Kentucky Fried Chicken 2007 Annual Report Download

Download and view the complete annual report

Please find the complete 2007 Kentucky Fried Chicken annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 86

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86

big
winning
Yum!
aroundthe
globe!
Yum! Brands 2007 Annual Customer Mania Report
<80B$5FRYHUVBBD S 3% 

Table of contents

  • Page 1
    Yum! Brands 2007 Annual Customer Mania Report winning around the Yum! big globe!

  • Page 2
    Financial Highlights (In millions, except for per share amounts) Year-end % B/(W) change 2007 2006 Company sales Franchise and license fees Total revenues Operating profit Net income Diluted earnings per common share Cash flows provided by operating activities $ 9,100 1,316 $ 10,416 $ 1,357 $ ...

  • Page 3
    ... of winning big around the globe. In fact, as we move into our second decade as a public company, we have never been more certain and more excited about the growth we have within our grasp in all corners of the world. DAVID C. NOVAK CHAIRMAN AND CHIEF EXECUTIVE OFFICER YUM! BRANDS, INC. 1

  • Page 4
    ...class brands and operations. What's more, we are highly profitable, generating $375 million in operating profit. That's an amazing 30% growth in 2007 and a five year average annual growth rate of over 25%. China is our highest returning international business with a cash payback on investments of...

  • Page 5
    ... highly sought after, well-paying jobs. I always liken our China opportunity to the days when Colonel Sanders, Glen Bell, Dan Carney and Ray Kroc started KFC, Taco Bell, Pizza Hut and McDonald's, creating category-leading brands in the U.S. that today regularly serve 300 million consumers at over 30...

  • Page 6
    ... Brands Everywhere. Yum! Restaurants International generated record operating profit of $480 million in 2007. Yum! Restaurants International (YRI), which operates in over 100 countries and territories outside of China and the U.S., had its best year yet in 2007. YRI delivered same store sales...

  • Page 7
    ... to replicate that on other parts of the continent. Today, KFC South Africa has 479 restaurants with the highest KFC transactions in the world and five-year average system sales growth of 29%. Additionally, we are making big strides in European markets, where McDonald's has a huge presence and we...

  • Page 8
    ... our turnaround plan takes hold. When you consider McDonald's has almost 14,000 traditional units in the U.S. compared to only 5,000 traditional Taco Bells and 5,000 KFCs, there's plenty of territory we can still penetrate. We also continue to develop Long John Silver's and A&W All American Food as...

  • Page 9
    ...PROFIT GROWTH; 2-3% SAME STORE SALES GROWTH #4. Drive IndustryLeading, Long-Term Shareholder and Franchisee Value. Any way you look at it Yum! Brands is an incredible cash machine, with each of our divisions generating free cash ï¬,ow. The good news is we already are a leader in Return On Invested...

  • Page 10
    ...positive impact on all our restaurants around the world. Clearly, we all have a lot to learn and it will be a journey as each of us strives to grow our piece of Yum! to reach our full potential. I'd like to thank our more than 1 million dedicated team members, restaurant managers, franchise partners...

  • Page 11
    ... and returns Drive industryleading, long-term shareholder and franchisee value We're building a powerful portfolio of brands in the world's fastestgrowing economy with 1.3 billion people. [bj jX j\a gbZXg[Xe ;JJG% Believe in All People We Are Customer Maniacs Recognize! Recognize! Recognize! Go...

  • Page 12
    Powerful brands, outstanding tenured leadership teams, bestin-class operations and a unique distribution system lead the way for big wins in China! Yum! China generated $375 million in operating profit and over $2 billion in revenue!

  • Page 13
    ...not just chicken, not just pizza. In 2007, we opened 471 new restaurants - more than one restaurant a day! And we're not just opening up new restaurants, we're doing it with strong same store sales growth. Over time, we want to open over 20,000 restaurants and plan to expand our average unit volumes...

  • Page 14
    852 new restaurants across 6 continents - a new record! YRI is a very diversified business, with emerging markets in India, Russia, Vietnam and Africa! Record operating profits of $480 million!

  • Page 15
    ... year in 2007. Strong international system sales growth of 15% and a record 852 new unit openings drove $480 million in operating profits, up 18% over prior year. The KFC Brand in particular had a spectacular year internationally. Our big franchise businesses in Asia, the Middle East, South Africa...

