Pizza Hut 2007 Annual Report Download

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big
winning
Yum!
aroundthe
globe!
Yum! Brands 2007 Annual Customer Mania Report
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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
    ... there's nothing more satisfying than being on a winning team, and I think you'll see from this report that we are absolutely focused on gaining the satisfaction 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...

  • Page 4
    ...the number one retail developer of new units outside the United States by opening 1,358 stores, the seventh straight year we've opened up more than 1,000 new restaurants. With such powerful results, we generated record cash from operations of over $1.5 billion and returned an all time high of nearly...

  • Page 5
    ... 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 30,000 U.S. restaurants...

  • Page 6
    ...are also opening up over 90% of the new restaurants and generating $568 million in franchise fees, requiring minimal capital on our part. Like China, YRI is a tremendous growth vehicle, but we believe it may have even more potential. While KFC and Pizza Hut are already global brands, with a total of...

  • Page 7
    ... Trusted Food Service Brand" in India for three years running by the ;OL ,JVUVTPJ ;PTLZ. And we are enthusiastic about the prospects for KFC, which now has 31 units in 9 cities. We are consistently growing our presence and building sales momentum in this large and rapidly growing market. Like China...

  • Page 8
    ... to open a significant number of stand-alone Taco Bells along with KFC-Taco Bell multibranding units. With Taco Bell well-positioned in the quickservice restaurant space, we are driving net-unit development in the U.S. with this brand. We are targeting to do the same across our entire U.S. business...

  • Page 9
    ... better job of running them. Taco Bell has earned the right to own, so we will only marginally reduce its ownership over time, continuing to own about 25% of the system. On the other hand, we will be taking total U.S. ownership down from 22% to possibly less than 10% by owning fewer Pizza Huts, KFCs...

  • Page 10
    ... big in everything they do. Never was this more evident than when we launched the world's largest Hunger Relief initiative in support of the United Nations World Food Programme and other hunger agencies. You'll see in this Report how our corporate social responsibility effort is helping hundreds...

  • Page 11
    ... category Drive aggressive, International expansion and build strong brands everywhere Dramatically improve U.S. brand positions, consistency and returns Drive industryleading, long-term shareholder and franchisee value We're building a powerful portfolio of brands in the world's fastestgrowing...

  • 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
    ... 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, which are high already, to even higher levels. With unit growth, same store sales growth and high returns, we're winning BIG in China and the best is yet to come...

  • 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
    ..., South Africa and Europe excelled as did the company operated markets of KFC UK, Mexico and KFC Australia. But we're even more excited by the potential for future growth than we are about the scale and breadth of our business today. Our two big brands, KFC and Pizza Hut, still have enormous unit...

  • Page 16
    ... a value-oriented product, priced at 3 for $15! We're also market testing the family-sized restaurant-quality line of Tuscani Pastas. This is a first for our QSR business, and is a completely unmet need in the QSR category - there is no restaurant-quality Home Meal Replacement pasta available today...

  • Page 17
    ... today. We're passionate and we're committed to dramatically improving our U.S. brand positions, consistency and returns. The single biggest advantage we have in the U.S. is our nearly 18,000 underleveraged traditional restaurants. We see this as a significant value opportunity that we can use...

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  • Page 25
    ... employee performance 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...

  • Page 26
    ... her team did so well with the new line that the company decided to add them to the menu of every A&W. 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...

  • Page 27
    ...my team," he says. "We hire the strongest candidates and they 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...

  • Page 28
    ... 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 support of the United Nations World Food...

  • Page 29
    .... This marketing campaign, the equivalent of $50 million, let the world know how committed we are to helping solve this global problem. volunteerism We launched the world's largest volunteer effort, with many of our 1 million employees system-wide donating 4 million volunteer hours to various...

  • Page 30
    ...to expand our business around the world, opening a record 471 new units in Mainland China and a record 852 units in YRI. By once again adding more new international units than any other restaurant company, Yum! continues to improve its competitive position. In 2007, we returned a record $1.7 billion...

  • 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 ...Breakfast 34% Source: The NPD Group, Inc.; 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...

  • 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
    ... to our second quarter of 2008. U.S. RESTAURANT PROFIT Diluted earnings per share of $1.68 or 15% growth Worldwide system sales growth of 8% driven by new-unit growth in mainland China and the International Division Worldwide same store sales growth of 3% and operating profit growth of 8% Double...

