
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware		81-2421743
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

~~7100 Corporate Drive~~101 East Park Boulevard, Suite 805 Plano, Texas ~~75024~~75074 United States of America		~~16/F Two Grand Gateway~~Yum China Building ~~3 Hong~~20 Tian Yao Qiao Road Shanghai200030 People’s Republic of China

(Address, Including Zip Code, of Principal Executive Offices)

(469) 980-2898

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
~~(Address, Including Zip Code, of Principal Executive Offices)~~Common Stock, par value $0.01 per share	~~(469) 980-2898~~YUMC	New York Stock Exchange
	~~(Registrant’s Telephone Number, Including Area Code)~~ 9987
~~Not Applicable~~ ~~(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)~~The Stock Exchange of Hong Kong Limited


Large accelerated filer	☐☒	Accelerated filer	☐
~~Non-accelerated filer~~	☒ ~~(Do not check if a small reporting company)~~	~~Smaller reporting company~~	☐
Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

~~Item 1.~~

~~Financial Statements~~

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016

Net income - including noncontrolling interests

$
221

$
202

$
514

$
424

Other comprehensive income, net of tax of nil:

Foreign currency gains (losses) arising during the period

76

(28
)

111

(57
)

Comprehensive income - including noncontrolling interests

297

174

625

367

Comprehensive income - noncontrolling interests

12

8

24

9

Comprehensive Income - Yum China Holdings, Inc.

$
285

$
166

$
601

$
358

Note 1 – Description of ~~the~~ Business

Yum China Holdings, Inc. (“Yum China” and, together with its subsidiaries, the “Company,” “we,” “us” and “our”) was incorporated in Delaware on April 1, ~~2016. The Company separated from Yum! Brands, Inc. (“YUM” or the “Parent”) on October 31,~~ 2016 (the “separation”), becoming an independent publicly traded company as a result of a pro rata distribution (the “distribution”) of all outstanding shares of Yum China common stock to shareholders of YUM. On October 31, 2016, YUM’s shareholders of record as of 5:00 p.m. Eastern Time on October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. Yum China’s common stock began trading “regular way” under the ticker symbol “YUMC” on the New York Stock Exchange on November 1, 2016..

The Company owns, franchises or has an ownership in entities that own and operate restaurants (also referred to as “stores” or “units”) under the KFC, Pizza Hut, ~~East Dawning,~~Taco Bell, Lavazza, Little Sheep and ~~Taco Bell~~Huang Ji Huang concepts (collectively, the ~~“Concepts”~~“concepts”). In connection with the separation of the Company in 2016 from ~~YUM,~~its former parent company, Yum! ~~Restaurants Asia Pte. Ltd.~~Brands, Inc. (“YUM”), a ~~wholly-owned indirect subsidiary of YUM, and~~master license agreement was entered into between Yum Restaurants Consulting (Shanghai) Company Limited (“YCCL”), a wholly-owned indirect subsidiary of ~~Yum~~the Company and YUM, through YRI China ~~entered into~~Franchising LLC, a ~~50-year master license agreement with automatic renewals for additional consecutive renewal terms~~subsidiary of ~~50 years each, subject only~~YUM, effective from January 1, 2020 and previously through Yum! Restaurants Asia Pte. Ltd., another subsidiary of YUM, from October 31, 2016 to ~~YCCL being in “good standing” and unless YCCL gives notice of its intent not to renew,~~December 31, 2019, for the exclusive right to use and ~~sub-license~~sublicense the use of intellectual property owned by YUM and its subsidiaries for the development and operation of the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones amended in April 2022, Taco Bell brands and their related marks and other intellectual property rights for restaurant services in the People’s Republic of China ~~excluding Hong Kong, Taiwan and Macau~~ (the “PRC” or “China”)., excluding Hong Kong, Macau and Taiwan. The term of the license is 50 years from October 31, 2016 for the KFC and Pizza Hut brands and, subject to achieving certain agreed-upon milestones, 50 years from April 15, 2022 for the Taco Bell brand, with automatic renewals for additional consecutive renewal terms of 50 years each, subject only to us being in “good standing” and unless we give notice of our intent not to renew. In exchange, we pay a license fee to YUM equal to 3%3% of net system sales from both our Company and franchise restaurants. We own the ~~East Dawning and~~intellectual property of Little Sheep ~~intellectual property~~and Huang Ji Huang and pay no license fee related to these concepts.

~~During~~In 1987, KFC was the first major global restaurant brand to enter China. As of March 31, 2023, there were over 9,200 KFC stores in China. We maintain a controlling interest of 58%, 70%, 83%, 92% and approximately 60% in the entities that own and operate the KFCs in and around Shanghai, Beijing, Wuxi, Suzhou and Hangzhou, respectively.

The first Pizza Hut in China opened in 1990. As of March 31, 2023, there were over 2,900 Pizza Hut restaurants in China.

In the second quarter ~~ended May 31,~~of 2020, the Company partnered with Luigi Lavazza S.p.A. (“Lavazza Group”), the world renowned family-owned Italian coffee company, and entered into a joint venture to explore and develop the Lavazza coffee concept in China. In September 2021, the Company and Lavazza Group entered into agreements for the previously formed joint venture (“Lavazza joint venture”) to accelerate the expansion of Lavazza coffee shops in China. Upon execution of these agreements, the Company controls and consolidates the joint venture with its 65% equity interest. The acquisition was considered immaterial.

In 2017, the Company ~~completed the acquisition of~~acquired a controlling interest in the holding company of DAOJIA.com.cn (“Daojia”), an ~~established~~ online food delivery service ~~provider.~~ provider in China. This business was extended to also include a team managing the delivery services for restaurants, including restaurants in our system, with their results reported under our delivery operating segment.

As part of our strategy to drive growth from off-premise occasions, we also developed our own retail brand operations, Shaofaner, which sells packaged foods through online and offline channels. The operating results of Shaofaner are included in our e-commerce business operating segment.

The Company agreed to pay cash consideration of $36.7 million to the sellers and made a concurrent capital contribution of $25.0 million to Daojia. As of the completion of the acquisition, the Company held 90% of Daojia’s outstanding shares of common stock, or 80% of its equity interests on a fully-diluted basis. Daojia became an operating segment of the Company. The acquisition was considered immaterial.

~~During the quarter ended May 31, 2017, Pizza Hut Casual Dining and Pizza Hut Home Service were combined and reported together as the Pizza Hut reportable segment. As a result, the Company~~ has two reportable segments: KFC ~~which remains unchanged,~~ and Pizza Hut. Our remaining operating segments, including the operations of ~~East Dawning,~~Taco Bell, Lavazza, Little Sheep, ~~Taco Bell~~Huang Ji Huang, our delivery operating segment and ~~Daojia,~~our e-commerce business, are combined and referred to as All Other Segments, as those operating segments are insignificant both individually and in the aggregate. ~~Segment financial information for prior periods has been recast~~For 2022, All Other Segments also included COFFii & JOY and East Dawning. The Company decided to ~~align with this change in segment reporting. There was no impact to~~wind down the ~~consolidated and combined financial statements~~operations of the East Dawning brand in 2021, and closed all stores by March 2022. In addition, the Company asdecided to wind down the operations of COFFii & JOY and closed all stores in 2022. Additional details on our segment reporting are included in Note 14.

The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “YUMC”. On September 10, 2020, the Company completed a ~~result~~secondary listing of ~~this change.~~its common stock on the Main Board of the Hong Kong Stock Exchange (“HKEX”) under the stock code “9987,” in connection with a global offering of 41,910,700 shares of its common stock. Net proceeds raised by the Company from the global offering after deducting underwriting fees and the offering expenses amounted to $2.2 billion. On October 24, 2022, the Company’s voluntary conversion of its secondary listing status to a primary listing status on the HKEX became effective (“Primary Conversion”) and the Company became a dual primary listed company on the NYSE and HKEX. On the same day, the Company’s shares of common stock traded on the HKEX were included in the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. The Company’s common stock listed on the NYSE and HKEX continue to be fully fungible.

Note 2 – Basis of Presentation

In connection with our separation from YUM, the direct and indirect equity interests of all of our operating subsidiaries and intermediate holding companies were transferred from YUM to Yum China, when Yum China was still one of YUM’s subsidiaries, through a series of transactions, which were completed in August 2016. The Company separated from YUM on October 31, 2016, becoming an independent publicly traded company as a result of a pro rata distribution of all outstanding shares of Yum China common stock to shareholders of YUM.

The financial statements presented herein represent (i) for periods prior to October 31, 2016, the combined financial statements of YUM’s China businesses and operations when Yum China was a wholly-owned subsidiary of YUM (referred to as “Condensed Combined Financial Statements”) and (ii) for periods subsequent to October 31, 2016, the consolidated financial statements of the Company as a separate publicly traded company following its separation from YUM (referred to as “Condensed Consolidated Financial Statements” and, together with the Condensed Combined Financial Statements, referred to as the “Condensed Consolidated and Combined Financial Statements”).

Our preparation of the accompanying Condensed Consolidated ~~and Combined~~ Financial Statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The accompanying Condensed Combined Financial Statements have been prepared on a standalone basis and are derived from YUM’s consolidated financial statements and underlying accounting records. Transactions between the Company and YUM that were not cash settled were considered to be effectively settled at the time the transactions were recorded. The Condensed Combined Financial Statements include all revenues, costs, assets and liabilities directly attributable to the Company either through specific identification or allocation. The Condensed Combined Statements of Income include allocations for certain of YUM’s Corporate functions that provided a direct benefit to the Company. These costs have been allocated based on Company system sales relative to YUM’s global system sales. System sales includes the sales results of all restaurants regardless of ownership. All allocated costs have been deemed to have been paid to YUM in the period in which the costs were recorded. The Company considers the cost allocation methodology and results for the periods prior to October 31, 2016 to be reasonable. However, the allocations may not be indicative of the actual expense that would have been incurred had the Company operated as an independent publicly traded company for the periods prior to October 31, 2016. Upon the separation, Parent Company Investment was adjusted as a result of settlement of certain assets and liabilities with YUM and formed the Company’s common stock and additional paid-in capital. See Note 3 for further discussion.

We have prepared the Condensed Consolidated ~~and Combined~~ Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Condensed Consolidated ~~and Combined~~ Financial Statements include all normal and recurring adjustments considered necessary to present fairly our financial position as of ~~August~~March 31, ~~2017,~~2023, and ~~the~~our results of ~~our~~ operations, ~~and~~ comprehensive income ~~for the quarters and years to date ended August 31, 2017 and 2016,~~ and cash flows for the ~~years to date~~quarters ended ~~August~~March 31, ~~2017~~2023 and ~~2016.~~2022. Our results of operations, comprehensive income and cash flows for these interim periods are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the ~~Consolidated and Combined Financial Statements~~consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on March ~~8, 2017.~~1, 2023.

Through the acquisition of Daojia, the Company also acquired a variable interest entity (“VIE”) and subsidiaries of the VIE effectively controlled by Daojia. There exists a parent-subsidiary relationship between Daojia and its VIE as a result of certain exclusive agreements that require Daojia to consolidate its VIE and subsidiaries of the VIE because Daojia is the primary beneficiary that possesses the power to direct the activities of the VIE that most significantly impact its economic performance, and ~~has the obligation~~is entitled to ~~absorb~~ substantially all of the profits and has the obligation to absorb all of the expected losses of the VIE. The acquired VIE and its subsidiaries were considered immaterial, both individually and in the aggregate. The results of Daojia’s operations have been included in the Company’s Condensed Consolidated Financial Statements since the acquisition date.

~~Recently Adopted Accounting Pronouncements~~

~~In July 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-11,~~ ~~Inventory (Topic 330)~~ (ASU 2015-11), which requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for the Company in the first quarter of 2017, with early adoption permitted. We adopted ASU 2015-11 during the quarter ended February 28, 2017, and such adoption did not have a material impact on our financial statements.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation-Stock Compensation (Topic 718)~~ ~~(ASU 2016-09):~~ ~~Improvements to Employee Share-Based Payment Accounting.~~ ASU 2016-09 includes provisions to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU 2016-09 includes a requirement that the tax effect related to the settlement of share-based awards be recorded within income tax expense or benefit in the income statement. The simplification of income tax accounting for share-based payment transactions also impacts the computation of weighted-average diluted shares outstanding under the treasury stock method. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 during the quarter ended February 28, 2017 and the impact of the adoption resulted in the following:

The Company elected to continue to estimate the number of awards expected to be forfeited and adjust the estimate when appropriate, as is currently required. This adoption did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

The Company recorded an excess tax benefit of $0.2 million and $7.0 million within provision for income taxes for the quarter and year to date ended August 31, 2017, respectively, related to excess tax benefits on awards, on a prospective basis. Prior to adoption, the tax effect of share-based awards would have been recognized in additional paid-in capital.

Under ASU 2016-09, excess tax benefits from share-based arrangements are classified within cash flow from operating activities, rather than within cash flow from financing activities. The Company applied this provision on a retrospective basis and the prior period statement of cash flows was adjusted. This adoption did not have a material impact on the Company’s cash flows.

~~There was no material impact on the computation of weighted-average diluted shares outstanding.~~

Certain comparative items in the Condensed Consolidated ~~and Combined~~ Financial Statements have been reclassified to conform to the current period’s presentation to facilitate comparison.

~~Our fiscal~~Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08 Business Combinations (Topic 805)— Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). It requires issuers to apply ASC 606 Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. We adopted this standard on January 1, 2023, and such adoption did not have a material impact on our financial statements.

In March 2022, the FASB issued ASU 2022-01 Fair Value Hedging—Portfolio Layer Method (“ASU 2022-01”), which allows entities to expand their use of the portfolio layer method for fair value hedges of interest rate risk. Under the guidance, entities can hedge all financial assets under the portfolio layer method and designate multiple hedged layers within a single closed portfolio. The guidance also clarifies the accounting for fair value hedge basis adjustments in portfolio layer hedges and how these adjustments should be disclosed. We adopted this standard on January 1, 2023, and such adoption did not have a material impact on our financial statements.

In March 2022, the FASB issued ASU 2022-02 Financial Instrument—Credit Losses (“ASU 2022-02”), amending ASC 310 to eliminate the recognition and measurement guidance for a troubled debt restructuring for creditors that have adopted ASC 326 and requiring them to make enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. The guidance also requires entities to present gross write-offs by year ~~ends~~of origination in their vintage disclosures. We adopted this standard on ~~December 31.~~January 1, 2023, and such adoption did not have a material impact on our financial statements.

In June 2022, the FASB issued ASU 2022-03 Fair Value Measurement—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restriction (“ASU 2022-03”), clarifying that a contractual restriction on sales of an equity security is not considered part of the unit of account of the equity security, and therefore, is not considered when measuring fair value. The guidance also clarifies that a contractual sales restriction should not be recognized as a separate unit of account. We adopted this standard on January 1, 2023, and such adoption did not have a material impact on our financial statements.

In September 2022, the FASB issued ASU 2022-04 Liabilities—Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”), requiring entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of the programs and information about their obligations outstanding at the end of the reporting period. We adopted this standard on January 1, 2023, and such adoption did not have a material impact on our financial statements.

Note 3 – Business Acquisitions and Equity Investments

Consolidation of Hangzhou KFC and Equity Investment in Hangzhou Catering

In the fourth quarter of 2021, the Company completed its investment in a 28% equity interest in Hangzhou Catering for cash consideration of $255 million. Hangzhou Catering holds a 45% equity interest in Hangzhou KFC, of which the Company previously held a 47% equity interest. Along with the investment, the Company also obtained two additional seats on the board of directors of Hangzhou KFC. Upon completion of the transaction, the Company directly and indirectly holds an approximately 60% equity interest in Hangzhou KFC and has majority representation on the board, and thus obtained control over Hangzhou KFC and started to consolidate its results from the acquisition date.

As a result of the acquisition of Hangzhou KFC, $66 million of the purchase price was allocated to the reacquired franchise right, which is amortized over the remaining franchise contract period of 1 year.

