Taco Bell 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
    ... 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 excited about the growth we have within our grasp in all corners of the world. DAVID C. NOVAK CHAIRMAN AND CHIEF EXECUTIVE OFFICER YUM! BRANDS, INC. 1

  • Page 4
    ... building best in class brands and operations. What's more, we are highly profitable, generating $375 million in operating profit. That's an amazing 30% growth in 2007 and a five year average annual growth rate of over 25%. China is our highest returning international business with a cash payback...

  • Page 5
    ...Pizza Hut available in 77 cities. We have one of the largest real estate and construction teams of any retailer in the world that opened 471 traditional restaurants in 2007 as we generated 12% same store sales growth. We have also developed target manufacturing capability for our proprietary dessert...

  • Page 6
    ... interest in 544 Pizza Hut Restaurants in the U.K. from Whitbread, PLC which had been an underperforming market. While the team has set a clear direction for a turnaround, the YRI is a diverse, high-return business, opening a record 852 new traditional restaurants across six continents last year! 4

  • Page 7
    ... the popularity of Taco Bell and the fact it is the second most profitable brand in the U.S., we are now planting the seeds to take it global. We are opening Taco Bells in the Philippines and Mexico, with plans to develop in Dubai, India, Spain and Japan over the next couple of years. While the...

  • Page 8
    ... now thankfully distant, highly publicized product supply and pest incidents that affected our largest and most profitable brand, Taco Bell - while Pizza Hut made progress and KFC basically stood still. Nevertheless, we turned this adversity into an opportunity by using the lessons learned to take...

  • Page 9
    ... business is an outstanding "value investment" with tremendous asset leverage opportunity, and we are committed to winning big by unlocking this value over the next two to three years. U.S. BRAND KEY MEASURES: 5% OPERATING PROFIT GROWTH; 2-3% SAME STORE SALES GROWTH #4. Drive IndustryLeading, Long...

  • Page 10
    ... one of the top performers on the New York Stock Exchange. In closing, I want you to know we will continue to be galvanized around building what we call the Yum! Dynasty, with the result being one of the world's most consistent and highest performing companies. Our focus on consistency has allowed...

  • 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
    ...re not just opening up new restaurants, we're doing 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...

  • 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
    ... 852 new unit openings drove $480 million in operating profits, up 18% over prior year. The KFC Brand in particular had a spectacular year internationally. Our big franchise businesses in Asia, the Middle East, South Africa and Europe excelled as did the company operated markets of KFC UK, Mexico...

  • Page 16
    ... Flame Grilled Shrimp. When you visit Long John Silver's you'll see what revolutionary QSR service is all about and why customers leave ringing the bell! At A&W All American Food, we have been serving hometown favorites for nearly 90 years. With real jukebox music and a frosty mug of our signature...

  • Page 17
    ... in the quick-service chicken, pizza, Mexican-style food and seafood categories, no other restaurant company has the kind of power we have in the marketplace today. We're passionate and we're committed to dramatically improving our U.S. brand positions, consistency and returns. The single biggest...

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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
    ... about taking care of the equipment all the time," she says. Displaying a high energy attitude, Loretta keeps her eye on all the moving parts for franchisee Patricia Painter. She does that while making sure that customers get the best product possible. With CHAMPS scores in the upper 90s, Loretta...

  • Page 27
    ... Year" during the Golden Bell Awards this year. "I credit 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...

  • Page 28
    ... hunger relief effort in support of the United Nations World Food Programme (WFP). Our aim was to raise awareness, volunteerism and funds to feed the hungry across the globe. I'm extraordinarily proud of our employees, franchisees and customers, who, together with the YUM Foundation, donated $16...

  • Page 29
    awareness Our advertising, public relations, in-store promotions and on-line activities created awareness of the hunger issue in 95% of the world's countries, reaching 1.5 billion people with this message. This marketing campaign, the equivalent of $50 million, let the world know how committed we ...

  • Page 30
    ... annual growth rate; totals for U.S., International and Worldwide exclude the impact of Long John Silver's and A&W. (b) Franchisee sales represents the combined estimated sales of unconsolidated affiliate and franchise and license restaurants. Franchisee sales, which are not included in our Company...

  • Page 31
    ... Asian 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...