  • Page 35
    .... 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 unconsolidated affiliates Operating profit $ 58...

  • Page 36
    ... 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 (income) costs includes the net of gain or loss on sales...

  • Page 37
    ... Franchisees 2 $ (21) Results of Operations % B/(W) 2007 vs. 2006 Company sales Franchise and license fees Total revenues Company restaurant profit % of Company sales Operating profit Interest expense, net Income tax provision Net income Diluted earnings per share(a) $ $ $ 9,100 1,316 $ 10,416...

  • Page 38
    ... 30, 2006. Company sales United States $ 4,518 $ 4,952 International Division 2,507 1,826 China Division 2,075 1,587 Worldwide Franchise and license fees United States International Division China Division Worldwide Total revenues United States International Division China Division Worldwide 9,100...

  • Page 39
    ... 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 U.S. International Division China Division Worldwide 100...

  • 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
    ... of restaurants and a 2007 increase in capital spending. Our 2007 effective income tax rate was positively impacted by valuation allowance reversals. In December 2007, the Company finalized various tax planning strategies based on completing a review of our international operations, distributed...

  • Page 42
    ... cash flows from the operations of our company stores and from our franchise operations, which require a limited YUM investment. In each of the last six fiscal years, net cash provided by operating activities has exceeded $1 billion. We expect these levels of net cash provided by operating...

  • Page 43
    ...marketing, commodity agreements, purchases of property, plant and equipment as well as consulting, maintenance and other agreements. We have not included in the contractual obligations table approximately $319 million for long-term liabilities for unrecognized tax benefits for various tax positions...

  • Page 44
    ...of operating losses. Our semi-annual impairment evaluations require an estimation of cash flows over the remaining useful life of the primary asset of the restaurant, which can be for a period of over 20 years, and any terminal value. We limit assumptions about important factors such as sales growth...

  • Page 45
    ... 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 using either discounted expected future cash flows from operations or the present value of the estimated future franchise...

  • Page 46
    ... actuarial present value of all benefits earned to date by employees and incorporates assumptions as to future compensation levels. Due to the relatively long time frame over which benefits earned to date are expected to be paid, our PBO's are highly sensitive to changes in discount rates. For our...

  • Page 47
    ... 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 48
    ... our business; new product and concept development by us and/or our food industry competitors; 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 and other operating...

  • Page 49
    ... 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 criteria...

  • Page 50
    ...of the Company's Annual Report. Our responsibility is to express an opinion on YUM's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we...

  • Page 51
    ... 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 based...

  • Page 52
    ... is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and...

  • Page 53
    ... 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 Franchise and license expenses Closures and impairment expenses Refranchising (gain) loss Other (income) expense...

  • Page 54
    ... three months - payments Three months or less, net Repurchase shares 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...

  • Page 55
    ... Current Assets Cash and cash equivalents Accounts and notes receivable, less allowance: $21 in 2007 and $18 in 2006 Inventories Prepaid expenses and other current assets Deferred income taxes Advertising cooperative assets, restricted Total Current Assets Property, plant and equipment, net Goodwill...

  • Page 56
    ...) Comprehensive Income Dividends declared on Common Stock ($0.2225 per common share) China December 2004 net income Repurchase of shares of Common Stock Employee stock option exercises (includes tax impact of $94 million) Compensation-related events (includes tax impact of $5 million) Balance at...

  • Page 57
    ..." 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 the "Concepts"). YUM is the world's largest quick service restaurant company based on the number of system units, with more than...

  • Page 58
    ... losses" as our primary indicator of potential impairment. Based on the best information available, we write down an impaired restaurant to its estimated fair market value, which becomes its new cost basis. We generally measure estimated fair market value by discounting estimated future cash...

  • Page 59
    ... 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, reduced by transaction costs. In executing our refranchising initiatives, we most often offer groups of...

  • Page 60
    ... related to unrecognized tax benefits as components of its income tax provision. See Note 20 for a further discussion of our income taxes. Cash equivalents represent funds we have temporarily invested (with original maturities not exceeding three months) as part of managing our day-to-day operating...

  • Page 61
    ...instruments and fair value information. DERIVATIVE FINANCIAL INSTRUMENTS in a negative balance in our Common Stock account. In such instances, on a period basis, we record the cost of any further share repurchases as a reduction in retained earnings. Due to the large number of share repurchases and...

