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Yum! Brands
2006 Annual Customer Mania Report
Yum!
around the
Going for
greatness
globe!

Table of contents

  • Page 1
    greatness around the Going for Yum! globe! Yum! Brands 2006 Annual Customer Mania Report

  • Page 2
    ...! KFC: Chicken Capital U.S.A. Taco Bell: Think Outside the Bun Pizza Hut: America's Favorite Pizza 26 27-29 30-32 33-84 INBC Long John Silver's and A&W All American Food A Great Culture Starts with Great People!: CHAMPS Great Results!: Financial Review Financials Doing Great Things for Our Community...

  • Page 3
    ... we are well on our way with a long runway ahead of us. Fueled by continued profitable international expansion, dynamic growth in China, and our strong and stable U.S. cash generation, I'm pleased to report we achieved 14% Earnings Per Share (EPS) growth in 2006. That's the fifth straight year we...

  • Page 4
    ... to KFC and Pizza Hut casual dining, we've recently developed and are successfully expanding Pizza Hut Home Service. We've also created our own quick service restaurant chain, East Dawning, tailored to the local favorites of the Chinese customer. We are offering affordable great-tasting Chinese food...

  • Page 5
    ...of the business is owned and operated by franchisees who are generating almost $500 million in franchise fees, requiring very little capital on our part, and opening up 90% of the new restaurants. As with China, YRI has a huge upside in terms of international expansion. KFC and Pizza Hut already are...

  • Page 6
    ... get Taco Bell?" We've just begun executing our strategy to take Taco Bell global. Our plan is to open new restaurants in Mexico, the Middle East, India, Japan, Canada and the Philippines over the next couple of years. Whereas Pizza Hut and KFC brought U.S. brands to established categories, chicken...

  • Page 7
    ...'ve opened our 1,000th WingStreet multibranding concept with Pizza Hut, delivering to our customers a delicious line of branded chicken wings, while driving incremental sales and profits. In addition to pursuing operations improvement, and new unit growth, we continue to pursue refranchising. I've...

  • Page 8
    .... Additionally, we are building process and discipline around the things that really matter in our restaurants, and are sharing our global best practices - and getting better and better every year. I'd like to thank our dedicated team members, restaurant managers, franchise partners and outstanding...

  • Page 9
    7

  • Page 10
    ... East Dawning brand - the Chinese solution to KFC. And we're successfully expanding our Pizza Hut Home Service. Our single biggest advantage is our outstanding local leadership team, one that knows how to build brands relevant to our Chinese customers. We invested early in our supply chain and have...

  • Page 11
    ...We believe we'll have more restaurants and profits in China than in the U.S. Over time, we plan to open at least 20,000 restaurants in mainland China! KFC and Pizza Hut are the #1 quickservice brands in mainland China! generated $290 million in operating profit and over $1.6 billion in revenue!

  • Page 12
    ...! We're bringing the West to the East! We opened nearly 400 KFC and Pizza Hut restaurants in 2006 - more than one new restaurant every day! With 2000+ KFC and Pizza Hut restaurants in 402 cities and provinces across mainland China, we're going for greatness in China and we're on the ground...

  • Page 13
    ... largest and fastest growing restaurant company. Ten new KFCs and 17 new Pizza Huts were added in this vibrant economy in 2006 and the unit volumes have been very encouraging. Our Russia business is progressing nicely as well. Thirty units were converted to the Rostik/KFC brand and the menu changes...

  • Page 14
    A high-return, cash-rich business - setting new records every year! Record operating profits of $407 million! Serving 4 billion customers in over 100 countries and territories!

  • Page 15
    ... manages over 11,700 traditional restaurants in over 100 countries and territories, 85% of which are operated by some 750 franchise partners. Leveraging their local knowledge, their passion for excellence and the unique competitive strength of Yum!'s brands, franchise and license fees have averaged...