  • Page 16
    ... who love our world famous taste, but were concerned about trans fat. This cemented our position as a leader in the QSR industry. Transformational? You bet! After three years and a $500 million investment, nearly 80% of KFC restaurants have a fresh, new look. And, with our franchise partners, we...

  • Page 17
    ... a significant value opportunity that we can use to bring more exciting brand news to life for our consumers. We know that our brands represent a promise that we make to YOU at every meal we serve. And we know we have the leaders and plans in place to drive sustainable sales and profit performance...

  • Page 18
    22

  • Page 19
    23

  • Page 20
    24

  • Page 21
    25

  • Page 22
    26

  • Page 23
    27

  • Page 24
    28

  • Page 25
    ... against key customer metrics. Excellent execution will drive the business as we go forward and I am here to tell you that we won't be satisfied until we have 100% CHAMPS execution and Same Store Sales Growth in every restaurant! Roger Eaton, Chief Operating and Development Officer Yum! Brands Inc...

  • Page 26
    ...Now that's Customer Mania at its best! Becky Redig, A&W All American Food Fond du Lac, Wisconsin Accuracy for this outstanding RGM means making and serving delicious pizzas the right way every time. That's just what the team at Pizza Hut RGM Marcie Dean's dine-in, carry-out restaurant delivers every...

  • Page 27
    ...demonstrate their Customer Mania with speedy service every day." Frank Villanueva, Taco Bell Dallas, Texas product quality Perfect fish all the time. That's what Long John Silver's RGM Heather Wheeler delivers in her restaurant. Heather runs a $1 million training restaurant for the company and she...

  • Page 28
    .... These are sobering statistics. While our restaurants already donate $50 million of prepared food to the underprivileged in the United States, we wanted to do even more. We view this as our privilege, and responsibility. So in 2007, we launched the world's most ambitious hunger relief effort in...

  • Page 29
    awareness Our advertising, public relations, in-store promotions and on-line activities created awareness of the hunger issue in 95% of the world's countries, reaching 1.5 billion people with this message. This marketing campaign, the equivalent of $50 million, let the world know how committed we ...

  • Page 30
    ..., Chief Financial Officer, Yum! Brands, Inc. Worldwide Sales (In Billions) 2007 2006 2005 2004 2003 5-Year Growth(a) UNITED STATES KFC Company sales Franchisee sales (b) PH Company sales Franchisee sales (b) TACO BELL Company sales Franchisee sales (b) LONG JOHN SILVER'S Company sales Franchisee...

  • Page 31
    ... food concept in China. Breakdown of Worldwide System Units Year-end 2007 Company Unconsolidated Affiliate Franchised Licensed Total UNITED STATES KFC Pizza Hut Taco Bell Long John Silver's A&W Total U.S. INTERNATIONAL KFC Pizza Hut Taco Bell Long John Silver's A&W Total International CHINA KFC...

  • Page 32
    Yum! Brands at-a-glance U.S. SALES BY BRAND BY DAYPART BY DISTRIBUTION CHANNEL Dinner 55% Lunch 37% ....; NPD Foodworld; CREST Dine Out 48% Dine In 52% Worldwide Units 2007 (In Thousands) Yum! Brands McDonald's Subway Burger King Domino's Pizza Wendy's Dairy Queen Quiznos 35 31 29 11 9 7 6 5 36

  • Page 33
    ... of our revenue drivers, Company and franchise same store sales as well as net unit development. Worldwide same store sales is the estimated growth in sales of all restaurants that have been open one year or more. U.S. Company same store sales include only KFC, Pizza Hut and Taco Bell Company owned...

  • Page 34
    ...costs, and lower self-insured property and casualty insurance reserves. Taco Bell experienced significant sales declines at both Company and franchise stores in the fourth quarter 2006 and for almost all of 2007, particularly in the northeast U.S. where both issues originated. For the full year 2007...

  • Page 35
    ... of Income for the year ended December 31, 2005. MAINLAND CHINA 2005 BUSINESS ISSUES U.S. Total Revenues Company sales Franchise and license fees Total Revenues Operating profit Franchise and license fees Restaurant profit General and administrative expenses Equity income from investments in...

  • Page 36
    ... our Pizza Hut Company ownership in that market from approximately 80% currently to approximately 40%. Refranchisings reduce our reported revenues and restaurant profits and increase the importance of system sales growth as a key performance measure. Additionally, G&A expenses will decline over time...

