SEC Company Response from Yum China Holdings, Inc. (YUMC) (CIK 0001673358) (YUMC) — Jun 24, 2016
Yum China Holdings, Inc. (YUMC) (CIK 0001673358)
Date: June 24, 2016 · CIK: 0001673358 · Accession: 0001104659-16-129255
AI Filing Summary & Sentiment
File numbers found in text: 001-37762
Referenced dates: May 31, 2016
Letter
U.S. Securities & Exchange Commission 100 F Street, NE Washington, D.C. 20549 Re: Yum! China Holding, Inc. Form 10-12B Filed May 4, 2016 File No. 001-37762
Dear Mr. Dobbie:
On behalf of our client, Yum! China Holding, Inc. (“Yum! China Holding” or the “Company”), set forth below are the responses to the comments of the Staff of the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) set forth in your letter dated May 31, 2016, regarding the Company’s
Registration Statement on Form 10 (File No. 001-37762) (the “Form 10”) filed on May 4, 2016. In connection with this letter responding to the Staff’s comments, we are filing with the Commission Amendment No. 1 to the Form 10 (“Amendment No. 1”). For the Staff’s convenience, a copy of this letter, along with five copies of Amendment No. 1 marked to show the revisions from the version of the Form 10 filed on May 4, 2016, are being delivered to your attention.
For your convenience, the Staff’s comments are set forth in bold, followed by responses on behalf of the Company. Terms not otherwise defined in this letter shall have the meanings set forth in Amendment No. 1. All page references in the responses set forth below refer to pages of the information statement filed as Exhibit 99.1 (the “Information Statement”) to Amendment No. 1.
Form 10
Exhibit 99.1
Market and Industry Data, page iii
1. In this section and elsewhere in your information statement, we note that you have relied on reports and publications from third-party sources for data. Please provide us with the relevant portions of the materials you cite.
Response: The Company is providing these materials to the Staff on a supplemental basis.
2. You state that the industry publications on which you are basing your disclosure do not “guarantee the accuracy or completeness” of certain information in the information statement, and that the nature of such information is “generally reliable” and “inherently imprecise.” Please revise to remove any implication that you are not responsible for disclosure you have included in the information statement.
Response: We acknowledge our responsibility for the disclosure included in the Information Statement. Amendment No. 1 has been revised on page iii in response to the Staff’s comment.
Questions and Answers about the Separation, page iv
3. Here and in the Separation and Distribution section, please include a question addressing how the costs of the Separation will be allocated between YUM and the company, and quantify the costs.
Response: Amendment No. 1 has been updated on pages vii, 91, and 102 in response to the Staff’s comment to further explain the separation-related costs that will be borne by the Company.
Information Statement Summary, page 1
4. Please disclose the directly comparable GAAP measure to “adjusted EBITDA” disclosed in the first paragraph and wherever else disclosed pursuant to Item 10(e)(i)(A) of Regulation S-K.
Response: Amendment No. 1 has been updated on pages 1, 52, 68 and 74 to give equal prominence to the Company’s net income as the most directly comparable GAAP measure. In addition, the Company has revised the adjusted EBITDA non-GAAP reconciliations on pages 55 and 70 of Amendment No. 1 to reconcile to net income rather than the Company’s operating profit.
5. Please tell us the basis for your statement that “our brands are integrated into Chinese popular culture and consumers’ daily lives.”
Response: The Company advises the Staff that the basis for this statement is our belief that the Company’s long history and extensive presence in China contribute to its deep integration into consumers’ lives. KFC opened its first restaurant in Beijing in 1987 and Pizza Hut opened its first restaurant in 1990. There are now over 5,000 KFCs, nearly 1,600 Pizza Hut Casual Dining restaurants and over 300 Pizza Hut Home Service units in over 1,100 cities. In 2015, our restaurants served over 2 billion customers around China, and our brands offer a variety of local menu items catering to Chinese appetites, including congee, rice and Chinese-style noodles.
Amendment No. 1 has been updated on pages 1 and 69 in response to the Staff’s comment.
Industry Backdrop, page 2
6. We note the connection you make, here and in the Business section, between the expected growth in the middle class and the expected increase in the company’s sales. Please balance this disclosure by including the information that growth in the middle class does not necessarily equate to a growth in sales, as the tastes of the Chinese middle class could shift away from QSR offerings, as they have in other countries.
Response: Amendment No. 1 has been updated on pages 2 and 70 in response to the Staff’s comment.
New-Unit Growth, page 3
7. We note your presentation on page 3 and on page 75 of compound annual growth rates. Because CAGR does not reflect volatility, please accompany your CAGR presentation with supporting numbers for each year, or tell us why this information is not material in each instance where you have disclosed CAGR.
