麥當勞 (MCD) 2001 Q1 法說會逐字稿

1 MCDONALDS TELECONFERENCE CALL

Hello, and welcome to the McDonald's Investor Relations Teleconference. At this time I'd like to turn the conference over to Ms. Mary Healy, Vice President, Investor Relations. Ms. Healy, you may begin.

Thank you. Hello everyone and thanks for joining us. The conference call is also being web cast wide and recorded for rebroadcast. With me are Jim Cantalupo, McDonalds Vice Chairman and President and Michael Conley McDonalds Executive Vice President and CFO. This morning we issued our first quarter earnings release. The purpose of this call is to elaborate on these results in their outlook and answer your questions. Please note that the language in our press release regarding forward-looking statements also applies to our comments today. Before I turn it over to Mike Conley, I want to point out that when we give comparable sales trends during this call they are adjusted for the trading day effect, which reduced first quarter sales increases by about 1% around the world. The comparable sales trends 2 are also on a constant currency basis. With that I'll turn the call over to Mike.

Good morning. I hope that you've all had a chance to review our first quarter earnings release but in any event, I'll begin with the review of the quarter. Earnings per share o 29 cents for the quarter or 30 cents in constant currencies were in line with the expectations we gave last month so in our first quarter update. Systemwide sales increased 6% while operating income declined 6% in constant currencies. As noted in the release, the small trend line results reflected numerous challenges, which we'll talk about. Lets take a look at the results by segment. We're pleased with US sales, which were up 4% going against the 5% increase last year. We're continuing to emphasize food taste in variety in the US, and during the quarter we rolled out the big and tasty lettuce and tomato hamburger. We also introduced our New Taste Menu, which features a rotating menu of up to four new products for a limited time to complement our improved core menu. The products featured would typically include specialty hamburger and chicken entrées, a breakfast item and a desert. Examples of products include the 3 bacon ranch crispy chicken, hot ham and cheese, the grilled Mac veggie, grilled onion double, the McVeal [_______________] and a [_______________] float. We'll also continue to bring excitement to our customers through fun promotions. For example, beginning today, you can play the Who Wants To Be A Millionaire game at McDonald's. This game fostered after the popular TV show offers customers opportunity to win cash and McDonald's food prizes. For those of you who watch the show, you'll be pleased to know, there's even the opportunity to use a lifeline while walking under our website. While fun for customers this game is one our just two to be offered in the US this year compared to five games last year. We believe more food focus promotions will help produce sales volatility.

US operating income increased 4% in the first quarter despite pressure on company operative margins from higher labor as well as higher energy costs. Our average hourly crew rate was up about 5% over the prior year. We have a number of initiatives focused on crew retention and training, which should help control labor cost to some extent. Overall, we're pleased with our momentum in the competitive US environment. Longer term, our goal is to double 4 sales in the US business primarily by increasing sales volumes in existing restaurants. Our team is developing plans and testing ideas to make this happen. One of the experiment is our McDonald's with a diner inside which recently opened in Cocamo Indiana. This restaurant incorporates McDonald's Menu with a Diner Star Menu and experience. It's a promising long-term opportunity to grow by extending our reach to capture different new locations. Now let's move onto Europe's first quarter performance. Europe's constant currency sales increased 2% against the strong 12% increase last year. Europe's operating income declined 13% for the quarter in constant currencies against a strong 15% increase last year. These results were hampered by consumer concerns about the safety of the European beef supply in certain markets. In our reported basis, results were also negatively impacted by the weaker Euro and the British pound. The biggest factor from the declining operating income was the pressure on the both company operated and franchise margins primarily related to weak comparable sales. The good news is, we're seeing recent improvement in comparable sales trends and beef product mix is improving in 5 certain markets, for example, in France comparable sales declined just 2% in the first quarter and in March they were slightly positive, and the beef product mix has been steadily increasing throughout the quarter. During these comparable sales for the quarter we are down 10%. However, for March they were down just 4%.

Germany has been focusing their advertising on a series of food promotions that emphasize value and the variety of products available at McDonalds. For example, in January, they celebrated their 30th anniversary by offering 30% off on different product each day. This was followed by a fish promotion in February and a chicken promotion in March. Germany also introduced the McFarmer pork sandwich and is offering toast to ham and cheese sandwiches and fish sticks as happy meal choices. This month Germany has featuring a different large sandwich each week including pork, chicken, and beef selections. France attributes their improvement to continue promotion of quality and value messages, as well as the success of the 280 Hamburger introduced March 1st. This beef hamburger sandwich is slightly larger than the Big Mac and offers French customers a tasty treat at a value price. Recently France sponsored open 6 houses in our restaurants as supplier facilities and our whole office. All this showcase our systems quality standards. The restaurant visits included tours of the kitchen and discussion sessions to answer questions and explain our food safety measures. Suppliers holding open houses at meat plants, bakeries and potato processing facilities gave tours and answered questions for the public. France has done an outstanding job of reacting quickly with product riding messages, introducing new products specifically the croque McDonald a grilled ham and cheese sandwich and communicating our quality messages in a compelling and impactful way. We believe we're seeing the results of these measures. The BSE concerns continue to be limited to a handful of markets in Europe. In all affected markets, we are emphasizing value, variety, and quality. Further, we are working with a Blue Ribbon Panel of experts and scientists to validate our own best practices and future initiatives, as well as influence the industry to take similar leadership efforts.

