Pizza Hut 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
    ... COMPANY. Let me explain why we think so. #1. Driving Profitable GLOBAL Growth On the international front we have an undeniable competitive advantage and undeniable growth opportunity with two global brands, KFC and Pizza Hut. This year we set another record as we opened 1,108 new restaurants...

  • Page 3
    ...brand and Pizza Hut is the number one casual dining chain. We just opened a Taco Bell Grande dine-in format that is off to a great start. The Chinese love our food and we love China. I've said it before and I'll say it again, there is no doubt in my mind that one day we will have more restaurants in...

  • Page 4
    ... Annual Study for overall drive-thru service. And Taco Bell's "Think Outside the Bun" advertising campaign and strong new product pipeline is among the best in the industry. Our biggest disappointment in the U.S. this year was negative 1% and negative 2% company same-store sales growth at Pizza Hut...

  • Page 5
    ... line of new products and everyday value meals. We are also emphasizing the fact that our chicken is brought to our restaurants fresh, not frozen, every day. Just as importantly for KFC, we are making steady progress in speed of service as we roll out the same drive-thru program that worked so...

  • Page 6
    ... multibrand partner for Pizza Hut's delivery service. Initial customer response is promising. We also acquired Pasta Bravo, a California fast casual chain with an outstanding line of pastas at great value, to be a partner brand with Pizza Hut's traditional dine-in restaurants. Franchise testing is...

  • Page 7
    ... expect. integration and systems, value engineered our facilities, developed WOW building designs and most importantly, improved people capability. While execution still remains our number one challenge, we are getting better and better. Improved margins and customer measures are evidence. Further...

  • Page 8
    ... to our restaurant teams. What you can't see in our numbers, but I hope you can get a sense of in this report, is the power of the worldwide culture we are building. It's a high energy, people capability first, customer mania culture that is centered on spirited recognition that drives performance...

  • Page 9
    7.

  • Page 10
    "power global

  • Page 11
    house"

  • Page 12
    ... company operations investment in seven key countries that account for over 70% of our international operating profit. Each of these markets is well established with powerful brands, powerful local teams and even more powerful growth potential. Our franchise and joint venture partners are driving...

  • 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
    15. ® 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 ...

  • Page 18
    ... Good Stuffâ„¢." Our new advertising, products and promotions reinforce that we're the family 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...

  • Page 19
    17.

  • Page 20
    18. KFC What's Cookin'

  • Page 21
    ..., delicious non-fried products, outstanding value meals, better-run restaurants, new menu boards and improved product packaging. And we're not going to stop there...You'll see a whole new advertising campaign that will remind our customers that our fried chicken is kitchen-fresh. And one of America...

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

  • Page 23
    ... service restaurant chain in the country, folks have lots of fond memories of A&W. Today, as a multibranding growth partner, we offer our delicious food as "Hometown American Favorites Made Fun." We're capitalizing on our nostalgia by inviting our customers to come in and ring our bell every time...

  • Page 24
    22. "po pow

  • Page 25
    ... enables us to build in trade areas that could not 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...

  • 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
    ... just two short years, Jeff has turned his Taco Bell into one of the top performers in the country. How did he do it? By driving a passionate Customer Mania culture and placing a strong emphasis on delicious product - every time! Jeff Stricklin, Restaurant General Manager, Taco Bell Product Quality...

  • Page 30
    ...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 giving a trusted customer experience - each and every time...

  • 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
    ... Japan/Canada U.K. Australia/New Zealand South Korea Other Mexico Future Growth Markets(c) Headquarters General & Administrative Costs $ 157 109 60 97 44 33 21 10 (30) (60) $ 441 (a) System sales represents the combined sales of Company, unconsolidated affiliates, franchise and license restaurants...

  • Page 33
    ... annual growth rate excludes the impact of transferring 30 units 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...

  • Page 34
    32. Financial Highlights "power " of (In millions, except per share amounts) Year-end Company sales Franchise and license fees Total revenues Operating profit Earnings before special items Special items, net of tax Net income Wrench litigation AmeriServe and other (charges) credits Cumulative ...

  • 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
    ... loss. 2001 includes $12 million of previously deferred refranchising gains and a charge of $11 million to mark to market the net assets of our Singapore business, which was sold during 2002 at a price approximately equal to its carrying value. Decreased restaurant profit Increased franchise...

  • Page 37
    ... 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 Diluted earnings per share...

  • 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
    ...the improved operating performance of our unconsolidated affiliates, particularly in China. WORLDWIDE INCOME TAXES 2003 Reported Income taxes Effective tax rate $ 268 30.2% 2002 $ 275 32.1% 2001 $ 241 32.8% WORLDWIDE FACILITY ACTIONS We recorded a net loss from facility actions of $36 million, $32...

