2000 Annual Report - Yum!

Management’s Discussion and Analysis
Introduction
TRICON Global Restaurants, Inc. and Subsidiaries (collectively
referred to as “TRICON” or the “Company”) is
comprised of the worldwide operations of KFC, Pizza Hut
and Taco Bell (“the Concepts”) and is the world’s largest
quick service restaurant (“QSR”) company based on the
number of system units. Separately, each brand ranks in the
top ten among QSR chains in U.S. system sales and units.
Our 10,400 international units make us the second largest
QSR company outside the U.S. TRICON became an independent,
publicly owned company on October 6, 1997 (the
“Spin-off Date”) via a tax free distribution of our Common
Stock (the “Distribution” or “Spin-off”) to the shareholders
of our former parent, PepsiCo, Inc. (“PepsiCo”).
Throughout Management’s Discussion and Analysis
(“MD&A”), we make reference to ongoing operating profit
which represents our operating profit excluding the impact
of facility actions net gain, unusual items and our accounting
and human resources policy changes in 1999 (collectively, the
“1999 accounting changes”). See Note 5 to the Consolidated
Financial Statements for a detailed discussion of these exclusions.
We use ongoing operating profit as a key performance
measure of our results of operations for purposes of evaluating
performance internally and as the base to forecast future performance.
Ongoing operating profit is not a measure defined
in accounting principles generally accepted in the U.S. and
should not be considered in isolation or as a substitution
for measures of performance in accordance with accounting
principles generally accepted in the U.S.
In 2000, our international business, Tricon Restaurants
International (“TRI” or “International”) accounted for 35%
of system sales, 29% of total revenues and 29% of ongoing
operating profit excluding unallocated and corporate expenses
and foreign exchange gains and losses. We anticipate that,
despite the inherent risks and typically higher general and
administrative expenses required by international operations,
we will continue to invest in key international markets with
substantial growth potential.
26 TRICON GLOBAL RESTAURANTS, INC. AND SUBSIDIARIES
This MD&A should be read in conjunction with our
Consolidated Financial Statements on pages 40–65 and the
Cautionary Statements on page 39. All Note references
herein refer to the Notes to the Consolidated Financial
Statements on pages 44 –65. Tabular amounts are displayed
in millions except per share and unit count amounts, or as
otherwise specifically identified.
Factors Affecting Comparability of 2000 Results to 1999
Impact of AmeriServe Bankruptcy Reorganization Process
See Note 21 for a complete discussion of the impact of
the AmeriServe Food Distribution, Inc. (“AmeriServe”)
bankruptcy reorganization process on the Company.
Kraft Taco Shell Recall
In the fourth quarter of 2000, allegations were made by a
public environmental advocacy group that testing of corn taco
shells, sold by Kraft Foods, Inc. (“Kraft”) in grocery stores
under a license to use the Taco Bell brand name, had indicated
the presence of genetically modified (“GM”) corn which had
only been approved by the applicable U.S. governmental
agencies for animal consumption. In light of the allegations,
Kraft recalled this product line. We are not aware of any evidence
that suggests that the GM corn at issue presents any
significant health risk to humans. Nonetheless, consistent
with our overall quality assurance procedures, we have taken
significant actions to ensure that our restaurant supply chain
is free of products containing the GM corn in question, and
we will continue to take whatever actions are prudent or
appropriate in this regard.
Although we are unable to estimate the amount, we believe
that our Taco Bell restaurants have experienced a negative
impact on sales following the allegations and the Kraft recall.
We do not currently believe this sales impact will be sustained
over the long term.
Franchisee Financial Condition
Like others in the QSR industry, from time to time, some of
our franchise operators experience financial difficulties with
respect to their franchise operations. At present, certain of
our franchise operators, principally in the Taco Bell system,
are facing varying degrees of financial problems, primarily as
a result of declines in store sales in the Taco Bell system, which
we believe have been exacerbated by the grocery product recalls
of corn taco shells by Kraft in the fourth quarter of 2000.