We believe our standards and practices are state of the art based on what is known in the scientific community today about this issue. 7 So, while we can't predict the future, we feel good about the steps we are taking and the progress we see, and we're hopeful that consumer confidence will continue to improve. The issue currently grabbing headlines in Europe is hoof-and-mouth disease or they is no consumer safety issue related to this. The significant coverage is certainly not positive for our sales. It's impossible to quantify any impact but suffice it to say, we're looking forward to this issue running this course. In the UK, where hoof-and-mouth has been discovered and widely covered our comparable sales were down 1% for the quarter. Moving on to Asia Pacific, sales increased 4% in constant currencies against the strong 12% increase last year. This difficult comparison was driven by last year's extremely successful Hello Kitty Promotions in Taiwan, Hong Kong, Singapore, and Malaysia. In addition, comparable sales in Australia continue to be week due to the implementation of the 10% goods and services tax last July. In Japan, comparable sales trends have improved and were positive in both February and March. So, while their economy is still very weak, we're encouraged by these results, and hopeful that we can maintain that momentum as the year progresses. China continues 8 to perform very well. Driven by our popular chicken offerings as well as value. Asia/Pacific company operative margins declined primarily due to the comparisons with the highly profitable Hello Kitty Promotions last year, as well as higher labor costs in 2001. Despite this decline, operative income in Asia/Pacific increased 8% in constant currencies due to higher royalty income from Japan and again on the sale of real estate in Singapore.

Latin America sales increased 11% in constant currencies driven by expansion. Mexico continued to perform well achieving positive comparable sales in 49 out of the last 51 months. We're also encouraged that Brazil, our largest market in the segment, achieved positive comparable sales for the quarter. Still sales in many Latin American markets such as Argentina continue to be impacted by weak economies, and our profitability in Latin America has been significantly hampered as a result of weak sales and financial assistance to operators as well. Regarding McDonald's other segment, Canada continued to post strong results driven by their value and food focus messages. Operating losses for the other brands reflecting long-term 9 investment spending, lowered quarterly operating income by $15 million. This investment spending accounted for 4 points of the 5% increase in consolidated SG&A expenses for the quarter. Interest expense increased 20% or $20 million for the quarter reflecting higher debt levels primarily related to share repurchase activity. We expect the rate of increase in interest expense to moderate throughout the year. We purchased about $450 million of stock during the quarter, bringing our cumulative total under our $4.5 billion program to $3.7 billion. So, we are on track to complete that program by year-end. This was a tough quarter and we believe the worst is behind us. However, we are still cautious for the second quarter due to near term issues. So, we are looking forward to better earnings results as the year progresses, particularly in the second half of the year. Now I would like to turn it over to Jim Cantalupo.

Thanks Mike. Well, we are facing a number of challenges around the world, we continue to show our strength. Our brand is one of the most well known in the world. It represents consistency in nearly 29 thousand restaurants. It's good tasting food, fast 10 friendly service, value cleanliness, and convenience. It's also a play places, kids, and fun. We have experienced local management chains in place and extremely strong competitive position and a global supply infrastructure second to none. These strengths and our focus on the basics of delivering quality service, cleanliness and value to every customer, every time, will continue to drive our business which we believe has enormous potential. We plan to add 1500-1600 McDonald's restaurants worldwide this year. And we expect to add at least that many in each of the next several years. We are balancing profitable new unit growth with building comparable sales through effective marketing menu management and operational excellence. We are improving service by focusing on what we call the People Promise, i.e.. treating people right, training and developing them and providing competitive pay and benefits. We believe that only satisfied employees can deliver the friendly efficient service, customers want and deserve. Growing the core McDonald's business remains our top priority. We will also pursue additional new locations. This may be achieved through experiments like McDonald's with the diner inside that Mike described earlier and 11 other ideas that leverage our existing McDonald's locations like McCafe's. McCafe's are gourmet, coffee and dessert centers within McDonald's restaurants. The concept is now in about 17 countries and we will be opening our first McCafe in the US within the next 60 days. We are also leveraging our strengths through our investments and other brands, which allow us to participate in new locations that we would otherwise not capture. We are very pleased with each of these brands and their long-term potential to add shareholder value.

