麥當勞 (MCD) 2002 Q1 法說會逐字稿

Hello, and welcome to the McDonald's investor relations teleconference.

By the request of McDonald's, today's conference is being recorded.

I would now like to turn the conference over to Ms. Mary Healy, Vice President of Investor Relations.

Ms. Healy, you may begin.

Hello, everyone, and welcome.

Matt Paull, our CFO, is with me today.

And we thank you for joining us.

This conference call is being Web cast live as well as being recorded for replay on the Web.

This morning we issued a press release with our first quarter results.

The language in that release regarding forward-looking statements also applies to our comments today.

I'll begin our commentary on the quarter with a discussion of earning per share.

Matt will then provide you with some detail.

Our review will be brief, since we discussed the quarter in great detail in our interim update a few weeks ago.

First quarter EPS was 31 cents, both as reported and in constant currencies before a $43 million charge, primarily related to our previously announced asset impairment in Latin America and the closing of restaurants in Turkey.

This is also before the cumulative effect of the change in accounting for goodwill.

This 31 cents is seven percent higher than the 29 cents reported in first quarter last year.

It is also one to two cents above the guidance we have in our interim update due primarily to strong sales in Europe during the last two weeks of March and better than expected U.S. profitability.

Including the $43 million asset impairment charge first quarter EPS was 27 cents before the cumulative effect of the accounting change.

We adopted FAS 142 accounting for goodwill and other intangible assets of January 1, 2002.

This standard effects McDonalds two ways, it eliminates goodwill and amortization.

And it requires us to annually evaluate good will on our balance sheet for possible impairment.

As described in the earnings release we recorded a non cash charge of $99 million after tax or seven cents a share to reflect the cumulative effect of this accounting change.

Foreign currency translation reduced reported EPS before the cumulative effect of the accounting change by one penny in the first quarter.

However, due to rounding there was no effect on the adjusted EPS of 31 cents.

Assuming rates stay where they are we expect currency translation to reduce reported annual EPS with or without the charges by one to two cents.

We expect 2002 annual earnings per share to improve significantly over 2001 results.

Consistent with our pervious guidance this equate to 2002 earnings per share of $1.47 to $1.50 excluding the impact of foreign currency translation and the $142 million of charges described earlier.

We expect significant improvement in the U.S. business and in our Asia Pacific - Middle East Africa segment in the second half of the year.

And we expect Europe to continue it's strong results.

These expectations for strong earnings growth in the second half of the year are consistent with Wall Street estimates.

I'll now turn the call over to Matt to give you some detail.

Thanks, Mary and good morning everybody.

Our performance thus far in 2002 is about where we thought it would be.

As we have said in the past, we expected the first quarter to be challenging and it was.

Now, we look forward to strong performance in the second half of the year as our initiatives start to have an impact.

My review of sales and operating income will exclude currency translation and the 142 million of charges Mary just discussed.

System wide sales increased three percent for the quarter.

Adjusted operating income was relatively flat for the quarter.

This included higher franchise margin dollars, lower G&A expenses, relatively flat company operated margin dollars and lower other operating income.

During the quarter, we saw significant improvements in Europe's performance, however, weak economies continue to pressure result in the Asia and Latin segments.

Europe contributed more than one-third of total operating income in the first quarter.

European sales increased 10 percent in constant currencies in the first quarter.

Europe's comparable sales increased five percent.

Each of Europe's big three countries posted positive comparable sales for the quarter, with Germany and the UK in the low single digits and France in the mid-single digits.

These three markets also had particularly strong comparable sales performance in March, helped by the shift of Easter from April to March.

Germany's sales increase was especially notable, given its difficulties earlier in the quarter.

The improved sales were driven by new products and supported by the equivalent of cents off coupons mailed to consumers.

Europe's operating income increased a robust 13 percent.

This was driven by a seven-percent increase in company-operated margin dollars and a 14 percent increase in franchise margin dollars.

In addition, G&A decreased both as a percent of sales and revenues.

Europe's company operated margins, as a percent of sales, were flat despite increases in France, Germany and the UK.

However, Europe's year over year margin trends improved from January through March.

In fact, March 2002 was more than 100 basis points higher than last year.

In the UK, company operated margins increased as a percent of sales for the quarter, although higher labor costs continued to pressure margins.

Company operated margins for both France and Germany also increased as a percent of sales.

However, positive, comparable sales growth was somewhat offset by higher labor costs due to minimum wage increases in each country.

Overall, we're encouraged by the progress we've made in Europe and are looking forward to building upon it.

In Europe, we expect sales to increase in the high single digits and operating income to increase in the high single to low double digits for the year, excluding $46 million in special charges in 2001.

Let's move to the U.S., which contributed about 60 percent of operating income.

First quarter total sales increased two percent and comparable sales declined by one-tenth of one percent.

