Pizza Hut 2004 Annual Report Download - page 40

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improvements.฀ In฀ 2003,฀ the฀ decrease฀ in฀ U.S.฀ restaurant฀
margin฀as฀a฀percentage฀of฀sales฀was฀primarily฀driven฀by฀the฀
increased฀occupancy฀expenses฀due฀to฀higher฀rent,฀primarily฀
due฀to฀additional฀rent฀expense฀associated฀with฀the฀amended฀
YGR฀ sale-leaseback฀ agreements,฀ and฀ utilities.฀ The฀ higher฀
food฀and฀paper฀ costs฀ were฀primarily฀due฀ to฀the฀ impact฀of฀
unfavorable฀discounting฀and฀product฀mix.฀Also฀contributing฀to฀
the฀decrease฀were฀higher฀labor฀costs,฀primarily฀driven฀by฀low฀
single-digit฀increases฀in฀wage฀rates.
In฀2004,฀the฀increase฀in฀International฀restaurant฀margins฀
as฀a฀percentage฀of฀sales฀was฀driven฀by฀the฀impact฀of฀same฀
store฀sales฀increases฀on฀restaurant฀margin฀and฀lower฀food฀
and฀ paper฀costs฀(principally฀due฀to฀supply฀ chain฀savings).฀
The฀increase฀was฀partially฀offset฀by฀a฀60฀basis฀point฀unfa-
vorable฀impact฀of฀operating฀certain฀restaurants฀in฀Canada,฀
which฀ is฀ a฀ market฀ with฀ below฀ average฀ margins,฀ that฀ were฀
previously฀operated฀by฀our฀unconsolidated฀affiliate,฀increased฀
labor฀costs฀in฀certain฀markets฀and฀a฀10฀basis฀point฀unfavor-
able฀impact฀from฀foreign฀currency฀translation.฀In฀2003,฀the฀
decrease฀in฀International฀restaurant฀margins฀as฀a฀percentage฀
of฀sales฀was฀driven฀by฀the฀impact฀on฀margin฀of฀same฀store฀
sales฀declines฀and฀a฀20฀basis฀point฀unfavorable฀impact฀from฀
foreign฀currency฀translation.฀The฀decrease฀was฀partially฀offset฀
by฀the฀impact฀of฀supply฀chain฀savings฀on฀the฀cost฀of฀food฀and฀
paper฀(principally฀in฀China),฀and฀the฀cessation฀of฀deprecia-
tion฀expense฀of฀approximately฀$9฀million฀for฀the฀Puerto฀Rico฀
business฀while฀it฀was฀held฀for฀sale.
The฀impact฀from฀foreign฀currency฀translation฀on฀margins฀
as฀ a฀ percentage฀ of฀ sales฀ is฀ a฀ result฀ of฀ the฀ portfolio฀ of฀
markets฀effect.฀International฀margin฀percentages฀in฀total฀are฀
impacted฀unfavorably฀when฀currencies฀strengthen฀in฀markets฀
with฀below฀average฀margins.฀Those฀markets฀contributing฀to฀
the฀unfavorable฀impacts฀of฀foreign฀currency฀translation฀on฀
margin฀have฀below฀average฀margins฀largely฀due฀to฀their฀higher฀
labor฀costs.
WORLDWIDE฀GENERAL฀AND฀ADMINISTRATIVE฀EXPENSES
General฀and฀administrative฀expenses฀increased฀$111฀million฀
or฀ 12%฀ in฀ 2004,฀ including฀ a฀ 2%฀ unfavorable฀ impact฀ from฀
foreign฀currency฀translation.฀The฀increase฀was฀driven฀by฀higher฀
compensation฀ related฀ costs,฀ including฀ incentive฀ compen-
sation,฀ amounts฀ associated฀ with฀ investments฀ in฀ strategic฀
initiatives฀in฀China฀and฀other฀international฀growth฀markets฀and฀
pension฀costs.฀Also฀contributing฀to฀the฀increase฀were฀higher฀
professional฀fees฀and฀increased฀reserves฀related฀to฀potential฀
development฀sites฀and฀surplus฀facilities.฀The฀increase฀was฀
also฀partially฀attributable฀to฀expenses฀of฀$11฀million฀associ-
ated฀with฀operating฀the฀restaurants฀we฀now฀own฀in฀Canada฀that฀
were฀previously฀operated฀by฀our฀unconsolidated฀affiliate.฀These฀
increases฀were฀partially฀offset฀by฀decreases฀in฀expenses฀due฀
to฀the฀favorable฀impact฀of฀refranchising฀certain฀restaurants.