To pull by Mexican Grill, Boston Market, and Donato's pizza all delivered positive comparable sales for the quarter. During the quarter we acquired a minority interest in Pret A Manger a UK-based quick service food concept that serves mainly cold sandwiches, snacks and drinks at lunchtime. Pret A Manger operates 107 restaurants in UK and opened its first US outlet, in New York, late last year. I was in UK last week and had the opportunity to turn number of Pret stores. These visits confirmed my confidence in this growth opportunity. I also met the senior European management and toured McDonald's restaurant. This visit along with my 12 recent visit to Japan, reinforced my commitment to and belief in the way we run our business. Having local management with an in-depth knowledge of the marketplace is invaluable. This enables us to respond with innovation and speed to the consumer confidence issue surrounding the beef supply in certain European markets. Meanwhile, we recognize we have other challenges including difficult economies and weak currencies in a number of markets. These issues are outside our control, are cyclical, and don't reflect the underlying strength of our brands and consumer franchise which goes to the heart of our future earning stream. In addition, in most of these markets we are growing market share and strengthening our position in the marketplace. There is no better example of this than McDonald's Japan. Our business there has thrived in a very weak recessional environment over the last decade. Well, we haven't always posted strong comparable sales. We have had significant growth in total sales and profits during a time when the competition has been losing market share in retrenching. So, while our business has experienced some volatility as a result of events around the world, we are confident that we are making the right long-term decisions for each of 13 our 120 markets.

For 2001, our annual earnings per share growth is expected to be within our previously stated range of 6-10% in terms of currencies. If foreign currencies remain where they are today, reported annual earnings per share will be about 4 cents lower than tax and currency EPS in 2001. This range is based on our expectation for improvement in business trends particularly in the second half of the year. As we have already mentioned, we are hopeful that we will see continued progress in Europe as we move throughout the year. Also we expect improvement in Australia where we lap the implementation of the 10% goods and services tax on July 1st. And we are encouraged about recent sales trends in Japan and Brazil. Finally, we are confident in our ability to continue our solid growth in United States. Now, I would like to open it up for your questions.

Thank-you.

At this time we will begin the question and answer session. If you would like to ask a question, please press *1. If you are using 14 speaker equipment, you may need to lift your handset prior to pressing *1. Should you wish to cancel your question, simply press *2, but please do not hang up. Once again that is *1 to ask a question and *2 to cancel. Your first question comes from John Glass from Deutsche bank.

Thanks. Good morning. Two quick questions for you, first, Mike, you sounded a little cautious on the second quarter. Do you still expect that to be below, or how much below the sort of 6-10% earnings growth rate did you expect for the full year? And then the second question, while I am at it, could you talk a little bit about pricing opportunities you may want to take in the US, particularly given, the labor market is still tight, utilities are up, and at least one of your major competitors is trying to push pricing up, could you talk about where you stand there? Thanks.

Yeah John, it's Mike Conley. In terms of the second quarter, we are not giving specific expectations, and I think there is uncertainty on our part because of the near term issues particularly in the near term BSE in Europe and of course you know hoof-and-mouth is as I mentioned in our remarks, 15 even though we can't quantify it. It's certainly not the coverage and media effects aren't particularly favorable to our business. So, we are going to have an update in mid June, and obviously we will tell you more about that but we feel more stronger about our ability to grow the business in end of the year in the range we projected, primarily driven by the second part of year. So, I really can't tell you too much more about the second quarter, nor will I comment against the aimless expectation out there. So suffice to say, that I think there are some uncertainties and it's probably more challenging in the second quarter than will be for the rest of the year after that. In terms of pricing opportunities, in US, I think, your question is, the industry generally has patched some of the labor pressures etc., along and I would suspect in terms of menu prices, I always expect that would continue. I don't see any dramatic change in pricing philosophy, certainly within McDonald's or necessarily across the whole US industry. I think the way to win in this environment is to continue to build transactions as well as build average check and in this competitive pricy market, you have to be careful 16 about the menu board. But that doesn't mean that isn't a part of the equation.

Thank you.

Your next question comes from Joe Buckley from Bear Stearns & Co.

Thank you. I have a couple of questions also on the cost side. In the first quarter, the US food and paper costs were actually down a bit as a percent of sales. Hope you'd to address the outlook for beef costs going forward in US, is this what you are seeing for beef and pork in Europe, and then you mentioned the wage rate being up 5% year over year. Curious if that was US only or that's global and so, what the US rate might be?