  • Page 16
    restaurants start with Great brands! We are #1 in four food categories! With leadership positions in the chicken, pizza, Mexican-style food and quick-service seafood categories, we continue to show the world the power of our portfolio. We have dedicated leadership teams focused on creating brands ...

  • Page 17
    ...OUTSIDE THE BUN® with creative promotions. In 2006, we launched Taco Bell's twist on Late Night - Fourthmeal - the meal between dinner and breakfast. To drive the success of this important day part, we integrated in-restaurant merchandising, website communications, television and online advertising...

  • Page 18
    OPEN # in four food categories! 1

  • Page 19
    Chicken Capital U.S.A. 0 21

  • Page 20
    Think Outside the Bun 22 23

  • Page 21
    25

  • Page 22
    LONG JOHN SILVER'S Since 1969, Long John Silver's has been bringing families together with our delicious, signature battered fish and shrimp. As the leader of the Quick Service Restaurant Seafood category, we continue to satisfy customers with great, new quality products like our delicious Buttered...

  • Page 23
    ...Store Sales Growth in every restaurant! Turn the page to meet some of the best Customer Maniacs from around the world who are putting smiles on customers' faces and are consistently executing the basics with a daily intensity that is driving the business. Peter Hearl Chief Operating and Development...

  • Page 24
    ... a high-energy attitude, Pizza Hut RGM Don Bryant keeps his eye on all parts of the business - and making sure customers don't have a bad experience because something isn't working right is very important. This 20-year veteran and his team drove sales up 25% last year, making his restaurant number...

  • Page 25
    ... Brands, Inc. WORLDWIDE SALES (in billions) UNITED STATES KFC Company sales Franchisee sales (b) PH Company sales Franchisee sales (b) TACO BELL Company sales Franchisee sales (b) LONG JOHN SILVER'S (c) Company sales Franchisee sales (b) A&W (c) Company sales Franchisee sales (b) TOTAL U.S. Company...

  • Page 26
    ... for an Asian food concept in China. BREAKDOWN OF WORLDWIDE SYSTEM UNITS Year-end 2006 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 Pizza Hut Taco Bell Total China Total (a) Company...

  • Page 27
    Yum! Brands at-a-glance U.S. SALES BY BRAND BY DAYPART BY DISTRIBUTION CHANNEL Dinner 56%... 24% Source: The NPD Group, Inc.; NPD Foodworld; CREST Dine Out 52% Dine In 48% WORLDWIDE UNITS 2006 (in thousands) Yum! Brands McDonald's Subway Burger King Domino's Pizza Wendy's Dairy Queen Popeyes 35...

  • Page 28
    ... operating under the KFC, Pizza Hut, Taco Bell, Long John Silver's or A&W AllAmerican Food Restaurants brands. Four of the Company's restaurant brands - KFC, Pizza Hut, Taco Bell and Long John Silver's - are the global leaders in the chicken, pizza, Mexicanstyle food and quick-service seafood...

  • Page 29
    ... UNITED STATES PRODUCE-SOURCING ISSUE Our Taco Bell business was negatively impacted by 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...

  • Page 30
    ... Statements of Income. We also recorded franchise fee income from the stores owned by the unconsolidated affiliate. From the date of the acquisition through December 4, 2006 (the end of the fiscal year for Pizza Hut U.K.), we reported Company sales and the associated restaurant costs, general...

  • Page 31
    ... 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...

  • Page 32
    ...) (19) 18,117 100% Results of Operations % B/(W) 2006 vs. 2005 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) $ $ 8,365 1,196 $ 9,561 $ 1,271 15...

  • Page 33
    ... Division Worldwide Company Franchise Total at a rate of 4% to 6% of sales). Franchise, unconsolidated affiliate and license restaurants 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...

  • Page 34
    ...average guest check and transactions. U.S. blended same store sales includes KFC, Pizza Hut and Taco Bell Company-owned restaurants only. U.S. same store sales for Long John Silver's and A&W restaurants are not included. In 2006, the increase in U.S. franchise and license fees was driven by new unit...