Response: On the basis of the supporting data that the Company will provide the Staff on a supplemental basis, we respectfully advise the Staff that the Company does not believe that such information is material to the Company’s disclosure of CAGR since our new unit development has been relatively consistent over this period.
8. You state that you believe you have an opportunity to grow your restaurant count three times over the long term. Please clarify what you mean by “long term” when referring to this development goal and balance your disclosure by addressing the risks associated with growth of this magnitude.
Response: Amendment No. 1 has been updated on pages 4 and 75 in response to the Staff’s comment.
Enhanced Profitability, page 4
9. Refer to your statement that “[s]ince we increased our focus on restaurant margin improvement in late 2013, margins at KFC improved two percentage points from 2013 to 2015.” Please revise to specifically state what margins improved. If other margins underperformed during this period, balance your disclosure by mentioning those as well.
Response: Amendment No. 1 has been updated on pages 5 and 76 in response to the Staff’s comment to clarify that restaurant margins at KFC improved two percentage points from 2013 to 2015. Operating margins also improved during this same period at KFC.
Reasons for the Separation, page 5
10. We note that one of the primary reasons for the separation is to allow for enhanced strategic and management focus. Please expand your discussion to clarify the differences between the company and YUM in terms of operating priorities and strategies.
Response: Amendment No. 1 has been updated on pages 5, 6 and 97 in response to the Staff’s comment.
Risk Factors, page 11
We are subject to all of the risks associated with leasing real estate…, page 15
11. Please revise this risk factor to be more specific about when the lease terms expire, distinguishing long-term from short-term leases.
Response: Amendment No. 1 has been revised on page 15 in response to the Staff’s comment.
Our results of operations may fluctuate due to seasonality and certain major events in China, page 20
12. Please recast this risk factor to emphasize the risk rather than the benefits associated with seasonal markets in China.
Response: The Company respectfully submits that this risk factor does not emphasize the benefits associated with seasonal markets. Instead, this disclosure is intentionally included as a risk factor to highlight the fact that underperformance during a period of high seasonality could have a disproportionate impact on the Company’s performance for a particular year. Amendment No. 1 has been updated on page 20 in response to the Staff’s comment.
Certain defects caused by non-registration of our lease agreements related to certain properties may materially and adversely affect our ability to use such properties, page 27
13. Revise this risk factor to quantify the potential fines associated with the failure to register the properties, and to explain the reasons that the leases have not been registered, or explain why you do not believe this is material.
Response: The Company respectfully advises the Staff that local regulations and practices vary in terms of the enforcement of this registration requirement and, therefore, it is not feasible for the Company to accurately quantify the potential fines associated with the failure to register its lease agreements. Amendment No. 1 has been revised on pages 27 and 28 in response to the Staff’s comment.
Management’s Discussion and Analysis, page 51
Summary, page 53
14. Please explain briefly the reasons that you believe sales in the second half of 2015 failed to meet expectations.
Response: Amendment No. 1 has been updated on pages 53 and 54 in response to the Staff’s comment.
Liquidity and Capital Resources, page 63
15. We note the working capital deficit for each year reported on the combined balance sheets. Please discuss (i) the reason for the deficit, (ii) its effect on your liquidity and operations, and (iii) how you manage the deficit. Refer to Item 303(a)(1) of Regulation S-K.
Response: The Company respectfully advises the Staff that we have historically operated our business with a working capital deficit, which is not uncommon in our industry and is also historically common for Yum! Brands, Inc. (“YUM”). Our Company sales are paid for in cash or by credit card (which is quickly converted into cash). Substantial amounts of cash received from our restaurant operations are invested in new restaurant assets which are non-current in nature. As part of our working capital strategy, we negotiate favorable credit terms with vendors and our on-hand inventory turns faster than the related short-term liabilities as a result. Accordingly, it is not unusual for current liabilities to exceed current assets. We believe such a deficit has no significant impact on our liquidity or operations.
16. Please discuss whether your existing cash, net cash from operations and sources of liquidity will be sufficient to fund your operations, anticipated capital expenditures and debt repayment obligations, if any, for the next 12 months.
Response: Amendment No. 1 has been updated on page 62 in response to the Staff’s comment.
Business, page 69
The Separation and Distribution, page 98
17. Please discuss in this section what alternatives the board considered before determining to go forward with the transaction. Explain any material advantages or disadvantages that persuaded the board that the spin-off was the most feasible and financially attractive approach.
