Kentucky Fried Chicken 2003 Annual Report Download

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YUM! BRANDS 2003 ANNUAL CUSTOMER MANIA REPORT
Power
Yum!
of

Table of contents

  • Page 1
    YUM! BRANDS 2003 ANNUAL CUSTOMER MANIA REPORT Power of Yum!

  • Page 2
    ... Power x5 Taco Bell Think Outside the Bun 16 18 20 22 24 26 28 Pizza Hut Gather 'Round the Good Stuff KFC What's Cookin' Long John Silver's/A&W Power of Choice Customer Mania Power 100% CHAMPS with a Yes! Running Great Restaurants 29 30 31 32 Yum! At-a-glance Global Facts Unit Information Power of...

  • Page 3
    ...-growth markets, accounted for $97 million in operating profit in 2003. Left: Seventeen years after opening the first KFC in China, Yum! Brands celebrated the opening of its 1,000th restaurant, located in Beijing. Right: KFC in China gathered all of its 1,000 Restaurant General Managers together...

  • Page 4
    ... units outside the U.S. and 20% return on invested capital. In the U.S., Taco Bell is now the second most profitable QSR brand and just celebrated hitting the $1 million mark for average unit volumes. In 2003, company same-store sales were up 2% on top of 7% growth the previous year. Top: Pizza Hut...

  • Page 5
    ... variety. It is already a big business for Yum!, accounting for 12% of our U.S. traditional restaurant base and generating almost $185 million in U.S. company store profits and franchise fees. Our learnings this year make With the acquisition of A&W and Long John Silver's in 2002, we tripled our...

  • Page 6
    ... and invested to drive execution and it's paying off. We now have a fully dedicated team of operating experts who have improved back of house Top: The popularity of the Long John Silver's brand grew in 2003 as it became the partner-of-choice in Yum!'s new Multibrand restaurants. This year, Yum! has...

  • Page 7
    ... of consistency we want to drive across Yum! Brands: 1) SAME-STORE SALES GROWTH IN EVERY STORE. 2) 100% CHAMPS WITH A YES! ATTITUDE IN EVERY STORE. Why are these two measures so important? If we are driving same-store sales growth, we are doing a better job of satisfying more customers. If we are...

  • Page 8
    ...best restaurant operator in our industry. David C. Novak Chairman and Chief Executive Officer Yum! Brands, Inc. As we march ahead, our entire organization is focused on building what we call the Yum! Dynasty, driving consistent results year after year, which is a trademark of truly great companies...

  • Page 9
    7.

  • Page 10
    "power global

  • Page 11
    house"

  • Page 12
    .... We've added more than 1,000 new international restaurants a year over the past three years, including 1,108 new international restaurant openings in 2003, our best year yet. We've achieved this growth while more than doubling our operating profits since Yum! Brands became a public company in 1997...

  • Page 13
    ... for Yum! Brands products. While Pizza Hut and KFC are long-time players in Asia, Taco Bell strengthened its position in the market in May 2003 with the opening of its first Taco Bell in China - a table-service restaurant called Taco Bell Grande. Above right: Sam Su (center), President, Yum...

  • Page 14
    "brand

  • Page 15
    power" x5

  • Page 16
    14. "Think Outside the Bun."

  • Page 17
    ... 2003 was another solid year for Taco Bell - filled with terrific products and results. Our Customer Mania culture helped drive company same-store sales growth of 2% - and for the first time - our system average unit volume exceeded $1,000,000. CHAMPS performance - tells us that we're on the right...

  • Page 18
    ... pizza company for nearly 50 million Pizza Hut customers each week. In 2003, we introduced family-friendly products like our first-to-market, lower fat Fit 'N Deliciousâ„¢ pizzas. And we launched some family-focused promotions, like our DVD offer with every pizza purchase at menu price...giving...

  • Page 19
    17.

  • Page 20
    18. KFC What's Cookin'

  • Page 21
    ... end of the year by introducing ads that invite our customers to KFC What's Cookin', which got people talking about our unbeatable fried chicken. We then were named as one of the top 10 fastest drive-thru restaurants in America by QSR Magazine, a major win on the operations front. Building on this...