Hi Joe. It's Mary. We aren't expecting beef costs to go up in the US. I think we are expecting for the year, it will be up about 8-10% and that is much more of an increase than the last 9 months than we really thought in the first quarter. I think it was fairly flat by our call in the first quarter. The outlook in Europe is a little bit uncertain because again of the issue of foot-and-mouth, it 17 depends where that goes from here. If that remains stable, we still expect that beef cost, pork cost and chicken cost will be up in the second quarter versus the year ago as they were in the first quarter. And so, our best guess at this point is that they will probably be up a similar amount as what we thought in the first quarter. The environment is somewhat stable out but again that could change and so there is some uncertainty out there. Jim did you want to add something?

I just want to tell you that the situation outside the US, really even beyond Europe is a little uncertain at this time because Australia is giving a bit more pressure on their beef costs also because of product mix shifts and torsion shifts by other people. So, you know, at this point, we've got, you know, much of that factored in where we think it's going to go in terms of our expectations but it's not as certain as I'd like to able to tell you, John.

And the average corollary rate time was meant to relate only to the US, of course, as that differs in every market around 18 the world, we have seen some labor pressure in other areas of the world particularly, I think, in Asia/Pacific this past quarter in terms of increases in wage rate but we don't have a breakdown in terms of specific increase on an average basis. So, 4.8% is the actual increase for the quarter in the US.

Thank-you.

I think, I'll just add one phase, it's Mike Conley, that despite the turmoil really in the commodities markets in Europe, our food and paper cost was not up, I think, it was less than a point. So, we were favorably affected relative to what we had really expected. So, that was good news.

Your next question comes from Jeff Omunhundro from First Union.

Hi, Jeff.

Hi, it's Jeff Omunhundro. Just a two quick questions Healy. First, I wonder if you could give us a little color on your thoughts regarding the number of menu items, I think it's around 36, any thoughts 19 of shrinking that? And also what the reception has been to the 'Mighty Kids' meal rollout?

Let me just talk, Jeff, a little bit about the menu. You know, our strength has always been historically unlimited quick service restaurant and that's where we focus. But, you know, the "made for you" operating system has given us a platform to expand the menu whether it's been for promotional periods or on a longer term basis, and we're going to continue experimenting with the broader menus and new menu products because our objective is to give customers, you know, what they are looking for from McDonald's, and if it's different, more variety and more choices, we think our operating system allows us to do that. So, I suspect you're going to see continued, I know you're going to see continued experimentation and addition of products in, our markets around the world as we continue our penetration, and I think, our operating system really gives us the ability to do that.

Your question on, Jeff, on the Mighty Kids meals which are kind of happy meals for bigger kids but we're happy with the early result. I think it's too early to tell how 20 significant it'll sustain itself and the target audience's kids, 8 to 11 years old, little bit older group obviously than our happy meals appeal to. So, we're pleased with the early results.

Very good.

Jeff, I'll only add one comment on the menu and that is, we always are working if we can to simplify operations by eliminating those menu products which just aren't getting that much value to customers. So, you know, that's the continual process in this system and you may have heard something about that but it's that something we look at on an ongoing basis.

Very good. Thank-you.

Your next question comes from Janice Meyer from CSFB.

Hi. Thank-you.

Hi, Janice.

Hi, a question on the outlook for your international margins over time. You seem to be using value and using variety to go after sales and implementing a strategy 21 obviously to get the sales back, and I wouldn't say at any cost, but clearly, you know, at some cost. Do you think some of these costs will now be permanent in you international business? I know there are some near term food cost pressure because of what's happening with BSE and hoof-and-mouth, but do you think the value initiatives or some of the variety initiatives could lead to some permanent margin pressures overseas?

Hi, Janice. I don't, you know, really think so over the longer term. You know, most of our margin pressure these last couple of years, a lot of it has been driven by the strength of the dollar. You know, we import a lot of products into some of our markets around the world and that really, in terms of raw commodity cost, etc., has put pressure or, you know, reduced our ability to show any improvement in margins. You can couple that with some, you know, stress in some of our major economies where we're going after value to, you know, increase our customer counts and traffic to the stores, that's really what resulted the margin pressure is coming from and I think our longer term basis when those situations abate, you're going to see 22 some margin improvement along with, you know, the academies that scaled their triggering by opening stores and certainly in rest of our markets where we have not reached the critical mass like we have in other markets. So, that all adds, in my view, to longer term margin improvement, and hopefully, you know, we put some of that on the bottom line as opposed to putting on the menu board. Unless, you know, that would be the longer-term strategy and I think it's possible.