Response: The Company respectfully advises the Staff that the Company does not believe that this disclosure is material to prospective holders of the Company’s common stock in the context of a spin off, in particular because the decision to go forward with the transaction was undertaken by the Board of Directors of YUM, and not by the Company, and neither the stockholders of YUM nor the future stockholders of the Company are making any voting decision with respect to the spin off. However, Amendment No. 1 has been updated on page 97 in response to the Staff’s comment.
Reasons for the Separation, page 98
18. In the bullet point captioned “Optimized Capital Structure,” please explain why the board expects that YUM will be more highly franchised, more geographically diversified and less volatile in terms of profit, and with a lower cost of capital. Also, please explain what impact this is likely to have on the company’s stockholders.
Response: Amendment No. 1 has been updated on page 98 in response to the Staff’s comment.
19. In this section and in Management’s Discussion and Analysis, as appropriate, please summarize the material aspects of the company’s business that will need to change in order to replace operations, governance, management and similar items currently provided by YUM or administered on a shared basis by the companies prior to separation. Quantify the cost of duplicating these items to the extent possible.
Response: Amendment No. 1 has been updated on page 98 in response to the Staff’s comment.
Risks associa
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MOSES T. EIKO STANGE DAVID A. SCHWARTZ JOHN F. LYNCH WILLIAM SAVITT ERIC M. ROSOF MARTIN J.E. ARMS GREGORY E. OSTLING DAVID B. ANDERS ANDREA K. WAHLQUIST ADAM J. SHAPIRO NELSON O. FITTS JOSHUA M. HOLMES DAVID E. SHAPIRO DAMIAN G. DIDDEN IAN BOCZKO MATTHEW M. GUEST DAVID E. KAHAN DAVID K. LAM BENJAMIN M. ROTH JOSHUA A. FELTMAN ELAINE P. GOLIN EMIL A. KLEINHAUS KARESSA L. CAIN RONALD C. CHEN GORDON S. MOODIE DONGJU SONG BRADLEY R. WILSON GRAHAM W. MELI GREGORY E. PESSIN CARRIE M. REILLY MARK F. VEBLEN VICTOR GOLDFELD EDWARD J. LEE BRANDON C. PRICE KEVIN S. SCHWARTZ MICHAEL S. BENN SABASTIAN V. NILES ALISON ZIESKE PREISS WILLIAM T. ALLEN MICHAEL H. BYOWITZ PETER C. CANELLOS DAVID M. EINHORN KENNETH B. FORREST THEODORE GEWERTZ MAURA R. GROSSMAN RICHARD D. KATCHER MEYER G. KOPLOW DOUGLAS K. MAYER ROBERT B. MAZUR MARSHALL L. MILLER PHILIP MINDLIN ROBERT M. MORGENTHAU DAVID M. MURPHY DAVID S. NEILL BERNARD W. NUSSBAUM LAWRENCE B. PEDOWITZ ERIC S. ROBINSON PATRICIA A. ROBINSON* ERIC M. ROTH MICHAEL W. SCHWARTZ STEPHANIE J. SELIGMAN ELLIOTT V. STEIN WARREN R. STERN PATRICIA A. VLAHAKIS ANTE VUCIC AMY R. WOLF * ADMITTED IN THE DISTRICT OF COLUMBIA COUNSEL DAVID M. ADLERSTEIN PAULA N. GORDON AMANDA K. ALLEXON NANCY B. GREENBAUM LOUIS J. BARASH MARK A. KOENIG FRANCO CASTELLI LAUREN M. KOFKE DIANNA CHEN J. AUSTIN LYONS ANDREW J.H. CHEUNG ALICIA C. McCARTHY PAMELA EHRENKRANZ AMANDA N. PERSAUD UMUT ERGUN S. CHRISTOPHER SZCZERBAN KATHRYN GETTLES-ATWA JEFFREY A. WATIKER ADAM M. GOGOLAK June 24, 2016 VIA HAND DELIVERY AND EDGAR Justin Dobbie Legal Branch Chief Office of Transportation and Leisure U.S. Securities & Exchange Commission 100 F Street, NE Washington, D.C. 20549 Re: Yum! China Holding, Inc. Form 10-12B Filed May 4, 2016 File No. 001-37762 Dear Mr. Dobbie: On behalf of our client, Yum! China Holding, Inc. (“Yum! China Holding” or the “Company”), set forth below are the responses to the comments of the Staff of the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) set forth in your letter dated May 31, 2016, regarding the Company’s Registration Statement on Form 10 (File No. 001-37762) (the “Form 10”) filed on May 4, 2016. In connection with this letter responding to the Staff’s comments, we are filing with the Commission Amendment No. 1 to the Form 10 (“Amendment No. 1”). For the Staff’s convenience, a copy of this letter, along with five copies of Amendment No. 1 marked to show the revisions from the version of the Form 10 filed on May 4, 2016, are being delivered to your attention. For your convenience, the Staff’s comments are set forth in bold, followed by responses on behalf of the Company. Terms not otherwise defined in this letter shall have the meanings set forth in Amendment No. 1. All page references in the responses set forth below refer to pages of the information statement filed as Exhibit 99.1 (the “Information Statement”) to Amendment No. 1. Form 10 Exhibit 99.1 Market and Industry Data, page iii 1. In this section and elsewhere in your information statement, we note that you have relied on reports and publications from third-party sources for data. Please provide us with the relevant portions of the materials you cite. Response: The Company is providing these materials to the Staff on a supplemental basis. 