus on environmental sustainability issues, (g) limitation on our ability to utilize our cash balances effectively, including making funds held by our China-based subsidiaries unavailable for use outside of mainland China, due to interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency and RMB out of mainland China, (h) changes in the laws and regulations of China or noncompliance with applicable laws and regulations, (i) reliance on dividends and other distributions on equity paid by our principal subsidiaries in China to fund offshore cash requirements, (j) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, (k) uncertainty regarding indirect transfers of equity interests in China resident enterprises and enhanced scrutiny by Chinese tax authorities, (l) difficulties in effecting service of legal process, conducting investigations, collecting evidence, enforcing foreign judgments or bringing original actions in China against us, (m) the Chinese government may determine that the variable interest entity structure of Daojia does not comply with Chinese laws on foreign investment in restricted industries, (n) inability to use properties due to defects caused by non-registration of lease agreements related to certain properties, (o) risk in relation to unexpected land acquisitions, building closures or demolitions, (p) potential fines and other legal or administrative sanctions for failure to comply with Chinese regulations regarding our employee equity incentive plans and various employee benefit plans, (q) proceedings instituted by the SEC against certain China-based accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act, (r) restrictions on our ability to make loans or additional capital contributions to our Chinese subsidiaries due to Chinese regulation of loans to, and direct investment in, Chinese entities by offshore holding companies and governmental control of currency conversion, (s) difficulties in pursuing growth through acquisitions due to regulations regarding acquisitions, and (t) the PRC government has significant oversight and discretion to exert control over offerings of securities conducted outside of China and over foreign investment in China-based issuers, and may limit or completely hinder our ability to offer securities to investors, or cause the value of our securities to significantly decline;
- Risks related to the separation and related transactions, such as (a) incurring significant tax liabilities if the distribution does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes and the Company could be required to indemnify YUM for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement, (b) being obligated to indemnify YUM for material taxes and related amounts pursuant to indemnification obligations under the tax matters agreement if YUM is subject to Chinese indirect transfer tax with respect to the distribution, (c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement, (d) the indemnity provided by YUM to us with respect to certain liabilities in connection with the separation may be insufficient to insure us against the full amount of such liabilities, (e) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, and (f) potential liabilities due to fraudulent transfer considerations; and
- General risks, such as (a) potential legal proceedings, (b) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (c) failure of our insurance policies to provide adequate coverage for claims associated with our business operations, (d) unforeseeable business interruptions, and (e) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of the SEC.

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, 2022) 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.

## Market risk

As filed, 1,935 characters.

### 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 at predetermined exchange rates with third parties to purchase certain amount of goods and services sourced overseas and make payments in the corresponding local currencies when practical, to minimize the related foreign currency exposure with immaterial impact on our financial statements.

As substantially all of the Company’s assets 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, 2023, the Company’s Operating profit would have decreased by approximately $31 million and $95 million, respectively, if the RMB weakened 10% relative to the US$. 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 risks 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.

## Controls and procedures

As filed, 1,016 characters.

#### 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, 2023 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 487 characters.

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, 2022, which was filed with the SEC on March 1, 2023.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-061471. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.