Operating income decreased two percent, primarily due to payments of $22 million to owner-operators, to facilitate the introduction of a front counter team service system.

Excluding these payments, U.S. operating income for the first quarter increase four percent.

For the quarter U.S. company operated margins as a percent of sales improved 50 basis points primarily due to the elimination of goodwill amortization and a lower contribution rate to the national advertising cooperative.

Our U.S. agenda focuses on differentiated the customer's experience through QSC superiority, great food taste and variety and everyday value offerings.

As a result of this agenda we expect U.S. sales and operating income to increase for the year in the mid single digits excluding $181 million of special charges in $2001.

A very important part of the agenda is improving QSC.

We intend to do this through our restaurant operations improvement process.

We described this process in great detail during our last conference call.

Our goal, as we said, is to achieve a very a high standard that differentiates us from the competition.

While we do not expect dramatic change over night, we think the top and bottom lines will improve as we move into the second half of this year.

Next let's discuss Asia which contributed about 13 percent of operating income.

This segment saw a two percent decline in first quarter sales and a 20 percent decline in constant currency operating income.

Comparable sales or the segment declined eight percent for the quarter primarily driven by Japan's low teen's comparable sales decline.

In Japan continuing weak economic conditions, consumer concerns about the government's ability to regulate food safety and a temporary interruption in the supple of Chicken McNuggets, which has since been resolved, all contributed to the sales decline.

To address consumer concerns we are actively communicating messages about our industry leading safety and quality standards.

Also recently Japan added several new products and changed their every day low pricing strategy.

To date we have not seen comparable sales improvement, so we continue to evaluate our options.

We expect to see strong results in the second half of this year.

Another contributing factor to the segments operating income decline was the comparison against a real estate gain in Singapore in the first quarter of last year.

On a positive note, Australia, China and New Zealand all performed well during the quarter.

In particular Australia's comparable sales were mid single digit positive for the quarter driven primarily by their new taste menu.

I'll close with comments on two additional items.

First, interest expense decreased almost $30 million or 24 percent for the quarter.

This was primarily due to lower average interest rates partly by higher average debt levels.

We expect the percentage decrease in interest expense to moderate throughout the year.

The second item is our repurchase of almost 12 million shares of common stock during the quarter for $331 million.

We expect purchase activity in the remaining quarters to be lower.

With that brief summary of our results, I'll open the call up for your questions.

And at this time, we'll begin the question-and-answer portion of today's call.

If you'd like to ask a question, please press star, one, on your touch-tone phone pad.

To withdraw your question, press star, two.

Once again, that is star one to ask a question and star, two, to withdraw your question.

And our first question comes from

of Morgan Stanley.

00:38"/> The first is if you could give us an update with regard to the launch of the value pricing or the dollar menu in California and the impact that that has had.

And then, lastly, just on the financials, if you could supply us with the EBITDA number as well as the debt level at the end of the quarter?

Thanks.

Hi,

.

It's Mary.

In terms of the initiative that we're running out in our local California, Los Angeles cooperative, they've put in a - everyday value menu starting January 1 of this year.

Since then, they've made some adjustments to it.

They reduced the size of the menu.

They started with about 20 items.

And they've reduced it to about 12, I believe, the beginning of March.

You know, that particular area of the country was going against some really strong numbers from prior years because they had been one of our top performing areas.

So they - as I recollect - they haven't yet been able to turn their comp sales to the positive, but they do believe that the value menu was having a positive incremental sales effect.

Although, again, they wanted to complement the everyday value menu with some other initiatives, both on the food side as well as their service initiative.

So, I think, our objective here continues to be to identify an appropriate everyday value strategy for each one of our markets.

We're not certain whether that would be the same across, you know, the whole United States.

Because, in fact, there may be reasons to do things differently in different parts of the country.

But, as you also know, I think we've had success with the

dollar menu, both in the New York area, where it started, as well as in a number of other markets in our East division.

In fact, now, I think we have some type of an everyday value menu in close to 4,000 restaurants across the U.S.

So, we're committed to building the business through everyday value offerings.

We think that they can allow us to give customers choices to kind of build their own value meal in addition to the extra value meal choices we already offer them.

Some customers want to buy their products a la carte and these fit in nicely with those customer desires and preferences.

And we also see in some of these markets where people will add on a product to their purchase which may include an extra value, and then they'll get a product from the dollar menu and it will be an add on.

So I think we're, you know, we'll see where the L.A. specific iteration goes.

They seem to be satisfied so far with the early results, although as I had mentioned, they made some adjustments and they're kind of building on that.

Do you want me to try to cover the debt level issue?

this is Matt.

Our debt levels are up a few hundred million dollars from this point in time last year.

There's been some activity where we've been issuing debt, but most of that the proceeds of the debts have been used to pay down commercial paper.