In addition to its equity interest in Hangzhou KFC, Hangzhou Catering operates approximately 60 Chinese dining restaurants under four time-honored brands and a food processing business. The Company ~~operates~~applies the equity method of accounting to the 28% equity interest in Hangzhou Catering excluding the Hangzhou KFC business and classified this investment in Equity investments based on its then fair value. The Company elected to report its share of Hangzhou Catering’s financial results with a ~~fiscal monthly calendar,~~one-quarter lag because its results are not available in time for the Company to record them in the concurrent period. The Company's equity losses from Hangzhou Catering, net of taxes, were immaterial for both the quarters ended March 31, 2023 and 2022, and included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income. As of March 31, 2023 and December 31, 2022, the carrying amount of the Company’s equity method investment in Hangzhou Catering was $36 million and $37 million, respectively, exceeding the Company’s interest in Hangzhou Catering’s underlying net assets by $26 million and $26 million, respectively. Substantially all of this difference was attributable to its self-owned properties and impact of related deferred tax liabilities determined upon acquisition, which is being depreciated over a weighted-average remaining useful life of 20 years.

Consolidation of Suzhou KFC

In the third quarter of 2020, the Company completed the acquisition of an additional 25% equity interest in Suzhou KFC for cash consideration of $149 million, increasing its equity interest to 72%, and thus the Company obtained control over Suzhou KFC and started to consolidate its results from the acquisition date.

As a result of the acquisition of Suzhou KFC, $61 million of the purchase price was allocated to the reacquired franchise right, which is amortized over the remaining franchise contract period of 2.4 years.

In December 2022, the Company acquired an additional 20% equity interest in Suzhou KFC for cash consideration of $115 million, bringing its total ownership to 92%. As the Company has previously obtained control of Suzhou KFC, this transaction was accounted for as an equity transaction. Upon completion of the transaction, the excess of purchase consideration over the carrying amount of the non-controlling interests was $15 million, which was recorded in Additional paid-in capital.

As a result of the acquisitions of all former unconsolidated affiliates that operate our concepts by December 2021, the Company consolidated their results since their respective acquisition dates, and therefore we no longer have franchise fees and expenses and revenues and expenses from transactions with ~~two months in~~unconsolidated affiliates for the quarters ended March 31, 2023 and 2022.

Fujian Sunner Development Co., Ltd. (“Sunner”) Investment

In the first quarter ~~three months~~of 2021, the Company acquired a 5% equity interest in Sunner, a Shenzhen Stock Exchange-listed company, for a total consideration of approximately $261 million. Sunner is China’s largest white-feathered chicken producer and the Company’s largest poultry supplier. The Company then accounted for the equity securities at fair value based on their closing market price on each measurement date.

In May 2021, a senior executive of the Company was nominated and appointed to Sunner’s board of directors upon Sunner’s shareholder approval. Through this representation, the Company participates in Sunner’s policy making process. The representation on the board, along with the Company being one of Sunner’s significant shareholders, provides the Company with the ability to exercise significant influence over the operating and financial policies of Sunner. As a result, the Company started to apply the equity method of accounting to the investment in May 2021 based on its then fair value. The Company elected to report its share of Sunner’s financial results with a one-quarter lag because Sunner’s results are not available in time for the Company to record them in the concurrent period. In the quarters ended March 31, 2023 and 2022, the Company's equity income from Sunner, net of taxes, was immaterial, which was included in Equity in net earnings (losses) from equity method investments in our Condensed Consolidated Statement of Income.

The Company purchased inventories of $119 million and $92 million from Sunner for the quarters ended March 31, 2023 and 2022, respectively. The Company’s accounts payable and other current liabilities due to Sunner were $49 million and $53 million as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023 and December 31, 2022, the Company’s investment in Sunner was classified in Equity investments and the carrying amounts were $230 million and $227 million, respectively, exceeding the Company’s interest in Sunner’s underlying net assets by $158 million and $157 million, respectively. As of March 31, 2023 and December 31, 2022, $17 million and $18 million of these basis differences were related to finite-lived intangible assets determined upon acquisition, respectively, which are being amortized over the estimated useful life of 20 years. The remaining differences were related to goodwill and indefinite-lived intangible assets, which are not subject to amortization, as well as deferred tax liabilities impact. As of March 31, 2023 and December 31, 2022, the market value of the Company’s investment in Sunner was $223 million and $214 million based on its quoted closing price, respectively.

Meituan Dianping (“Meituan”) Investment

In the third quarter of 2018, the Company subscribed for 8.4 million, or less than 1%, of the ordinary shares of Meituan, an e-commerce platform for services in China, for a total consideration of approximately $74 million, when it launched its initial public offering on the HKEX in September 2018. In the second ~~and third quarters and four months~~quarter of 2020, the Company sold 4.2 million of the ordinary shares of Meituan.

The Company accounts for the equity securities at fair value with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income. The fair value of the ~~fourth quarter.~~

~~Note 3 – Transactions with YUM~~

~~Prior~~investment in Meituan is determined based on the closing market price for the shares at the end of each reporting period. The fair value change, to the ~~separation, there existed a parent-subsidiary relationship between YUM~~extent the closing market price of shares of Meituan as of the end of reporting period is higher than our cost, is subject to U.S. tax.

In the quarters ended March 31, 2023 and 2022, the ~~Company. We had the following~~related pre-tax losses of $17 million and $38 million on investment in equity securities of Meituan were included in Investment loss in our Condensed Consolidated Statements of Income.

Note 4 – Revenue Recognition

The Company’s revenues primarily include Company sales, Franchise fees and income and Revenues from transactions with ~~YUM~~franchisees.

Company Sales

Revenues from Company-owned restaurants are recognized when a customer takes possession of the food and tenders payment, which is when our obligation to perform is satisfied. The Company presents sales net of sales-related taxes. We also offer our customers delivery through both our own mobile applications and third-party aggregators’ platforms, and we primarily use our dedicated riders to deliver orders. When orders are fulfilled by our dedicated riders, we control and determine the price for the ~~quarter~~delivery service and ~~year~~generally recognize revenue, including delivery fees, when a customer takes possession of the food. When orders are fulfilled by the delivery staff of third-party aggregators, who control and determine the price for the delivery service, we recognize revenue, excluding delivery fees, when control of the food is transferred to ~~date ended August 31, 2016:~~the third-party aggregators’ delivery staff. The payment terms with respect to these sales are short-term in nature.

~~Allocation~~

We recognize revenues from prepaid stored-value products, including gift cards and product vouchers, when they are redeemed by the customer. Prepaid gift cards sold at any given point generally expire over the next 36 months, and product vouchers generally expire over a period of ~~Corporate Expenses~~up to 12 months. We recognize breakage revenue, which is the amount of prepaid stored-value products that is not expected to be redeemed, either (1) proportionally in earnings as redemptions occur, in situations where the Company expects to be entitled to a breakage amount, or (2) when the likelihood of redemption is remote, in situations where the Company does not expect to be entitled to breakage, provided that there is no requirement for remitting balances to government agencies under unclaimed property laws. The Company reviews its breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

~~Prior~~

Our privilege membership programs offer privilege members rights to ~~October 31, 2016, YUM historically performed centralized corporate functions~~multiple benefits, such as free delivery and discounts on ~~our behalf. Accordingly,~~ certain ~~YUM costs have been~~products. For certain privilege membership programs offering a pre-defined amount of benefits that can be redeemed ratably over the membership period, revenue is ratably recognized over the period based on the elapse of time. With respect to privilege membership programs offering members a mix of distinct benefits, including a welcome gift and assorted discount coupons with pre-defined quantities, consideration collected is allocated to the ~~Company~~benefits provided based on their relative standalone selling price and ~~reflected as expenses in~~revenue is recognized when food or services are delivered or the ~~Condensed Combined Financial Statements. Management considers~~benefits expire. In determining the ~~allocation methodologies used to be reasonable and appropriate reflections~~relative standalone selling price of the ~~historical expenses attributable to the Company. The expenses reflect~~ed in the Condensed Combined Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if we had operated as a separate, standalone entity.

Corporate expense allocations primarily relate to centralized corporate functions, including finance, accounting, treasury, tax, legal, internal audit and risk management functions. In addition, corporate expense allocations include, among other costs, IT maintenance, professional fees for legal services and expenses related to litigation, investigations or similar matters. Corporate allocations of $3 million and $9 million were allocated tobenefits, the Company ~~during~~considers likelihood of future redemption based on historical redemption pattern and reviews such estimates periodically based upon the ~~quarter~~latest available information regarding redemption and ~~year to date ended August 31, 2016, respectively,~~expiration patterns.

Franchise Fees and Income

Franchise fees and income primarily include upfront franchise fees, such as initial fees and renewal fees, and continuing fees. We have ~~been included~~determined that the services we provide in general and administrative (“G&A”) expenses in the Condensed Combined Statements of Income. All of the corporate allocations of costs are deemed to have been incurred and settled through Parent Company Investment in the Condensed Combined Balance Sheets in the period where the costs were recorded. Following the separation from YUM, we perform these functions using our own resources or purchased services.

~~License Fee~~

~~The Condensed Combined Statements of Income include license fees that were historically paid to YUM comprised of initial~~exchange for upfront franchise fees and continuing fees ~~equal~~are highly interrelated with the franchise right. We recognize upfront franchise fees received from a franchisee as revenue over the term of the franchise agreement or the renewal agreement because the franchise rights are accounted for as rights to 3%access our symbolic intellectual property. The franchise agreement term is generally 10 years for KFC and Pizza Hut, generally five years for Little Sheep and three to 10 years for Huang Ji Huang. We recognize continuing fees, which are based upon a percentage of franchisee sales, as those sales occur.

Revenues from Transactions with Franchisees

Revenues from transactions with franchisees consist primarily of sales of food and paper products, advertising services, delivery services and other services provided to franchisees.

The Company centrally purchases substantially all food and paper products from suppliers for substantially all of our restaurants, including franchisees, and then sells and delivers them to the restaurants. In addition, the Company owns seasoning facilities for its Chinese dining business unit, which manufacture and sell seasoning products to Huang Ji Huang and Little Sheep franchisees. The Company also provides delivery services to franchisees. The performance obligation arising from such transactions is considered distinct from the franchise agreement as it is not highly dependent on the franchise agreement and the customer can benefit from such services on its own. We consider ourselves the principal in this arrangement as we have the ability to control a promised good or service before transferring that good or service to the franchisees. Revenue is recognized upon transfer of control over ordered items or services, generally upon delivery to the franchisees.

For advertising services, the Company often engages third parties to provide services and acts as a principal in the transaction based on our responsibilities of defining the nature of the services and administering and directing all marketing and advertising programs in accordance with the provisions of our franchise agreements. The Company collects advertising contributions, which are generally based on certain percentage of sales from substantially all of our restaurants, including franchisees. Other services provided to franchisees consist primarily of customer and technology support services. Advertising services and other services provided are highly interrelated to franchise right, and are not considered individually distinct. We recognize revenue when the related sales occur.

Other Revenues

Other revenues primarily include i) sales of products to customers through e-commerce channels and the sale of our seasoning products to distributors, and ii) revenues from logistics and warehousing services provided to third parties through our supply chain network. Our segment disclosures also include revenues relating to delivery services that were provided to our Company-owned restaurants and, therefore, were eliminated for consolidation purposes.

Other revenues are recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.

Loyalty Programs

Each of the Company’s KFC and Pizza Hut reportable segments operates a loyalty program that allows registered members to earn points for each qualifying purchase. Points, which generally expire 18 months after being earned, may be redeemed for future purchases of KFC or Pizza Hut branded products or other products for free or at a discounted price. Points cannot be redeemed or exchanged for cash. The estimated value of points earned by the loyalty program members is recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed, with a corresponding deferred revenue liability included in Accounts payable and other current liabilities on the Condensed Consolidated Balance Sheets and subsequently recognized into revenue when the points are redeemed or expire. The Company estimates the value of the future redemption obligations based on the estimated value of the product for which points are expected to be redeemed and historical redemption patterns and reviews such estimates periodically based upon the latest available information regarding redemption and expiration patterns.

Disaggregation of Revenue

The following tables present revenue disaggregated by types of arrangements and segments:


	Quarter Ended 3/31/2023
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated		Combined		Elimination			Consolidated
Company sales	$	2,166	$	591	$	15	$	—	$	2,772	$	—		$	2,772
Franchise fees and income		17		2		6		—		25		—			25
Revenues from transactions with franchisees		10		1		19		63		93		—			93
Other revenues		5		3		162		10		180		(153	)		27
Total revenues	$	2,198	$	597	$	202	$	73	$	3,070	$	(153	)	$	2,917


	Quarter Ended 3/31/2022
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated		Combined		Elimination			Consolidated
Company sales	$	1,991	$	542	$	15	$	—	$	2,548	$	—		$	2,548
Franchise fees and income		16		2		6		—		24		—			24
Revenues from transactions with franchisees		8		1		11		57		77		—			77
Other revenues		2		2		131		10		145		(126	)		19
Total revenues	$	2,017	$	547	$	163	$	67	$	2,794	$	(126	)	$	2,668

Accounts Receivable

Accounts receivable primarily consist of trade receivables and royalties from franchisees, and are generally due within 30 days of the period in which the corresponding sales occur. Our provision of credit losses for accounts receivable is based upon the current expected credit losses (“CECL”) model. The CECL model requires an estimate of the credit losses expected over the life of accounts receivable since initial recognition, and accounts receivable with similar risk characteristics are grouped together when estimating CECL. In assessing the CECL, the Company considers both quantitative and qualitative information that is reasonable and supportable, including historical credit loss experience, adjusted for relevant factors impacting collectability and forward-looking information indicative of external market conditions. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control. Accounts receivable that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for doubtful accounts. As of March 31, 2023 and December 31, 2022, the ending balances of provision for accounts receivable were both $2 million, and amounts of accounts receivable past due were immaterial.

Costs to Obtain Contracts

Costs to obtain contracts consist of upfront franchise fees that we paid to YUM prior to ~~October 31, 2016. Total~~the separation in relation to initial fees or renewal fees we received from franchisees, as well as license fees ~~paid during~~that are payable to YUM in relation to our deferred revenue of prepaid stored-value products, privilege membership programs and customer loyalty programs. They meet the ~~quarter~~requirements to be capitalized as they are incremental costs of obtaining contracts with customers and ~~year~~the Company expects to ~~date ended August 31, 2016~~generate future economic benefits from such costs incurred. Such costs to obtain contracts are ~~reflected~~included in Other assets on the ~~table below:~~

Quarter ended

Year to date ended

8/31/2016

8/31/2016

Initial fees - Company

$
3

$
7

Initial fees - Franchise

—

1

Continuing Fees - Company

53

135

Continuing Fees - Franchise

13

35

Total

$
69

$
178

~~Cash Management~~Condensed Consolidated Balance Sheets and ~~Treasury~~

are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. Subsequent to the separation, we are no longer required to pay YUM initial or renewal fees that we receive from franchisees. The Company ~~funds its operations through cash generated from~~did not incur any impairment losses related to costs to obtain contracts during any of the ~~operation~~periods presented. Costs to obtain contracts were $7 million and $6 million at March 31, 2023 and December 31, 2022, respectively.

Contract Liabilities

Contract liabilities at March 31, 2023 and December 31, 2022 were as follows:


Contract liabilities	3/31/2023		12/31/2022
– Deferred revenue related to prepaid stored-value products	$	157	$	139
– Deferred revenue related to upfront franchise fees		33		32
– Deferred revenue related to customer loyalty programs		24		23
– Deferred revenue related to privilege membership programs		17		16
Total	$	231	$	210

Contract liabilities primarily consist of ~~its Company-owned stores,~~deferred revenue related to prepaid stored-value products, privilege membership programs, customer loyalty programs and upfront franchise ~~operations~~fees. Deferred revenue related to prepaid stored-value products, privilege membership programs and ~~dividend payments from unconsolidated affiliates. Prior to October 31, 2016, excess cash was historically repatriated to YUM through intercompany loans or dividends. Transfers of cash both to~~customer loyalty programs is included in Accounts payable and ~~from YUM are included within Parent Company Investment~~other current liabilities in the Condensed ~~Combined~~Consolidated Balance Sheets. ~~YUM has issued debt~~Deferred revenue related to upfront franchise fees that we expect to recognize as revenue in the next 12 months is included in Accounts payable and other current liabilities, and the remaining balance is included in Other liabilities in the Condensed Consolidated Balance Sheets. Revenue recognized that was included in the contract liability balance at the beginning of each period amounted to $58 million and $62 million for ~~general corporate purposes but~~the quarters ended March 31, 2023 and 2022, respectively. Changes in ~~no case has~~contract liability balances were not materially impacted by business acquisition, change in estimate of transaction price or any ~~such debt been guaranteed or assumed by the Company or otherwise secured by the assets~~other factors during any of the ~~Company. As YUM’s debt~~periods presented.