  • Page 35
    ... related costs. Excluding the unfavorable impact of lapping the 53rd week in 2005, U.S. operating profit increased $23 million or 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...

  • Page 36
    ... 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. Currency translation did not have...

  • Page 37
    ... of SFAS 123R. Net cash used in investing activities was $476 million versus $345 million in 2005. The increase was driven by the current year acquisitions of the remaining interest in our Pizza Hut U.K. unconsolidated affiliate and the Rostik's brand and associated intellectual properties in...

  • Page 38
    ... quarter of 2007. The majority of our remaining long-term debt primarily comprises Senior Unsecured Notes with varying maturity dates from 2008 through 2016 and interest rates ranging from 6.25% to 8.88%. The Senior Unsecured Notes represent senior, unsecured obligations and rank equally in right...

  • Page 39
    ... 158 required the Company to recognize the funded status of its pension and post-retirement plans in the December 30, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. Gains or losses and prior service costs or credits that arise...

  • Page 40
    ..., as a component of our annual effective rate. Thus, our reported quarterly income tax rate may become more volatile upon adoption of FIN 48. This change will not impact the manner in which we record income tax expense on an annual basis. In September 2006, the FASB issued SFAS No. 157, "Fair...

  • Page 41
    ... is the price a willing buyer would pay for the reporting unit, and is generally estimated by discounting expected future cash flows from the reporting unit over twenty years plus an expected terminal value. The discount rate used in determining fair value is our weighted average cost of capital...

  • Page 42
    ... 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 U.S. plans, we measured...

  • Page 43
    ... liabilities) totaled approximately $1.4 billion as of December 30, 2006. Operating in international markets exposes the Company to movements in foreign currency exchange rates. The Company's primary exposures result from our operations in Asia-Pacific, Europe and the Americas. Changes in foreign...

  • Page 44
    ...to ensure adequate supply of restaurant products and equipment in our stores; unexpected disruptions in our supply chain; effects and outcomes of any pending or future legal claims involving the Company; the effectiveness of operating initiatives and marketing and advertising and promotional efforts...

  • Page 45
    ... report dated February 28, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. As discussed in Notes 2 and 16 to the consolidated financial statements, YUM adopted the provisions of the Financial Accounting...

  • Page 46
    ... regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the...

  • Page 47
    ... 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 48
    ... to Yum! Brands, Inc. Annual Report to Shareholders On June 12, 2006, David Novak, Yum Brands, Inc. Chairman and Chief Executive Officer submitted a certification to the New York Stock Exchange (the NYSE) as required by Section 303A.12(a) of the NYSE Listed Company Manual. This certification...

  • Page 49
    ..., except per share data) 2006 2005 2004 Revenues Company sales Franchise and license 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...

  • Page 50
    ... months or less, net Repurchase shares of common stock Excess tax benefit from share-based compensation Employee stock option proceeds Dividends paid on common shares Other, net Net Cash Used in Financing Activities Effect of Exchange Rate on Cash and Cash Equivalents Net (Decrease) Increase in Cash...

  • Page 51
    ... and equipment, net Goodwill Intangible assets, net Investments in unconsolidated affiliates Other assets Deferred income taxes Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities Income taxes payable Short-term borrowings Advertising...

  • Page 52
    ...' Equity and Comprehensive Income YUM! Brands, Inc. and Subsidiaries Accumulated Other Comprehensive Income (Loss) Fiscal years ended December 30, 2006, December 31, 2005 and December 25, 2004 (in millions, except per share data) Issued Common Stock Shares Amount Retained Earnings Total Balance...

  • Page 53
    ... in millions, except share data) 1. Description of Business YUM! Brands, Inc. and Subsidiaries (collectively referred to as "YUM" or the "Company") comprises the worldwide operations of KFC, Pizza Hut, Taco Bell and since May 7, 2002, Long John Silver's ("LJS") and A&W All-American Food Restaurants...