  • Page 37
    ... of refranchising and Company store closures: 2007 Decreased Company sales Increased franchise and license fees Decrease in total revenues U.S. International Division China Division Worldwide Restaurant Unit Activity Worldwide Company Unconsolidated Affiliates Franchisees Total Excluding Licensees...

  • Page 38
    ... while increasing sales and points of distribution for two brands, results in just one additional unit count. Franchise unit counts include both franchisee and unconsolidated affiliate multibrand units. Multibrand restaurant totals were as follows: 2007 United States International Division Worldwide...

  • Page 39
    ..., the increases in China Division Company sales and franchise and license fees were driven by new unit development and same store sales growth. Company Restaurant Margins 2007 Company sales Food and paper Payroll and employee benefits Occupancy and other operating expenses Company restaurant margin...

  • Page 40
    ...the Pizza Hut U.K. business) and higher restaurant operating costs. Excluding the unfavorable impact of lapping the 53rd week in 2005, International Division operating profit increased 11% in 2006. The increase was driven by the impact of same store sales growth and new unit development on franchise...

  • Page 41
    ... income tax payments in 2007. In 2006, net cash provided by operating activities was $1,299 million compared to $1,233 million in 2005. The increase was driven by a higher net income, lower pension contributions and a 2006 partial receipt of the settlement related to the 2005 mainland China supplier...

  • Page 42
    ... thus reported on our Consolidated Statement of Cash Flows for the year ended December 29, 2007. The offset to this cash on our Consolidated Balance Sheet at December 29, 2007 is in accounts payable and other current liabilities. In 2006, net cash used in investing activities was $476 million versus...

  • Page 43
    ... 29, 2007 included: CONTRACTUAL OBLIGATIONS Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Long-term debt obligations(a) $ 5,034 $ Capital leases(b) 390 Operating leases(b) 3,886 Purchase obligations(c) 414 Other long-term liabilities reflected on our Consolidated Balance Sheet under...

  • Page 44
    ... 20 years, and any terminal value. We limit assumptions about important factors such as sales growth and margin improvement to those that are supportable based upon our plans for the unit and actual results at comparable restaurants. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS 48 YUM! BRANDS, INC...

  • Page 45
    ...of our trademark/ brand intangible assets on a number of factors including the competitive environment, our future development plans for the applicable Concept and the level of franchisee commitment to the Concept. We generally base the expected useful lives of our franchise contract rights on their...

  • Page 46
    ... our pension expense. Our estimated long-term rate of return on U.S. plan assets represents the weighted-average of historical returns for each asset category, adjusted for an assessment of current market conditions. Our expected long-term rate of return on U.S. plan assets at September 30, 2007 was...

  • Page 47
    ... term and pre-vesting forfeitures. These groups consist of grants made primarily to restaurant-level employees under our Restaurant General Manager Stock Option Plan (the "RGM Plan") and grants made to executives under our other stock award plans. Historically, approximately 15% - 20% of total...

  • Page 48
    ...currency exchange rates would impact the translation of our investments in foreign operations, the fair value of our foreign currency denominated financial instruments and our reported foreign currency denominated earnings and cash flows. For the fiscal year ended December 29, 2007, operating profit...

  • Page 49
    ... Misstatements in the Current Year, in 2006, and SFAS No. 123R, Share-based Payment, in 2005. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), YUM's internal control over financial reporting as of December 29, 2007, based on...

  • Page 50
    ... of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of YUM as of December 29, 2007 and December 30, 2006, and the related consolidated statements of income, cash flows and shareholders' equity and comprehensive income for each of the years in the...

  • Page 51
    ...integrity and fair presentation of the Consolidated Financial Statements, related notes and other information included in this annual report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include certain amounts...

  • Page 52
    ... that our internal control over financial reporting was effective as of December 29, 2007. Supplement to Yum! Brands, Inc. Annual Report to Shareholders On June 14, 2007, David Novak, Yum Brands, Inc. Chairman and Chief Executive Officer submitted a certification to the New York Stock Exchange (the...

  • Page 53
    ... 31, 2005 (in millions, except per share data) 2007 2006 2005 Revenues Company sales Franchise and license fees Total revenues Costs and Expenses, Net Company restaurants Food and paper Payroll and employee benefits Occupancy and other operating expenses General and administrative expenses...

  • Page 54
    ...of Common Stock Excess tax benefit from share-based compensation Employee stock option proceeds Dividends paid on Common Stock Other, net Net Cash Used in Financing Activities Effect of Exchange Rate on Cash and Cash Equivalents Net Increase in Cash and Cash Equivalents Net Increase in Cash and Cash...

