Pizza Hut 2007 Annual Report Download - page 40

44 YUM! BRANDS, INC.
G&A expenses increased 2% in 2006. The increase
was primarily driven by higher compensation related costs,
including amounts associated with investments in strategic
initiatives in China and other international growth markets,
partially offset by lapping higher prior year litigation related
costs. The net impact of the additional G&A expenses associ-
ated with acquiring the Pizza Hut U.K. business, the favorable
impact of lapping the 53rd week in 2005 and the unfavorable
impact of foreign currency translation was not significant.
Worldwide Other (Income) Expense
2007 2006 2005
Equity income from investments in
unconsolidated affiliates $ (51) $ (51) $ (51)
Gain upon sale of investment in
unconsolidated affiliate(a) (6) (2) (11)
Recovery from supplier(b) —— (20)
Contract termination charge(c) —8 —
Wrench litigation income(d) (11) — (2)
Foreign exchange net (gain) loss
and other (3) (7) —
Other (income) expense $ (71) $ (52) $ (84)
(a) Fiscal years 2007 and 2006 reflects recognition of income associated with receipt
of payments for a note receivable arising from the 2005 sale of our fifty percent
interest in the entity that operated almost all KFCs and Pizza Huts in Poland and
the Czech Republic to our then partner in the entity. Fiscal year 2005 reflects the
gain recognized at the date of this sale.
(b) Relates to a financial recovery from a supplier ingredient issue in mainland China
totaling $24 million in 2005, $4 million of which was recognized through equity
income from investments in unconsolidated affiliates.
(c) Reflects an $8 million charge associated with the termination of a beverage agree-
ment in the U.S. segment in 2006.
(d) Fiscal years 2007 and 2005 reflect financial recoveries from settlements with
insurance carriers related to a lawsuit settled by Taco Bell Corporation in 2004.
Worldwide Closure and Impairment Expenses and
Refranchising (Gain) Loss
See the Store Portfolio Strategy section for more detail of our
refranchising and closure activities and Note 5 for a summary
of the components of facility actions by reportable operating
segment.
Operating Profit
% Increase/
(Decrease)
2007 2006 2007 2006
United States $ 739 $ 763 (3) —
International Division 480 407 18 9
China Division 375 290 30 37
Unallocated and corporate
expenses (257) (229) 12 (7)
Unallocated other income
(expense) 97NM NM
Unallocated refranchising
gain (loss) 11 24 NM NM
Operating profit $ 1,357 $ 1,262 89
United States operating
margin 14.2% 13.6% 0.6ppts. 0.8ppts.
International Division
operating margin 15.6% 17.6% (2.0)ppts. 0.1ppts.
Neither unallocated and corporate expenses, which comprise
G&A expenses, nor unallocated refranchising gain (loss) are
allocated to the U.S., International Division or China Division
segments for performance reporting purposes. The increase
in unallocated and corporate expenses in 2007 was driven
by an increase in annual incentive compensation and proj-
ect costs. The decrease in 2006 unallocated and corporate
expenses was driven by the lapping of the unfavorable impact
of 2005 litigation related costs.
U.S. operating profit decreased 3% in 2007. The decrease
was driven by higher restaurant operating costs, principally
commodities and labor, partially offset by lower G&A expenses,
lower closure and impairment expenses and an increase in
Other income.
Excluding the unfavorable impact of lapping the 53rd
week in 2005, U.S. operating profit increased 3% in 2006.
The increase was driven by the impact of same store sales
on restaurant profit (due to higher average guest check) and
franchise and license fees, new unit development and lower
closures and impairment expenses. These increases were
partially offset by the unfavorable impact of refranchising,
higher G&A expenses and a charge associated with the termi-
nation of a beverage agreement in 2006. The impact of lower
commodity costs and lower property and casualty insurance
expense on restaurant profit was largely offset by higher other
restaurant costs, including labor, advertising and utilities.
International Division operating profit increased 18% in
2007 including a 6% favorable impact from foreign currency
translation. The increase was driven by the impact of same
store sales growth and new unit development on restaurant
profit and franchise and license fees. The increase was par-
tially offset by higher G&A expenses (including expenses
which were previously netted within equity income prior to
our acquisition of the remaining fifty percent of 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
and license fees and restaurant profit. These increases were
partially offset by higher restaurant operating costs and lower
equity income from unconsolidated affiliates. Foreign currency
translation did not have a significant impact.
China Division operating profit increased 30% in 2007
including a 7% favorable impact from foreign currency trans-
lation. The increase was driven by the impact of same store
sales growth and new unit development on restaurant profit.
The increase was partially offset by higher restaurant operat-
ing costs and G&A expenses.
China Division operating profit increased 37% in 2006
including a 4% favorable impact from foreign currency trans-
lation. The increase was driven by the impact of same store
sales growth and new unit development on restaurant profit as
well as an increase in equity income from our unconsolidated
affiliates. These increases were partially offset by higher G&A
expenses and the lapping of a prior year financial recovery
from a supplier.