So the increase from last year at this time is about $400 million on a base of about $9 billion.

Thank you.

And our next question comes from

of Goldman Sachs.

Hi, I have two questions actually.

The first is in terms of the unit account growth it seemed a little bit lit in the quarter even taking into consideration the sale of

and just wondering what that means in terms of meeting your full year guidance for the unit additions?

And then secondly, in the U.S. it looks like in March you saw a little bit of deterioration.

For the first two months of the year, you had reported three percent growth in system wide sales and for the full quarter two percent.

So if you can help us understand what happened in the U.S. during the month.

OK.

, I'll answer the first part of your question.

Our first quarter unit openings are always at a very low level relative to the level we'll get to as we move throughout the year.

So we have a seasonality to our unit openings that we have always had, part of it has to do with weather.

And so we are still on track and think to open about 13 to 1400 net restaurants worldwide this year.

So I believe you're looking at just the change from December 31st to March 31st.

And that would just reflect the normal seasonality in the reduction of openings.

And it's also possible, depending on which number

is picking up.

We closed some

restaurants because we sold them and that showed up in the first quarter.

And she mentioned that.

But relative to the U.S. performance you're right, that their sales performance was stronger through the first two months of the year.

And I think we saw the strongest performance in February when we ran the Chicken Parmesan sandwich under our new taste menu.

Matt, do you want to comment on that?

Yeah, the - in February we had a national window tied in with the Olympics is part of our new taste menu and we're trying to brand variety through our new taste menu.

We ran the promotion across the country.

It was very successful, very heavy units per thousand.

And we ran the same messages across, you know, almost all of our markets.

And it was very successful and we're going to be following up.

This month, we've launched Chicken Selects and in June we'll have a chicken flatbread on foccoccia bread and also fudge brownies that we're promoting on a national basis, that will be part of our new taste menu, which is our efforts to brand varieties.

So that people know that when they come into their stores, there will always be something new.

And we rotate those every six to eight weeks.

But I would just add, quarterly, that as we - as I commented on, I think, in the remarks, we are expecting a pickup in U.S. performance in the second half of the year.

So, we wouldn't necessary expect dramatically different results in the second quarter.

Thank you.

And our next question comes from

of CIBC.

Thanks.

A couple of questions on the U.S. margins.

One is could you desegregate how much of a benefit you got in the U.S. from the reduction of ad spending versus the G&A - the D&A elimination.

And also, is there any, you know, lower sales in March?

This also implied maybe you did a little less discounting in there for that improved margins, comments on the competitive environment.

And then, finally, with respect to the payments to the franchisees for the front counter service, is any of that - go into the second quarter or is that all done in this quarter?

Thanks.

, I'll take the first questions having to do with the U.S. margins.

The national spending that each of our restaurants commits to went from 1.85 percent to 1.5 percent.

So, 35 basis points for the average restaurant are no longer being spent in a national fund.

The issue then becomes whether those company operated restaurants are contributing any of that savings to local advertising costs.

In some cases, they are.

In some cases they aren't.

So that 35 basis points - some number less than that is contributing to the margin improvement.

And then, most of the balance is attributable to the elimination of goodwill amortization.

Which was about 50 basis points improvement in the margin.

The $22 million of payments on our operators,

, all took place in the first quarter - that expense is in the other operating income and the cash was also paid out during that period.

In terms of your question on less discounting in March versus otherwise, I'm not really sure about that.

I don't think I have enough facts to comment on that.

Again, you know, we have an everyday value offering in 4,000 plus restaurants, at least, in the United States.

And that's every day.

And now other markets are doing things on kind of localized window basis and maybe different days of the week.

So, I don't think that was a significant factor.

Thank you.

And our next question comes from

of Salomon Smith Barney.

Hi.

I just wanted to say, first off, I think it's a good idea that you're putting in a little bit more explicit same store sales information by region so I wanted to thank for your that.

Two questions, first, just regarding the March sales in Europe which look very good, just wondering, what might lead you to believe that those types of sales levels might be either sustainable or not sustainable?

And the second question has to do with the mystery shops that have been conducted in the U.S.

I was just wondering, is there any noticeable difference between how the franchise restaurants are scoring and the company owned restaurants are scoring?

Thanks.

, I'll take the first question on Europe March sales.

I think we did comment that the shift if Easter from April last year into March this year we think helped our sales in Europe for the month.

And so that's one reason, we wouldn't necessarily say that that's very comp sales levels that we achieved in March and Europe is sustainable.

I think if you put in perspective our target for the year in terms of Europe sales being in the high single digits, and for the quarter they were - it was up 10 percent.

So, you know, we're not talking about a huge follow up relative to the quarter's performance, but I do think March was probably stronger than that.

And particularly, in Germany, their sales were driven also partly by the introduction of some new product.