The Company has elected, as a practical expedient, not to disclose the value of remaining performance obligations associated with sales-based royalty promised to franchisees in exchange for franchise right and other related ~~interest~~services. The remaining duration of the performance obligation is ~~not directly attributable~~the remaining contractual term of each franchise agreement. We recognize continuing franchisee fees and revenues from advertising services and other services provided to ~~the Company, no such amounts have been allocated to the Condensed Combined Financial Statements.~~franchisees based on a certain percentage of sales, as those sales occur.

Note 45 – Earnings Per Common Share (“EPS”)

On October 31, 2016, YUM’s shareholders of record as of October 19, 2016 received one share of Yum China common stock for every one share of YUM common stock held as of the record date. For periods ended October 31, 2016 and prior, basic and diluted earnings per share were computed using the number of shares of Yum China common stock outstanding as of October 31, 2016, the date on which Yum China common stock was distributed to YUM’s shareholders. The same number of shares was used to calculate basic and diluted earnings per share for the quarter and year to date ended August 31, 2016 since there were no dilutive securities until after the separation.

The following table summarizes the components of basic and diluted ~~earnings~~EPS (in millions, except per ~~share:~~share data):


	Quarter Ended
	3/31/2023		3/31/2022
Net Income – Yum China Holdings, Inc.	$	289	$	100
Weighted-average common shares outstanding (for basic calculation)(a)		418		426
Effect of dilutive share-based awards(a)		5		4
Weighted-average common and dilutive potential common shares outstanding (for diluted calculation)(a)		423		430
Basic Earnings Per Common Share	$	0.69	$	0.23
Diluted Earnings Per Common Share	$	0.68	$	0.23
Share-based awards excluded from the diluted EPS computation(b)		2		3

(a)

As a result of the separation, shares of Yum China common stock were distributed to YUM’s shareholders of record as of October 19, 2016 and were included in the calculated weighted-average common shares outstanding. Holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards of either YUM or Yum China in their entirety. Any subsequent exercise of these awards, whether held by the Company’s employees or YUM’s employees, would increase the number of common shares outstanding. The incremental shares arising from outstanding equity awards are included in the computation of diluted EPS, if there is dilutive effect. In September 2020, 41,910,700 common shares were issued as a result of the Company’s global offering and secondary listing on the HKEX and they were included in the calculated weighted-average common shares outstanding.

(b)

These outstanding stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance stock units (“PSUs”) were excluded from the computation of diluted EPS because to do so would have been antidilutive for the quarters presented, or because certain PSUs are contingently issuable based on the achievement of performance and market conditions, which have not been met as of March 31, 2023 and 2022.

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Net Income – Yum China Holdings, Inc.

$
211

$
192

$
493

$
414

Weighted-average common shares outstanding (for basic
   calculation) ^(a)

385,836,842

363,758,219

387,028,586

363,758,219

Effect of dilutive share-based employee compensation ^(a)

11,238,837

—

9,993,824

—

Effect of dilutive warrants^(b)

1,421,674

—

363,102

—

Weighted-average common and dilutive potential common
   shares outstanding (for diluted calculation)

398,497,353

363,758,219

397,385,512

363,758,219

Basic Earnings Per Share

$
0.55

$
0.53

$
1.28

$
1.14

Diluted Earnings Per Share

$
0.53

$
0.53

$
1.24

$
1.14

Employee stock options, stock appreciation rights and warrants
   excluded from the diluted EPS computation ^(c)

8,200,405

—

10,256,326

—

~~(a)~~

As a result of the separation, shares of Yum China common stock were distributed to YUM’s shareholders of record as of October 19, 2016 and included in the calculated weighted-average common shares outstanding. Holders of outstanding YUM equity awards generally received both adjusted YUM awards and Yum China awards, or adjusted awards on shares of common stock of either YUM or Yum China in their entirety. Any subsequent exercise of these awards, whether held by the Company’s employees or YUM’s employees, would increase the number of common shares outstanding. The outstanding equity awards are included in the computation of diluted EPS, if there is dilutive effect.

~~(b)~~

Pursuant to the investment agreements dated September 1, 2016, Yum China issued to strategic investors two tranches of warrants on January 9, 2017, with each tranche providing the right to purchase 8,200,405 shares of Yum China common stock, at an exercise price of $31.40 and $39.25 per share, respectively. The outstanding warrants are included in the computation of diluted EPS, if there is dilutive effect when the average market price of Yum China common stock for the period exceeds the exercise price of the warrants.

~~(c)~~

These outstanding employee stock options, stock appreciation rights and warrants were not included in the computation of diluted EPS because to do so would have been antidilutive for the quarters and years to date presented.

Changes in Equity and Redeemable Noncontrolling Interest (in millions)

Yum China Holdings, Inc.

Accumulated

Common

Additional

Other

Redeemable

Stock

Paid-in

Retained

Comprehensive

Treasury Stock

Noncontrolling

Total

Noncontrolling

Shares

Amount

Capital

Earnings

Income

Shares

Amount

Interests

Equity

Interest

Balance at December 31, 2016

383,344,835.42

$
4

$
2,352

$
40

$
1

(784,686.42
)

$
(20
)

$
66

$
2,443

$
—

Net Income

493

21

514

Foreign currency translation gains

108

3

111

Comprehensive income

625

—

Dividends declared

(22
)

(22
)

Acquisition of Daojia

2

2

5

Repurchase of shares of common stock

(3,355,696.00
)

(128
)

(128
)

Exercise and vesting of share-based awards

4,851,190.00

—

5

5

Share-based compensation

16

16

Balance at August 31, 2017

388,196,025.42

$
4

$
2,373

$
533

$
109

(4,140,382.42
)

$
(148
)

$
70

$
2,941

$
5


	Yum China Holdings, Inc.
												Accumulated
	Common					Additional						Other															Redeemable
	Stock					Paid-in			Retained			Comprehensive			Treasury Stock						Noncontrolling			Total			Noncontrolling
	Shares*			Amount		Capital			Earnings			(Loss) Income			Shares			Amount			Interests			Equity			Interest
Balance at December 31, 2022		419		$	4	$	4,390		$	2,191		$	(103	)		—		$	—		$	666		$	7,148		$	12
Net Income										289												24			313			—
Foreign currency translation adjustments													12									2			14			—
Comprehensive income																									327			—
Cash dividends declared ($0.13 per common share)										(54	)														(54	)
Contributions from/ dividends declared to noncontrolling interests																						34			34
Repurchase and retirement of shares		(1	)		—		(10	)		(52	)														(62	)
Exercise and vesting of share- based awards		1			—		(2	)																	(2	)
Share-based compensation							13															—			13
Balance at March 31, 2023		418		$	4	$	4,391		$	2,374		$	(91	)		—		$	—		$	726		$	7,404		$	12

Balance at December 31, 2021		449		$	4	$	4,695		$	2,892		$	268			(21	)	$	(803	)	$	852		$	7,908		$	14
Net Income										100											10				110			—
Foreign currency translation adjustments													11								2				13			—
Comprehensive income																									123			—
Cash dividends declared ($0.12 per common share)										(51	)														(51	)
Dividends declared																						(81	)		(81	)
Contributions from noncontrolling interests																					18				18
Repurchase of shares of common stock																(5	)		(232	)					(232	)
Exercise and vesting of share- based awards		—			—		(2	)																	(2	)
Share-based compensation							11																		11
Balance at March 31, 2022		449		$	4	$	4,704		$	2,941		$	279			(26	)	$	(1,035	)	$	801		$	7,694		$	14

*: Shares may not add due to rounding.

Share Repurchase ~~Program~~and Retirement

~~On February 7, 2017, we announced that our~~Our Board of Directors has authorized ~~a $300 million~~an aggregate of $2.4 billion for our share repurchase program. ~~Under this authorization, we~~The Company repurchased1 million and 5 million shares of Yum China common stock at a total cost of $62 million and $232 million during the ~~year~~quarters ended March 31, 2023 and 2022, respectively. The total repurchase cost included $2 million and $8 million settled subsequent to ~~date ended August~~March 31, ~~2017~~2023 and 2022, for shares repurchased with trade dates on and prior to March 31, 2023 and 2022, respectively. As of March 31, 2023, approximately $1.1 billion remained available for future share repurchases under the authorization.

The Inflation Reduction Act of 2022 (“IRA”), which is discussed further in Note 13, imposes an excise tax of 1% on net share repurchases that occur after December 31, 2022. Excise tax incurred on net share repurchases was recognized as ~~indicated below. All amounts exclude applicable transaction fees.~~part of the cost of the shares repurchased and the financial impact was not material during the first quarter of 2023.

Shares Repurchased
(thousands)

Dollar Value of
Shares
Repurchased

Remaining Dollar
Value of Shares
that may be
Repurchased

3,355,696

$
128

$
172

Note 8 – Other Expenses, net

~~The Refranchising gain, net by reportable segment and All Other Segments is presented below. We do not allocate such gains and losses to our segments for performance reporting purposes.~~

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
KFC

$
—

$
4

$
1

$
8

Pizza Hut

—

—

—

—

All Other Segments

—

—

1

—

Total Company

$
—

$
4

$
2

$
8


	Quarter Ended
	3/31/2023			3/31/2022
Amortization of reacquired franchise rights(a)	$	2		$	26
Foreign exchange impact and others		(1	)		(1	)
Other expenses, net	$	1		$	25

(a)

As a result of the acquisition of Hangzhou KFC, Suzhou KFC and Wuxi KFC, $66 million, $61 million and $61 million of the purchase price were allocated to intangible assets related to reacquired franchise rights, respectively, which are being amortized over the remaining franchise contract period of 1 year, 2.4 years and 5 years. The above reacquired franchise rights were substantially amortized as of December 31, 2022 and resulted in the decrease of amortization expenses in the quarter ended March 31, 2023.

Quarter ended

Year to date ended

8/31/2017

8/31/2017

Total
Company

KFC

Pizza Hut

All Other
Segments

Total
Company

KFC

Pizza Hut

All Other
Segments
Store closure income^(a)

$
3

$
2

$
1

$
—

$
8

$
5

$
3

$
—

Store impairment charges

(6
)

(3
)

(2
)

(1
)

(28
)

(15
)

(12
)

(1
)

Closure and impairment expenses

$
(3
)

$
(1
)

$
(1
)

$
(1
)

$
(20
)

$
(10
)

$
(9
)

$
(1
)

Quarter ended

Year to date ended

8/31/2016

8/31/2016

Total
Company

KFC

Pizza Hut

All Other
Segments

Total
Company

KFC

Pizza Hut

All Other
Segments
Store closure income^(a)

$
1

$
1

$
—

$
—

$
7

$
5

$
1

$
1

Store impairment charges

(6
)

(5
)

(1
)

—

(43
)

(30
)

(12
)

(1
)

Closure and impairment expenses

$
(5
)

$
(4
)

$
(1
)

$
—

$
(36
)

$
(25
)

$
(11
)

$
—

~~(a)~~

Store closure income include proceeds from forced store closures, lease reserves established when we cease using a property under an operating lease and subsequent adjustments to those reserves and other facility-related expenses from previously closed stores. Remaining lease obligations for closed stores were not material at August 31, 2017 or December 31, 2016.

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Equity income from investments in unconsolidated affiliates

$
21

$
18

$
51

$
44

Foreign exchange gain and other

1

(1
)

(1
)

—

Other income, net

$
22

$
17

$
50

$
44

~~(a)~~

~~Includes receivables of $17 million and $16 million due from payment processors or aggregators as of August 31, 2017 and December 31, 2016, respectively.~~


Property, Plant and Equipment (“PP&E”)	3/31/2023			12/31/2022
Buildings and improvements, and construction in progress	$	2,937		$	2,912
Finance leases, primarily buildings		62			62
Machinery and equipment		1,645			1,612
PP&E, gross		4,644			4,586
Accumulated depreciation		(2,530	)		(2,468	)
PP&E, net	$	2,114		$	2,118

Property, Plant and Equipment

8/31/2017

12/31/2016
Buildings and improvements

$
2,168

$
2,029

Capital leases, primarily buildings

30

29

Machinery and equipment

1,139

1,081

Property, plant and equipment, gross

3,337

3,139

Accumulated depreciation and amortization

(1,685
)

(1,492
)

Property, plant and equipment, net

$
1,652

$
1,647


Equity Investments	3/31/2023		12/31/2022
Investment in equity method investees	$	268	$	266
Investment in equity securities		78		95
Equity investments	$	346	$	361

Accounts Payable and Other Current Liabilities

8/31/2017

12/31/2016
Accounts payable

$
575

480

Accrued capital expenditures

92

132

Accrued compensation and benefits

204

191

Accrued taxes, other than income taxes

17

14

Dividends payable

5

—

Other current liabilities

227

154

Accounts payable and other current liabilities

$
1,120

$
971


Other Assets	3/31/2023		12/31/2022
Land use right	$	122	$	123
Long-term deposits, primarily lease deposits		90		90
Prepayment for acquisition of PP&E(a)		36		6
Costs to obtain contracts		7		6
VAT assets		5		5
Others		18		18
Other assets	$	278	$	248

(a)

The increase was primarily due to a prepayment made in relation to the acquisition of a building located in Shanghai to house the Company’s headquarters and flagship stores, which is currently expected to be delivered to the Company around 2026.


Accounts Payable and Other Current Liabilities	3/31/2023		12/31/2022
Accounts payable	$	674	$	727
Operating lease liabilities		437		448
Accrued compensation and benefits		263		285
Contract liabilities		203		182
Accrued capital expenditures		139		181
Accrued marketing expenses		69		72
Other current liabilities		172		203
Accounts payable and other current liabilities	$	1,957	$	2,098


Other Liabilities	3/31/2023		12/31/2022
Accrued income tax payable	$	55	$	52
Contract liabilities		28		28
Other non-current liabilities		81		82
Other liabilities	$	164	$	162

Other Liabilities and Deferred Credits

8/31/2017

12/31/2016
Deferred escalating minimum rent

$
161

$
153

Other noncurrent liabilities and deferred credits

113

99

Other liabilities and deferred credits

$
274

$
252

The changes in the carrying amount of goodwill are as follows:


	Total Company			KFC		Pizza Hut		All Other Segments
Balance as of December 31, 2022
Goodwill, gross	$	2,379		$	1,893	$	19	$	467
Accumulated impairment losses(a)		(391	)		—		—		(391	)
Goodwill, net		1,988			1,893		19		76
Effect of currency translation adjustments		7			7		—		—
Balance as of March 31, 2023
Goodwill, gross		2,386			1,900		19		467
Accumulated impairment losses(a)		(391	)		—		—		(391	)
Goodwill, net	$	1,995		$	1,900	$	19	$	76

Total
Company

KFC

Pizza Hut

All Other
Segments

Balance as of December 31, 2016

Goodwill, gross

$
461

$
70

$
9

$
382

Accumulated impairment losses^(a)

(382
)

—

—

(382
)
Goodwill, net

79

70

9

—

Goodwill acquired and allocated

23

5

9

9

Effect of currency translation adjustment

5

4

1

—

Balance as of August 31, 2017

Goodwill, gross

489

79

19

391

Accumulated impairment losses^(a)

(382
)

—

—

(382
)
Goodwill, net

$
107

$
79

$
19

$
9

(a)

Accumulated impairment losses represent goodwill impairment attributable to the reporting units of Little Sheep and Daojia.

~~(a)~~

~~Accumulated impairment losses represent Little Sheep goodwill impairment.~~

8/31/2017

12/31/2016

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying Amount

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying Amount

Definite-lived intangible assets

Reacquired franchise rights

$
98

$
(81
)

$
17

$
93

$
(71
)

$
22

Daojia platform

17

—

17

—

—

—

Customer-related assets

12

(5
)

7

7

(4
)

3

Other

19

(10
)

9

19

(9
)

10

$
146

$
(96
)

$
50

$
119

$
(84
)

$
35

Indefinite-lived intangible assets

Little Sheep trademark

$
54

$
—

$
54

$
53

$
—

$
53

Total intangible assets

$
200

$
(96
)

$
104

$
172

$
(84
)

$
88
��
(a)

Changes in gross carrying amount and accumulated amortization include the effect of currency translation adjustments.