Janice, it's Mike Conley, I'd just add couple of points there, you know, if you look back, prior to this year stable markets are more developed markets, much of which Europe represents, their margins were very stable in those markets, when you get negative comparables with these near term issues like BSE, you have core labor issues, and the margin erosion can easily get exaggerated, beyond after the sales decrease. So, I think you're seeing some of that, so I wouldn't overreact to it in terms of long term trends, and then in Asia/Pacific, in particular, this quarter the Hello Kitty profit comparison had a pretty significant impact on margins and that's simply a promotional comparison quarter-over-quarter. 23

Thank-you.

Your next question comes from Peter Oakes from Merrill Lynch.

Hi, good morning.

Hi, Peter.

I'm a bit curious to get a little bit of colors to what beef consumption trends, how they've been tracking in Europe overall? You mentioned that France has definitely shown some improvement, and obviously, Germany being fairly instrumental there, but Europe collectively, are you certain to see that trend bottom or is it still lower in this stage?

I have to say Peter that was down last week, and we really got into this with our European management. So, we're looking at it in terms of our expectation for the rest of the year, goes back looking at some of the history we've been through particularly in UK, and I know this isn't the exact same situation, but we're seeing patterns that to me are encouraging with regard to the recovery of our 24 beef sales, as well as the trends in our sale. Now, you know, is it going to be exactly the same, I don't think so it's going to be exactly the same in terms of time period etc., or recovery rates, but I am encouraged by France and the recovering beef sales in a number of the markets. So, you know, yes, the answer is overall yes. We're seeing beef come back. Now, you know, the hoof and mouth that helped the issue and you know, when you see the cattle being burned on TV every night in Europe, it really has an impact, I think, on the consumer. But overall, we're seeing beef comeback.

Yeah, and Peter just I would add that in any given market as we look at it, we have to take into account what promotion they are currently running and I think as Mike mentioned in his remarks for example, Germany was running a chicken promotion in March. You can expect that of course they didn't sell us much beef when they were promoting chicken. So, it does vary a little bit by markets, but over the last three months, there is a clear indication that our beef sales are up compared to what they were three months ago.

Adding onto that, it's 25 just a little more texture. In Europe, because of the situation, we had a very concerted effort and adding other nine beef menu products in the form of pork sandwiches, and Mike talked about the ham and cheese sandwich, and so that effort has really impacted the beef sales also because of the promotions and loads of variety offering.

We have also been encouraged with experiences of France, and more recently of Spain when we value price, you know, beef sandwiches as well. So, you'll probably see some more of that.

Thank-you.

Your next question comes from Andy Barish from Banc of America Securities.

Thanks folks. A couple of quick questions on the guidance, foreign currency looks like it's going to be a penny or two worse than a month or so ago as we stand today, I guess. Is there an offset in terms of interest expense or rates with some of your floating rate? Can you, maybe, give us a sense of how much US status floating rate or where you stand on, lower 26 rate environment? And then secondly, other brand operating losses look like they're running in the first quarter at a $60 million runrate which is a lot higher than the year ago. Any changes in expectations there? and you mentioned some new infrastructure costs. I think that was in regard to other brands. Can you just give me a sense of what's that all about?

This is Mike Conley and I'll answer your second question first by the other brands. If the first quarter operating losses were greater than last year, but we still expect over the entire year the operating losses in the other branch to be fairly comparable of last year, a part of the reason for that is that Boston Markets in a seasonality way, it's weakest quarter is the first quarter, it's strongest quarter is the fourth quarter. So, that dynamic changes over the year and we're still looking in expectation where those operating losses should not really widened for the year. In terms of currency, I think we had indicated it was 2 to 3 cents in our update and since then currencies have moved 4 points [_______________] as they weakened again a bit, so now we take it most likely it's 4 cents. We are constantly managing 27 our portfolio in terms of fixed floating, foreign denominated, this currency and that currency versus US, so I can tell you that while we have taken advantage of low fixed rate interest rates over a period of time, we have also after using interest rate swaps etc., are also moved in the floating. I don't have the exact percentage; I'd say our trend is moving a little bit along with floating.

And Andy the guidance or the indication we have given for the currency based on today's rate is really are you taking into account our expectation for interest expense, so we expect that the weakening currency reduced our interest expense debt in that EPS expectation of 4 cents in capital currency.

Thank-you.

Your next question comes from Mitchell Speiser from Lehman Brothers.

Hi, Mitch.

Thanks. Hi. Two questions, first in Europe, can you give us a sense of how non-beef sales are trending. Are 28 they up in any of the markets or are they just down less than beef and also in the US, there's just been a lot of talk about transactions and typically you have not given us any information on transactions but perhaps this time around if you can set the records straight in the first quarter were transactions up? That's it. Thank-you.