  • Page 54
    ... of purchasing certain restaurant products and equipment in the U.S. Our equity ownership in each cooperative is generally proportional to our percentage ownership of the U.S. system units for the Concept. We account for our investments in these purchasing cooperatives using the cost method, under...

  • Page 55
    ... with a closed store, any gain or loss upon that sale is also recorded in store closure costs (income). 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...

  • Page 56
    CASH AND CASH EQUIVALENTS Cash equivalents represent funds we have temporarily invested (with original maturities not exceeding three months) as part of managing our day-to-day operating cash receipts and disbursements. INVENTORIES INTERNAL DEVELOPMENT COSTS AND ABANDONED SITE COSTS We value our ...

  • Page 57
    ...2006 2005 $ 10 48 58 (20) $ 38 Payroll and employee benefits General and administrative expense Operating profit Income tax benefit Net income impact $ 9 51 60 (21) We do not use derivative instruments for trading purposes and we have procedures in place to monitor and control their use. Our use...

  • Page 58
    ... OF MISSTATEMENTS 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 unconsolidated affiliate and certain state tax benefits. The net income statement impact on any given...

  • Page 59
    ... Pizza Hut United Kingdom unconsolidated affiliate, we accounted for our ownership under the equity method. The unconsolidated affiliate historically accounted for all of its leases as operating and we made no adjustments in recording equity income. We decreased our 2006 beginning retained earnings...

  • Page 60
    ...of these liabilities were reflected in our Investment in unconsolidated affiliate balance under the equity method of accounting and were not presented as liabilities on our Consolidated Balance Sheet. 6. Pizza Hut United Kingdom Acquisition On September 12, 2006, we completed the acquisition of the...

  • Page 61
    ... Income. We also recorded a franchise fee for the royalty received from the stores owned by the unconsolidated affiliate. From the date of the acquisition through December 4, 2006 (the end of our fiscal year for Pizza Hut U.K.), we reported Company sales and the associated restaurant costs, general...

  • Page 62
    ... operating leases 15 Reacquired franchise rights(a) 18 Pension-related intangible(b) - Other 5 $ 411 Unamortized intangible assets Trademarks/brands $ 1,386 $ 1,256 $ (66) (18) (10) - - (1) $ (95) $ 144 208 18 - 7 5 $ 382 $ (59) (9) (14) - - (1) $ (83) 12. Short-term Borrowings and Long-term...

  • Page 63
    ...commenced six months after issuance date and are payable semi-annually thereafter. (b) Includes the effects of the amortization of any (1) premium or discount; (2) debt issuance costs; and (3) gain or loss upon settlement of related treasury locks. Excludes the effect of any interest rate swaps as...

  • Page 64
    ... the large number of franchisees and licensees of each Concept and the short-term nature of the franchise and license fee receivables. FAIR VALUE At December 30, 2006 and December 31, 2005, the fair values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable...

  • Page 65
    ...Benefits paid Exchange rate changes Administrative expenses Fair value of plan assets at end of year Funded status at end of year Employer contributions(b) Unrecognized actuarial loss Unrecognized prior service cost Net amount recognized at year-end U.K. unconsolidated affiliate in 2006. 2005 2006...

  • Page 66
    ... benefit obligation Fair value of plan assets $ 864 786 673 2005 $ 815 736 610 2006 $ 152 130 117 2005 $ 57 45 39 Discount rate Long-term rate of return on plan assets Rate of compensation increase 2006 2005 2004 2006 2005 2004 5.75% 6.15% 6.25% 5.00% 5.50% 5.30% Based on current funding...

  • Page 67
    ...Restaurant General Manager Stock Option Plan ("RGM Plan") and the YUM! Brands, Inc. SharePower Plan ("SharePower"). Under all our plans, the exercise price of stock options and stock appreciation rights ("SARs") granted must be equal to or greater than the average market price of the Company's stock...