(b)

Accumulated impairment losses represent impairment charges on intangible assets acquired from Daojia primarily attributable to the Daojia platform.

Note 11 – Leases

As of March 31, 2023, we leased over 13,000 properties in China for our Company-owned restaurants. We generally enter into lease agreements for our restaurants with initial terms of 10 to 20 years. Most of our lease agreements contain termination options that permit us to terminate the lease agreement early if the restaurant’s unit contribution is negative for a specified period of time. We generally do not have renewal options for our leases. Such options are accounted for only when it is reasonably certain that we will exercise the options. The rent under the majority of our current restaurant lease agreements is generally payable in one of three ways: (i) fixed rent; (ii) the higher of a fixed base rent or a percentage of the restaurant’s sales; or (iii) a percentage of the restaurant’s sales. Most leases require us to pay common area maintenance fees for the leased property. In addition to restaurants leases, we also lease office spaces, logistics centers and equipment. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In limited cases, we sub-lease certain restaurants to franchisees in connection with refranchising transactions or lease our properties to other third parties. The lease payments under these leases are generally based on the higher of a fixed base rent or a percentage of the restaurant’s annual sales. Income from sub-lease agreements with franchisees or lease agreements with other third parties are included in Franchise fees and income and Other revenues, respectively, within our Condensed Consolidated Statements of Income.


Supplemental Balance Sheet
	3/31/2023		12/31/2022		Account Classification
Assets
Operating lease right-of-use assets	$	2,172	$	2,219	Operating lease right-of-use assets
Finance lease right-of-use assets		38		38	PP&E, net
Total leased assets	$	2,210	$	2,257

Liabilities
Current
Operating lease liabilities	$	437	$	448	Accounts payable and other current liabilities
Finance lease liabilities		5		5	Accounts payable and other current liabilities
Non-current
Operating lease liabilities		1,864		1,906	Non-current operating lease liabilities
Finance lease liabilities		41		42	Non-current finance lease liabilities
Total lease liabilities	$	2,347	$	2,401


Summary of Lease Cost	Quarter Ended
	3/31/2023			3/31/2022			Account Classification

Operating lease cost	$	132		$	157		Occupancy and other operating expenses, G&A or Franchise expenses
Finance lease cost
Amortization of leased assets		1			1		Occupancy and other operating expenses
Interest on lease liabilities		1			—		Interest income, net
Variable lease cost(a)		106			96		Occupancy and other operating expenses or Franchise expenses
Short-term lease cost		4			3		Occupancy and other operating expenses or G&A
Sub-lease income		(5	)		(6	)	Franchise fees and income or Other revenues
Total lease cost	$	239		$	251

(a)

The Company was granted $8 million and $3 million in ~~2019, $4 million~~lease concessions from landlords related to the effects of the COVID-19 pandemic during the quarters ended March 31, 2023 and 2022, respectively. The lease concessions were primarily in the form of rent reduction over the period of time when the Company’s restaurant business was adversely impacted. The Company applied the interpretive guidance in a FASB staff question-and-answer document issued in April 2020 and $4elected: (1) not to evaluate whether a concession received in response to the COVID-19 pandemic is a lease modification and (2) to assume such concession was contemplated as part of the existing lease contract with no contract modification. Such concession was recognized as negative variable lease cost in the period the concession was granted.


Supplemental Cash Flow Information	Quarter Ended
	3/31/2023		3/31/2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	137	$	155
Operating cash flows from finance leases		1		1
Financing cash flows from finance leases		1		1
Right-of-use assets obtained in exchange for lease liabilities(b):
Operating leases	$	46	$	28
Finance leases		—		3

(b)

This supplemental non-cash disclosure for right-of-use (“ROU”) assets obtained in exchange for lease liabilities includes an increase in lease liabilities associated with obtaining new ROU assets of $65 million and $63 million for the quarters ended March 31, 2023 and 2022, respectively, as well as adjustments to lease liabilities or ROU assets due to modification or other reassessment events, which resulted in ~~2021.~~

a $19 million and $32 million decrease in lease liabilities for the quarters ended March 31, 2023 and 2022, respectively.



Lease Term and Discount Rate	3/31/2023			3/31/2022
Weighted-average remaining lease term (years)
Operating leases		7.1			7.1
Finance leases		11.0			11.4

Weighted-average discount rate
Operating leases		5.1	%		5.4	%
Finance leases		5.1	%		5.4	%

Summary of Future Lease Payments and Lease Liabilities

Maturities of lease liabilities as of March 31, 2023 were as follows:


	Amount of Operating Leases		Amount of Finance Leases		Total
Remainder of 2023	$	417	$	5	$	422
2024		456		6		462
2025		395		6		401
2026		346		6		352
2027		289		5		294
Thereafter		843		32		875
Total undiscounted lease payment		2,746		60		2,806
Less: imputed interest(c)		445		14		459
Present value of lease liabilities	$	2,301	$	46	$	2,347

(c)

As the rate implicit in the lease cannot be readily determined, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the imputed interest and present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.

As of March 31, 2023, we have additional lease agreements that have been signed but not yet commenced, with total undiscounted minimum lease payments of $126 million. These leases will commence between the second quarter of 2023 and 2026 with lease terms of 1 year to 20 years.

Note 1012 – Fair Value Measurementsand Disclosures

~~As of August 31, 2017, the carrying values~~

The Company’s financial assets and liabilities primarily consist of cash and cash equivalents, short-term investments, long-term bank deposits and notes, accounts receivable, ~~and~~ accounts payable ~~approximated~~and lease liabilities, and the carrying values of these assets and liabilities approximate their fair ~~values~~value in general.

The Company’s financial assets also include its investment in the equity securities of Meituan, which is measured at fair value based on the closing market price for the shares at the end of each reporting period, with subsequent fair value changes recorded in our Condensed Consolidated Statements of Income.

The following table is a summary of our financial assets measured on a recurring basis or disclosed at fair value and the level within the fair value hierarchy in which the measurement falls. The Company classifies its cash equivalents, short-term investments, long-term bank deposits and notes, and investment in equity securities within Level 1 or Level 2 in the fair value hierarchy because it uses quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value, respectively. No transfers among the levels within the fair value hierarchy occurred during the quarters ended March 31, 2023 and 2022.


			Fair Value Measurement or Disclosure at March 31, 2023
	Balance at March 31, 2023		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	250			$	250
Fixed income debt securities(a)		100				100
Money market funds		8		8
Total cash equivalents		358		8		350		—
Short-term investments:
Time deposits		1,195				1,195
Fixed income debt securities(a)		550				550
Structured deposits		125				125
Total short-term investments		1,870		—		1,870		—
Long-term bank deposits and notes:
Time deposits(b)		943				943
Fixed income bank notes(a)		151				151
Total long-term bank deposits and notes		1,094		—		1,094		—
Equity investments:
Investment in equity securities		78		78
Total	$	3,400	$	86	$	3,314	$	—


			Fair Value Measurement or Disclosure at December 31, 2022
	Balance at December 31, 2022		Level 1		Level 2		Level 3
Cash equivalents:
Time deposits	$	355			$	355
Fixed income debt securities(a)		129		29		100
Money market funds		59		59
Total cash equivalents		543		88		455		—
Short-term investments:
Time deposits		1,434				1,434
Fixed income debt securities(a)		500				500
Structured deposits		88				88
Total short-term investments		2,022		—		2,022		—
Long-term bank deposits and notes:
Time deposits(b)		680				680
Equity investments:
Investment in equity securities		95		95
Total	$	3,340	$	183	$	3,157	$	—

(a)

Classified as held-to-maturity investments and measured at amortized cost.

(b)

As of March 31, 2023 and December 31, 2022, the ~~short-term nature~~long-term bank deposits and notes balance included $81 million of ~~these instruments.~~time deposits, which is restricted for use in order to secure the balance of prepaid stored-value cards issued by the Company pursuant to regulatory requirements.

Non-Recurring Fair Value Measurements

In addition, certain of the Company’s restaurant-level assets ~~such as property, plant~~(including operating lease ROU assets and ~~equipment,~~PP&E), goodwill and intangible assets, are measured at fair value based on unobservable inputs (Level 3) on a non-recurring basis, if determined to be impaired.

~~During~~

We review long-lived assets of restaurants semi-annually for impairment, or whenever events or changes in circumstances indicate that the ~~quarter and year to date ended August 31, 2017, we~~carrying amount of a restaurant may not be recoverable. We recorded restaurant-level impairment ~~(Level 3)~~ of ~~$2 million~~nil for both quarters ended March 31, 2023 and $20 million, respectively. During the quarter and year to date ended August 31, 2016, we recorded restaurant-level impairment (Level 3) of $2 million and $35 million, respectively. The remaining net book value of the assets measured at2022, excluding fair value ~~as of August 31, 2017, subsequent~~measurements made for restaurants that were subsequently closed or refranchised prior to ~~these impairments, was not significant.~~those respective quarter-end dates.

Note 1113 – Income Taxes


	Quarter ended						Year to date ended						Quarter Ended
	8/31/2017			8/31/2016			8/31/2017			8/31/2016			3/31/2023			3/31/2022
Income tax provision	$	102		$	87		$	213		$	165		$	125		$	55
Effective tax rate		31.7	%		29.8	%		29.3	%		28.0	%		28.5	%		33.1	%

Note 14 –Segment Reporting

~~Note 12 – Reportable Operating Segments~~

During the second quarter of 2017, we integrated the businesses of Pizza Hut Casual Dining and Pizza Hut Home Service and began reporting them together as the Pizza Hut reportable segment. As a result, the Company has We have two reportable segments: KFC ~~which remains unchanged,~~ and Pizza Hut. Our remaining non-reportable operating segments, including the operations of ~~East Dawning,~~Taco Bell, Lavazza, Little Sheep, ~~Taco Bell~~Huang Ji Huang, our delivery operating segment and ~~Daojia,~~our e-commerce business, and for 2022, also including COFFii & JOY and East Dawning, are combined and referred to as All Other Segments, as these operating segments are insignificant both individually and in ~~the~~ aggregate. ~~Segment financial information for prior periods has been recast to align with this change in segment reporting. See Note 1.~~

Quarter ended

Year to date ended
Revenues

8/31/2017

8/31/2016

8/31/2017

8/31/2016
KFC

$
1,423

$
1,297

$
3,435

$
3,325

Pizza Hut

604

574

1,451

1,407

All Other Segments

11

12

30

42

Total

$
2,038

$
1,883

$
4,916

$
4,774


	Quarter Ended 3/31/2023
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	2,198	$	597	$	49	$	73	$	2,917	$	—		$	2,917
Inter-segment revenue		—		—		153		—		153		(153	)		—
Total	$	2,198	$	597	$	202	$	73	$	3,070	$	(153	)	$	2,917


	Quarter Ended 3/31/2022
Revenues	KFC		Pizza Hut		All Other Segments		Corporate and Unallocated(a)		Combined		Elimination			Consolidated
Revenue from external customers	$	2,017	$	547	$	41	$	63	$	2,668	$	—		$	2,668
Inter-segment revenue		—		—		122		4		126		(126	)		—
Total	$	2,017	$	547	$	163	$	67	$	2,794	$	(126	)	$	2,668


	Quarter Ended
Operating Profit (Loss)	3/31/2023			3/31/2022
KFC	$	420		$	220
Pizza Hut		55			30
All Other Segments		(6	)		(17	)
Unallocated revenues from transactions with franchisees(b)		63			57
Unallocated other revenues		10			10
Unallocated expenses for transactions with franchisees(b)		(63	)		(57	)
Unallocated other operating costs and expenses		(8	)		(9	)


Unallocated and corporate G&A expenses		(56	)		(44	)
Unallocated other income, net		1			1
Operating Profit	$	416		$	191
Interest income, net(a)		38			12
Investment loss(a)		(17	)		(37	)
Income Before Income Taxes and Equity in Net Earnings (Losses) from Equity Method Investments	$	437		$	166


	Quarter Ended
Impairment Charges	3/31/2023		3/31/2022
KFC(c)	$	3	$	5
Pizza Hut(c)		1		1
All Other Segments(c)		—		2
	$	4	$	8


	Total Assets
	3/31/2023		12/31/2022
KFC	$	5,238	$	5,296
Pizza Hut		879		880
All Other Segments		378		381
Corporate and Unallocated(d)		5,468		5,269
	$	11,963	$	11,826

Quarter ended

Year to date ended
Operating Profit

8/31/2017

8/31/2016

8/31/2017

8/31/2016
KFC^(a)

$
286

$
238

$
647

$
538

Pizza Hut

80

82

177

132

All Other Segments

(8
)

(5
)

(8
)

(6
)

Unallocated and corporate expenses^(b)

(45
)

(35
)

(108
)

(96
)

Unallocated Other income^(b)

4

2

4

6

Unallocated Refranchising gain^(b)

—

4

2

8

Operating Profit

$
317

$
286

$
714

$
582

Interest income, net^(b)

6

3

13

7

Income Before Income Taxes

$
323

$
289

$
727

$
589

(a)

Identifiable Assets

8/31/2017

12/31/2016

KFC^(c)

$
1,469

$
1,411

Pizza Hut

678

628

All Other Segments

141

160

Corporate^(d)

2,172

1,528

$
4,460

$
3,727

Long-Lived Assets^(e)

8/31/2017

12/31/2016

KFC

$
1,119

$
1,099

Pizza Hut

593

553

All Other Segments

113

129

Corporate

38

33

$
1,863

$
1,814

~~(a)~~

Includes equity income from investments in unconsolidated affiliates of $21 million and $18 million for the quarters ended August 31, 2017 and 2016, respectively, and $51 million and $44 million for the years to date ended August 31, 2017 and 2016, respectively.

~~(b)~~ Amounts have not been allocated to any segment for performance reporting purposes.

(b)

Primarily includes revenues and associated expenses of transactions with franchisees derived from the Company’s central procurement model whereby the Company centrally purchases substantially all food and paper products from suppliers then sells and delivers to KFC and Pizza Hut restaurants, including franchisees. Amounts have not been allocated to any segment for purposes of making operating decisions or assessing financial performance as the transactions are deemed corporate revenues and expenses in nature.

(c)

Primarily includes store closure impairment charges.

(d)

Primarily includes cash and cash equivalents, short-term investments, long-term bank deposits and notes, equity investments, inventories that are centrally managed and PP&E that are not specifically identifiable within each segment.

~~(c)~~

~~Includes investments in the unconsolidated affiliates totaling $74 million and $71 million for the quarter ended August 31, 2017 and for the year ended December 31, 2016, respectively.~~

~~(d)~~

~~Primarily includes cash and cash equivalents, short-term investments and inventories that are centrally managed.~~

~~(e)~~

~~Includes property, plant and equipment, net, goodwill, and intangible assets, net.~~

~~Item 2.~~

~~Management’s Discussion and Analysis of~~ ~~Financial Condition and Results of Operations~~

•

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 ~~franchise~~ and ~~unconsolidated affiliate~~franchise restaurants that operate our ~~Concepts,~~concepts, except for sales from non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise ~~and unconsolidated affiliate~~ restaurants typically generate ongoing franchise fees for the Company at aan average rate of approximately 6% of system sales. Franchise ~~and unconsolidated affiliate~~ restaurant sales are not included in Company sales onin the Condensed Consolidated ~~and Combined~~ 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.

•

~~Same-store~~Effective January 1, 2018, the Company revised its definition of same-store sales growth isto 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 ~~and in the Company system~~for one year or ~~more.~~

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.~~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~~sales and Restaurant ~~Profit~~profit analysis, Store Portfolio Actions represent the net impact of ~~new unit~~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.

In addition to the results provided in accordance with GAAP throughout this MD&A, the Company provides non-GAAP measures which present Operating Profit before Special Items, Diluted Earnings Per Common Share before Special Items, Effective tax rate before Special Items and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, depreciation, amortization and other items, including store impairment charges. Special Items consist of reversal of loss associated with sale of aircraft, income from the reversal of contingent consideration previously recorded for a business combination and impact of the redemption of the Little Sheep noncontrolling interest which are described in (a), (b), (c) and (d) in the accompanying notes. 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. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Rather, the Company believes that the presentation of these non-GAAP measures provides additional information to investors to facilitate the comparison of past and present results, excluding those items that we do not believe are indicative of our ongoing operations due to their nature.