  • Page 32
    ... 5% Dine Out 59% Dine In 41% Dinner 25% Lunch 41% Snacks/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 31 29 11 9 7 6 5 36

  • Page 33
    ...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 restaurants that...

  • Page 34
    ...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 Franchisee Value The Company is focused on delivering high returns...

  • Page 35
    ... 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 8 $ 66...

  • Page 36
    ... several years reducing our Pizza Hut Company ownership in that market from approximately 80% currently to approximately 40%. Refranchisings reduce our reported revenues and restaurant profits and increase the importance of system sales growth as a key performance measure. Additionally, G&A expenses...

  • Page 37
    ... International Division Company Unconsolidated Affiliates 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...

  • Page 38
    ... and the 53rd week in fiscal year 2005. Excluding the favorable impact of the Pizza Hut U.K. acquisition, Worldwide Company sales decreased 1% in 2007. The decrease was driven by refranchising and store closures, partially offset by new unit development and same store sales growth. Excluding the...

  • Page 39
    ... driven by higher annual incentive and other compensation costs, including amounts associated with strategic initiatives in China and other international growth markets. 2005 Company sales Food and paper Payroll and employee benefits Occupancy and other operating expenses Company restaurant margin...

  • 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
    ... 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 and sold our interest in our Japan...

  • Page 42
    ... the QSR industry allows us to generate substantial 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...

  • Page 43
    ... Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Long-term debt obligations(a) $ 5,034 $ Capital leases(b) 390 Operating leases(b) 3,886 Purchase obligations(c) 414 Other long-term liabilities reflected on our Consolidated Balance Sheet under GAAP 44 Total contractual obligations 470...

  • 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
    ... plan assets also impacts our pension expense. Our estimated long-term rate of return on U.S. plan assets represents the weighted-average of historical returns for each asset category, adjusted for an assessment of current market conditions. Our expected long-term rate of return on U.S. plan assets...

  • Page 47
    ... our income taxes. Quantitative and Qualitative Disclosures About 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...

  • Page 48
    ...economic instability in local markets and changes in currency exchange and interest rates; and the impact that any widespread illness or general health concern may have on our business and/or the economy of the countries in which we operate. We are subject to volatility in food costs as a result of...

  • Page 49
    ... Taxes, in 2007, Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year...

  • Page 50
    ...management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal...

  • Page 51
    ... of the financial statements, as well as to safeguard assets from unauthorized use or disposition. The system is supported by formal policies and procedures, including an active Code of Conduct program intended to ensure employees adhere to the highest standards of personal and professional...

  • Page 52
    ...Yum! Brands, Inc. Annual Report to Shareholders On June 14, 2007, 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 indicated...

  • Page 53
    ... 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 Total costs and expenses, net Operating Profit...

  • Page 54
    ...affiliates Excess tax benefits from share-based compensation Share-based compensation expense Changes in accounts and notes receivable Changes in inventories Changes in prepaid expenses and other current assets Changes in accounts payable and other current liabilities Changes in income taxes payable...

  • Page 55
    ... 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 56
    ... data) Issued Common Stock Shares Amount Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Balance at December 25, 2004 Net income Foreign currency translation adjustment arising during the period Foreign currency translation adjustment included in net income Minimum pension...

  • Page 57
    ..., 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 35,000 units of which approximately 44% are located outside...

  • 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 flows...

  • Page 59
    ... its current fair market value. This value becomes the store's new cost basis. We record any resulting difference between the store's carrying amount and its new cost basis to refranchising (gain) loss. Considerable management judgment is necessary to estimate future cash flows, including cash flows...

  • Page 60
    ...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 cash receipts and disbursements. Included in cash equivalents are short-term, highly liquid debt securities...

  • Page 61
    ... Benefits." SFAS 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...

  • Page 62
    ... state tax returns instead of in the year the benefit originated. We increased our 2006 beginning retained earnings by approximately $7 million to recognize these state tax benefits as deferred tax assets. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED Our opening Consolidated Balance Sheet at...

  • Page 63
    ... of Cash Flows for the year ended December 29, 2007. The offset to this cash on our Consolidated Balance Sheet at December 29, 2007 is in accounts payable and other current liabilities. While we will no longer have an ownership interest in this entity that operates both KFCs and Pizza Huts in Japan...