2. You state that the industry publications on which you are basing your disclosure do not “guarantee the accuracy or completeness” of certain information in the information statement, and that the nature of such information is “generally reliable” and “inherently imprecise.” Please revise to remove any implication that you are not responsible for disclosure you have included in the information statement. Response: We acknowledge our responsibility for the disclosure included in the Information Statement. Amendment No. 1 has been revised on page iii in response to the Staff’s comment. Questions and Answers about the Separation, page iv 3. Here and in the Separation and Distribution section, please include a question addressing how the costs of the Separation will be allocated between YUM and the company, and quantify the costs. Response: Amendment No. 1 has been updated on pages vii, 91, and 102 in response to the Staff’s comment to further explain the separation-related costs that will be borne by the Company. Information Statement Summary, page 1 4. Please disclose the directly comparable GAAP measure to “adjusted EBITDA” disclosed in the first paragraph and wherever else disclosed pursuant to Item 10(e)(i)(A) of Regulation S-K. Response: Amendment No. 1 has been updated on pages 1, 52, 68 and 74 to give equal prominence to the Company’s net income as the most directly comparable GAAP measure. In addition, the Company has revised the adjusted EBITDA non-GAAP reconciliations on pages 55 and 70 of Amendment No. 1 to reconcile to net income rather than the Company’s operating profit. 5. Please tell us the basis for your statement that “our brands are integrated into Chinese popular culture and consumers’ daily lives.” Response: The Company advises the Staff that the basis for this statement is our belief that the Company’s long history and extensive presence in China contribute to its deep integration into consumers’ lives. KFC opened its first restaurant in Beijing in 1987 and Pizza Hut opened its first restaurant in 1990. There are now over 5,000 KFCs, nearly 1,600 Pizza Hut Casual Dining restaurants and over 300 Pizza Hut Home Service units in over 1,100 cities. In 2015, our restaurants served over 2 billion customers around China, and our brands offer a variety of local menu items catering to Chinese appetites, including congee, rice and Chinese-style noodles. Amendment No. 1 has been updated on pages 1 and 69 in response to the Staff’s comment. Industry Backdrop, page 2 6. We note the connection you make, here and in the Business section, between the expected growth in the middle class and the expected increase in the company’s sales. Please balance this disclosure by including the information that growth in the middle class does not necessarily equate to a growth in sales, as the tastes of the Chinese middle class could shift away from QSR offerings, as they have in other countries. Response: Amendment No. 1 has been updated on pages 2 and 70 in response to the Staff’s comment. New-Unit Growth, page 3 7. We note your presentation on page 3 and on page 75 of compound annual growth rates. Because CAGR does not reflect volatility, please accompany your CAGR presentation with supporting numbers for each year, or tell us why this information is not material in each instance where you have disclosed CAGR. Response: On the basis of the supporting data that the Company will provide the Staff on a supplemental basis, we respectfully advise the Staff that the Company does not believe that such information is material to the Company’s disclosure of CAGR since our new unit development has been relatively consistent over this period. 8. You state that you believe you have an opportunity to grow your restaurant count three times over the long term. Please clarify what you mean by “long term” when referring to this development goal and balance your disclosure by addressing the risks associated with growth of this magnitude. Response: Amendment No. 1 has been updated on pages 4 and 75 in response to the Staff’s comment. Enhanced Profitability, page 4 9. Refer to your statement that “[s]ince we increased our focus on restaurant margin improvement in late 2013, margins at KFC improved two percentage points from 2013 to 2015.” Please revise to specifically state what margins improved. If other margins underperformed during this period, balance your disclosure by mentioning those as well. Response: Amendment No. 1 has been updated on pages 5 and 76 in response to the Staff’s comment to clarify that restaurant margins at KFC improved two percentage points from 2013 to 2015. Operating margins also improved during this same period at KFC. Reasons for the Separation, page 5 10. We note that one of the primary reasons for the separation is to allow for enhanced strategic and management focus. Please expand your discussion to clarify the differences between the company and YUM in terms of operating priorities and strategies. Response: Amendment No. 1 has been updated on pages 5, 6 and 97 in response to the Staff’s comment. Risk Factors, page 11 We are subject to all of the risks associated with leasing real estate…, page 15 11. Please revise this risk factor to be more specific about when the lease terms expire, distinguishing long-term from short-term leases. Response: Amendment No. 1 has been revised on page 15 in response