  • Page 40
    ...Company sales Operating profit $ $ 5,081 574 $ 5,655 $ 739 6 1 6 (3) ppts. 2002 2001 $ 4,778 569 $ 5,347 $ 764 16.0% $ 802 11 5 11 18 0.8)ppts. 15 14.6% (1.4) 812 1 U.S. RESTAURANT UNIT ACTIVITY Company Unconsolidated Affiliates.(a) Franchisees Licensees Total Balance at Dec. 29, 2001 New Builds...

  • Page 41
    ... restaurant operating costs, primarily due to higher labor costs, and the unfavorable impact of refranchising and store closures. The higher labor costs were driven by wage rates. KFC Pizza Hut Taco Bell (2)% (1)% 2% Same Store Sales (4)% (4)% 1% 2002 Transactions 2% 3% 1% Average Guest Check...

  • Page 42
    ...impact of the YGR acquisition, system sales increased 8%. The increase was driven by new unit development and same store sales growth, partially offset by store closures. INTERNATIONAL COMPANY RESTAURANT MARGIN Company sales Food and paper Payroll and employee benefits Occupancy and other operating...

  • Page 43
    ... of supply chain savings initiatives on the cost of food and paper (principally in China), and the cessation of depreciation expense of approximately $9 million for the Puerto Rico business which is held for sale. Restaurant margin as a percentage of sales increased approximately 210 basis points in...

  • Page 44
    ... be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. We have excluded agreements that are cancelable without penalty. Purchase obligations relate primarily to purchases of property, plant and equipment as well as marketing, information technology...

  • Page 45
    ... 2004 OPERATING PROFIT COMPARISONS WITH 2003 New Accounting Pronouncements Not Yet Adopted See Note 2. Canada Unconsolidated Affiliate Dissolution On November 10, 2003 our Unconsolidated Affiliate that previously operated 479 KFC, 236 Pizza Hut and 18 Taco Bell restaurants in Canada was dissolved...

  • Page 46
    ... we will sell a restaurant, we write down the restaurant to its fair value. We often refranchise restaurants in groups and therefore perform impairment evaluations at the group level. Fair value is based on the expected sales proceeds less applicable transaction costs. Estimated sales proceeds are...

  • Page 47
    ... our business management units internationally (typically individual countries). Fair value is the price a willing buyer would pay for the reporting unit, and is generally estimated by discounting expected future cash flows from the reporting units over twenty years plus an expected terminal value...

  • Page 48
    ... DISCLOSURES ABOUT 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...

  • Page 49
    ... development by us and/or our food industry competitors; changes in commodity, labor, and other operating costs; changes in competition in the food industry; publicity which may impact our business and/or industry; severe weather conditions; volatility of commodity costs; increases in minimum wage...

  • Page 50
    ... 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 restaurants Food...

  • Page 51
    ... working capital Net Cash Provided by Operating Activities Cash Flows - Investing Activities Capital spending Proceeds from refranchising of restaurants Acquisition of Yorkshire Global Restaurants, Inc. Acquisition of restaurants from franchisees Short-term investments Sales of property, plant...

  • Page 52
    ... stock, no par value, 250 shares authorized; no shares issued Common stock, no par value, 750 shares authorized; 292 shares and 294 shares issued in 2003 and 2002, respectively Retained earnings (accumulated deficit) Accumulated other comprehensive income (loss) Total Shareholders' Equity Total...

  • Page 53
    ...Issued Common Stock Shares Amount Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Balance at December 30, 2000 Net income Foreign currency translation adjustment Net unrealized loss on derivative instruments (net of tax benefits of $1 million) Minimum...

  • Page 54
    ... Concepts, we develop, operate, franchise and license a system of both traditional and non-traditional quick service restaurants. Each Concept has proprietary menu items and emphasizes the preparation of food with high quality ingredients as well as unique recipes and special seasonings to provide...

  • Page 55
    ... net present value of any remaining lease obligations, net of estimated sublease income, if any. Refranchising gains (losses) includes the gains or losses from the sales of our restaurants to new and existing franchisees and the related initial franchise fees, reduced by transaction costs and direct...

  • 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
    ... The Company has adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the use of the purchase method of accounting for all business combinations and modifies the application of the purchase accounting method. Goodwill represents the excess of the cost of a business acquired...

  • 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
    ... that the required consolidation of franchise entities, if any, would materially impact our Financial Statements. The Company, along with representatives of the franchisee groups of each of its Concepts, has formed purchasing cooperatives for the purpose of purchasing certain restaurant products and...

  • Page 60
    ... Company sales Franchise and license fees 2002 $ 7,139 877 2001 $ 6,683 839 The impact of the acquisition, including interest expense on debt incurred to finance the acquisition, on net income and diluted earnings per share would not have been significant in 2002 and 2001. The pro forma information...

  • Page 61
    ... at Note 12). 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...

  • Page 62
    ... a franchise acquisition - Fair 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...