And they have some additional plans as we move throughout this quarter, however, as we all know, you know, sometimes new product introductions can give you an initial boost that doesn't necessarily sustain the debt level either.

So we feel good about our expectation to achieve high single digit growth in Europe sales for the year, but that would be slightly off of what - the level for March.

And I'll take the mystery shop question.

Through the end of March we've now mystery shopped 40,000 times that's roughly three times per store in the U.S.

And the results are fairly consistent with what we reported to you on the interim update that you know we're seeing about the same issues showing up in our company operated and our franchise stores.

I can't, you know, report that we're doing a whole lot better in one area versus another company operated versus franchise.

Our biggest opportunities in both company operated and franchise stores are in the service area.

I think we've mentioned that we're setting a very, very high standard for ourselves well above the standard for the industry.

And on the basis of that very high standard we're finding that about half of our stores are not currently meeting that standard.

Thank you.

And our next question comes from

of Sun Trust.

Thanks very much.

Matt, you brought up the subject of your, you know, evaluating your alternatives in Japan.

I just wanted what are those alternatives?

And Mary if you had the same store sales data for the second quarter that would be very helpful?

Thank you.

Thanks

.

Our alternatives in Japan - some of it has to do with the way we offer everyday value in Japan.

We did shift from last year to this.

We had, towards the end of last year, we had a weekday value menu.

And, for a number of reasons, we decided to eliminate it.

And that has had an effect on our sales.

And we replaced it with more of an approach to every day value.

And we're evaluating whether or not that has worked and the right way to offer value to our customers in Japan.

You know, we're also certainly looking at different uses for chicken.

And we had an issue involving our McNuggets, which had a reasonably significant effect in March.

And we're through that problem now and our source of supply is continuing.

And that is probably also a factor in our results.

, second quarter comparable sales for Japan last year were slightly negative for the quarter.

Thank you.

And our next question comes from

of UBS Warburg.

Good afternoon.

I just have a couple of quick ones.

First, on the initiatives.

What do you still have in - have on the docket that you haven't fully implemented, such as the 800 numbers and anything else?

Secondly, I notice a predominant push towards chicken on your new products.

Are there any potential new burgers that are on the road?

And third is, just on the marketing side, have you heard any backlash from franchisees within your system, that the message is still confusing?

Thank you.

Hi,

.

This is Matt.

I'll try to take the first and last questions and I'll ask Mary to take the middle question.

One the initiatives in the U.S., the 800 number, this coming month, will begin being rolled out and it will in all of our stores and operational by mid-July.

And it includes very detailed systems and, you know, new uses of technology to aid us in customer recovery.

We will recover every customer or contact every customer that has an issue within 48 hours.

So, that is not out there yet.

That is yet to arrive.

And, in addition, the - on the mystery shops and the grading of restaurants, we're very early in the process.

So, at this point, our operation consultants are visiting the restaurant, doing what we call systems days.

We're through all of the training.

We've described the process.

We've begun the mystery shops.

But what's going to happen is that all this data will come together and the ops consultants will meet with the franchisee or the store manager and talk about where the opportunities for improvement are.

And focus our resources on those opportunities.

That isn't happening yet.

The other pieces of this are that we have employee commitment surveys that'll tell us what we need to do to better motivate our employees in the stores.

And we don't have that information in hand yet.

And lastly, they're the incentives in our company owned stores for the manager's to improve performance and take better care of those customers, we won't begin paying those incentives until the second quarter of 2002.

And on the marketing issue, I think your question was are there concerns that our franchises have about our marketing?

I think that the franchisees and the company agree that we can and will do a better job by focusing fewer messages.

I think that we're in some cases cluttering the airways and the minds of our customers with what our messages are.

And we need to have fewer and more focused messages.

And I think we and the franchises all agree on that.

, I think your comment relates to the products that we've been featuring on our new taste menu and there has been an emphasis on chicken products.

As I think you're all aware there has been a shift in eating habits in the U.S., we're all eating more chicken these days.

We also have a very strong line up of burgers on our core menu.

So I think we view the new taste menu as an opportunity to go into - some products are a little bit different than what we've got on the core menu.

The idea of the chicken select seems something that plays to McDonald's strength's I think in that

it's easy to eat on the run.

And we have had some success with chicken, but the chicken selects are a different, you know, type of offering.

And then with the upcoming chicken flat bread sandwich that too again it's something different.

And what we're hearing from customers is they want to see something really different on the new taste menu and not necessarily just a burger with a different topping.

Not to say that we won't use the new taste menu for some hamburger offerings in the future but in the near term you'll probably see us continue with this focus on things that will be really new and different.

Thanks.

And our next question comes from

of Bank of America.

Hi, folks, two questions.

First on European company operated margins flattish for the first quarter with the solid five percent comps.

Can you address leverage in the business?