  • Page 68
    ... 2005, we added two new phantom investment options to the EID Plan, a Stock Index Fund and the Bond Index Fund. Additionally, the EID Plan allows participants to defer incentive compensation to purchase phantom shares of our Common Stock at a 25% discount from the average market price at the date of...

  • Page 69
    ... and state tax provision for 2006 includes $4 million current tax benefit as a result of the reconciliation of tax on repatriated earnings as recorded in our Consolidated Statements of Income to the amounts on our tax returns. Total changes in valuation allowances were increases of $109 million and...

  • Page 70
    ... Internal Revenue Service adjustments. 21. Reportable Operating Segments We are principally engaged in developing, operating, franchising and licensing the worldwide KFC, Pizza Hut and Taco Bell concepts, and since May 7, 2002, the LJS and A&W concepts, which were added when we acquired YGR. KFC...

  • Page 71
    ...operate principally KFC and/or Pizza Hut restaurants. These unconsolidated affiliates operate in China and Japan. We identify our operating segments based on management responsibility. As noted in Note 1, in 2005 we began reporting information for our international business in two separate operating...

  • Page 72
    ... August 13, 2003, a class action lawsuit against Pizza Hut, Inc., styled Coldiron v. Pizza Hut, Inc., was filed in the United States District Court, Central District of California. Plaintiff alleged that she and other current and former Pizza Hut Restaurant General Managers ("RGMs") were improperly...

  • Page 73
    ... were filed by a Taco Bell RGM purporting to represent all current and former RGMs who worked at corporate-owned restaurants in California from August 2002 to the present. The lawsuits allege violations of California's wage and hour laws involving unpaid overtime and meal and rest period violations...

  • Page 74
    ... consuming food, which was allegedly contaminated with E. coli 0157:H7, purchased from a Taco Bell restaurant in Riverhead, New York. Subsequently, ten other cases have been filed naming the Company, Taco Bell Corp. and/or Taco Bell of America and alleging similar facts on behalf of other customers...

  • Page 75
    ... Financial Data (Unaudited) 2006 Revenues: Company sales Franchise and license fees Total revenues Restaurant profit Operating profit Net income Diluted earnings per common share Dividends declared per common share 2005 Revenues: Company sales Franchise and license fees Total revenues Restaurant...

  • Page 76
    ... which addresses the financial accounting and reporting for legal obligations associated with the retirement of long-lived assets and the associated asset retirement costs. (e) U.S. Company blended same-store sales growth includes the results of Company owned KFC, Pizza Hut and Taco Bell restaurants...

  • Page 77
    ...! Brands, Inc. Acting President, Long John Silver's/A&W Timothy P. Jerzyk 54 Senior Vice President, Investor Relations and Treasurer, Yum! Brands, Inc. Ted F. Knopf 55 Senior Vice President, Finance and Corporate Controller, Yum! Brands, Inc. Patrick C. Murtha 49 Chief Operating Officer, Pizza Hut...

  • Page 78
    ... (those who hold YUM shares in their own names) should address communications concerning statements, address changes, lost certificates and other administrative matters to: Merrill Lynch/SharePower Stock Option Plan Services P.O. Box 30446 New Brunswick, NJ 08989-0446 Phone: (800) 637-2432...

  • Page 79
    ... of interest to investors. Earnings and other financial results, corporate news and company information are also available online. Copies of Yum! Brands' SEC Forms 8-K, 10-K and 10-Q and quarterly earnings releases are available free of charge. Contact Yum! Brands' Shareholder Relations at (888) 298...

  • Page 80
    ...many community activities and charities including ChildLine, a free, 24-hour help-line for children facing danger. Trained volunteers counsel the children and provide needed support for those who feel they have nowhere else to turn. We Do Society Right Program. KFC and Pizza Hut Thailand help build...

  • Page 81
    Alone We're Delicious. Together We're Yum!