to the Staff’s comment. Our results of operations may fluctuate due to seasonality and certain major events in China, page 20 12. Please recast this risk factor to emphasize the risk rather than the benefits associated with seasonal markets in China. Response: The Company respectfully submits that this risk factor does not emphasize the benefits associated with seasonal markets. Instead, this disclosure is intentionally included as a risk factor to highlight the fact that underperformance during a period of high seasonality could have a disproportionate impact on the Company’s performance for a particular year. Amendment No. 1 has been updated on page 20 in response to the Staff’s comment. Certain defects caused by non-registration of our lease agreements related to certain properties may materially and adversely affect our ability to use such properties, page 27 13. Revise this risk factor to quantify the potential fines associated with the failure to register the properties, and to explain the reasons that the leases have not been registered, or explain why you do not believe this is material. Response: The Company respectfully advises the Staff that local regulations and practices vary in terms of the enforcement of this registration requirement and, therefore, it is not feasible for the Company to accurately quantify the potential fines associated with the failure to register its lease agreements. Amendment No. 1 has been revised on pages 27 and 28 in response to the Staff’s comment. Management’s Discussion and Analysis, page 51 Summary, page 53 14. Please explain briefly the reasons that you believe sales in the second half of 2015 failed to meet expectations. Response: Amendment No. 1 has been updated on pages 53 and 54 in response to the Staff’s comment. Liquidity and Capital Resources, page 63 15. We note the working capital deficit for each year reported on the combined balance sheets. Please discuss (i) the reason for the deficit, (ii) its effect on your liquidity and operations, and (iii) how you manage the deficit. Refer to Item 303(a)(1) of Regulation S-K. Response: The Company respectfully advises the Staff that we have historically operated our business with a working capital deficit, which is not uncommon in our industry and is also historically common for Yum! Brands, Inc. (“YUM”). Our Company sales are paid for in cash or by credit card (which is quickly converted into cash). Substantial amounts of cash received from our restaurant operations are invested in new restaurant assets which are non-current in nature. As part of our working capital strategy, we negotiate favorable credit terms with vendors and our on-hand inventory turns faster than the related short-term liabilities as a result. Accordingly, it is not unusual for current liabilities to exceed current assets. We believe such a deficit has no significant impact on our liquidity or operations. 16. Please discuss whether your existing cash, net cash from operations and sources of liquidity will be sufficient to fund your operations, anticipated capital expenditures and debt repayment obligations, if any, for the next 12 months. Response: Amendment No. 1 has been updated on page 62 in response to the Staff’s comment. Business, page 69 The Separation and Distribution, page 98 17. Please discuss in this section what alternatives the board considered before determining to go forward with the transaction. Explain any material advantages or disadvantages that persuaded the board that the spin-off was the most feasible and financially attractive approach. Response: The Company respectfully advises the Staff that the Company does not believe that this disclosure is material to prospective holders of the Company’s common stock in the context of a spin off, in particular because the decision to go forward with the transaction was undertaken by the Board of Directors of YUM, and not by the Company, and neither the stockholders of YUM nor the future stockholders of the Company are making any voting decision with respect to the spin off. However, Amendment No. 1 has been updated on page 97 in response to the Staff’s comment. Reasons for the Separation, page 98 18. In the bullet point captioned “Optimized Capital Structure,” please explain why the board expects that YUM will be more highly franchised, more geographically diversified and less volatile in terms of profit, and with a lower cost of capital. Also, please explain what impact this is likely to have on the company’s stockholders. Response: Amendment No. 1 has been updated on page 98 in response to the Staff’s comment. 19. In this section and in Management’s Discussion and Analysis, as appropriate, please summarize the material aspects of the company’s business that will need to change in order to replace operations, governance, management and similar items currently provided by YUM or administered on a shared basis by the companies prior to separation. Quantify the cost of duplicating these items to the extent possible. Response: Amendment No. 1 has been updated on page 98 in response to the Staff’s comment. Risks associa