  • Page 62
    ... is required. UNALLOCATED RESERVES Prior to 2006, we used certain 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...

  • Page 63
    ... operates both KFCs and Pizza Huts in Japan, it will continue to be a franchisee as it was when it operated as an unconsolidated affiliate. This sale of our interest will result in lower Other income as we will no longer record our share of the entity's earnings under the equity method of accounting...

  • Page 64
    ... segments for performance reporting (b) Store closure (income) costs include the net gain or loss on sales of real estate on which we formerly operated a Company restaurant that was closed, lease reserves established when we cease using a property under an operating lease and subsequent adjustments...

  • Page 65
    ...line items of our Consolidated Statements of Income. We no longer record franchise fee income for the restaurants previously owned by the unconsolidated affiliate nor do we report other income under the equity method of accounting. As a result of this acquisition, Company sales and restaurant profit...

  • Page 66
    ... past acquisitions representing the value of our KFC, LJS and A&W trademarks/ brands. The value of a trademark/brand is determined based upon the value derived from the royalty we avoid, in the case of Company stores, or receive, in the case of franchise and licensee stores, for the use of the...

  • Page 67
    ... certain office and restaurant equipment. We do not consider any of these individual leases material to our 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...

  • Page 68
    ... business trends of our Concepts. This concentration of credit risk is mitigated, in part, by the large number of franchisees and licensees of each Concept and the short-term nature of the franchise and license fee receivables. CREDIT RISKS 15. Financial Instruments We enter into interest rate...

  • Page 69
    ...of year Service cost Interest cost Participant contributions Plan amendments Acquisitions(a) Curtailment gain Exchange rate changes Benefits and expenses paid Actuarial (gain) loss Benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on...

  • Page 70
    ... service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits. (b) Curtailment losses have been recognized as refranchising losses as they have 2007 Projected benefit obligation Accumulated benefit obligation Fair value...

  • Page 71
    ... assumptions used to measure our benefit obligation on the measurement date and include benefits attributable to estimated further employee service. Our postretirement plan provides health care benefits, principally to U.S. salaried retirees and their dependents, and includes retiree cost sharing...

  • Page 72
    ... million, respectively. 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...

  • Page 73
    ... other items that are recorded directly to shareholders' equity. Amounts included in other accumulated comprehensive loss for the Company's derivative instruments and unrecognized actuarial losses are recorded net of the related income tax effects. Refer to Note 16 for additional information about...

  • Page 74
    ...(1.7) (1.1) (0.5) 25.8% Our 2007 effective income tax rate was positively impacted by valuation allowance reversals. In December 2007, the Company finalized various tax planning strategies based on completing a review of our international operations, distributed a $275 million intercompany dividend...

  • Page 75
    ...positions for disclosure purposes. As these items were temporary in nature, there was no change to the disclosed amount of $185 million of unrecognized tax benefits which, if recognized, would affect the effective income tax rate. The major jurisdictions in which the Company files income tax returns...

  • Page 76
    ... A&W concepts. KFC, Pizza Hut, Taco Bell, LJS and A&W operate throughout the U.S. and in 104, 96, 14, 6 and 10 countries and territories outside the U.S., respectively. Our five largest international markets based on operating profit in 2007 are China, United Kingdom, Asia Franchise, Australia and...

  • Page 77
    ... in quarterly and annual net income. We believe that we have recorded reserves for property and casualty losses at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility. We are subject to various claims and contingencies related to lawsuits...

  • Page 78
    ... 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 District of Minnesota. Plaintiffs allege that they and other current and former KFC Assistant Unit Managers...

  • 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
    ...revenue drivers, Company and franchise same store sales as well as net unit development. Additionally, we began reporting information for our international business in two separate operating segments (the International Division and the China Division) in 2005 as a result of changes in our management...

  • 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...

  • Page 83
    ... of the plan. complete the following functions online at the Web site of American Stock Transfer & Trust ("AST"): www.amstock.com. Access account balance and other general account information Change an account's mailing address View a detailed list of holdings represented by certificates and the...

  • Page 84
    ....com/franchising/default.asp Yum! Brands' Annual Report contains many of the valuable trademarks owned and used by Yum! Brands and subsidiaries and affiliates in the United States and worldwide. Capital Stock Information The following table sets forth the high and low stock prices, as well as cash...

  • Page 85
    ... 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 inside and outside our company...

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