UFPC Business and Supply Chain Update

Confidential - For Members Only. Do not Duplicate or Distribute.AKFCF Upper Midwest / Great Lakes / Southwest Conference– October11, 2011/ Las Vegas,

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UFPCBusiness and Supply Chain Update

Upper Midwest / Great Lakes / SouthwestRegional ConferenceScottsdale, ArizonaOctober 11, 2011


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Agenda

Commodities UpdateCost of Goods UpdatePRTM (PWC) UpdateFinancing UpdateResource ServicesOther


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Commodity Update


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Low Corn Yields are Expected Hot temperatures during July across the Midwest has led to

deteriorating corn production prospects. 2010 and 2011 will mark the first time since 1944 and 1945

where corn yields were 5 percent below trend (normal) levels in consecutive years.

Conditions are variable from state to state and field to field.

Hot temperatures impact pollination. Corn does not fill to the end of the ear due to pollination problems.

Example: Indiana corn

While overall corn yields will be low, some farmers will experience large corn yields.

Example: Nebraska corn


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Corn Prices are Extremely Volatile Corn prices reach record

highs due to poor crop yields and historically low corn inventories.

Corn Prices (Cents per Bushel)

Corn prices have recently declined due to slowing economic fears, but prices remain historically elevated.


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Demand Rationing is Occurring

Chicken Producers are Cutting Production.


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But Ethanol Margins Remain Favorable

Despite corn prices doubling, ethanol margins remain elevated.

Source: The LaSalle Group


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Commodity Outlook Corn

Demand cutbacks are occurring and likely will become the focus of the market this fall. Because of low corn yields, the prospects for lower corn price opportunities are limited until Q3 2012.

Soybean meal Soybean meal prices are expected to trade in a sideways range unless soybean yields are above expectations.

Soybean oil The USDA projects biodiesel demand will increase by 63 percent in 2012 due to a larger government mandate. This is expected to lead to tighter soybean oil inventories next year.

Wheat Record drought conditions in the Plain states has contributed to lower than expected production. Global wheat inventories, however, are at normal levels. This should limit wheat inflation risk.

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Commodity Q1-Q2 2012 Q3-Q4 2012 2013

Corn

Soybean Meal

Soybean Oil

Wheat

Market Price Expectations

Note: price arrows reflect market price changes from the same period of the year prior (example: Q3-Q4 2012 arrows reflect market price changes from Q3-Q4 2011.


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Key Variables Federal Reserve Policies

Another Quantitative Easing program will spur inflation. Movement of the U.S. Dollar

Elevated money supply leads to a weaker U.S. dollar and stronger commodity exports.

Ethanol and Biodiesel Subsidies The ethanol and biodiesel tax credits are scheduled to terminate at the

end of 2011. This should lead to slowing ethanol production growth unless Congress

extends these supports. General Economic Conditions

Consumer confidence is eroding Gasoline demand is declining Manufacturing is slowing All of these indicators point to slowing economic growth or a recession. It is unlikely that strong commodity demand (and historically high prices)

can persists in this environment.


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Results

The KFC commodity committee and UFPC have mitigated cost below levels that would have existed in absence of risk management.

As of October 6, realized and unrealized cost mitigation has totaled:

$17.1 million dollars


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Cost of Goods Update


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KFC Concept2011 Cost of Goods (COGS)

Q4 ForecastTim Mueller


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2011 COGS Forecast vs. PlanKey Item Detail (as of P9)

Key items driving inflation include Oil, Biscuits, Fresh Chicken, (COB), packaging, Flour, Breading, Potato Wedges


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2011 COGs Forecast by Category; by Quarter (as of P9)


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2011 COGS ForecastBy Period (as of P9)


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2012 COGS Plan KFC Concept Summary (Round 2 of 3)

KFC COGS inflation is projected at 3.2% on increased fresh poultry, packaging (reusable containers), potato and oil costs.

Milk & egg mix reformulation to extend hold time adds $2.0MM.


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Restaurant Margin ImprovementPwC (PRTM) Update


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Program Objectives

Phase Two ObjectivesPhase One Objectives

Target Setting & Prioritization

Identify and quantify major savings opportunities

Define principles for customization of processes for KFC

Set category priorities based on size of opportunity and timeline to savings

Build plan and align resources for Phase Two

Margin Improvement & Process Customization

Drive rapid savings on Wave 1 categories with PRTM resources/expertise

– Fast track sourcing process for near term opportunities

Train/coach KFC organization through launch of Wave 2 categories

– Position KFC to achieve remaining savings opportunities

Define/implement margin focused modifications to KFC development/LTO processes and system incentives

Customize sourcing process governance to fit KFC

Overall Objective: Rapidly Deliver Savings to the KFC System and Establish Processes for Ongoing Margin Management While Maintaining Or Improving The Consumer Experience