Quarterly highlights:

% Change

System Sales^(a)

Same-Store Sales^(a)

Net New Units

Operating Profit

KFC
+11

+7

+5

+20

Pizza Hut
+7

—

+8

—

All Other Segments

(37
)

(5
)

+3

NM

Total
+10

+6

+6

+11

Year to date highlights:

% Change

System Sales^(a)

Same-Store Sales^(a)

Net New Units

Operating Profit

KFC
+8

+4

+5

+20

Pizza Hut
+7

+1

+8

+37

All Other Segments

(36
)

(8
)

+3

(81
)
Total
+7

+4

+6

+23


~~(a)~~	% Change
	System Sales ~~and~~ (a)	Same-Store Sales ~~percentages as shown in tables exclude the impact of~~(a)	Net New Units			Operating Profit (Reported)	Operating Profit (Ex F/X.X)
KFC	+17	+8	+9			+91	+105
Pizza Hut	+17	+7	+11			+85	+98
All Other Segments(b)	+4	+7		(4	)	+62	+59
Total	+17	+8	+9			+118	+134

(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.

During the first quarter of ~~August 31, 2017,~~2023, sales rebounded significantly year over year and sequentially. Our strong sales growth was driven by tremendous efforts in seizing opportunities as the Company operated over 7,700 units, predominately KFC and Pizza Hut restaurants, which are the leading quick service and casual dining restaurant brands, respectively, in mainland China. Given our strong competitive position, a growing economy and a population of approximately 1.4 billion in mainland China, the Company has rapidly added KFC and Pizza Hut restaurants.

country pivoted from strict COVID-19 measures. As compared to the ~~third~~first quarter of ~~2016,~~2022, Company sales in the ~~third~~first quarter of ~~2017~~2023 increased ~~8% and 10%~~9%, ifor 17% excluding the impact of F/X. The increase in Company sales ~~during~~for the quarter, excluding the impact of F/X, was driven by net unit growth and same-store sales growth. The increase in Restaurant profit for the quarter was driven by same-store sales leverage and labor efficiency, partially offset by wage inflation and promotion costs. The increase in Restaurant profit for the year to date ended August 31, 2017 was primarily due to the impact of the retail tax structure reform implemented on May 1, 2016 and also driven by sales leverage, partially offset by wage inflation and commodity inflation. The benefit from the retail tax structure reform was most impactful on food and paper costs, although other items such as utility cost and rental expense also benefited from it.

~~The Consolidated and Combined Results of Operations for the quarters and year to date ended August 31, 2017 and 2016 are presented below:~~

Quarter ended

% B/(W)^(a)

Year to date ended

% B/(W)^(a)

8/31/2017

8/31/2016

Reported

8/31/2017

8/31/2016

Reported

Company sales

$
1,998

$
1,848

8

$
4,818

$
4,684

3

Franchise fees and income

40

35

14

98

90

9

Total revenues

$
2,038

$
1,883

8

$
4,916

$
4,774

3

Restaurant profit

$
399

$
356

12

$
927

$
798

16

Restaurant Margin %

20.0
%

19.2
%

0.8

ppts.

19.3
%

17.0
%

2.3

ppts.

Operating Profit

$
317

$
286

11

$
714

$
582

23

Interest income, net

6

3

NM

13

7

77

Income tax provision

(102
)

(87
)

(19
)

(213
)

(165
)

(29
)

Net Income - including
noncontrolling interests

221

202

9

514

424

21

Net Income - noncontrolling interests

10

10

6

21

10

NM

Net Income - Yum China Holdings, Inc.

$
211

$
192

9

$
493

$
414

19

Diluted Earnings Per Share

$
0.53

$
0.53

—

$
1.24

$
1.14

9

Effective tax rate

31.7
%

29.8
%

29.3
%

28.0
%

Operating Profit before Special Items

$
314

$
283

$
711

$
580

Diluted Earnings Per Common Share
before Special Items

$
0.52

$
0.52

$
1.23

$
1.11

Effective tax rate before Special Items

32.0
%

29.9
%

29.4
%

28.0
%

Adjusted EBITDA

$
425

$
390

$
1,004

$
895

~~(a)~~

~~Represents period-over-period change in percentage. NM refers to changes over 100%, from negative to positive amounts or from zero to an amount.~~

~~Performance Metrics~~

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
System Sales Growth (Decline)

8
%

(3
)%

3
%

—
%

System Sales Growth, excluding F/X

10
%

3
%

7
%

5
%

Same-store Sales Growth (Decline)

6
%

(1
)%

4
%

1
%

Unit Count

8/31/2017

8/31/2016

% Increase

Company-owned

6,149

5,847

5

Unconsolidated affiliates

872

812

7

Franchisees

726

671

8

7,747

7,330

6

~~Special Items~~

~~Special Items, along with the reconciliation to the most comparable GAAP financial measure, are presented below.~~

Quarter ended

Year to date ended
Detail of Special Items

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Reversal of loss associated with sale of aircraft ^(a)

—

3

—

2

Income from the reversal of contingent consideration^(b)

3

—

3

—

Special Items Income - Operating Profit

3

3

3

2

Tax Expenses on Special Items^(c)

—

(1
)

—

(1
)

Special Items Income, net of tax - including
   noncontrolling interests

3

2

3

1

Special Items Expense, net of tax of nil
   - noncontrolling interests^(d)

—

—

—

(8
)

Special Items Income, net of tax
   - Yum China Holdings, Inc.

$
3

$
2

$
3

$
9

Weighted average diluted shares outstanding

398,497,353

363,758,219

397,385,512

363,758,219

Special Items Diluted Earnings Per Common Share

$
0.01

$
0.01

$
0.01

$
0.03

Reconciliation of Reported Operating Profit to
   Operating Profit Before Special Items

Reported Operating Profit

$
317

$
286

$
714

$
582

Special Items Income - Operating Profit

3

3

3

2

Operating Profit before Special Items

$
314

$
283

$
711

$
580

Reconciliation of Reported EPS to EPS Before
   Special Items

Reported Diluted Earnings Per Common Share

$
0.53

$
0.53

$
1.24

$
1.14

Special Items Diluted Earnings Per Common Share

0.01

0.01

0.01

0.03

Diluted Earnings Per Common Share before Special Items

$
0.52

$
0.52

$
1.23

$
1.11

Reconciliation of Reported Effective Tax Rate to
   Effective Tax Rate Before Special Items

Reported effective tax rate (See Note 11)

31.7
%

29.8
%

29.3
%

28.0
%

Impact on tax rate as a result of Special Items^(c)

(0.3
)%

(0.1
)%

(0.1
)%

(—
)%

Effective tax rate before Special Items

32.0
%

29.9
%

29.4
%

28.0
%

~~(a)~~

During the quarter ended August 31, 2016, we completed the sale of a corporate aircraft and recorded the reversal of a portion of the loss previously recognized within Special Items in 2015 to reflect the final proceeds of the sale.

~~(b)~~

During the quarter ended August 31, 2017, we recognized income from the reversal of contingent consideration previously recorded for a business combination as the likelihood of making payment becomes remote.

~~(c)~~

~~The tax expense was determined based upon the nature as well as the jurisdiction of each Special Item at the applicable tax rate.~~

~~(d)~~

During the quarter ended May 31, 2016, the Little Sheep founding shareholders sold their remaining 7% Little Sheep ownership interest to the Company pursuant to their redemption rights. The difference between the purchase price of less than $1 million, which was determined using a non-fair value based formula pursuant to the agreement governing the redemption rights, and the carrying value of their redeemable noncontrolling interests was recorded as an $8 million loss attributable to noncontrolling interests.

~~Adjusted EBITDA~~

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

Quarter ended

Year to date ended
Reconciliation of Net Income to Adjusted EBITDA

8/31/2017

8/31/2016

8/31/2017

8/31/2016
Net Income — noncontrolling interests

$
10

$
10

$
21

$
10

Net Income — Yum China Holdings, Inc.

211

192

493

414

Income tax provision

102

87

213

165

Interest income, net

(6
)

(3
)

(13
)

(7
)

Operating Profit

317

286

714

582

Depreciation and amortization

105

101

265

272

Store impairment charges (See Note 6)

6

6

28

43

Special Items Income – Operating profit

(3
)

(3
)

(3
)

(2
)

Adjusted EBITDA

$
425

$
390

$
1,004

$
895

~~Segment Results~~

~~KFC~~

Quarter ended

Year to date ended

% B/(W)

% B/(W)

8/31/2017

8/31/2016

Reported

Ex F/X

8/31/2017

8/31/2016

Reported

Ex F/X

Company sales

$
1,385

$
1,263

10

11

$
3,342

$
3,238

3

7

Franchise fees and income

38

34

13

14

93

87

7

11

Total revenues

$
1,423

$
1,297

10

12

$
3,435

$
3,325

3

7

Restaurant profit

$
292

$
250

17

19

$
671

$
589

14

18

Restaurant margin %

21.1
%

19.7
%

1.4

ppts.

1.4

ppts.

20.1
%

18.2
%

1.9

ppts.

1.9

ppts.

G&A expenses

$
42

$
39

(7
)

(9
)

$
106

$
101

(6
)

(10
)

Closure and impairment expenses, net

$
1

$
4

40

38

$
10

$
25

58

56

Other income, net

$
(18
)

$
(16
)

14

16

$
(45
)

$
(38
)

18

23

Operating Profit

$
286

$
238

20

22

$
647

$
538

20

24

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016
System Sales Growth (Decline)

10
%

(4
)%

4
%

1
%

System Sales Growth, excluding F/X

11
%

2
%

8
%

7
%

Same-Store Sales Growth (Decline)

7
%

(1
)%

4
%

4
%

Unit Count

8/31/2017

8/31/2016

% Increase

Company-owned

4,007

3,832

5

Unconsolidated affiliates

872

812

7

Franchisees

468

443

6

5,347

5,087

5

~~Company Sales and Restaurant Profit~~

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

Quarter ended
Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017
Company sales

$
1,263

$
44

$
99

$
(21
)

$
1,385

Cost of sales

(365
)

(13
)

(36
)

6

(408
)

Cost of labor

(243
)

(7
)

(17
)

4

(263
)

Occupancy and other

(405
)

(11
)

(13
)

7

(422
)

Restaurant profit

$
250

$
13

$
33

$
(4
)

$
292

Year to date ended
Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017
Company sales

$
3,238

$
94

$
139

$
(129
)

$
3,342

Cost of sales

(970
)

(27
)

(31
)

39

(989
)

Cost of labor

(625
)

(18
)

(49
)

26

(666
)

Occupancy and other

(1,054
)

(23
)

22

39

(1,016
)

Restaurant profit

$
589

$
26

$
81

$
(25
)

$
671

The increases in Company sales and Restaurant profit associated with store portfolio actions for the quarter was driven by net unit growth. Significant other factors impacting Company sales and Restaurant profit were the Company same-store sales growth of 7%8%, ~~partially offset by higher labor costs including wage inflation of 8% and promotion costs.~~

~~The year-to-date increases in Company sales and Restaurant profit associated with store portfolio actions was driven by~~ net unit ~~growth. Significant other factors impacting Company sales and Restaurant profit were the Company same-store sales~~ growth of 4%10% in Company-owned stores, and the favorable impact from retail tax structure reform (primarily in cost of sales), partially offset by higher labor costs including wage inflation of 8%, commodity inflation of 3% and promotion costs. significantly reduced temporary store closures.

~~Franchise Fees and Income~~

~~The quarter and year-to-date increases in Franchise fees and income, excluding the impact of F/X, was primarily driven by the impact of refranchising and net unit growth.~~

~~G&A Expenses~~

~~The quarter and year-to-date increases in G&A expenses, excluding the impact of F/X, was primarily driven by higher compensation costs due to wage inflation.~~

~~Operating Profit~~

The increase in Operating ~~Profit~~profit for the quarter, excluding the impact of F/X, was primarily driven by ~~same-store~~the increase in Company sales, ~~growth~~higher labor productivity, operational efficiency, the increase in temporary relief from the government and ~~net unit growth,~~landlords and lower rental expenses from store portfolio optimization, partially offset by increased value promotions, higher ~~restaurant~~performance-based compensation and wage inflation in the low single digits.

The Consolidated Results of Operations for the quarters ended March 31, 2023 and 2022 are presented below:


	Quarter Ended						% B/(W) (a)
	3/31/2023			3/31/2022			Reported				Ex F/X
Company sales	$	2,772		$	2,548			9				17
Franchise fees and income		25			24			1				9
Revenues from transactions with franchisees		93			77			21				30
Other revenues		27			19			43				54
Total revenues	$	2,917		$	2,668			9				18
Company restaurant expenses	$	2,209		$	2,197			(1	)			(8	)
Operating Profit	$	416		$	191			118				134
Interest income, net		38			12			224				232
Investment loss		(17	)		(37	)		54				54
Income tax provision		(125	)		(55	)		(127	)			(141	)
Equity in net earnings (losses) from equity method investments		1			(1	)	NM				NM
Net Income – including noncontrolling interests		313			110			184				206
Net Income – noncontrolling interests		24			10			(136	)			(155	)
Net Income – Yum China Holdings, Inc.	$	289		$	100			189				212
Diluted Earnings Per Common Share	$	0.68		$	0.23			196				222
Effective tax rate		28.5	%		33.1	%
Supplementary information – Non-GAAP Measures(b)
Restaurant profit	$	563		$	351			61				73
Restaurant margin %		20.3	%		13.8	%		6.5		ppts.		6.5		ppts.
Adjusted Operating Profit	$	419		$	193
Adjusted Net Income – Yum China Holdings, Inc.	$	292		$	102
Adjusted Diluted Earnings Per Common Share	$	0.69		$	0.24
Adjusted Effective Tax Rate		28.4	%		32.7	%
Adjusted EBITDA	$	539		$	365

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 3/31/2023
	% change
System Sales Growth		8	%
System Sales Growth, excluding F/X		17	%
Same-Store Sales Growth		8	%


Unit Count	3/31/2023		3/31/2022		% Increase
Company-owned		11,374		10,385		10
Franchisees		1,806		1,732		4
		13,180		12,117		9

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 3/31/2023
	KFC			Pizza Hut			All Other Segments			Corporate and Unallocated			Elimination			Total
GAAP Operating Profit (Loss)	$	420		$	55		$	(6	)	$	(53	)	$	—		$	416
Less:
Franchise fees and income		17			2			6			—			—			25
Revenues from transactions with franchisees		10			1			19			63			—			93
Other revenues		5			3			162			10			(153	)		27
Add:
General and administrative expenses		68			29			10			56			—			163
Franchise expenses		9			1			—			—			—			10
Expenses for transactions with franchisees		9			1			18			63			—			91
Other operating costs and expenses		4			3			161			8			(152	)		24
Closures and impairment expenses, net		1			1			1			—			—			3
Other expenses (income), net		2			—			—			(1	)		—			1
Restaurant profit (loss)	$	481		$	84		$	(3	)	$	—		$	1		$	563
Company sales		2,166			591			15			—			—			2,772
Restaurant margin %		22.2	%		14.2	%		(21.2	)%	N/A			N/A				20.3	%


	Quarter Ended 3/31/2022
	KFC			Pizza Hut			All Other Segments			Corporate and Unallocated			Elimination			Total
GAAP Operating Profit (Loss)	$	220		$	30		$	(17	)	$	(42	)	$	—		$	191
Less:
Franchise fees and income		16			2			6			—			—			24
Revenues from transactions with franchisees		8			1			11			57			—			77
Other revenues		2			2			131			10			(126	)		19
Add:
General and administrative expenses		65			29			13			44			—			151
Franchise expenses		9			1			—			—			—			10
Expenses for transactions with franchisees		8			1			9			57			—			75
Other operating costs and expenses		1			1			134			9			(128	)		17
Closures and impairment (income) expenses, net		(1	)		1			2			—			—			2
Other expenses (income), net		26			—			—			(1	)		—			25
Restaurant profit (loss)	$	302		$	58		$	(7	)	$	—		$	(2	)	$	351
Company sales		1,991			542			15			—			—			2,548
Restaurant margin %		15.2	%		10.7	%		(50.9	)%	N/A			N/A				13.8	%


