Pizza Hut 2007 Annual Report Download - page 34

38 YUM! BRANDS, INC.
Dramatically Improve U.S. Brand Positions, Consistency and
Returns The Company continues to focus on improving its
U.S. position through differentiated products and marketing
and an improved customer experience. The Company also
strives to provide industry leading new product innovation
which adds sales layers and expands day parts. We are the
leader in multibranding, with nearly 3,700 restaurants provid-
ing customers two or more of our brands at a single location.
We continue to evaluate our returns and ownership positions
with an earn the right to own philosophy on Company owned
restaurants. Our ongoing earnings growth model calls for
annual operating profit growth of 5% in the U.S. with same
store sales growth of 2% to 3% and leverage of our General
and Administrative (“G&A”) infrastructure.
Drive Industry-Leading, Long-Term Shareholder and Fran-
chisee Value The Company is focused on delivering high
returns and returning substantial cash flows to its sharehold-
ers via share repurchases and dividends. The Company has
one of the highest returns on invested capital in the Quick
Service Restaurants (“QSR”) industry. Additionally, 2007 was
the third consecutive year in which the Company returned over
$1.1 billion to its shareholders through share repurchases
and dividends. The Company is targeting an annual dividend
payout ratio of 35% to 40% of net income.
2007 HIGHLIGHTS
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 digit operating profit growth of 30% from the
China Division and 18% from the International Division,
offsetting a 3% decline in the U.S.
Effective tax rate of 23.7%
Payout to shareholders of $1.7 billion through share
repurchases and dividends, with repurchases helping to
reduce our diluted share count by a net 4%
Significant Known Events, Trends or Uncertainties
Impacting or Expected to Impact Comparisons of
Reported or Future Results
The following factors impacted comparability of operating
performance for the years ended December 29,2007, Decem-
ber 30, 2006 and December 31, 2005 and could impact
comparability with our results in 2008.
MAINLAND CHINA COMMODITY INFLATION China Division res-
taurant margin as a percentage of sales declined to 20.1%
during 2007 from 20.4% in 2006. This decline was driven
by rising chicken costs in mainland China, which make up
approximately 40% of mainland China’s cost of food and
paper, and higher restaurant labor costs in mainland China.
Rising chicken costs are resulting from both lower than
expected availability and increased demand in the market.
The increased costs were partially offset in 2007 by strong
same store sales growth, including the impact of menu pricing
increases. In mainland China, we expect that high commodity
inflation (including higher chicken costs) will continue into the
first half of 2008 and moderate later in the year.
U.S. RESTAURANT PROFIT Our resulting U.S. restaurant mar-
gin as a percentage of sales decreased 1.3 percentage points
in 2007 and increased 0.8 percentage points in 2006. Our
U.S. restaurant profit was impacted in 2007 and 2006 by
several key events and trends. These include the negative
impact on the Taco Bell business of adverse publicity related
to a produce-sourcing issue in the fourth quarter of 2006
and an infestation issue in one franchise store in February
2007, fluctuations in commodity 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, Taco
Bell’s Company same store sales were down 5%. Taco Bell’s
Company same store sales were flat in the fourth quarter of
2007 and we believe that Taco Bell will fully recover from these
issues. However, our experience has been that recoveries of
this type vary in duration.
In 2007, we experienced significant increases in commod-
ity costs resulting in approximately $44 million of commodity
inflation. This inflation was primarily driven by meats and
cheese products. We expect these unfavorable commodity
trends to continue in 2008 resulting in commodity inflation
of approximately 5% for the full year, with the majority of this
impact seen in the first half of the year. In 2006, restaurant
profits were positively impacted versus 2005 by a decline in
commodity costs, principally meats and cheese, of approxi-
mately $45 million.
The sizeable February 2008 beef recall in the U.S. had
no impact on our results though the impact, if any, on beef
prices going forward is not yet known.
Self-insurance property and casualty insurance expenses
were down $27 million versus the prior year in both 2007
and 2006, exclusive of the estimated reduction due to refran-
chising stores. The favorability in insurance expenses was
the result of improved loss trends, which we believe are pri-
marily driven by safety and claims handling procedures we
implemented over time, as well as workers’ compensation
reforms at the state level. We anticipate that given the sig-
nificant favorability in 2007, property and casualty expense in
2008 will be significantly higher in comparison. The increased
expenses are currently expected to be most impactful to our
second quarter of 2008.
PIZZA HUT UNITED KINGDOM ACQUISITION On Septem-
ber 12, 2006, we completed the acquisition of the remaining
fifty percent ownership interest of our Pizza Hut United King-
dom (“U.K.”) unconsolidated affiliate from our partner, paying
approximately $178 million in cash, including transaction
costs and net of $9 million of cash assumed. Additionally,
we assumed the full liability, as opposed to our fifty percent
share, associated with the Pizza Hut U.K.’s capital leases of
$97 million and short-term borrowings of $23 million. This
unconsolidated affiliate operated more than 500 restaurants
in the U.K.