Mitch, let me talk about the European situation and the menu. The non-beef products are up, substantially major markets have impacted more and initially with the BSE and Hoof and Mouth products, but as I said before the beef situation seems to be coming back and but our other products are up. We were selling pork six months ago, pork sandwiches in most markets. Today we are selling more chicken. Happy meal mixes of change around a bit with the offering of fish sticks and the ham and cheese sandwiches, so I am encouraged by beef returning, I am also encouraged about the receptivity of the other products we put out on the menu in the form of pork and chicken products. So, I am balanced, I am pleased with the way all parts of the menu are going and Mary, on the transaction.

Mitch, it's Mike Conley. 29 On the transaction, no we don't disclose them, but we have said that part of our challenge is to grow transaction that's certainly one of our goals. We are also trying to manage cost pressures with building average check and it is fair to say we have had more success in building average check in the last couple of years that we have on building TCs but that is very much a goal of ours and very much our priority.

Thank-you.

Your next question comes from John Ivanhoe from JP Morgan

Thanks, hi, I'm sorry I'm calling from another place can you hear me.

JIM CANTALUPO/MARY HEALY: Yes.

Two questions actually, Jim actually seemed to be unusually aggressive in terms of talking about the margin impact because of the US dollar appreciating versus various currencies. Is there any way to quantify that in this specific quarter as it relates to the declining company operated margins in Europe and Asia/Pacific? And secondly it maybe a little bit broader based question it seems to be that, part 30 of maybe the issue and perhaps [_______________] questions internationally that you are just counting your core products and offering a lot of variety but that variety is also discounted internationally. It seems to me that you are thinking about doing "made for you" at least in Europe and testing that at some point of time. Is there any thought of going somewhat higher and in terms of the sandwich that you are selling internationally and trying to get a premium price point selling a premium product just as you are trying to do in United States or the international markets are not yet in that stage of development?

I talked the about the dollar a little bit first, John. You know, it's been five or six years of the strengthening dollar pretty much around the world against most currencies, and it's really impossible to give exact numbers, and we hope we'll track it by quarter and could we try to at some point to capture it because it goes drifting the raw material cost etc., and it really affects both franchises, as well as company margins because many of our construction materials and equipment is brought here in the United States in dollars 31 around the world and affects those margins also, but the primary one is in markets where we executed our strategy of trying to be, as local as possible like Europe is more self contained there is less impact. When you get to Asia and Latin America, there is more impact. We are importing French fries in many of the markets. We are now growing then in Argentina and that helps Argentina, but every thing else is impacted because they are buying from Argentina and then in Asia, many of the franchises come from Australia or the United States as well as beef and a number of other products. So, five years of this pressure on the dollar really has impacted our margins to a great extent but we know; I can clarify it for you. You can look at what the percentage increase in the dollar is and relatively these currencies you can get some impact but then you got the raw material cost many of the ingredients are traded in dollars on the world markets like sugar and certain other commodities, so it's a very complex also but needless to say it has put pressure on our cost and margins over the years. We would have seen more come in the form of improved margins had the dollar not strengthened over these last five 32 years, and the other question of "made for you" in Europe and where we got annual premium price, you know right now we have some more pressing issues that we are trying to deal with.

The longer term, I certainly think that strategy has it's place in our international market place particularly in Europe, and we've over the course of time added every once in a while a new product if not on a promotional basis at premium prices. We are testing "made for you" in our three major markets this year; we are putting it into test in England, France and Germany, in a few stores. It is not a pressing business issue for us because as you recall we never went to the system the US changed from in United States here so the microwaving and cuing ovens were not in place and the need to address two taste issues, one is pressing but the "made for you" platform is the real advantage in long term in terms of menu and ability to do exactly the kind of things you are talking about, as well as help us out with this menu products we have added here in this particular point of BSE issues and expanding the menu with chicken and fish varieties and certain ham and cheese sandwiches etc., so we are putting that in place. I think 33 it's going to be the platform. I think in the long term the strategy of higher premium priced products is certainly a valid one and in fact, one of the things we are looking at right now around the world is a Deluxe Chicken Product on the menu in most markets which would be a higher priced point of products with chicken, white meats etc., in terms of trends are moving in that direction and we think that's a opportunity on our menu and has shown great results in a number of our Asian markets, and more recently in Australia, it had some impact. We just put in a chicken sandwich and chicken wings in the last 30 days and has helped sales there too, so you know it's a balanced strategy and I hope that gives you some texture as to where we might be going.

Thank-you.

Your next question comes from Douglas Christopher from Crowell.

Hi, good morning, and thank you. I just have three questions, first is regarding the newer formats if you can't be specific or give the actual costs, could you just add a little more or give us a little more 34 information regarding the cost or performance of those formats maybe even ranges for the different formats?