  • Page 55
    ... Assets Property, plant and equipment, net Goodwill Intangible assets, net Investments in unconsolidated affiliates Other assets Deferred income taxes Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities Income taxes payable Short-term...

  • Page 56
    ... Income YUM! Brands, Inc. and Subsidiaries Fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005 (in millions, except per share data) Issued Common Stock Shares Amount Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Balance at December 25, 2004 Net...

  • Page 57
    ... in millions, except share data) 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, Long John Silver's ("LJS") and A&W AllAmerican Food Restaurants ("A&W") (collectively...

  • Page 58
    ...international businesses except China close one period or one month earlier to facilitate consolidated reporting. FISCAL YEAR $2 million, $2 million and $3 million were included in Franchise and license expenses in 2007, 2006 and 2005, respectively. Our revenues consist of sales by Company operated...

  • Page 59
    ... assets, primarily land, associated with a closed store, any gain or loss upon that sale is also recorded in store closure (income) costs. Refranchising (gain) loss includes the gains or losses from the sales of our restaurants to new and existing franchisees and the related initial franchise fees...

  • Page 60
    ... with its carrying value. Fair value is the price a willing buyer would pay for a reporting unit, and is generally estimated using either discounted expected future cash flows from operations or the present value of the estimated future franchise royalty stream plus any estimated sales proceeds from...

  • Page 61
    ... Benefits." SFAS 158 required the Company to recognize the funded status of its pension and post-retirement plans in the December 30, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. Gains or losses and prior service costs...

  • Page 62
    ... non-GAAP conventions to account for capitalized interest on restaurant construction projects, the leases of our Pizza Hut United Kingdom ("U.K.") unconsolidated affiliate and certain state tax benefits. The net income statement impact on any given year from the use of these non-GAAP conventions...

  • Page 63
    ... from our international subsidiary to the U.S. in December 2007 and are thus reported on our Consolidated Statement of Cash Flows for the year ended December 29, 2007. The offset to this cash on our Consolidated Balance Sheet at December 29, 2007 is in accounts payable and other current liabilities...

  • Page 64
    ... 29, 2007 and December 30, 2006 total $9 million and $13 million, respectively, of U.S. property, plant and equipment, primarily land, on which we previously operated restaurants and are included in prepaid expenses and other current assets on our Consolidated Balance Sheets. 68 YUM! BRANDS, INC...

  • Page 65
    ... operated almost all KFCs and Pizza Huts in Poland and the Czech Republic to our then partner in the entity. Fiscal year 2005 reflects the gain recognized at the date of this sale. (b) Relates to a financial recovery from a supplier ingredient issue in mainland China totaling $24 million, $4 million...

  • Page 66
    ... Assets The changes in the carrying amount of goodwill are as follows: 12. Accounts Payable and Other Current Liabilities 2007 U.S. International Division China Division Worldwide 2006 $ 554 302 119 - 411 $ 1,386 Balance as of December 31, 2005 $ 384 Acquisitions - Disposals and other, net...

  • Page 67
    ... operations. Most leases require us to pay related executory costs, which include property taxes, maintenance and insurance. In 2007, we entered into an agreement to lease a corporate aircraft to enhance our international travel capabilities. This lease provides for an upfront payment of $10 million...

  • Page 68
    ... of $13 million, respectively, to long-term debt. INTEREST RATE DERIVATIVE INSTRUMENTS At December 29, 2007 and December 30, 2006, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these...

  • Page 69
    ... Comprehensive Income: U.S. Pension Plans International Pension Plans 2007 Actuarial net loss Prior service cost $ 77 3 $ 80 2006 $ 216 - $ 216 2007 $ 13 - $ 13 2006 $ 31 - $ 31 The following chart summarizes the balance sheet impact, as well as benefit obligations, assets, and funded status...

  • Page 70
    ... USED TO DETERMINE THE NET PERIODIC BENEFIT COST FOR FISCAL YEARS: U.S. Pension Plans International Pension Plans 2007 2006 2005 2007 2006 2005 Net periodic benefit cost Service cost Interest cost Amortization of prior service cost(a) Expected return on plan assets Amortization of net loss Net...