I assume front counter cost with the euro introduction probably had some impact, and if so anyway to quantify?

And then secondly, G&A costs were down on a dollar basis in the first quarter.

I know we've got $100 million of savings expected from what you thought ongoing levels would have been, but I didn't think G&A would be down on a dollar amount, is that going to continue?

, this is Matt.

I'll deal with the G&A issue.

And I'll take a stab at the margin issue and I'll ask Mary to jump in.

On the G&A issue, for the - you have to remember that a lot of our G&A doesn't roll out

throughout the year.

There are some projects that are more likely to contribute bigger dollars towards G&A, in the third and fourth quarters of the year.

And so, the best we can tell you is you shouldn't, you know, take this quarter's result and multiply it by four to come up with the G&A for the year.

That wouldn't work too well.

And we're going to save $100 million off of what we otherwise would have spent.

Other than that, probably, can't give you too much help.

On the issue about Europe's company operated margins, what's going on there is that the big three markets, while they all had improved margins - percentages over last year, when you get beyond the big three - you know, sort of the mid-tier market in Europe, there's a lot of activity.

Some of the big - some of those markets had to do a lot of importing of beef, which increased our food costs.

And in other markets, where the brand is a little bit newer to the market, we're still in a growth stage where we're trying to build habits.

And it's in some of those markets we never expected our margins to be real strong.

And that's pulling down the average a bit.

And lastly, I would remind you that we said in October at the analyst meeting that, for the year, we expected our overall operating margins to be about flat with last year.

And then, the last piece of it - go ahead, Mary.

I was just going to add - one of the factors we were aware of in that - influenced our guidance on margins for the year was the fact that we are seeing a lot of pressure on labor costs in the big three market.

And I commented - or Matt commented on that, I think, in our remarks.

So, while we did have an increase in margin

point, we might not have seen as much leverage as we would have liked, had labor costs not been up as much as they had been in all three of our major markets.

Thank you.

Thanks.

And our next question comes from

of Bear Stearns.

The question's basically on the same topic.

in Europe.

With Easter falling on March 31, how much benefit do you think you really picked up in the month of March?

I mean, just kind of discuss how that might have impacted the business, you know, happening the very last day of March.

And then, would you elaborate a little bit on the food cost?

You mentioned importing beef.

Why did that occur or were there some other food cost items that penalized margins?

And then, very lastly, if you would just address Canada, which looked like it had a very soft quarter.

, we estimate that the shift in Easter from April to March, probably, positively influenced comparable sales for the quarter by three-quarters to a point in Europe.

And it, you know, for the - so, for the month of March, it was closer to, you know, between two and three points on the comparable sales in March - the month, actually, of March.

In terms of the importation of beef, one example, in particular, was in Russia, where there was an issue in Russia where there were concerns about Russian beef.

And so they began importing beef from Australia and it was at a much higher cost than the Russian beef.

We believe that that situation has been resolved now and in the near future we'll be able to start using Russian beef again.

Although, what we hear is that that cost has increased so it won't be quite like going back to last year's cost.

That we'll still see some increase on, you know, some pressure on that.

And then there was another market, Sweden, that I think we had a similar situation.

There were a couple of other markets that had some changes in ownership or there was at least one other market that had kind of a shift in ownership, bought some franchise restaurants and those restaurants were under performing.

And those had lower sales that impacted their company operating margin at that market.

I think the final question was about Canada, and that's mostly just about a comparison to a very strong quarter last year.

I think the count for Canada was over four percent in the first quarter of last year.

Thank you.

Thank you.

And our next question comes from

of CSFB.

Hi.

Thanks.

A couple of questions.

On the U.S. domestic your - it looks like your sales were down year-over-year but your comps were flat and your units were actually a little.

So could you comment on why it looks like average unit volumes were down a bit in the U.S.?

Also, if you look at Germany, France, U.K., obviously, Germany and France were hurt by Mad Cow.

France seems to come back pretty strong.

Germany hasn't.

Do you have - you're really overlapping some very easy sales comparisons and it doesn't look like you've gotten the customers that you lost back.

Do you think there's been a permanent loss of customers in Europe from Mad Cow?

And then just finally, you talked a lot about Chicken Parmesan, can you talk about the chicken selects and how that's do?

Yeah, and

, if I could just clarify your first question, because I'm - are your talking about U.S. company operated...

Company operated, correct.

OK.

Yeah.

Yeah, you know that I have to look at it.

I haven't looked at in that level of detail.

That's something we might have to get back to you on.

I'm not sure if there was, you know, an ownership shift will sometime depends on when that happens during the quarter.

And so I'll follow up on that.

OK.

Thanks.

And the other two?

The..

On Germany, we were plus high single digits for March.

So, you know, we've recovered what we loss in BSC in really all of the markets in Europe.

So I think that we've come back nicely there.