Yeah Douglas, let me just make a comment on the other brands, the phase that we are in with most of these brands now is not one of dramatic growth. We are still in the phase of gaining unit economics where we want and testing penetration levels, customer acceptance of the experience and that type of thing, and so that's the mode we are in. In spite of that top sales with all the initiatives we have got and each of the brands have been, actually I am very happy with them. Boston Market in particular since we have taken it's overage has had pretty good comp sales in the mid single digits or above and more recently in the stores we have remodeled and put in some new menu products we are very happy with the comp sales on those stores and that's just in a few markets, Tucson, it just went into Milwaukee, and one or two other markets, and so I am real pleased with where we have taken the brand in the short period of time, and I'm real encouraged about it's long term potential and Chipotle. Chipotle continues to perform very well. We are about further 35 penetrating markets we are in. We run very significant comp sales in all the markets generally that we are in with Chipotle because it's a concept that really responds to the frequency of customer and taste, as we get tried, and so you see dramatic comp sales in their concept over the course of the first few years in the market places and even in their more established market. And then Donato's is one where we're still really in the phase of getting the experience we want to offer right. We haven't opened a lot of stores. We just recently started opening. They are more in line with the concept; we're looking for long term, which is a broader pizzeria type experience. I think we've got four of them open, and their comp sales have been low single digit on the existing stores. But suffice it to say all those three concepts, there is a core of stores in Boston Market that have very satisfactory unit economic that we'd be happy with in both Donato's and Chipotle, their home basis. They have tremendous unit economics which is what attracted them in the first place or part of it, and so, you know, our mission out there is to try to get some handle on our ability to achieve those home-based unit economics and over what timeframe. So, that's where, and the 36 Pret A Manger opportunity I think it's going to be a long term, very interesting one for us because they have a great unit economics and I think a very broad appeal concept.

Thank-you.

Your next question comes from Tom Thompson from Thompson Siegel.

Thanks. Good morning. Could you elaborate on the magnitude and the extent of the temporary [_______________] systems that you related to in Latin America and European markets? How much, especially in Latin America, where your franchise margins were down over seven points? Thanks.

Tom, I'm just putting the Latin perspective. I think it's 3% of our validated income now, but down there, when you have a major devaluation like we had in Brazil you would guess we've gone through a number of these. There's a tail on these things, and the tail affects both your supply chain, as well as your franchisees in terms of the impact on their business particular to finance in dollars and 37 whatever, you know, else is going on within their operation. So, you know, we try to work through all those issues on an individual case by case basis, and at some point, you make decisions that you think are right for the long term, and we made a few of those in the first quarter and I don't know if we have quantified the exact magnitude of that Mike?

Yeah, in both Europe and Latin America each, the impact is right around between $6 and $7 million. I would also add that a significant portion of that really is sort of catch up in terms of some of that is retroactive rapidly. So, I wouldn't conclude that those numbers would fall forward like that if recur at that magnitude.

Thank you Tom.

Your next question comes from Chris Reynolds from Neuberger Berman.

Hi Chris.

Hi, how are you? I have a question about your system ownership of your units. There seems to have been a trend over the 38 last decade of the percent of units that are operated by franchisees declining. Last year was about 59% and the current quarter was about 58%. I want to try to understand what's driving that trend and what are the implications to your P&L because I would think that, as you operate more units, there is more volatility in your operating income performance and potentially pressure on your return on assets.

Yeah Chris. You know, you really have to take this on a market by market basis, but I think if you look at overall numbers, part of the reason for that trend you are talking about is really expansion in markets outside the US with higher company operated markets. If you look at the United States, I think the trend has been the other way. We operate less stores today than we did 10 years ago as a percentage of the system. Now, outside US market by markets, we have joint venture markets. We also bought some joint venture markets, which is as up the company stores but they really run like a company operated market you could deal with. Overall, our commitment to franchising is pretty evident and that's where we will continue to emphasize our growth, and, you 39 know, depending on those markets, I think the UK has gone from 100% company operated ten years ago to, I think, they are down to 70% now. So, we have got a franchising program going on very strong there, and England, France and Germany are different percentages for other reasons. Some deal with what makes good methodical basis in terms of density and what makes sense for franchisees to operate versus company stores. But our commitment to franchisees is really pretty evident in the way we go about our business, and we have no change in terms of our broadcasters going forward.

Chris, it's Mike Conley, I'll just add a couple of comments the US hasn't changed. I think, as Jim indicated in terms of it's mix of company versus franchise stores much over the last several years, I'd add one other thought for you. Yes, I think that company stores can create more volatility, you know, across our income statement but that's on the downside. On the upside, you know, the profit contribution margin you can earn on incremental sales when you produce comparable sales increases, adds tremendous value, I think, for our shareholders. So, it's a two way street. 40

Plus on the return side, just as an added pointer. The returns are generally better at the operating level and they are franchisees that have better returns except we meet operating levels that are similar to the franchisees the returns look actually pretty good for running company operations.