  • Page 22
    20. "Surfs up...Time for a Frosty Float."

  • Page 23
    ... U.S. company same-store sales growth 3% in 2003 and will be the key multibrand partner for the other Yum! brands going forward. In fact, Long John Silver's will be the multibrand partner in about one half of the 500 multibrand additions which we expect will open in 2004. This "Fish First" strategy...

  • Page 24
    22. "po pow

  • Page 25
    ...support just a single brand. And, when you add a new concept to an existing restaurant, operators get increased sales from the new concepts while strengthening the base business too. That's why our multibrand company stores are generating between $1.2 to $1.3 million in average unit volumes. In 2003...

  • Page 26
    "pow w customer mania

  • Page 27
    w wer"

  • Page 28
    26. Accuracy Speed Hospitality Product Quality Cleanliness Maintenance We think we have the most talented Customer Maniacs in the industry. Meet some of them! Top, left to right: Van Hang, Ramona Macias Middle: Roxie Padot, Jeff Stricklin, Brenda Lederer Bottom: Mitch McCulloch

  • Page 29
    ... emphasis on delicious product - every time! Jeff Stricklin, Restaurant General Manager, Taco Bell Product Quality Speed Don't blink. Because RGM Van Hang makes things happen in his restaurant - fast. Among the top 2% of all Pizza Hut operators, Van closed out 2003 with same-store sales up 4% and...

  • Page 30
    ... Great Restaurants 100% CHAMPS with a Yes! and Same-Store Sales Growth in Every Store At Yum! Brands we're building an operating culture of 840,000 Customer Maniacs with one purpose: satisfying our customers better than any other restaurant company. The true power of Running Great Restaurants is in...

  • Page 31
    29. Yum! At-a-glance U.S. Sales by Daypart U.S. Sales by Distribution Channel •Dinner 59% •Lunch 34% •Snacks/Breakfast 7% •Dine Out 80% •Dine In 20% •Dinner 64% •Lunch 27% •Snacks/Breakfast 9% •Dine Out 72% •Dine ...

  • Page 32
    30. Global Facts Worldwide Sales (in billions) 2003 United States KFC Pizza Hut Taco Bell Long John Silver's(c) A&W(c) Total U.S. International KFC Pizza Hut Taco Bell Long John Silver's(c) A&W(c) Total International Worldwide Company sales Franchisee sales(b) $ 7.4 18.5 $ 6.9 17.3 $ 6.1 16.2 $ 6.3...

  • Page 33
    ...from Taco Bell U.S. to Taco Bell International in 2002. (c) Includes 6 and 4 Yan Can units in 2003 and 2002, respectively. Breakdown of Worldwide System Units Year-end 2003 Company Unconsolidated Affiliate Franchised Licensed Total United States KFC Pizza Hut Taco Bell Long John Silver's A&W Total...

  • Page 34
    ...charges) credits Cumulative effect of accounting change Special items Income tax on special items Special items, net of tax Diluted earnings per common share: Earnings before special items Special items, net of tax Reported Cash flows provided by operating activities 2003 $ 7,441 939 $ 8,380 $ 1,059...

  • Page 35
    ... worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver's ("LJS") and A&W All-American Food Restaurants ("A&W") (collectively "the Concepts") and is the world's largest quick service restaurant ("QSR") company based on the number of system units. LJS and A&W were added when YUM acquired...

  • Page 36
    ... markets. Such refranchisings reduce our reported Company sales and restaurant profits while increasing our franchise fees. Proceeds from refranchising increase the level of cash available to fund discretionary spending. The following table summarizes our refranchising activities: Number of units...

  • Page 37
    ... vs. 2003 2002 Revenues Company sales Franchise and license fees Total revenues Company restaurant margin % of Company sales Operating profit Interest expense, net Income tax provision Income before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net income...

  • Page 38
    ...lapping support costs related to the financial restructuring of certain Taco Bell franchisees in 2001. The decrease was partially offset by higher marketing support costs in certain international markets. WORLDWIDE COMPANY RESTAURANT MARGIN Company sales Food and paper Payroll and employee benefits...