  • 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
    ...213 $ 2002 417 258 491 $ 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...

  • 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
    ... calculations based on market rates. note 17 PENSION AND POSTRETIREMENT MEDICAL BENEFITS Pension Benefits We sponsor noncontributory defined benefit pension plans covering substantially all full-time U.S. salaried employees, certain hourly employees and certain international employees. The most...

  • Page 67
    ... 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 recognized at year-end $ 501 26 34...

  • Page 68
    ... returns for each asset category, adjusted for an assessment of current market conditions. Assumed health care cost trend rates at September 30: Postretirement Medical Benefits categories of equity and debt security performance. The investment strategy is primarily driven by lower participant ages...

  • Page 69
    ... ranging from one to ten years and expire ten to fifteen years after grant. We estimated the fair value of each option grant made during 2003, 2002 and 2001 as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Risk-free interest rate...

  • Page 70
    .... These investment options are limited to cash and phantom shares of our Common Stock. The EID Plan allows participants to defer incentive compensation to purchase phantom shares of our Common Stock at a 25% discount from the average market price at the date of deferral (the "Discount Stock Account...

  • Page 71
    ...for approximately $100 million at an average price per share of approximately $21 under this program. note 22 INCOME TAXES The details of our income tax provision (benefit) are set forth below. Amounts do not include the income tax benefit of approximately $1 million on the $2 million cumulative...

  • Page 72
    ... added when we acquired YGR. KFC, Pizza Hut, Taco Bell, LJS and A&W operate throughout the U.S. and in 88, 86, 12, 3 and 13 countries and territories outside the U.S., respectively. Our five largest international markets based on operating profit in 2003 are China, United Kingdom, Australia, Canada...

  • Page 73
    ..., we had provided approximately $32 million of partial guarantees of two loan pools related primarily to the Company's historical refranchising programs and, to a lesser extent, franchisee development of new restaurants. In support of one of these guarantees, we have posted $32 million of letters of...

  • Page 74
    ... filed by two former Taco Bell shift managers purporting to represent approximately 17,000 current and former hourly employees statewide. The lawsuit alleged violations of state wage and hour laws, principally involving unpaid wages including overtime, and rest and meal period violations, and sought...

  • Page 75
    ... alleged that Taco Bell Corp. misappropriated certain ideas and concepts used in its advertising featuring a Chihuahua. The plaintiffs sought to recover monetary damages under several theories, including breach of implied-in-fact contract, idea misappropriation, conversion and unfair competition. On...

  • Page 76
    ... (26) 7,321 1,059 618 (1) 617 2.02 2002 Revenues: Company sales Franchise and license fees Total revenues AmeriServe and other charges (credits) Total costs and expenses, net Operating profit Net income Diluted earnings per common share First Quarter Second Quarter Third Quarter Fourth Quarter...

  • Page 77
    ... States of America and include certain amounts based upon our estimates and assumptions, as required. Other financial information presented in the annual report is derived from the financial statements. We maintain a system of internal control over financial reporting, designed to provide reasonable...

  • Page 78
    ..., the financial position of YUM as of December 27, 2003 and December 28, 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 27, 2003, in conformity with accounting principles generally accepted in the United States of America. As...

  • Page 79
    ...Company owned KFC, Pizza Hut and Taco Bell restaurants that have been open one year or more. LJS and A&W are not included. (h) International system sales growth includes the results of all international restaurants regardless of ownership, including Company owned, franchise, unconsolidated affiliate...

  • Page 80
    ... and Chief Concept Officer, Taco Bell, U.S.A. Jared E. Buss 61 Chief Operating Officer, Pizza Hut, U.S.A. Anne P. Byerlein 45 Chief People Officer, Yum! Brands, Inc. Christian L. Campbell 53 Senior Vice President, General Counsel, Secretary and Chief Franchise Policy Officer, Yum! Brands, Inc...

  • Page 81
    ...address all questions regarding your account, outstanding options or shares received through option exercises to: Merrill Lynch/SharePower Stock Option Plan Services P.O. Box 30446 New Brunswick, NJ 08989-0446 Phone: (800) 637-2432 (U.S.A., Puerto Rico and Canada) (732) 560-9444 (all other locations...

  • Page 82
    ... Services Direct Stock Purchase Plan A prospectus and a brochure explaining this convenient plan are available from our transfer agent: American Stock Transfer & Trust Company P.O. Box 922 Wall Street Station New York, NY 10269-0560 Attn: DRIP Dept. Phone: (888) 439-4986 CAPITAL STOCK INFORMATION...

  • Page 83
    ... Minds: Pizza Hut's Book It! For nearly 20 years, Pizza Hut has provided an incentive for elementary aged children to learn to read. More than 22 million students a year, in 900,000 classrooms, participate in Book It! The program is relied on year after year by teachers in 50,000 schools - nearly...

  • 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