Thanks Chris.

You next question comes from Mark Kalinowski from Salomon Smith Barney.

Hi. I just want to ask about something that came out in a trade publication a little bit ago. Adage was saying that McDonald's is planning a program called Mac rewards and had signed up partners like Disney and [_______________]. Essentially, it sounded like a customer loyalty program. I just wanted to ask when this might be ready to come out in US and some more details on the program itself?

You know Mark this is Mary, I actually got that question for the first time this year today and I am not familiar with the product. It doesn't like Mike and Jim are either 41 familiar. We'll get back to you on that though. Sorry, you know, I'd say that, in general, certainly customer reward forums are something that we find interesting and a feeling that we can find the right way to make one work. I think we've had some experience with customer reward programs outside US they have been successful in certain markets and Jim might like to touch on that, but specific to this question, I will have to get back to you.

Yeah I think Mark that, you know, long term relationships with your customer are what, you know, the retail business is all about, and loyalty program certainly plays a role like that and we experimented with a number of them around the world. I think its something that I desire that we follow the terms of what's the best way to do it for McDonald's because that kind of relationship is really important in long term. Most of the issues are revolved around cost and attractiveness in terms of our business with the small checks and the technology required to deal with it. But, you know, we have one pretty good reward program going on in Japan, as well as the two other markets. 42

Thank-you.

Your next question comes from Harry [_______________] from [_______________].

Hi, Harry.

Hey Mary, Hey Mike, Hey Jim. I just wanted to check to see maybe we're the only optimists out there, but what's happening with Boston Market in terms of the number of stores of 1500 to 1600 developments for next year or so? How much? How many? Let's get back to the basics. Congratulations on lasting through the way that we heard the numbers through the quarter. I'm amazed that you guys are all still employed. Sorry to sound so funny but God help us all. Make sure you folks have a great quarter and thanks in advance.

Thank-you.

God bless the market, we don't have the [_____________] for now nine months. We're really putting a growth strategy into place but our business up to date has been about getting something fixed in the order of existing organization and that's paying 43 dividends. As I said, I am positive about it. I think you will see us opening some stores towards the end of the year in certain markets. You know, it's not going to be, it's not those other brands are not in the 1500 to 1600 restaurants that we are talking about in addition to.

I think, we have time for one or two more brief question then we'd like to wrap it up.

Your next question comes from Joe Buckley from Bear Stearns.

Could you comment on pricing in Europe as you speak of some of these alternative products and newer products. Are you doing so at this kind of pricing and then just one more in the temporary [_______________] systems density we just talked about what markets in Europe and Latin America you've applied to do?

Yeah Joe. The pricing issue, you know, sometimes they are discounted and sometimes they are not. Generally, with promotional times, what I would like to think about is their attractive prices that is going to 44 motivate consumers into trial and repeat business, and that's how we really approach the menu. A lot of the special report flavored promotions, the consumer wouldn't perceive them as a discount to enable a higher food cost in our traditional products and you could call that a discount but we are really after creating traffic, getting trial, and keeping the momentum in our business, and that's what is really driving our pricing as opposed to discount in these New Menu Items.

I think I on your other question Joe in terms of specific market. I don't think this will come as a big surprise, but in Europe, it's primarily the markets that have been targeted by the BSE. So, I think you know pretty much what those markets are. It includes Germany and France which actually are the bigger markets and then Italy and Spain. But generally, you know, those are the markets because they have hard hit by this issue. In Latin America, Brazil of course is among the market and the bulk of it in Latin America relates to Brazil.

And let me just add on the franchises assistance. You know, this is 45 nothing new. If you go back in our history during times of stress in many of the markets where our franchisees are doing their part of the bargain, we're there to help because it is a partnership, and I think that's been one of the big differences between ours and many others in terms of our financial capability to do that, as well as it's the right thing to do for the long term. So, we don't want to drag these issues forward. We want to deal with them and put everybody on the right footing for the future because that's what we're all about.

Okay I think that we're about to run out of time, so I'd like to ask Jim to close the call with a few comments.

Thanks Mary. I just have a few comments for closing. We have faced numerous challenges and difficulties throughout our history and have always managed through these cycles. If you could travel throughout the world and visit McDonald's restaurants as I do, you would share my confidence that we would manage through these latest challenges as well. Customers embrace McDonald's because we offer them something that is desired world over. Good tasting food at values prices served by friendly 46 people in a pleasant environment. It all comes back to the strength of our brand and our long-term approach to growing the business. I want to thank you for joining us and we appreciate your interest in McDonald's. Thank-you.

MARY HEALY/MICHAEL CONLEY: Thank-you.

This concludes today's conference call. Have a great day.