	Quarter Ended
	3/31/2023			3/31/2022
Reconciliation of Reported GAAP Results to Non-GAAP Adjusted Measures
Reconciliation of Operating Profit to Adjusted Operating Profit
Operating Profit	$	416		$	191
Special Items, Operating Profit		(3	)		(2	)
Adjusted Operating Profit	$	419		$	193
Reconciliation of Net Income to Adjusted Net Income
Net Income – Yum China Holdings, Inc.	$	289		$	100
Special Items, Net Income – Yum China Holdings, Inc.		(3	)		(2	)
Adjusted Net Income – Yum China Holdings, Inc.	$	292		$	102
Reconciliation of EPS to Adjusted EPS
Basic Earnings Per Common Share	$	0.69		$	0.23
Special Items, Basic Earnings Per Common Share		(0.01	)		(0.01	)
Adjusted Basic Earnings Per Common Share	$	0.70		$	0.24
Diluted Earnings Per Common Share	$	0.68		$	0.23
Special Items, Diluted Earnings Per Common Share		(0.01	)		(0.01	)
Adjusted Diluted Earnings Per Common Share	$	0.69		$	0.24
Reconciliation of Effective Tax Rate to Adjusted Effective Tax Rate
Effective tax rate (See Note 13)		28.5	%		33.1	%
Impact on effective tax rate as a result of Special Items		0.1	%		0.4	%
Adjusted effective tax rate		28.4	%		32.7	%

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


	Quarter Ended
Reconciliation of Net Income to Adjusted EBITDA	3/31/2023			3/31/2022
Net Income – Yum China Holdings, Inc.	$	289		$	100
Net Income – noncontrolling interests		24			10
Equity in net (earnings) losses from equity method investments		(1	)		1
Income tax provision		125			55
Interest income, net		(38	)		(12	)
Investment loss		17			37
Operating Profit		416			191
Special Items, Operating Profit		3			2
Adjusted Operating Profit		419			193
Depreciation and amortization		116			164
Store impairment charges		4			8
Adjusted EBITDA	$	539		$	365

Details of Special Items are presented below:


	Quarter Ended
Details of Special Items	3/31/2023			3/31/2022
Share-based compensation expense for Partner PSU Awards(1)	$	(3	)	$	(2	)
Special Items, Operating Profit		(3	)		(2	)
Tax effect on Special Items(2)		—			—
Special Items, net income – including noncontrolling interests		(3	)		(2	)
Special Items, net income – noncontrolling interests		—			—
Special Items, Net Income – Yum China Holdings, Inc.	$	(3	)	$	(2	)
Weighted-average diluted shares outstanding (in millions)		423			430
Special Items, Diluted Earnings Per Common Share	$	(0.01	)	$	(0.01	)

(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 ~~costs~~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 ~~G&A expenses.~~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 ~~year-to-date~~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
							% B/(W)
	3/31/2023			3/31/2022			Reported				Ex F/X
Company sales	$	2,166		$	1,991			9				17
Franchise fees and income		17			16			5				13
Revenues from transactions with franchisees		10			8			29				39
Other revenues		5			2			195				218
Total revenues	$	2,198		$	2,017			9				17
Company restaurant expenses	$	1,685		$	1,689			—				(7	)
G&A expenses	$	68		$	65			(4	)			(12	)
Franchise expenses	$	9		$	9			4				(3	)
Expenses for transactions with franchisees	$	9		$	8			(25	)			(34	)
Other operating costs and expenses	$	4		$	1			(295	)			(325	)
Closures and impairment expenses (income), net	$	1		$	(1	)	NM				NM
Other expenses, net	$	2		$	26			92				92
Operating Profit	$	420		$	220			91				105
Restaurant profit	$	481		$	302			60				72
Restaurant margin %		22.2	%		15.2	%		7.0		ppts.		7.0		ppts.


	Quarter Ended 3/31/2023
	% change
System Sales Growth		9	%
System Sales Growth, excluding F/X		17	%
Same-Store Sales Growth		8	%


Unit Count	3/31/2023		3/31/2022		% Increase
Company-owned		8,335		7,668		9
Franchisees		904		773		17
		9,239		8,441		9

Company Sales and Restaurant Profit

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


	Quarter Ended
Income (Expense)	3/31/2022			Store Portfolio Actions			Other			F/X			3/31/2023
Company sales	$	1,991		$	175		$	165		$	(165	)	$	2,166
Cost of sales		(621	)		(56	)		(18	)		49			(646	)
Cost of labor		(501	)		(35	)		(15	)		39			(512	)
Occupancy and other operating expenses		(567	)		(23	)		23			40			(527	)
Restaurant profit	$	302		$	61		$	155		$	(37	)	$	481

The increase in ~~Operating Profit,~~Company sales for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit growth and ~~lower closure and impairment expenses, partially offset by higher G&A expenses and higher restaurant operating costs.~~

~~Pizza Hut~~

Quarter ended

Year to date ended

% B/(W)

% B/(W)

8/31/2017

8/31/2016

Reported

Ex F/X

8/31/2017

8/31/2016

Reported

Ex F/X

Company sales

$
603

$
573

5

7

$
1,449

$
1,405

3

7

Franchise fees and income

1

1

37

40

2

2

31

36

Total revenues

$
604

$
574

5

7

$
1,451

$
1,407

3

7

Restaurant profit

$
108

$
108

1

2

$
256

$
210

22

26

Restaurant margin %

17.8
%

18.7
%

(0.9
)
ppts.

(0.8
)
ppts.

17.6
%

14.9
%

2.7

ppts.

2.7

ppts.

G&A expenses

$
27

$
25

(4
)

(6
)

$
70

$
68

(1
)

(5
)

Closure and impairment expenses, net

$
1

$
1

54

56

$
9

$
11

23

20

Operating Profit

$
80

$
82

—

2

$
177

$
132

37

42

Quarter ended

Year to date ended

8/31/2017

8/31/2016

8/31/2017

8/31/2016

System Sales Growth (Decline)

6
%

1
%

3
%

(3
)%

System Sales Growth, excluding F/X

7
%

7
%

7
%

3
%

Same-Store Sales Growth (Decline)

—
%

(4
)%

1
%

(8
)%

Unit Count

8/31/2017

8/31/2016

% Increase

Company-owned

2,114

1,973

7

Franchisees

29

20

45

2,143

1,993

8

~~Company Sales and Restaurant Profit~~

significantly reduced temporary store closures. The ~~changes~~increase in ~~Company sales and~~ Restaurant profit ~~were as follows:~~

Quarter ended
Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017
Company sales

$
573

$
38

$
2

$
(10
)

$
603

Cost of sales

(144
)

(11
)

(12
)

3

(164
)

Cost of labor

(129
)

(8
)

1

2

(134
)

Occupancy and other

(192
)

(10
)

2

3

(197
)

Restaurant profit

$
108

$
9

$
(7
)

$
(2
)

$
108

Year to date ended

Income (Expense)

8/31/2016

Store Portfolio Actions

Other

F/X

8/31/2017

Company sales

$
1,405

$
94

$
6

$
(56
)

$
1,449

Cost of sales

(376
)

(24
)

9

15

(376
)

Cost of labor

(326
)

(23
)

(5
)

13

(341
)

Occupancy and other

(493
)

(26
)

25

18

(476
)

Restaurant profit

$
210

$
21

$
35

$
(10
)

$
256

~~The increases in Company sales and Restaurant profit associated with store portfolio actions~~ for the quarter, was primarily driven by net unit growth. Company sales and Restaurant profit were negatively impacted by promotion costs and higher labor costs including wage inflation of 6%, partially offset by labor efficiency.

The year-to-date increases in Company sales and Restaurant profit associated with store portfolio actions was primarily driven by net unit growth. Significant other factors impacting Company sales and Restaurant profit were the favorable impact from retail tax structure reform (primarily in cost of sales), Company same-store sales growth of 1% and labor efficiency, partially offset by higher labor costs including wage inflation of 6% and commodity inflation of 1%.

~~G&A Expenses~~

~~The quarter and year-to-date increases in G&A expenses,~~ excluding the impact of F/X, was primarily driven by the increase in Company sales, higher labor productivity, operational efficiency, the increase in temporary relief from the government and landlords and lower rental expenses from store portfolio optimization, partially offset by higher performance-based compensation, ~~costs due to~~ wage inflation in the low single digits and increased ~~headcounts.~~value promotions.

~~Operating Profit~~31

Franchise Fees and Income/Revenues from Transactions with Franchisees

The increase in ~~Operating Profit~~Franchise fees and income and Revenues from transactions with franchisees for the quarter, excluding the impact of F/X, was primarily driven by net unit growth ~~partially offset by higher restaurant operating costs mainly attributable to promotion costs~~ and ~~wage inflation.~~same-store sales growth.

G&A Expenses

The ~~year-to-date~~ increase in ~~Operating Profit,~~G&A expenses for the quarter, excluding the impact of F/X, was primarily driven by ~~lower restaurant operating costs including~~higher performance-based compensation and merit increases.

Other Expenses, net

The decrease in Other expenses, net for the ~~favorable~~quarter, 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 increase in Operating profit for the ~~retail tax structure reform,~~quarter, excluding the impact of F/X, was primarily driven by the increase in Restaurant profit, and decrease in Other expenses, net, ~~unit growth~~partially offset by higher G&A expenses.

Pizza Hut


	Quarter Ended
							% B/(W)
	3/31/2023			3/31/2022			Reported				Ex F/X
Company sales	$	591		$	542			9				17
Franchise fees and income		2			2			2				10
Revenues from transactions with franchisees		1			1			7				15
Other revenues		3			2			88				103
Total revenues	$	597		$	547			9				18
Company restaurant expenses	$	507		$	484			(5	)			(13	)
G&A expenses	$	29		$	29			(1	)			(9	)
Franchise expenses	$	1		$	1			(1	)			(9	)
Expenses for transactions with franchisees	$	1		$	1			(5	)			(13	)
Other operating costs and expenses	$	3		$	1			(75	)			(88	)
Closures and impairment expenses, net	$	1		$	1			(82	)			(96	)
Operating Profit	$	55		$	30			85				98
Restaurant profit	$	84		$	58			44				55
Restaurant margin %		14.2	%		10.7	%		3.5		ppts.		3.5		ppts.


	Quarter Ended 3/31/2023
	% change
System Sales Growth		9	%
System Sales Growth, excluding F/X		17	%
Same-Store Sales Growth		7	%


Unit Count	3/31/2023		3/31/2022		% Increase
Company-owned		2,838		2,543		12
Franchisees		145		136		7
		2,983		2,679		11

Company Sales and ~~same-store~~Restaurant Profit

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

~~All Other Segments~~


	Quarter Ended
Income (Expense)	3/31/2022			Store Portfolio Actions			Other			F/X			3/31/2023
Company sales	$	542		$	60		$	35		$	(46	)	$	591
Cost of sales		(166	)		(19	)		(14	)		15			(184	)
Cost of labor		(157	)		(14	)		(9	)		13			(167	)
Occupancy and other operating expenses		(161	)		(12	)		5			12			(156	)
Restaurant profit	$	58		$	15		$	17		$	(6	)	$	84

~~All Other Segments includes East Dawning, Little Sheep, Taco Bell and Daojia.~~

Quarter ended

Year to date ended

% B/(W)

% B/(W)

8/31/2017

8/31/2016

Reported

Ex F/X

8/31/2017

8/31/2016

Reported

Ex F/X

Company sales

$
10

$
12

(23
)

(22
)

$
27

$
41

(34
)

(31
)

Franchise fees and income

1

—

86

93

3

1

65

74

Total revenues

$
11

$
12

(18
)

(16
)

$
30

$
42

(29
)

(26
)

Restaurant (loss) profit

(1
)

(3
)

88

87

$
—

$
(2
)

NM

NM

Restaurant margin %

(1.5
)%

(7.7
)%

6.2

ppts.

6.1

ppts.

2.2
%

(1.7
)%

3.9

ppts.

4.0

ppts.

G&A expenses

$
6

$
2

NM

NM

$
10

$
6

(74
)

(78
)

Operating Loss

$
(8
)

$
(5
)

NM

NM

$
(8
)

$
(6
)

(81
)

(77
)

The ~~decrease~~increase in Company sales for the quarter, excluding the impact of F/X, was primarily driven by same-store sales growth, net unit ~~closures~~growth and ~~refranchising.~~

significantly reduced temporary store closures. The ~~year-to-date decrease~~increase in ~~Company sales,~~Restaurant profit for the quarter, excluding the impact of F/X, was primarily driven by ~~unit closures, refranchising~~the increase in Company sales, higher labor productivity, operational efficiency, the increase in temporary relief from the government and ~~same-store sales decline of 8%.~~landlords and lower rental expenses from store portfolio optimization, partially offset by increased value promotions, higher performance-based compensation and wage inflation in the low single digits.

~~Corporate & Unallocated~~

Quarter ended

Year to date ended

Income (Expense)

8/31/2017

8/31/2016

% B/(W)

8/31/2017

8/31/2016

% B/(W)

Corporate G&A expenses

$
(45
)

$
(35
)

(31
)

$
(108
)

$
(96
)

(13
)

Refranchising gain, net (See Note 6)

—

4

(87
)

2

8

(74
)

Other unallocated

4

2

NM

4

6

(23
)

Interest income, net

6

3

NM

13

7

77

Income tax provision (See Note 11)

(102
)

(87
)

(19
)

(213
)

(165
)

(29
)

Effective tax rate (See Note 11)

31.7
%

29.8
%

(1.9
)%

29.3
%

28.0
%

(1.3
)%

~~Corporate~~ G&A Expenses

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

Operating Profit

The increase in Operating profit for the quarter, 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
							% B/(W)
	3/31/2023			3/31/2022			Reported				Ex F/X
Company sales	$	15		$	15			3				12
Franchise fees and income		6			6			(8	)			(1	)
Revenues from transactions with franchisees		19			11			73				86
Other revenues		162			131			23				33
Total revenues	$	202		$	163			24				33
Company restaurant expenses	$	18		$	22			17				10
G&A expenses	$	10		$	13			18				12
Expenses for transactions with franchisees	$	18		$	9			(89	)			(104	)
Other operating costs and expenses	$	161		$	134			(21	)			(30	)
Closures and impairment expenses, net	$	1		$	2			87				86
Operating Loss	$	(6	)	$	(17	)		62				59
Restaurant loss	$	(3	)	$	(7	)		57				54
Restaurant margin %		(21.2	)%		(50.9	)%		29.7		ppts.		29.7		ppts.


	Quarter Ended 3/31/2023
	% change
Same-Store Sales Growth		7	%

Total Revenues

The increase in Total revenues of all other segments for the quarter, excluding the impact of F/X, was primarily driven by inter-segment revenue generated by our delivery team for services provided to KFC and Pizza Hut restaurants as a result of rising delivery sales.

Operating Loss

The decrease in Operating loss for the quarter, excluding the impact of F/X, was primarily driven by the decrease in Operating loss from certain emerging brands.

Corporate and Unallocated


	Quarter Ended
							% B/(W)
	3/31/2023			3/31/2022			Reported			Ex F/X
Revenues from transactions with franchisees	$	63		$	57			11			19
Other revenues	$	10		$	10			(1	)		7
Expenses for transactions with franchisees	$	63		$	57			(10	)		(18	)
Other operating costs and expenses	$	8		$	9			5			(2	)
Corporate G&A expenses	$	56		$	44			(26	)		(33	)
Other unallocated income, net	$	(1	)	$	(1	)		60			72
Interest income, net	$	38		$	12			224			232
Investment loss	$	(17	)	$	(37	)		54			54
Income tax provision (See Note 13)	$	(125	)	$	(55	)		(127	)		(141	)
Equity in net earnings (losses) from equity method investments	$	1		$	(1	)	NM			NM
Effective tax rate (See Note 13)		28.5	%		33.1	%		4.6	%		4.6	%

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 increase for the quarter, excluding the impact of F/X, was mainly due to the increase in system sales for franchisees.

G&A Expenses

The increase in Corporate G&A expenses for the quarter, excluding the impact of F/X, was primarily due to higher performance-based compensation ~~costs partially attributable to hiring additional personnel to perform public company functions, as well as increased professional service fees.~~ and merit increases.

Interest Income, Net

The ~~quarter and year-to-date increases~~increase in interest income, net for the quarter was primarily driven by higher ~~returns on larger balances~~interest rates and higher investment balance.

Investment Loss

The decrease in investment loss for the quarter mainly relates to the more moderate decline in the fair value of ~~short-term investments and time deposits.~~our investment in Meituan compared to the prior year period. See Note 3 for additional information.