  • Page 71
    ... $33 million. 17. Stock Options and Stock Appreciation Rights At year end 2007, we had four stock award plans in effect: the YUM! Brands, Inc. Long-Term Incentive Plan ("1999 LTIP"), the 1997 Long-Term Incentive Plan ("1997 LTIP"), the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan...

  • Page 72
    .... Tax benefits realized on our tax returns from tax deductions associated with stock options and SARs exercised for 2007, 2006 and 2005 totaled $76 million, $68 million and $94 million, respectively. The Company has a policy of repurchasing shares on the open market to satisfy award exercises...

  • Page 73
    ...losses, net of tax Net unrealized losses on derivative instruments, net of tax Total accumulated other comprehensive income (loss) $ 94 (64) (10) $ 20 $ 2006 - (160) 4 $ (156) 20. Income Taxes The details of our income tax provision (benefit) are set forth below: 2007 Current: Federal Foreign State...

  • Page 74
    ... of income taxes calculated at the U.S. federal tax statutory rate to our effective tax rate is set forth below: 2007 U.S. federal statutory rate State income tax, net of federal tax benefit Foreign and U.S. tax effects attributable to foreign operations Adjustments to reserves and prior years...

  • Page 75
    ... tax assets (liabilities) are set forth below: 2007 Net operating loss and tax credit carryforwards Employee benefits, including share-based compensation Self-insured casualty claims Lease related liabilities Various liabilities Deferred income and other Gross deferred tax assets Deferred tax asset...

  • Page 76
    ... tax assets, property, plant and equipment, net, related to our office facilities and cash. (g) Includes property, plant and equipment, net, goodwill, and intangible assets, net. (h) Includes long-lived assets of $843 million, $813 million and $271 million for entities in the United Kingdom for 2007...

  • Page 77
    ... v. Long John Silver's, Inc. ("Johnson") was filed in the United States District Court for the Middle District of Tennessee, Nashville Division. Johnson's suit alleged that LJS's former "Security/Restitution for Losses" policy (the "Policy") provided for deductions from Restaurant General Managers...

  • Page 78
    ... of those currently provided for in our Consolidated Financial Statements. On September 2, 2005, a collective action lawsuit against the Company and KFC Corporation, originally styled Parler v. Yum Brands, Inc., d/b/a KFC, and KFC Corporation, was filed in the United States District Court for the...

  • Page 79
    ... 10, 2007, a putative class action against Taco Bell Corp., the Company and other related entities styled Sandrika Medlock v. Taco Bell Corp., was filed in United States District Court, Eastern District, Fresno, California. The case was filed on behalf of all hourly employees who have worked for the...

  • Page 80
    ... or condition. PROPOSED INTERNAL REVENUE SERVICE ADJUSTMENTS 23. Selected Quarterly Financial Data (Unaudited) 2007 First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenues: Company sales Franchise and license fees Total revenues Restaurant profit(a) Operating profit Net income...

  • Page 81
    ... Data YUM! Brands, Inc. and Subsidiaries (in millions, except per share and unit amounts) Fiscal Year 2007 Summary of Operations Revenues Company sales Franchise and license fees Total Closures and impairment expenses(a) Refranchising gain (loss)(a) Operating profit(b) Interest expense, net Income...

  • Page 82
    ...Franchise Policy Officer, Yum! Brands, Inc. Richard T. Carucci 50 Chief Financial Officer, Yum! Brands, Inc. Greg Creed 50 President and Chief Concept Officer, Taco Bell Gregg R. Dedrick 48 President and Chief Concept Officer, KFC Roger Eaton 47 Chief Operating and Development Officer Designate, Yum...

  • Page 83
    ...(those who hold YUM shares in their own names) should address communications concerning statements, address changes, lost certificates and other administrative matters to: American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 Phone: (888) 439-4986 International: (718...

  • Page 84
    ...DIRECT STOCK PURCHASE PLAN STOCK TRADING SYMBOL - YUM The New York Stock Exchange is the principal market for YUM Common Stock. At year-end 2007, Yum! Brands had approximately 85,000 registered shareholder accounts of record of YUM Common Stock. SHAREHOLDERS American Stock Transfer & Trust Company...

  • Page 85
    ... in my piece of Yum?!" Our intentionality drives step change thinking. We imagine how big something can be and work future-back, going full out with positive energy and personal accountability to make it happen. Uh\_W ^abj [bj We grow by being avid learners, pursuing knowledge and best practices...

  • Page 86
    Alone We're Delicious. Together We're Yum!