I don't think there's been a shift in consumption patterns.

And I don't think that our customers have failed to come back.

I think they've come back in larger numbers.

And then lastly, on the chicken select issue, I haven't seen all of the numbers for the U.S.

I know that in the central division which is one-third of the U.S. that the chicken select offering is about 50 percent more popular than chicken parmesan, in terms of the number of people who tried it in the first six or seven days that we've had it on the menu.

So, it is doing well, as a separate item.

And,

, I think, on the

issue in Germany, in particular, we had commented last month when we talked about Germany, that some of the promotions they ran in the first couple months of the year just did not resonate with consumers.

But we view that more as just a marketing effort that didn't do well versus something fundamental, in terms of the consumer habits.

Thanks.

And our next question comes from

of Wacovia Securities.

Hello.

I wonder if you could give us an update on your United States beef sourcing strategies and how international is now being integrated in that.

And what's leading to that and what your outlook is.

Sure,

.

Our beef sourcing strategy, you know, for years and years and years - forever, all of our beef came from the U.S.

There is a shortage of lean beef in the U.S. and, as a result, prices are a little higher.

And we have tried a very tiny experiment in a few markets in the Southeast.

I think those few markets are taking - 20 to 30 percent of their beef supply is coming from, I think, Australia and New Zealand.

It's an experiment.

You know, we still expect the vast majority of our beef will continue to come from the U.S.

And the sources from which we're now taking some of our beef are places where the USDA does inspect both in those other countries and when the beef arrives here.

And if you look at it as a percentage of our total purchases of beef, I think it's tiny.

It's probably one percent or less.

But for the markets where we're experimenting with it, it's 20 to 30 percent of beef purchases in those markets.

And it's an issue about which we're incredibly sensitive.

You know, we have a terrific relationship with the beef producers here in the U.S.

We're going to do this in a way that, you know, doesn't cause a lot of commotion among the beef producers.

And we're going to wait and see how this goes and, obviously, we're looking at the cost savings versus the public relations issues that it creates for us.

It's just a test.

Thank you.

Thanks.

And our next question comes from

of

.

Can you please give your strategic rationale - why did you did decide to accelerate store openings in the United States compared to the last three or four years?

Sure,

.

You know, we have, over the last five years, seen a nice increase in our average sales volumes for new U.S. restaurants.

And that has come about, we think, partly because of a pull back on total openings in the U.S. so it caused us to just get higher quality sites overall.

And we - so that has encouraged us I think in terms of opening additional stores.

And we've been achieving good returns on those investments that we're making in the U.S.

So that combined with the opportunities we have for relocating restaurants which we sometimes do given the maturity of the United States.

And rebuilding restaurants we think continues to give us an opportunity to add, you know, 300 or so restaurants in the U.S. as we move forward.

It's about two percent on our total base so it's not a huge part of our growth in the U.S.

But with growing areas in the U.S., areas growing in population, we want to be where the customers are.

And so that we want to continue to take advantage of those opportunities, as long as we and our franchises are earning good returns on those restaurants.

Thank you.

And our next question comes from

of Lehman Brothers.

Thank you.

A few questions.

First can you comment why you did lower your advertising dollars in the U.S.?

And will it return to the previous percentage level at some point?

Second, the front counter service operation, would you say that's more of a customer service initiative versus a speed of service initiative?

I guess in others words, do you think it will increase speed of service?

And lastly on interest expense can you comment on what it might hand out to be for the full year?

Thank you.

, I'll take the first one about the lower advertising.

We lowered the national spend from 1.8 percent to 1.5.

It was a one year lowering.

We have a commitment from our franchisees that if we think it all makes sense we'll go back to 1.85.

And in many cases, some of the money that is not being spend nationally is being spent in local coops.

But let me emphasize that there a couple of factors going on here.

It really didn't effect the amount of national media advertising we're doing partly because media costs are down a little bit.

And also because some of the national money we're no longer spending was going to sponsorships.

I think we for instance we ceased our sponsorship of NASCAR as an example.

On the interest expense issue, you know we've learned very early, and our career is not to try to predict where interest rates will go.

It's very clear to us that, you know, Mr. Greenspan doesn't plan on doing anything in the next couple of months, but we don't know what things will look like in the second half of the year.

And as a reminder, I know, you know, that at this point in time, roughly 55 percent of our debts it floating rate debts.

And that's the reason, you know, we expect interest rates to go up.

And because a lot of our debt is floating rate right now, we wouldn't expect that 24 percent decline in interest expense to stay at that level through the remainder of the year.

And maybe the percent, later in the year, would be half that number.

For the full year.

For the full year.

Yeah.

I think on the front counter service changes,

, I guess we would say that we think that those changes can give customers a friendlier, more efficient experience.