  • Page 39
    ... return benefit Valuation allowance additions (reversals) Other, net Effective tax rate 2003 35.0% 1.8 (3.6) (1.7) (4.1) 2.8 - 30.2% 2002 35.0% 2.0 (2.8) (1.8) - - (0.3) 32.1% 2001 35.0% 2.1 (0.7) (1.8) - (1.7) (0.1) 32.8% WORLDWIDE OPERATING PROFIT % B/(W) vs. % B/(W) vs. 2003 2002 United States...

  • Page 40
    ...offset by store closures. U.S. REVENUES Company sales increased $303 million or 6% in 2003. Excluding the favorable impact of the YGR acquisition, company sales increased 2%. The increase was driven by new unit development, partially offset by store closures and refranchising. Franchise and license...

  • Page 41
    ... have been open one year or more. U.S. blended same store sales include KFC, Pizza Hut, and Taco Bell company owned restaurants only. U.S. same store sales for Long John Silver's and A&W restaurants are not included. Following are the same store sales growth results by brand: 2003 Same Store Sales...

  • Page 42
    ... Franchise 44 114 64 133 Total 158 197 INTERNATIONAL REVENUES Company sales increased $247 million or 12% in 2003, after a 4% favorable impact from foreign currency translation. The increase was driven by new unit development, partially offset by refranchising, same store sales declines and store...

  • Page 43
    ... YUM investment. In each of the last two fiscal years, net cash provided by operating activities has exceeded $1 billion. These cash flows have allowed us to fund our discretionary spending, while at the same time reducing our long-term debt balances. We expect these levels of net cash provided...

  • Page 44
    ... plan is not required to be funded in advance, but is pay as you go. We made postretirement benefit payments of $4 million in 2003. Also excluded from the contractual obligations table are payments we may make for employee health and property and casualty losses for which we are self-insured...

  • Page 45
    ... the Pizza Huts, as well as 17 Taco Bells and 5 KFCs. The Company also acquired the real estate associated with 140 KFCs for which the Company will not be the operator. Our former partner in the Unconsolidated Affiliate acquired full ownership of all other assets, as well as the franchise rights to...

  • Page 46
    ... 2003 would impact our 2004 pension expense by approximately $11 million. We do not believe that the underfunded status of the pension plans will materially affect our financial position or cash flows in 2004 or future years. Given current funding levels and discount rates we would anticipate making...

  • Page 47
    ... to be impaired given current business performance. For 2002, we impaired $5 million of goodwill related to the Pizza Hut France reporting unit. Our impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the asset with its carrying amount. Our indefinite...

  • Page 48
    ... MARKET RISK The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity prices. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use...

  • Page 49
    Yum! Brands Inc. 47. Foreign Currency Exchange Rate Risk International operating profit constitutes approximately 36% of our operating profit in 2003, excluding unallocated and corporate expenses. In addition, the Company's net asset exposure (defined as foreign currency assets less foreign ...

  • Page 50
    ... Statements of Income Fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 (in millions, except per share data) 2003 2002 2001 Revenues Company sales Franchise and license fees $ 7,441 939 8,380 $ 6,891 866 7,757 $ 6,138 815 6,953 Costs and Expenses, net Company...

  • Page 51
    ... receivable Inventories Prepaid expenses and other current assets Accounts payable and other current liabilities Income taxes payable Net change in operating working capital Net Cash Provided by Operating Activities Cash Flows - Investing Activities Capital spending Proceeds from refranchising of...

  • Page 52
    ... Cash and cash equivalents Short-term investments, at cost Accounts and notes receivable, less allowance: $28 in 2003 and $42 in 2002 Inventories Assets classified as held for sale Prepaid expenses and other current assets Deferred income taxes Total Current Assets Property, plant and equipment, net...

  • Page 53
    ... loss on derivative instruments (net of tax benefits of $1 million) Minimum pension liability adjustment (net of tax benefits of $14 million) Comprehensive Income Repurchase of shares of common stock Employee stock option exercises (includes tax benefits of $13 million) Compensation-related...