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Phase One – Target Setting & Prioritization

Interviews

Document Reviews

BOH Observations

Competitive Research

Data Gathering Analysis & Solution Development

Category Workshops

Process/Incentive Review

Benchmark Comparisons

Cost in Use Analysis

Value Proposition

Where And How To Achieve

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Sourcing Category Profiles

Phase Objective: Define the value proposition/savings targets and prioritize the approach

Spend Analysis


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(8 wks) (5 Months)

Overall Program Timeline

Initial Savings Estimates

Integrated Program Plan

Cross Functional Workshops

Build Category Spend Profiles

Process Customization Principles

Phase One – Target Setting and Prioritization

Phase Two – Category Margin Improvement and Process Customization

Kick Off

Category Margin Management - Wave 1 Categories (PRTM Led, Training KFC)

Ideation Workshops

Category Platform Plan

Testing and Market Validation (If Necessary)

Sourcing Process

Transition

Define Item Strategy

Feasibility Assessment

Process Customization/Sustainability

Kick Off

Category Margin Management - Wave 2 Categories (KFCl Led, PRTM Coaching)

Ideation Workshops

Category Platform Plan

Testing & Market Validation (If Necessary)

Sourcing Process

Item Strategy

Feasibility Assessment

Incentives, Sourcing, Category Margin Management and Development/LTO Processes

Store Visits & Product Training

Spend Analysis

Stakeholder Interviews

Map Cost in Use


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Program Leadership & Roles/Responsibilities

Enrique RamirezPat Murtha

Core TeamJud BellFred BauerTeresa CrawfordSandy Chastain-Brough

Steering CommitteeTim Mueller

Jim Olson

Trip Vornholt

Dan Woodside

• Day To Day Program Guidance (Issue Resolution, Resource Allocation, etc.)

• Recommend Solutions To Steer Comm• Provide Facts/Trade-offs For Steer Comm To

Make Decisions

• Develop Optimal Cross-Functional Solutions• Support Solutions With Facts• Define Sustainable Processes

• Decision Making Body• Ensure Resource Availability• Remove Barriers/Roadblocks

Category Teams

MarketingFinanceR&D

OperationsFranchiseUFPC

Process Customization

MarketingFinanceR&D

OperationsFranchiseUFPC

Scott Haner*Dave EvansTim Mueller*Mike Ledford

John Cywinski

Dave Evans

Doug Hasselo

Jim Metevier

Roles/Responsibilities

** UFPC/KFC Program Leads

Phas

e 2


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Financing Programs Update


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MERIT/Drive Thru Timer, Holding Cabinets Program Milestones*

Financing secured for two separate programs Complete Review financing program with operators Complete Financing program approved by Concept & UFPC Boards Complete Pre-qualification process Complete Complete cabinet & timer negotiations October 14 Mail financing & equipment order packets October 17 Launch on line equipment reservation system October 17 AIP/supplier commitment for cabinets October 17 Financing window Oct 17 – Nov 30 MERIT supplier summit October 26 Complete MERIT negotiations November 4 Cabinet production & installations** Mar 2012 – Mar 2013 MERIT/Drive Thru Timer production & installations Mar 2012 – Mar 2015 Financing Fee applied to mashed potatoes & biscuits Sept 2012 – Sept 2016

* Assumes approval of NCAC/KFC operator agreement** Cabinet installations target one year ; however operator agreement states compliance by 2015. Operators responsible for scoping and permitting


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Resource Services


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Resource Services

Resource Services: Started at UFPC in 2002: Programs selected based on 3 criteria Large returns, Low barriers to entry & growth and Effective implementation and mgmt Primary programs include: Cell phones, Parcel, Debit cards, CO2, Pest services, Gift cards

and Employee discount programs (see latest Fall 2011 Directory) Program funded by small fee – pay to play

Fees set up to offset development and mgmt costs; Avg. fee less than 1%

Energy Deregulated areas represent 30% of KFC’s total system spend of $205MM – (about $70M)

• Realized > $95MM in Yum! system energy savings since starting program in 2002 Average annual savings for a participating KFC location = $2,000 per store

2011 Energy focus: Develop programs to target $145MM spend in regulated markets• Ameresco: 3rd party outsourcing of utility bills (> 7,000 stores represented in testing)

Cost of $2.50/store per month per utility invoice• Real Win Win: rebate outsourcing to a national rebate partner (>5,000 stores on board)

No fee unless rebate granted (RealWinWin receives 25% of rebate) Gift Cards

Timeline to participate in 2011 Holiday season:• Return signed participation agreement to Andrew Now• Software download to stores Oct 31• UFPC ships materials to franchisee office Nov 7• Restaurants should train, install POP and merchandiser Nov 14


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Other

UFPC Business and Supply Chain Update

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