So, I think, on - it's a combination of both better customer service because they are dealing with one person taking their order and that allows us to kind of position crew people who are strongest at customer interaction and at customer service at those registers.

And then, in addition, it's a very similar system to really what we use for our drive through today.

And we know that when we focus on drive through speed of service, we can cut down that time.

So, we have - you know, I wouldn't say we have it perfect yet.

I think that through our restaurant operations improvement process, this will be one of the areas that will be improved as we go through and get feedback, both from customers, through the mystery shopper program, as well as through our own internal evaluations of evaluating each system in the restaurant.

So, we are, right now, trying to make sure that, within each of our restaurants, the systems that are in place are being used most effectively.

And so, I think that front counter system will be those.

That it's not, you know, it's not a panacea, moving to that new system, but we do think it gives us the opportunity to reduce service times as well as give customers a better experience.

Thanks.

And our next question comes from

of

Capital.

Yes.

Thank you, very much.

I would like to ask to - ask you to address competitive dynamics in Japan.

For example, I understand that Starbucks is offering food, but McDonald's has responded by offering upscale gourmet coffee in its restaurants.

, I will try to cover the situation going on there.

You're exactly right.

You know, Starbucks has grown quickly in Japan.

And we all know they went public a few months back.

I think they are trying to offer some food, but I'd like to point out that, you know, they have, probably, a couple of hundred restaurants attempting to offer food.

We have 4,000 stores.

And we're offering premium coffee, probably, in, you know, three times as many stores as Starbucks has in Japan.

And we view coffee as a big opportunity for us.

Some of the stores that are offering coffee are also offering some premium pastries.

So, you know, we agree, it's a competitive environment, but we think that our premiere real estate locations and the power of our brand really give us a big advantage of that market.

You know, a quick reminder, our market share in Japan over the last 10 years which have been a touch 10 years in that economy our market share has gone up 15 percent points.

Thank you.

And our next question comes from

of Merrill Lynch.

Hi, good afternoon.

Actually a different twist on the whole Mad Cow situation for bot Europe and Japan.

Do you have a sense as to where beef mix is Europe now versus say pre BSE?

And actually, do you have a sense as to the damage as to what that mix looks like in Japan?

And then on other note, now that we've got kind of a country by country break down of unit count for full year '01 it's clear you had net closings in a number of markets.

And Matt, I was just curious, if you think about your watch list of whether it be units or even markets that probably deserve a little more attention, how far along are you on this process of addressing some of the under performers?

Particularly on what could be, you know, some soft economies for some time?

Thanks.

Hi,

.

I think relative to the beef product mix, maybe I can answer that.

We're pretty much back to where were pre BSE levels.

I think I can say that.

I'm not sure about Japan.

And Japan, just by way of reminder

, the beef mix in Japan was probably before all of this started the lowest percentage of product mix of any of our big eight markets.

And so it was low to begin with.

Clearly, part of what's going on in Japan is that there is a concern about beef, and our brand is associated with beef and that is having some effect.

So it's not like people were eating a lot of beef before this all started.

We always sold a lot of pork and fish and chicken products in our Japanese stores.

The issue in Japan too is that I think consumers have somewhat lost confidence in some of the government entities that are supposed to be regulating overall food safety because of some issues that have arisen.

So it seems that there might be just, you know, a hesitancy on the part of some consumers to be eating out.

And then lastly,

, I think you had questions about under performing markets.

You know we took a pretty careful look at 15 or 20 markets, many of them in Latin America, a small number in Asia where we didn't like our returns.

And we always do this, you know, risk-reward analysis, what kind of capital are we putting at risk?

And what does success look like?

And we decided for the next few years in some of these markets that we didn't like the risk reward ratio, so we dramatically pared back capital, and I know you're familiar with that.

And in Latin America, we're opening probably a third or a fourth as many stores as we did a few years ago.

The same thing is true in some other markets.

But it's limited to Latin America and some small parts of Asia.

The other thing we're doing for the markets, where we're not putting in additional capita, we're also - each market has developed a plan to get to cash flow break even.

And we're very carefully monitoring that plan.

But I don't want to give you the impression that we're completely pulling out of markets.

That's not happening.

But we're being very, very careful with the capital we commit and, in many cases, we're dramatically cutting G&A and getting, you know, alternative sources of supply chain in order to help us bring down costs in line with, you know, the sales opportunities that exist in those markets.

And a large part of this, especially in Latin America, is that the middle class, which we depend on for our success, has shrunk and, you know, we don't think it's going to bounce back in six months.

It could bounce back in some of these markets in a year or two and we're trying to right size for the opportunity.

Thank you.

And our next question comes from

of JP Morgan.

Oh, hi.

Thanks.

If we look at the stores that maybe were at the proper, you know, service attributes from a

perspective, were they doing anything different in terms of staffing levels or what they're paying, you know, their staff relative to a, you know, a control, perhaps, in that same market, that were not at proper service levels?

