Pizza Hut 2005 Annual Report Download - page 33

Commodity฀Inflation฀ Higher฀commodity฀costs,฀particularly฀in฀
cheese฀and฀meat฀prices,฀negatively฀impacted฀U.S.฀restaurant฀
margins฀as฀a฀percentage฀of฀sales฀by฀approximately฀160฀basis฀
points฀for฀the฀year฀ended฀2004฀versus฀the฀year฀ended฀2003.
Wrench฀Litigation฀ We฀recorded฀income฀of฀$2฀million฀and฀
$14฀million฀in฀2005฀and฀2004,฀respectively,฀and฀expense฀
of฀$42฀million฀in฀2003.฀See฀Note฀4฀for฀a฀discussion฀of฀the฀
Wrench฀litigation.
AmeriServe฀ and฀ Other฀ Charges฀ (Credits)฀ We฀ recorded฀
income฀of฀$2฀million,฀$16฀million฀and฀$26฀million฀in฀2005,฀
2004฀ and฀ 2003,฀ respectively.฀ See฀ Note฀ 4฀for฀ a฀ detailed฀
discussion฀of฀AmeriServe฀and฀other฀charges฀(credits).
Store฀ Portfolio฀ Strategy฀ From฀ time฀ to฀ time฀ we฀ sell฀
Company฀ restaurants฀ to฀ existing฀ and฀ new฀ franchisees฀
where฀geographic฀synergies฀can฀be฀obtained฀or฀where฀their฀
expertise฀can฀generally฀be฀leveraged฀to฀improve฀our฀overall฀
operating฀performance,฀while฀retaining฀Company฀ownership฀
of฀key฀U.S.฀and฀international฀markets.฀Such฀refranchisings฀
reduce฀our฀reported฀revenues฀and฀restaurant฀profits฀and฀
increase฀the฀importance฀of฀system฀sales฀growth฀as฀a฀key฀
performance฀measure.
The฀ following฀ table฀ summarizes฀ our฀ refranchising฀
activities:
฀2005฀ 2004฀ 2003
Number฀of฀units฀refranchised฀ ฀382฀ ฀317฀ ฀228
Refranchising฀proceeds,฀pre-tax฀ $฀145฀ $฀140฀ $฀ 92
Refranchising฀net฀gains,฀pre-tax฀฀ $฀ 43฀ $฀ 12฀ $฀ 4
In฀addition฀to฀our฀refranchising฀program,฀from฀time฀to฀time฀
we฀close฀restaurants฀that฀are฀poor฀performing,฀we฀relocate฀
restaurants฀to฀a฀new฀site฀within฀the฀same฀trade฀area฀or฀we฀
consolidate฀two฀or฀more฀of฀our฀existing฀units฀into฀a฀single฀
unit฀ (collectively฀ “store฀ closures”).฀ Store฀ closure฀ costs฀
(income)฀includes฀the฀net฀of฀gains฀or฀losses฀on฀sales฀of฀real฀
estate฀on฀which฀we฀are฀not฀currently฀operating฀a฀Company฀
restaurant,฀lease฀reserves฀established฀when฀we฀cease฀using฀
a฀property฀under฀an฀operating฀lease฀and฀subsequent฀adjust-
ments฀to฀those฀reserves,฀and฀other฀facility-related฀expenses฀
from฀previously฀closed฀stores.
The฀following฀table฀summarizes฀Company฀store฀closure฀
activities:
฀2005฀ 2004฀ 2003
Number฀of฀units฀closed฀ ฀246฀ ฀319฀ ฀287
Store฀closure฀costs฀(income)฀฀ $฀—฀ $฀(3)฀ $฀6
The฀ impact฀ on฀ operating฀profit฀ arising฀ from฀ refranchising฀
and฀Company฀store฀closures฀is฀the฀net฀of฀(a)฀the฀estimated฀
reductions฀in฀restaurant฀profit,฀which฀reflects฀the฀decrease฀
in฀Company฀sales,฀and฀general฀and฀administrative฀expenses฀
and฀(b)฀the฀estimated฀increase฀in฀franchise฀fees฀from฀the฀
stores฀refranchised.฀The฀amounts฀presented฀below฀reflect฀
the฀ estimated฀ impact฀from฀ stores฀ that฀were฀ operated฀ by฀
us฀for฀all฀or฀some฀portion฀of฀the฀respective฀previous฀year฀
and฀were฀no฀longer฀operated฀by฀us฀as฀of฀the฀last฀day฀of฀the฀
respective฀year.฀The฀amounts฀do฀not฀include฀results฀from฀new฀
restaurants฀that฀we฀opened฀in฀connection฀with฀a฀relocation฀
of฀an฀existing฀unit฀or฀any฀incremental฀impact฀upon฀consolida-
tion฀of฀two฀or฀more฀of฀our฀existing฀units฀into฀a฀single฀unit.