Income Tax Provision

Our income tax provision primarily includes tax on our earnings at the Chinese statutory tax rate of 25%~~. To the extent those earnings are not deemed permanently reinvested in China, we are required to record U.S.~~, withholding tax on ~~those~~planned or actual repatriation of earnings ~~net~~outside of ~~a credit for the foreign taxes paid in China. Our effective~~China, Hong Kong profits tax, ~~rate was 31.7%~~ and ~~29.8% for the quarters ended August 31, 2017 and 2016, respectively, and 29.3% and 28.0% for the year to date ended August 31, 2017 and 2016, respectively.~~U.S. corporate income tax, if any. The ~~higher~~lower effective tax rate for the quarter ~~and year to date~~ ended ~~August~~March 31, ~~2017~~2023 was primarily due to ~~higher costs~~a true-up of ~~repatriating current year earnings into~~foreign withholding tax in the ~~U.S.~~quarter ended March 31, 2022, a reduction in valuation allowance for certain subsidiaries, and less impact from our investment in Meituan.

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 has significantly impacted the Company’s operations and financial results and caused significant volatility in our operations. During the first quarter of 2023, sales rebounded significantly year-over-year and sequentially. Our strong sales growth was driven by tremendous efforts in seizing opportunities as the country pivoted from strict COVID-19 measures. Margins also improved substantially, benefiting from sales leveraging, cost structure rebasing, and temporary relief from the government and landlords.

However, we are still in the early stages of recovery. Sales during the Chinese New Year holiday trading period were buoyed by pent-up travel demand, yet same-store sales post Chinese New Year holiday in the first quarter have remained at teens level below 2019. During the Labor Day holiday period, trading was vibrant and grew on a year-over-year basis, yet same-store sales were still approximately in the mid-single digits range below the 2019 level on a pro-forma basis. We also expect inflationary pressures to be gradually built up and the benefit from temporary relief to be phased out over the coming quarters. The pace and the trajectory of the recovery remain uncertain, given the challenging macroeconomic conditions and the lingering effects of the pandemic. 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, the Chinese government implemented reform to its retail tax structure, which is intended to be a progressive and positive shift to more closely align with a more modern service-based economy. Under this reform, 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 ~~general~~ 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~~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 ~~an input~~a VAT ~~credit~~ 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, inon the Condensed Consolidated Balance Sheets. At each balance sheet date, the Company reviews the outstanding balance of any ~~input~~ VAT ~~credit~~ asset for recoverability, ~~based on~~giving consideration to the indefinite life of VAT assets as well as its forecasted ~~operating results. We evaluate the recoverability of the net VAT credit asset based on our estimated~~ operating results and capital spending, which inherently includes significant assumptions that are subject to change.

As of ~~August~~March 31, ~~2017, an input VAT credit asset of $120 million and payable of $3 million were recorded in Other assets and other current liabilities, respectively, in~~2023, the ~~Condensed Consolidated Balance Sheets. The~~ Company has not made an allowance for the recoverability of ~~the input~~ VAT ~~credit asset,~~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 with an aim to support business recovery. 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 March 31, 2023, VAT assets of $95 million, VAT assets of $5 million and net VAT ~~payables more than one year from August 31, 2017. Any input VAT credit asset would be classified as~~payable of $6 million were recorded in Prepaid expenses and other current assets, ifOther assets and Accounts payable and other current liabilities, respectively, on the Condensed Consolidated Balance Sheets.

The Company ~~expected~~will continue to ~~use~~review the ~~credit within one year.~~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 output VAT and, therefore, reduce 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 in the first quarter of 2023. The VAT deductions were recorded as a reduction to the related expense item, primarily in Company restaurant expenses included in the Condensed Consolidated Statements of Income.

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 ~~VAT reform is still at an early stage of implementation and the~~ interpretation and application of the new VAT regime ~~may~~are not ~~be immediately clear or~~ settled at some local governmental levels. In addition, China is in the ~~timetable for~~process of enacting the prevailing VAT regulations into a national VAT law. However, the timetable for enacting the national VAT law ~~including ultimate enacted VAT rates,~~ 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 quarter to quarter.

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 ~~and adversely~~ affect the Company’s business, results of operations, cash flows and financial ~~condition.~~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~~.discussion.

Condensed Consolidated ~~and Combined~~ Cash Flows

Our cash flows for the ~~year to date~~quarters ended ~~August~~March 31, ~~2017~~2023 and ~~2016~~2022 were as follows:

Net cash provided by operating activities was ~~$987~~$507 million in ~~2017~~2023 as compared to ~~$824~~$171 million in ~~2016.~~2022. The increase was primarily driven by ~~higher Net Income and timing of payments for inventory.~~the increase in net income along with working capital changes.

Net cash used in investing activities was ~~$294~~$429 million in ~~2017~~2023 as compared to ~~$232~~net cash provided by investing activities of $13 million in ~~2016.~~2022. The ~~increase~~change was ~~primarily driven by acquisition~~mainly due to net impact on cash flow resulting from purchases and maturities of ~~Daojia in 2017, lapping cash proceeds generated from the sale of aircraft~~short-term investments, long-term bank deposits and ~~the impact from refranchising, which reduced net cash used in 2016.~~notes.

Net cash used in financing activities~~of $142~~ was $99 million in ~~2017 was mainly related~~2023 as compared to ~~share repurchases of $128 million and net cash used in financing activities of $249~~$274 million in ~~2016 mainly represented changes~~2022. The decrease was primarily driven by the decrease in ~~net investment by Parent.~~share repurchases.

Liquidity and Capital Resources

Historically we have funded our operations through cash generated from the operation of our Company-owned stores, ~~and from~~ our franchise operations and dividend payments from our former unconsolidated affiliates. ~~Prior to October 31, 2016, excess cash was historically repatriated to YUM through intercompany loans or dividends.~~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 ~~any distributions~~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 ~~share repurchases we may make.~~investments that build and support our ecosystem. We believe that our future cash from operations, together with our ~~access to~~ funds on hand and access to the capital markets, will provide adequate resources to fund these uses of cash, and that our existing cash, ~~and~~ net cash from operations and credit facilities will be sufficient to fund our operations and anticipated capital expenditures for the next 12 months.

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 or absence of a credit rating;~~

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.~~

economies, as well as relations between the Chinese and U.S. governments.

There can be no assurance ~~particularly as a new company that currently has no credit rating,~~ 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 ~~overall~~additional 10% withholding tax ~~rate equal~~levied by the Chinese tax authority, subject to ~~the 35% U.S. statutory income~~any reduction or exemption set forth in relevant tax ~~rate.~~treaties or tax arrangements.

~~Dividends and~~ Share Repurchases and Dividends

On ~~February 7, 2017, we announced that~~March 17, 2022, our ~~board~~Board of ~~directors authorized a $300 million~~Directors increased the share repurchase ~~program.~~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, ~~including~~ block trades, accelerated share repurchase transactions and the use of Rule 10b5-1 trading plans. ~~As of August~~During the quarters ended March 31, ~~2017,~~2023 and 2022, the Company ~~has~~ repurchased ~~$128~~$62 million or ~~3,355,696~~1.0 million shares and $232 million or 5.0 million shares of common stock, respectively, under the repurchase program.

For the quarters ended March 31, 2023 and 2022, the Company paid cash dividends of approximately $54 million and $51 million, respectively, to stockholders through a quarterly dividend payment of $0.13 and $0.12 per share, respectively.

On ~~October 4, 2017,~~May 2, 2023, the Board of Directors ~~increased Yum China’s existing~~declared a cash dividend of $0.13 per share, ~~repurchase authorization from $300 million~~payable on June 20, 2023, to ~~an aggregate~~stockholders of ~~$550~~record as of the close of business on May 30, 2023. The total estimated cash dividend payable is approximately $54 million.

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~~Board of ~~directors,~~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.

On October 4, 2017, the Board of Directors approved a regular quarterly cash dividend program, and declared an initial cash dividend of $0.10 per share on Yum China’s common stock, payable as of the close of business on December 21, 2017 to stockholders of record as of the close of business on November 30, 2017. Future dividends will be subject to review and approval by the Board of Directors.

Borrowing Capacity

As of ~~August~~March 31, ~~2017,~~2023, the Company had credit facilities of ~~RMB2,300~~ RMB4,512million (approximately ~~$350~~$656 million), comprised of onshore credit facilities of RMB3,000 million (approximately $436 million) in ~~the~~aggregate and offshore credit facilities of $220 million in aggregate.

The credit facilities ~~have~~had remaining terms ranging from 1less than one year to ~~3 years.~~two years as of March 31, 2023. Each credit facility bears interest based on the ~~prevailing rate stipulated~~Loan Prime Rate (“LPR”) published by the ~~People’s~~National Interbank Funding Centre of the PRC, London Interbank Offered Rate (“LIBOR”) administered by the ICE Benchmark Administration, or Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of ~~China and contains financial covenants including, among other things, limitations on certain additional indebtedness and liens, and certain other transactions specified in the respective agreement.~~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 agreement. Interest on any outstanding borrowings is due at least monthly. Some of the onshore credit facilities contain sub-limits for overdrafts, non-financial bonding, standby letters of credit and guarantees. As of ~~August~~March 31, ~~2017,~~2023, we had outstanding bank guarantees of RMB199 million (approximately $29 million) mainly to secure our lease payments to landlords for certain Company-owned restaurants. The credit facilities were therefore reduced by the ~~full amount~~same amount. There was a $2-million bank borrowing outstanding as of ~~borrowings~~March 31, 2023, which was ~~available to us under each facility.~~secured by a $1-million short-term investment. The bank borrowing will be due within one year and was included in Accounts payable and other current liabilities.

Off-Balance Sheet Arrangements

See the Guarantees section of Note 1315 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 ~~May 2014,~~March 2023, the FASB issued ASU ~~No. 2014-09,~~ ~~Revenue from Contracts~~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 ~~Customers (Topic 606)~~ ~~(ASU 2014-09),~~common control leases over their useful life to ~~provide principles within~~the common control group and account for them as a ~~single framework for revenue recognition~~transfer of ~~transactions involving contracts with customers across all industries. In July 2015,~~assets between entities under common control through an adjustment to equity when the ~~FASB approved a one-year deferral~~lessee no longer controls the use of the ~~effective date of the new revenue standard.~~underlying asset. ASU 2014-09 is now effective for the Company in our first quarter of fiscal 2018 with early adoption permitted in the first quarter of 2017. The standard allows for either a full retrospective or modified retrospective transition method. In March and April 2016, the FASB issued the following amendments to clarify the implementation guidance: ASU No. 2016-08, ~~Revenue from Contracts with Customers (Topic 606)~~: ~~Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~ ~~and ASU No. 2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~. We do not believe these standards will impact our recognition of revenue from Company-owned restaurants or our recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. However, the initial fees from franchisees, which are currently recognized as revenue when we have performed substantially all initial services required by the franchise agreement, generally upon the opening of a store, will be recognized over the term of the franchise agreement because the franchise rights will be accounted for as rights to access our symbolic intellectual property. This will result in additional deferred revenue associated with the franchise right upon adoption of the new standard. We recognized $2 million and $5 million of initial fees, including renewal fees, as revenue for the quarter and year to date ended August 31, 2017, respectively. We are evaluating whether the standards will have an impact on transactions currently not included in our revenues such as franchisee contributions to and subsequent expenditures from advertising programs. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our statements of income or cash flows. We are evaluating whether the new standards will impact the principal/agent determinations in these arrangements. If we determine we are the principal in these arrangements we would include contributions to and expenditures from these advertising programs within our Consolidated Statements of Income and Cash Flows. While any such change has the potential to materially impact our gross amount of reported revenues and expenses, such impact would largely be offsetting and we would not expect there to be a significant impact on our reported Net Income. In addition, we are continuing to evaluate the impact the adoption of these standards will have on the recognition and presentation of other revenue transactions with unconsolidated affiliates and franchisees. The new guidance also requires enhanced disclosures, including the identification of performance obligations and significant judgments in measurement and recognition.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ (ASU 2016-02), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-022023-01 is effective for the Company in our first quarter of fiscal 2019 with early adoption permitted. The standard must be adopted using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect that this standard will have a material effect on our financial statements. While we are continuing to assess the effect of adoption, we currently believe the most significant changes relate to the recognition of right-of-use assets and lease liabilities on our balance sheet for operating leases of the land and/or building of our restaurants and office space. At August 31, 2017, we operated more than 6,100 restaurants, leasing the underlying land and/or building, with our commitments expiring within 20 years from the inception of the lease. The amount of our future minimum lease payments under operating leases was approximately $3 billion as of August 31, 2017. We anticipate continuing to add more restaurants and increase our leasing activity between now and adoption.

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326)~~ (ASU 2016-13): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted beginning in the first quarter of 2019. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230)~~ (ASU 2016-15), which provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of 2018 using a retrospective transition method,January 1, 2024, with early adoption permitted. We are currently evaluating the impact the adoption of this standard ~~will~~may have on our financial statements.

~~In October 2016, the FASB issued ASU No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~ (ASU 2016-16), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The guidance will require a modified retrospective application with a cumulative adjustment to opening retained earnings at the beginning of the first quarter of 2018, but permits adoption at the beginning of an earlier annual period. We are currently evaluating the impact the adoption of this standard will have on our financial statements.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~ (ASU 2016-18), which requires that entities show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~ (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~ (ASU 2017-04), which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. ASU 2017-04 is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this guidance to have a material impact on our financial statements.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting~~ (ASU 2017-09), which clarifies that modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changes in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2018, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact 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 ~~food-borne~~foodborne illness concerns, (b) significant failure to maintain effective quality ~~control~~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 ~~diseases,~~illnesses, including the COVID-19 pandemic, (e) ~~the fact that we derive substantially all of our revenue from our operations in China, (f)~~ 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, ~~and~~ the potential cannibalization of existing sales by aggressive

development ~~(j) fluctuation of raw materials prices,~~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 ~~customers and employees, (p)~~information technology systems, (r) the ~~dependence of~~fact that our ~~delivery~~ business depends on the performance of, and our long-term relationships with, third-party ~~aggregators and~~ mobile payment processors, ~~(q)~~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 ~~accelerated~~ impact of social media, ~~(r) litigation and~~(x) failure to comply with anti-bribery or anti-corruption laws, ~~(s)~~(y) U.S. federal income taxes, changes in tax rates, disagreements with ~~taxing~~tax authorities and imposition of new taxes, ~~(t)~~(z) changes in consumer discretionary spending and general economic conditions, ~~(u) competition~~(aa) the fact that the restaurant industry in ~~the retail food industry, (v)~~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, ~~(w)~~(cc) our inability to adequately protect the intellectual property we own or have the right to use, ~~(x) YUM’s~~(dd) our licensor’s failure to protect its intellectual property, ~~(y)~~(ee) seasonality and certain major events in China, ~~(z) failure of or damage to information systems, (aa)~~(ff) our failure to detect, deter and prevent all instances of fraud or other misconduct committed by our employees, customers or other third parties, ~~(bb) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (cc) failure~~(gg) the fact that our success depends on the continuing efforts of our ~~insurance policies~~key management and experienced and capable personnel as well as our ability to ~~provide adequate coverage~~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 ~~claims associated with~~ our ~~business operations, (dd) failure by us to maintain effective disclosure controls~~investment in equity securities and ~~procedures~~lower yields of our short-term investments may adversely affect our financial condition and ~~internal control over financial reporting in accordance with the rules~~results of ~~the SEC and (ee) unforeseeable business interruptions;~~

operations;

•

Risks related to doing business in China, such as (a) changes in Chinese political policies and economic and social policies or conditions, (b) ~~changes in laws and regulations, (c)~~ 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, ~~(e) limitations~~(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 ~~governmental control~~interventions in or the imposition of restrictions and limitations by the PRC government on currency conversion and payments of foreign currency ~~(f)~~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 ~~operating~~principal subsidiaries in China to fund offshore cash requirements, ~~(g)~~(j) potential unfavorable tax consequences resulting from our classification as a China resident enterprise for Chinese enterprise income tax purposes, ~~(h)~~(k) uncertainty regarding indirect transfers of equity interests in China resident enterprises and enhanced scrutiny by Chinese tax authorities, ~~(i)~~(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, ~~(j)~~(o) risk in relation to unexpected land acquisitions, building closures or demolitions, ~~(k)~~(p) potential fines and other legal or administrative sanctions for failure to comply with ~~law~~Chinese regulations regarding our employee equity incentive plans and ~~(l)~~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;~~

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) ~~not achieving all of the anticipated benefits, (b)~~ 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, ~~(c)~~(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, (d) limitations on our ability to engage in strategic transactions as a result of the separation, (e) our inability to satisfy financial reporting and other requirements to which we are subject as an independent publicly traded company, (f) limited experience of our management in managing a public company, (g) inability to access capital markets on acceptable terms, (h) increased administrative and other costs incurred by virtue of our status as an independent public company, (i) limitations on our ability to compete with YUM and other restrictions on our operations contained in the master license agreement, (j) failure by YUM to perform its obligations under the transaction agreements that we entered into with it as part of the separation, (k)(c) potential indemnification liabilities owing to YUM pursuant to the separation and distribution agreement, ~~and there being no assurance that~~(d) the indemnity

provided by YUM to us with respect to certain liabilities in connection with the separation ~~will~~may be ~~sufficient~~insufficient to insure us against the full amount of such liabilities, ~~(l)~~(e) the possibility that a court would require that we assume responsibility for obligations allocated to YUM under the separation and distribution agreement, ~~(m)~~and (f) potential liabilities due to fraudulent transfer ~~considerations~~considerations; and ~~(n) actual or~~

•

General risks, such as (a) potential ~~conflicts of interest of certain~~legal proceedings, (b) changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters, (c) failure of our ~~executive officers~~insurance policies to provide adequate coverage for claims associated with our business operations, (d) unforeseeable business interruptions, and ~~directors because~~(e) failure by us to maintain effective disclosure controls and procedures and internal control over financial reporting in accordance with the rules of ~~their previous positions at YUM; and~~

~~Risks related to~~ the acquisition of Daojia, including that (a) the PRC government may determine that the variable interest entity structure of Daojia does not comply with PRC laws on foreign investment in restricted industries, (b) the integration of Daojia may require significant time, attention and resources, potentially diverting attention from the conduct of our core businesses, and (c) the expected synergies from the acquisition may not be realized.

