Pizza Hut 2011 Annual Report Download - page 125

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction and Overview
The following Management’s Discussion and Analysis (“MD&A”), should be read in conjunction with the Consolidated Financial
Statements on pages 48 through 93 (“Financial Statements”) and the Forward-Looking Statements on page 2 and the Risk Factors
set forth in Item 1A. Throughout the MD&A, YUM! Brands, Inc. (“YUM” or the “Company”) makes reference to certain
performance measures as described below.
• The Company provides the percentage changes excluding the impact of foreign currency translation (“FX” or “Forex”). These
amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the
foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency
fluctuations.
• System sales growth includes the results of all restaurants regardless of ownership, including Company-owned, franchise,
unconsolidated affiliate and license restaurants. Sales of franchise, unconsolidated affiliate and license restaurants generate
franchise and license fees for the Company (typically at a rate of 4% to 6% of sales). Franchise, unconsolidated affiliate and
license restaurant sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise
and license fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant
indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-
store sales as well as net unit development.
• Same-store sales is the estimated growth in sales of all restaurants that have been open one year or more.
• Company restaurant profit is defined as Company sales less expenses incurred directly by our Company restaurants in generating
Company sales. Company restaurant margin as a percentage of sales is defined as Company restaurant profit divided by
Company sales.
• Operating margin is defined as Operating Profit divided by Total revenue.
All Note references herein refer to the Notes to the Financial Statements on pages 54 through 93. Tabular amounts are displayed
in millions of U.S. dollars except per share and unit count amounts, or as otherwise specifically identified.
Description of Business
YUM is the world’s largest restaurant company in terms of system restaurants with approximately 37,000 restaurants in more than
120 countries and territories operating under the KFC, Pizza Hut or Taco Bell brands. In December of 2011 we sold our Long John
Silver's ("LJS") and A&W All American Food Restaurants ("A&W") brands to key franchise leaders and strategic investors in
separate transactions. The results for these businesses through the sale dates are included in the Company's results for 2011, 2010
and 2009. The Company’s restaurant brands – KFC, Pizza Hut and Taco Bell – are the global leaders in the chicken, pizza and
Mexican-style food categories, respectively. Of the approximately 37,000 restaurants, 20% are operated by the Company, 74% are
operated by franchisees and unconsolidated affiliates and 6% are operated by licensees.
YUM’s business consists of three reporting segments: China Division ("China"), YUM Restaurants International (“YRI” or
“International Division”) and the United States. The China Division includes only mainland China, and YRI includes the remainder
of our international operations. The China Division, YRI and Taco Bell U.S. now represent approximately 90% of the Company’s
operating profits, excluding Corporate and unallocated income and expenses.
Strategies
The Company continues to focus on four key strategies:
Build Leading Brands in China in Every Significant Category – The Company has developed the KFC and Pizza Hut brands into
the leading quick service and casual dining restaurants, respectively, in mainland China. Additionally, the Company owns and
operates the distribution system for its restaurants in China which we believe provides a significant competitive advantage. Given
this strong competitive position, a growing economy and a population of 1.3 billion in mainland China, the Company is rapidly
adding KFC and Pizza Hut Casual Dining restaurants and testing the additional restaurant concepts of Pizza Hut Home Service
(pizza delivery) and East Dawning (Chinese food). Additionally, on February 1, 2012 we acquired an additional 66% interest in
Form 10-K