The฀following฀table฀summarizes฀the฀estimated฀impact฀on฀
revenue฀of฀refranchising฀and฀Company฀store฀closures:
฀ ฀ Inter-฀
฀ ฀ national฀฀ China฀฀ World-฀
2005฀ U.S.฀ Division฀ Division฀ wide
Decreased฀sales฀฀ $฀(240)฀ $฀(263)฀ $฀(15)฀ $฀(518)
Increased฀franchise฀fees฀฀ ฀ 8฀ ฀ 13฀ ฀ —฀ ฀ 21
Decrease฀in฀total฀revenues฀ $฀(232)฀ $฀(250)฀ $฀(15)฀ $฀(497)
฀ ฀ Inter-฀
฀ ฀ national฀฀ China฀ World-฀
2004฀ U.S.฀ Division฀ ฀Division฀ wide
Decreased฀sales฀฀ $฀(241)฀ $฀(111)฀ $฀(20)฀ $฀(372)
Increased฀franchise฀fees฀฀ ฀ 7฀ ฀ 5฀ ฀ —฀ ฀ 12
Decrease฀in฀total฀revenues฀ $฀(234)฀ $฀(106)฀ $฀(20)฀ $฀(360)
The฀following฀table฀summarizes฀the฀estimated฀impact฀on฀oper-
ating฀profit฀of฀refranchising฀and฀Company฀store฀closures:
฀ ฀ Inter-฀
฀ ฀ national฀฀ China฀฀ World-฀
2005฀ U.S.฀ Division฀ Division฀ wide
Decreased฀restaurant฀profit฀฀ $฀(22)฀ $฀(34)฀ $฀(1)฀ $฀(57)
Increased฀franchise฀fees฀฀ ฀ 8฀ ฀ 13฀ ฀—฀ ฀ 21
Decreased฀general฀and฀฀
฀ administrative฀expenses฀ ฀ 1฀ ฀ 10฀ ฀—฀ ฀ 11
Decrease฀in฀operating฀profit฀ $฀(13)฀ $฀(11)฀ $฀(1)฀ $฀(25)
฀ ฀ Inter-฀
฀ ฀ national฀฀ China฀ World-฀
2004฀ U.S.฀ Division฀ ฀Division฀ wide
Decreased฀restaurant฀profit฀฀ $฀(18)฀ $฀(9)฀ $฀(2)฀ $฀(29)
Increased฀franchise฀fees฀฀ ฀ 7฀ ฀ 5฀ ฀—฀ ฀ 12
Decreased฀general฀and฀฀
฀ ฀administrative฀expenses฀ ฀ —฀ ฀ 6฀ ฀—฀ ฀ 6
Decrease฀in฀operating฀profit฀ $฀(11)฀ $฀ 2฀ $฀(2)฀ $฀(11)
RESULTS฀OF฀OPERATIONS
฀ ฀ %฀B/(W)฀ ฀ %฀B/(W)฀
฀2005฀ vs.฀2004฀ 2004฀ vs.฀2003
Company฀sales฀ $฀8,225฀ ฀ 3฀ $฀7,992฀ ฀ 7
Franchise฀and฀฀
฀ license฀fees฀ ฀1,124฀ ฀10฀ ฀1,019฀ ฀ 8
Revenues฀ $฀9,349฀ ฀ 4฀ $฀9,011฀ ฀ 8
Company฀restaurant฀฀
฀ profit฀฀ $฀1,155฀ ฀—฀ $฀1,159฀ ฀ 5
%฀of฀Company฀sales฀ 14.0%฀ (0.5)ppts.฀14.5%฀ (0.3)ppts.
Operating฀profit฀ ฀1,153฀ ฀—฀ ฀1,155฀ ฀ 9
Interest฀expense,฀net฀ ฀ 127฀ ฀ 2฀ ฀ 129฀ ฀ 25
Income฀tax฀provision฀ ฀ 264฀ ฀ 7฀ ฀ 286฀ ฀ (7)
Net฀income฀฀ $฀ 762฀ ฀ 3฀ $฀ 740฀ ฀ 20
Diluted฀earnings฀฀
฀ per฀share(a)฀$฀ 2.55฀ ฀ 5฀ $฀ 2.42฀ ฀ 20
(a)฀See฀Note฀3฀for฀the฀number฀of฀shares฀used฀in฀this฀calculation.
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 37.