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 ~~Securities and Exchange Commission~~SEC (including the information set forth under the captions ~~“Forward-Looking Statements”~~“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, ~~2016)~~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.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash flows and net investments in foreign operations, virtually all of which are denominated in RMB. ~~We chose not~~While substantially all of our supply purchases are denominated in RMB, from time to ~~hedge our foreign currency denominated earnings through~~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 ~~use of financial instruments, and attempted~~corresponding local currencies when practical, to minimize the related foreign currency exposure ~~by purchasing goods and services from third parties in local currencies when practical.~~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 ended ~~August~~March 31, ~~2017,~~2023, the Company’s Operating ~~Profit~~profit would have decreased by approximately ~~$29~~$39 million if the RMB weakened 10% relative to the ~~U.S. dollar.~~US$. 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 ~~risk~~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.

~~Item 4.~~

~~Controls~~ ~~and Procedures~~

Investment Risk

In September 2018, we invested $74 million in 8.4 million of Meituan’s ordinary shares. The Company sold 4.2 million of its ordinary shares of Meituan in the second quarter of 2020 for proceeds of approximately $54 million. Equity investment in Meituan is recorded at fair value, which is measured on a recurring basis and is subject to market price volatility. See Note 3 for further discussion on our investment in Meituan.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and the CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by ~~the~~this report.

Changes in Internal Control Over Financial Reporting

There were no changes with respect to the Company’s internal control over financial reporting ~~or in other factors~~during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, internal control over financial ~~reporting during the quarter ended August 31, 2017.~~reporting.

PART II – Other ~~Information~~Information

~~Item 1.~~

~~Legal Proceedings~~

Item 1. Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 1315 to the Company’s Condensed Consolidated ~~and Combined~~ Financial Statements set forth in Part I of this report.

~~Item 1A.~~

~~Risk Factors~~

Item 1A. Risk Factors

We face a variety of risks that are inherent in our business and our industry, including operational, legal and regulatory risks. Such risks could cause our actual results to differ materially from our forward-looking statements, expectations and historical trends. There have been no material changes from the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2022, which was filed with the SEC on March ~~8, 2017.~~1, 2023.

~~Item 2.~~

Item 2. Unregistered Sales ~~of Equity Securities and Use of Proceeds~~

~~On February 7, 2017, we announced that our board~~ of ~~directors~~Equity Securities and Use of Proceeds

Our Board of Directors authorized ~~a $300 million~~an aggregate of $2.4 billion for our share repurchase ~~program. This~~program, including its most recent increase in authorization ~~does~~on March 17, 2022. The authorizations do not have an expiration date.

The following table provides information as of ~~August~~March 31, ~~2017~~2023 with respect to shares of Yum China common stock repurchased by the Company ~~under this authorization:~~during the quarter then ended:

Period

Total Number of
Shares Purchased

Average Price Paid
Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased under the
Plans or Programs
(millions)
Cumulative through May 31, 2017

1,072,602

$
36.27

1,072,602

$
261

6/1/17-6/30/17

1,650,832

$
39.98

1,650,832

$
195

7/1/17-7/31/17

523,595

$
36.75

523,595

$
176

8/1/17-8/31/17

108,667

$
36.52

108,667

$
172

Total for the quarter ended August 31, 2017

2,283,094

$
39.08

2,283,094

$
172

Cumulative total

3,355,696

$
38.18

3,355,696

$
172


Period	Total Number of Shares Repurchased (thousands)		Average Price Paid Per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (thousands)		Approximate Dollar Value of Shares that May Yet Be Repurchased under the Plans or Programs (millions)

1/1/23-1/31/23		337	$	59.40		337	$	1,131
2/1/23-2/28/23		316	$	60.17		316	$	1,112
3/1/23-3/31/23		375	$	61.22		375	$	1,089
Total		1,028	$	60.30		1,028	$	1,089

~~On October 4, 2017, the Board of Directors increased Yum China’s existing share repurchase authorization from $300 million to an aggregate of $550 million.~~

Item 6. Exhibits

~~Item 6.~~Exhibit

Number

E~~xhibits~~

~~Exhibit~~ ~~Number~~		Description of Exhibits
10.1
~~3.1~~		~~Amended and Restated Certificate of Incorporation~~Form of Yum China Holdings, Inc. ~~(incorporated by reference to Exhibit 3.1 to Yum China Holdings, Inc.’s Current Report on Form 8-K filed on November 1, 2016).~~2022 Long Term Incentive Plan Restricted Stock Unit Agreement. *

~~3.2~~10.2		~~Amended and Restated Bylaws~~Form of Yum China Holdings, Inc. ~~(incorporated by reference to Exhibit 3.2 to~~2022 Long Term Incentive Plan Stock Appreciation Rights Agreement. *

10.3		Form of Yum China Holdings, Inc.~~’s Current Report on Form 8-K filed on November 1, 2016).~~ 2022 Long Term Incentive Plan Performance Unit Agreement. *

~~3.3~~31.1		~~Certificate of Designations of Preferred Stock (incorporated by reference to Exhibit 3.1 to Yum China Holdings, Inc.’s Registration Statement on Form 8-A filed on October 27, 2016).~~

~~31.1~~		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document *

101.SCH		Inline XBRL Taxonomy Extension Schema Document *

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document *

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document *

104		Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document *

*Filed or furnished herewith.

~~SIGNATURES~~

** Portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Yum China Holdings, Inc.
	(Registrant)


Date:	~~October 6, 2017~~May 8, 2023	/s/ ~~Jacky Lo~~Xueling Lu
		~~Chief Financial Officer,~~
		~~Treasurer,~~ Controller and Principal Accounting Officer


		Page
		No.

Part I.	Financial Information

	Item 1 – Financial Statements	3

	Condensed Consolidated ~~and Combined~~ Statements of Income – Quarters Ended March 31, 2023 and ~~Years to date ended August 31, 2017 and 2016~~2022 (Unaudited)	3

	Condensed C~~onsolidated and~~ ~~Combined~~Consolidated Statements of Comprehensive Income – Quarters Ended March 31, 2023 and ~~Years to date ended August 31, 2017 and 2016~~2022 (Unaudited)	4

	Condensed C~~onsolidated and Combined~~Consolidated Statements of Cash Flows – ~~Years to date ended August~~Quarters Ended March 31, ~~2017~~2023 and ~~2016~~2022 (Unaudited)	5

	Condensed Consolidated Balance Sheets – ~~August~~March 31, ~~2017~~2023 (Unaudited) and December 31, ~~2016~~2022	6

	Notes to Condensed Consolidated ~~and Combined~~ Financial Statements (Unaudited)	7

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	1724

	Item 3 – Quantitative and Qualitative Disclosures ~~about~~About Market Risk	3240

	Item 4 – Controls and Procedures	3340

Part II.	Other Information

	Item 1 – Legal Proceedings	3442

	Item 1A – Risk Factors	3442

	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	3442

	Item 6 – Exhibits	3543

	Signatures	3644


Accounts Receivable, net	8/31/2017			12/31/2016			3/31/2023			12/31/2022
Accounts receivable, gross	$	83		$	76		$	61		$	66
Allowance for doubtful accounts		(2	)		(2	)		(2	)		(2	)
Accounts receivable, net	$	81		$	74		$	59		$	64


Prepaid Expenses and Other Current Assets	8/31/2017		12/31/2016		3/31/2023		12/31/2022
Prepaid rent	$	42	$	39
Other prepaid expenses and current assets^(a)		117		81
VAT assets					$	95	$	88
Interest receivables						38		31
Receivables from payment processors and aggregators						37		53
Dividends receivable from equity method investees						2		6
Other prepaid expenses and current assets						124		129
Prepaid expenses and other current assets	$	159	$	120	$	296	$	307

Property, Plant and Equipment	8/31/2017			12/31/2016
Buildings and improvements	$	2,168		$	2,029
Capital leases, primarily buildings		30			29
Machinery and equipment		1,139			1,081
Property, plant and equipment, gross		3,337			3,139
Accumulated depreciation and amortization		(1,685	)		(1,492	)
Property, plant and equipment, net	$	1,652		$	1,647

Other Liabilities and Deferred Credits	8/31/2017		12/31/2016
Deferred escalating minimum rent	$	161	$	153
Other noncurrent liabilities and deferred credits		113		99
Other liabilities and deferred credits	$	274	$	252


	3/31/2023										12/31/2022
	Gross Carrying Amount(a)		Accumulated Amortization(a)			Accumulated Impairment Losses(b)			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses(b)			Net Carrying Amount
Finite-lived intangible assets
Reacquired franchise rights	$	277	$	(273	)	$	—		$	4	$	276	$	(271	)	$	—		$	5
Huang Ji Huang franchise related assets		22		(3	)		—			19		22		(3	)		—			19
Daojia platform		16		(4	)		(12	)		—		16		(4	)		(12	)		—
Customer-related assets		12		(10	)		(2	)		—		12		(9	)		(2	)		1
Others		9		(5	)		—			4		9		(5	)		—			4
	$	336	$	(295	)	$	(14	)	$	27	$	335	$	(292	)	$	(14	)	$	29
Indefinite-lived intangible assets
Little Sheep trademark	$	52	$	—		$	—		$	52	$	52	$	—		$	—		$	52
Huang Ji Huang trademark		78		—			—			78		78		—			—			78
	$	130	$	—		$	—		$	130	$	130	$	—		$	—		$	130

Total intangible assets	$	466	$	(295	)	$	(14	)	$	157	$	465	$	(292	)	$	(14	)	$	159

	8/31/2017							12/31/2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Definite-lived intangible assets
Reacquired franchise rights	$	98	$	(81	)	$	17	$	93	$	(71	)	$	22
Daojia platform		17		—			17		—		—			—
Customer-related assets		12		(5	)		7		7		(4	)		3
Other		19		(10	)		9		19		(9	)		10
	$	146	$	(96	)	$	50	$	119	$	(84	)	$	35
Indefinite-lived intangible assets
Little Sheep trademark	$	54	$	—		$	54	$	53	$	—		$	53

Total intangible assets	$	200	$	(96	)	$	104	$	172	$	(84	)	$	88	��

	Identifiable Assets
	8/31/2017		12/31/2016
KFC^(c)	$	1,469	$	1,411
Pizza Hut		678		628
All Other Segments		141		160
Corporate^(d)		2,172		1,528
	$	4,460	$	3,727

	Long-Lived Assets^(e)
	8/31/2017		12/31/2016
KFC	$	1,119	$	1,099
Pizza Hut		593		553
All Other Segments		113		129
Corporate		38		33
	$	1,863	$	1,814

	Quarter ended						% B/(W)^(a)				Year to date ended						% B/(W)^(a)
	8/31/2017			8/31/2016			Reported				8/31/2017			8/31/2016			Reported
Company sales	$	1,998		$	1,848			8			$	4,818		$	4,684			3
Franchise fees and income		40			35			14				98			90			9
Total revenues	$	2,038		$	1,883			8			$	4,916		$	4,774			3
Restaurant profit	$	399		$	356			12			$	927		$	798			16
Restaurant Margin %		20.0	%		19.2	%		0.8		ppts.		19.3	%		17.0	%		2.3		ppts.
Operating Profit	$	317		$	286			11			$	714		$	582			23
Interest income, net		6			3		NM					13			7			77
Income tax provision		(102	)		(87	)		(19	)			(213	)		(165	)		(29	)
Net Income - including noncontrolling interests		221			202			9				514			424			21
Net Income - noncontrolling interests		10			10			6				21			10		NM
Net Income - Yum China Holdings, Inc.	$	211		$	192			9			$	493		$	414			19
Diluted Earnings Per Share	$	0.53		$	0.53			—			$	1.24		$	1.14			9
Effective tax rate		31.7	%		29.8	%						29.3	%		28.0	%
Operating Profit before Special Items	$	314		$	283						$	711		$	580
Diluted Earnings Per Common Share before Special Items	$	0.52		$	0.52						$	1.23		$	1.11
Effective tax rate before Special Items		32.0	%		29.9	%						29.4	%		28.0	%
Adjusted EBITDA	$	425		$	390						$	1,004		$	895

	Quarter ended						Year to date ended
Detail of Special Items	8/31/2017			8/31/2016			8/31/2017			8/31/2016
Reversal of loss associated with sale of aircraft ^(a)		—			3			—			2
Income from the reversal of contingent consideration^(b)		3			—			3			—
Special Items Income - Operating Profit		3			3			3			2
Tax Expenses on Special Items^(c)		—			(1	)		—			(1	)
Special Items Income, net of tax - including noncontrolling interests		3			2			3			1
Special Items Expense, net of tax of nil - noncontrolling interests^(d)		—			—			—			(8	)
Special Items Income, net of tax - Yum China Holdings, Inc.	$	3		$	2		$	3		$	9
Weighted average diluted shares outstanding		398,497,353			363,758,219			397,385,512			363,758,219
Special Items Diluted Earnings Per Common Share	$	0.01		$	0.01		$	0.01		$	0.03
Reconciliation of Reported Operating Profit to Operating Profit Before Special Items
Reported Operating Profit	$	317		$	286		$	714		$	582
Special Items Income - Operating Profit		3			3			3			2
Operating Profit before Special Items	$	314		$	283		$	711		$	580
Reconciliation of Reported EPS to EPS Before Special Items
Reported Diluted Earnings Per Common Share	$	0.53		$	0.53		$	1.24		$	1.14
Special Items Diluted Earnings Per Common Share		0.01			0.01			0.01			0.03
Diluted Earnings Per Common Share before Special Items	$	0.52		$	0.52		$	1.23		$	1.11
Reconciliation of Reported Effective Tax Rate to Effective Tax Rate Before Special Items
Reported effective tax rate (See Note 11)		31.7	%		29.8	%		29.3	%		28.0	%
Impact on tax rate as a result of Special Items^(c)		(0.3	)%		(0.1	)%		(0.1	)%		(—	)%
Effective tax rate before Special Items		32.0	%		29.9	%		29.4	%		28.0	%

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (millions)
Cumulative through May 31, 2017		1,072,602	$	36.27		1,072,602	$	261

6/1/17-6/30/17		1,650,832	$	39.98		1,650,832	$	195
7/1/17-7/31/17		523,595	$	36.75		523,595	$	176
8/1/17-8/31/17		108,667	$	36.52		108,667	$	172
Total for the quarter ended August 31, 2017		2,283,094	$	39.08		2,283,094	$	172

Cumulative total		3,355,696	$	38.18		3,355,696	$	172