  • Page 54
    ... Financial Statements (Tabular amounts in millions, except share data) note 1 DESCRIPTION OF BUSINESS YUM! Brands, Inc. and Subsidiaries (collectively referred to as "YUM" or the "Company") comprises the worldwide operations of KFC, Pizza Hut, Taco Bell and since May 7, 2002, Long John Silver...

  • Page 55
    ... Financial Statements for the year ended December 27, 2003. Store closure costs include costs of disposing of the assets as well as other facility-related expenses from previously closed stores. These store closure costs are generally expensed as incurred. Additionally, at the date we cease using...

  • Page 56
    ... held for sale or (b) its current fair market value. This value becomes the store's new cost basis. We charge (or credit) any difference between the store's carrying amount and its new cost basis to refranchising gains (losses). When we make a decision to close a store previously held for sale, we...

  • Page 57
    ... for machinery and equipment and 3 to 7 years for capitalized software costs. As discussed above, we suspend depreciation and amortization on assets related to restaurants that are held for sale. Internal Development Costs and Abandoned Site Costs We capitalize direct costs associated with the site...

  • Page 58
    ...-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company...

  • Page 59
    ... Property, plant and equipment Intangible assets Goodwill Other assets Total assets acquired Current liabilities Long-term debt, including current portion Future rent obligations related to sale-leaseback agreements Other long-term liabilities Total liabilities assumed Net assets acquired (net cash...

  • Page 60
    ... these sale-leaseback agreements were amended during 2003 and are now being accounted for as operating leases. As of the date of acquisition we recorded approximately $49 million of reserves ("exit liabilities") related to our plans to consolidate certain support functions, and exit certain markets...

  • Page 61
    ... In 2002, we recorded a $5 million charge in International related to the impairment of the goodwill of the Pizza Hut France reporting unit. The following table summarizes Company sales and restaurant profit related to stores held for sale at December 27, 2003, or disposed of through refranchising...

  • Page 62
    ... market value of assets received in connection with a non-cash acquisition - Debt reduction due to amendment of sale-lease back agreements (See Note 14) 88 Equity income from investments in unconsolidated affiliates Foreign exchange net (gain) loss note 11 PROPERTY, PLANT AND EQUIPMENT, NET 2003...

  • Page 63
    ... franchise rights to goodwill, net of related deferred tax liabilities of $53 million, ($27 million for the U.S. and $26 million for International). (b) Represents impairment of the goodwill of the Pizza Hut France reporting unit. (c) Includes goodwill related to the YGR purchase price allocation...

  • Page 64
    ... 491 $ 1,166 $ Accounts payable Accrued compensation and benefits Other current liabilities note 14 SHORT-TERM BORROWINGS AND LONG-TERM DEBT 2003 2002 $ 12 115 19 146 Short-term Borrowings Current maturities of long-term debt International lines of credit Other Long-term Debt Senior, unsecured...

  • Page 65
    ... restaurants. Capital and operating lease commitments expire at various dates through 2087 and, in many cases, provide for rent escalations and renewal options. Most leases require us to pay related executory costs, which include property taxes, maintenance and insurance. Future minimum commitments...

  • Page 66
    ...the large number of franchisees and licensees of each Concept and the short-term nature of the franchise and license fee receivables. Fair Value At December 27, 2003 and December 28, 2002, the fair values of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable...

  • Page 67
    ...in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Benefits paid Administrative expenses Fair value of plan assets at end of year Funded status Employer contributions Unrecognized actuarial loss Unrecognized prior service cost Net amount...

  • Page 68
    66. Weighted-average assumptions used to determine the net periodic benefit cost for fiscal years: Pension Benefits Postretirement Medical Benefits Discount rate Long-term rate of return on plan assets Rate of compensation increase 2003 6.85% 8.50% 3.85% 2002 7.60% 10.00% 4.60% 2001 8.03% 10.00...

  • Page 69
    Yum! Brands Inc. 67. date of grant. RGM Plan options granted have a four year vesting period and expire ten years after grant. We may grant options to purchase up to 14.0 million shares of stock at a price equal to or greater than the average market price of the stock on the date of grant under ...