General฀and฀administrative฀expenses฀increased฀$32฀mil-
lion฀or฀3%฀in฀2003,฀including฀a฀1%฀unfavorable฀impact฀from฀
foreign฀currency฀translation.฀Excluding฀the฀unfavorable฀impact฀
from฀both฀foreign฀currency฀translation฀and฀the฀YGR฀acquisi-
tion,฀general฀and฀administrative฀expenses฀were฀flat฀for฀2003.฀
Lower฀management฀incentive฀compensation฀costs฀were฀offset฀
by฀increases฀in฀expenses฀associated฀with฀international฀res-
taurant฀expansion฀and฀pension฀expense.
WORLDWIDE฀FRANCHISE฀AND฀LICENSE฀EXPENSES
Franchise฀and฀license฀expenses฀decreased฀$2฀million฀or฀8%฀
in฀2004.฀The฀decrease฀was฀primarily฀driven฀by฀the฀favorable฀
impact฀of฀lapping฀the฀biennial฀International฀franchise฀conven-
tion฀held฀in฀2003.
Franchise฀and฀license฀expenses฀decreased฀$21฀million฀
or฀42%฀in฀2003.฀The฀decrease฀was฀primarily฀attributable฀to฀
lower฀allowances฀for฀doubtful฀franchise฀and฀license฀fee฀receiv-
ables,฀principally฀at฀Taco฀Bell.
WORLDWIDE฀OTHER฀(INCOME)฀EXPENSE
฀2004฀ 2003฀ 2002
Equity฀income฀from฀investments฀฀
฀ in฀unconsolidated฀affiliates฀ $฀(54)฀ $฀(39)฀ $฀(29)
Foreign฀exchange฀net฀(gain)฀loss฀ ฀ (1)฀ ฀ (2)฀ ฀ (1)
Other฀(income)฀expense฀ $฀(55)฀ $฀(41)฀ $฀(30)
Other฀income฀increased฀$14฀million฀or฀34%฀in฀2004,฀including฀
a฀7%฀favorable฀impact฀from฀foreign฀currency฀translation.฀The฀
increase฀was฀driven฀by฀an฀increase฀in฀equity฀income฀from฀our฀
unconsolidated฀affiliates,฀principally฀in฀China,฀and฀the฀dissolu-
tion฀of฀our฀unconsolidated฀affiliate฀in฀Canada฀which฀recorded฀
a฀loss฀for฀the฀year฀ended฀December฀27,฀2003.
Other฀income฀ increased฀ $11฀million฀ or฀ 39%฀in฀ 2003,฀
including฀a฀6%฀favorable฀impact฀from฀foreign฀currency฀trans-
lation.฀The฀increase฀was฀primarily฀driven฀by฀an฀increase฀in฀
equity฀income฀from฀our฀unconsolidated฀affiliates,฀particularly฀
in฀China.
WORLDWIDE฀FACILITY฀ACTIONS
We฀recorded฀a฀net฀loss฀from฀facility฀actions฀of฀$26฀million,฀
$36฀million฀and฀$32฀million฀in฀2004,฀2003฀and฀2002,฀respec-
tively.฀See฀the฀Store฀Portfolio฀Strategy฀section฀for฀more฀detail฀
of฀our฀refranchising฀and฀closure฀activities฀and฀Note฀7฀for฀a฀
summary฀of฀the฀components฀of฀facility฀actions฀by฀reportable฀
operating฀segment.
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