  • Page 64
    ... (cash paid and investment allocated) $ 27 338 18 125 508 107 97 23 43 270 $ 238 Closure and impairment expenses purposes. (a) Refranchising (gain) loss is not allocated to segments for performance reporting (b) Store closure (income) costs include the net gain or loss on sales of real estate...

  • Page 65
    ...(income) expense in the Consolidated Statements of Income. We also recorded a franchise fee for the royalty received from the stores owned by the unconsolidated affiliate. Since the date of acquisition, we have reported Company sales and the associated restaurant costs, G&A expense, interest expense...

  • Page 66
    ... - 10 $ 672 Accounts payable Accrued compensation and benefits Dividends payable Proceeds from sale of interest in Japan unconsolidated affiliate (See Note 5) Other current liabilities $ 639 372 75 128 436 $ 1,650 13. Short-term Borrowings and Long-term Debt 2007 Short-term Borrowings Unsecured...

  • Page 67
    ... 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 and forward starting interest rate swaps utilized...

  • Page 68
    ... amount, maturity date, and currency of these contracts match those of the underlying receivables or payables. For those foreign currency exchange forward contracts that we have designated as cash flow hedges, we measure ineffectiveness by comparing the cumulative change in the forward contract with...

  • Page 69
    ... FUNDED STATUS AT MEASUREMENT DATE: $ (110) $ (191) $ (22) $ (35) (a) Relates to the acquisition of the remaining fifty percent interest in our Pizza Hut Amounts recognized in the Consolidated Balance Sheet: U.S. Pension Plans International Pension Plans 2007 Accrued benefit asset - non-current...

  • Page 70
    ...77% WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE THE NET PERIODIC BENEFIT COST FOR FISCAL YEARS: U.S. Pension Plans International Pension Plans 2007 2006 2005 2007 2006 2005 Net periodic benefit cost Service cost Interest cost Amortization of prior service cost(a) Expected return on plan assets...

  • Page 71
    ... postretirement benefit obligation. The weighted-average assumptions used to determine benefit obligations and net periodic benefit cost for the postretirement medical plan are identical to those as shown for the U.S. pension plans. Our assumed heath care cost trend rates for the following year as...

  • 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
    ... the Internal Revenue Code (the "401(k) Plan") for eligible U.S. salaried and hourly employees. Participants are able to elect to contribute up to 25% of eligible compensation on a pre-tax basis. Participants may allocate their contributions to one or any combination of 10 investment options within...

  • Page 74
    ... 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 and sold our interest in our Japan...

  • Page 75
    ...: 2007 Net operating loss and tax credit carryforwards Employee benefits, including share-based compensation Self-insured casualty claims Lease related liabilities Various liabilities Deferred income and other Gross deferred tax assets Deferred tax asset valuation allowances Net deferred tax assets...

  • Page 76
    ..., operating, franchising and licensing the worldwide KFC, Pizza Hut, Taco Bell, LJS and 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...

  • Page 77
    ...") and Assistant Restaurant General Managers' ("ARGMs") salaries that violate the salary basis test for exempt personnel under regulations issued pursuant to the U.S. Fair Labor Standards Act ("FLSA"). Johnson alleged that all RGMs and ARGMs who were employed by LJS for the three year period prior...

  • Page 78
    ... 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 79
    ...coli 0157:H7. Subsequently, twenty-six other cases have been filed naming the Company, Taco Bell Corp., Taco Bell of America, K.F.C. Company (alleged owner/operator of the Taco Bell restaurant claimed to be at issue in one case), and/or Yum! Restaurant Services Group, Inc. and alleging similar facts...

  • Page 80
    .... 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 Diluted earnings...

  • Page 81
    ... of restaurants Repurchase shares of Common Stock Dividends paid on common shares Balance Sheet Total assets Long-term debt Total debt Other Data Number of stores at year end Company Unconsolidated Affiliates Franchisees Licensees System U.S. Company same store sales growth(d) International Division...

  • Page 82
    ..., General Counsel, Secretary and Chief 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...

  • Page 83
    ... 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 identifying certificate numbers Request a certificate for shares held by...

  • Page 84
    ... (298-6986) INTERNATIONAL FRANCHISING INQUIRY PHONE LINE http://www.yum.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...

  • 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!