  • Page 70
    ...a contributory plan to provide retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code (the "401(k) Plan") for eligible U.S. salaried and hourly employees. During 2003, participants were able to elect to contribute up to 25% of eligible compensation on a pre-tax basis...

  • Page 71
    ... the Internal Revenue Service relating to the deductibility of reacquired franchise rights and other intangibles offset by an $8 million reduction in deferred and accrued taxes payable. Valuation allowances related to deferred tax assets in certain states increased by $6 million ($4 million, net of...

  • Page 72
    ... (assets) are set forth below: 2003 Intangible assets and property, plant and equipment Other Gross deferred tax liabilities Net operating loss and tax credit carryforwards Employee benefits Self-insured casualty claims Capital leases and future rent obligations related to sale-leaseback agreements...

  • Page 73
    ... for the year ended December 27, 2003 and assets and debt of approximately $858 million and $41 million, respectively, at December 27, 2003. Identifiable Assets United States International(d) Corporate(e) Long-Lived Assets(f) United States International Corporate (a) Includes equity income of...

  • Page 74
    ... three-year term unless the Company elects not to renew the Agreements. If these Agreements had been triggered as of December 27, 2003, payments of approximately $38 million would have been made. In the event of a change of control, rabbi trusts would be established and used to provide payouts...

  • Page 75
    ... provide certain indemnities to PepsiCo. Under terms of the agreement, we have indemnified PepsiCo for any costs or losses it incurs with respect to all letters of credit, guarantees and contingent liabilities relating to our businesses under which PepsiCo remains liable. As of December 27, 2003...

  • Page 76
    ...SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) First Quarter Second Quarter Third Quarter Fourth Quarter Total 2003 Revenues: Company sales Franchise and license fees Total revenues Wrench litigation AmeriServe and other charges (credits) Total costs and expenses, net Operating profit Income before...

  • Page 77
    ...system of internal control over financial reporting, designed to provide reasonable assurance as to the reliability of the financial statements, as well as to safeguard assets from unauthorized use or disposition. The system is supported by formal policies and procedures, including an active Code of...

  • Page 78
    ..., and the related consolidated statements of income, cash flows and shareholders' equity (deficit) and comprehensive income for each of the years in the three-year period ended December 27, 2003. These consolidated financial statements are the responsibility of YUM's management. Our responsibility...

  • Page 79
    Yum! Brands Inc. 77. Selected Financial Data Fiscal Year (in millions, except per share and unit amounts) 2003 2002 2001 2000 1999 Summary of Operations Revenues Company sales(a) Franchise and license fees Total Facility actions(b) Wrench litigation(c) AmeriServe and other (charges) credits...

  • Page 80
    ... Chief Executive Officer, Long John Silver's, Inc. and Chief Executive Officer, A&W Restaurants, Inc. Gregg R. Dedrick 44 President and Chief Concept Officer, KFC, U.S.A. David J. Deno 46 Chief Financial Officer, Yum! Brands, Inc. Peter R. Hearl 52 President and Chief Concept Officer, Pizza Hut...

  • Page 81
    ... matters to: American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 Phone: (888) 439-4986 www.amstock.com or Shareholder Coordinator Yum! Brands, Inc. 1441 Gardiner Lane, Louisville, KY 40213 Phone: (888) 298-6986 E-mail: [email protected] Access accounts online at...

  • Page 82
    ...York Stock Exchange is the principal market for YUM Common Stock. Shareholders At year-end 2003, YUM! Brands had approximately 102,000 registered shareholders of record of YUM common stock. Dividend Policy Yum! Brands does not currently pay dividends. Low-Cost Investment Plan Investors may purchase...

  • Page 83
    ... world's largest prepared food recovery program. We now donate millions of pounds of prepared food to the hungry. Food that has nutritional value and will provide nourishment to those most in need, the underprivileged. HARVEST Nourishing Young Minds: Pizza Hut's Book It! For nearly 20 years, Pizza...

  • Page 84
    Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! Yum! YUM! BRANDS 2003 ANNUAL CUSTOMER MANIA REPORT Alone we're delicious. Together we're