Kentucky Fried Chicken (Bermuda) Limited - Report to Shareholders – Preliminary Results to 31 January, 2011

Hamilton, Bermuda – 05 April, 2011 - Kentucky Fried Chicken (Bermuda) Limited (KFCB.BH) has released the Chairman’s Letter to Shareholders.

“Fiscal 2011 was a challenging year for Kentucky Fried Chicken (Bermuda) Limited (“KFC”) as the company was not immune to the difficult economic conditions which impacted Bermuda in 2010 and look to worsen in 2011.

In light of the uncertain economic and investment climate and challenges KFC has faced in the past year, together with additional challenges anticipated in the next year, the Board felt it appropriate to communicate preliminary year-end results to our shareholders together with our general outlook for the next year. 

Preliminary unaudited results for KFC show a disappointing trend of declining sales and profitability.  Fiscal 2011 sales of $5.032 million represent a decline of nearly 5% year-over-year to the lowest level in 3 years.  Diligent expense control by our senior management team resulted in a year-over-year total expense reduction of better than 2%, notwithstanding a generally inflationary operating cost environment.

Strong expense control, however, was insufficient to overcome declining sales and as a consequence KFC saw 2011 operating income decline by 44% from 2010 to the lowest level in many years.  While careful treasury management has allowed KFC to improve investment returns despite historically low interest rates, improved investment income was insufficient to overcome weak operating results.  Consequently, full year net income is down by approximately 28% year-over-year, representing a less than 6% return on shareholders’ equity.  This translates to anticipated per share income in the range of $0.27-$0.30 for the past year.

While we are pleased that KFC has emerged from a difficult fiscal 2011 with some net profit and that we have avoided any forced staff reductions for our loyal team; clearly a trend of declining sales and profitability is neither sustainable nor provides an acceptable return to our shareholders.

During fiscal 2012 KFC faces the challenge of fundamentally restructuring its expense base to better fit new economic realities and stop the decline of operating profits.  To date, we have asked our senior managers to share in the financial pain of deteriorating results as their total compensation has declined in line with the fortunes of the company’s shareholders.  We thank them for their enduring commitment to our business under difficult circumstances. 

Total payroll related costs (inclusive of wages, taxes, and benefits) increased for the fifth consecutive year to $1.826 million and represented 50% of KFC’s total operating expense.  Combined wage and payroll tax expenses increased by approximately $48,000 during the year. It is clear that with staff employment expenses representing the largest contributor to KFC’s operating expenses, lower employment costs will be a necessary ingredient in any recipe to stabilize and ultimately improve KFC’s financial performance.

In the next year we will be asking all of our team members to work collaboratively with management to find operational efficiencies which allow us to trim further operating expenses while continuing to try to preserve jobs as we deliver the quality of service our customers expect.

The challenges ahead are by no means small, but neither are they insurmountable.  We believe that through the determination of our stakeholders KFC can and will meet these challenges and emerge a stronger company that delivers excellent value to its customers, provides secure employment to its staff, and delivers fair returns to its investors.

KFC’s annual audit is due to commence shortly.  In due course final audited accounts will be released following their completion.”

Donald P. Lines, OBE, FCA, JP

Chairman