In other words, is it anything structural or is it just, generally, better management from your outside perspective right now.

Thanks.

, I'll take a stab at this.

I don't think it's structural.

I think that you find that the stores that are doing the better job, probably have less turnover in store managers.

They probably have more incentives that they provide for the store managers.

They probably have more incentives that they provide for the store managers.

And, in some cases, you'll find it's just the presence of the franchisee in the store on more regular basis makes a difference.

But I don't think it's anything that we could say is structural.

We're in the process of trying to decompose all the data that we're collecting.

One of the interesting things that we've seen is that when we looked at the first month-and-a-half worth of mystery shops, we looked at one market in a lot of detail and we found that the stores that had the very highest

scores, compared to the TV market they were in, had comps that were more than seven points higher than the stores that had the worst

.

And you know, that kind of information is very motivating to us.

But I don't yet have any single thing we can point to, to say this one item makes the difference.

I think that we believe, when we look at our company operated stores, that incentives for the manager of the store that are tied to

and to measurable items, are a key part of this.

And so, in the stores where we have complete control - the 15 percent that are company operated stores - this quarter, we're beginning, you know, significant bonus payments to store managers who do a good job of taking care of their customers.

And the amount of bonus that can be earned by a store manager of a company-operated store is several multiples of what it used to be.

Thank you.

And our next question comes from

of U.S. Bank.

Mary, you mentioned, I want to go back to the value test and maybe using this as a proxy for the roll out for other parts of the country.

But I think your comment was that L.A. is satisfied with early results of the value testing.

You mentioned that there's been changes to that test in the production of items.

Can you tell us what does satisfied with early results me?

Can you give us a sense for, you know, sales have moved from X to X plus, as a barometer, please?

Yeah, I think, you know, and I was careful to say they're not satisfied with their sales trends, because again, as I had mentioned, you know, they've had negative comparable sales in that market.

But they've had negative comparable sales for a little bit of time now.

And they were one of the markets that had been very aggressive with a value strategy in terms of a - kind of a 29-39 strategy on certain days of the week.

And so they were - they had moved off of that and now were trying a new approach.

When I say they're satisfied with it, I say that they're satisfied that they're getting incremental sales and profits from this piece of this strategy.

I don't know what their numbers, you know they've only been doing since January and then they made some changes in March, so I can't tell you what the full three month results are.

But clearly when we were looking at this back even in February, before they made the changes, they were saying it was adding incremental sales.

They fully recognized that it wasn't enough to completely turnaround their sales trends and they needed to be doing some other things.

So, you know, I think well one thing we've learned is that combined efforts in our business are what work best.

You can't necessarily rely on just one driver of your sales and that's because customers, you know, different customers are motivated by many different factors.

So the - we continue to believe that every day value is an important motivator for a group of customers and we want to find the most effective way to deliver that to them.

But at the same time, as you see in the marketplace, we're also looking to try to add variety and brand that variety through our new taste menu.

Thanks.

And our next question comes from

of Robertson Stephens.

Hi, good afternoon.

Some follow ups.

First European franchise margins which were up 50 basis point.

Can you talk about if that was a more normalized level since we're through most of the rent relief?

B, following up on the interest expense comment you said the year, I guess the full year could decline could be half.

So should be at a flat year-over-year run rate on the interest expense by year end?

And then just quickly if you can comment on Latin America, not much talked about it.

Could talk about Brazil?

You talked about Argentina pulling the sales down.

Are we seeing some turnaround or some flattening performance in Brazil?

Thank you.

OK.

, your first question on Europe, you know, their rent relief is less now that business has bounced back.

So, that was one factor that is helping the franchise margin year over year.

And also, then, just the strength of their comparable sales performance.

So, whether this is a normalized run rate, again, their comps were pretty strong in the first quarter, particularly in March.

So, I think if business continues to stay strong, which we expect it will, I would think there's - you know, it's probably reasonable to assume that we could see some pickup in the franchise margin for the year in Europe, just driven by the strong comparable sales results.

And on the interest expense, I don't think we're going to try to predict what interest expense will be in the fourth quarter.

And we're reasonably comfortable saying that we're not going to be down 24 percent for the whole year.

And maybe, you know, we'll be down half that for the whole year.

But, you know, quarter by quarter, we're not going to try to predict what it will be.

Again, about 55 percent of our debt portfolio is floating rate interest right now.

I don't expect that number to change, significantly, by the end of the year.

So,

, you can kind of make your own prediction about what will happen to floating rate interest rates and apply that to our debt portfolio and probably come up with your own number, which might be as good as ours.

And then, on the issue of Brazil and Argentina, just, you know, some very broad guidance.

Brazil is far and away the biggest market.

Latin America was negative 5.5.

But I think it's safe to say that Argentina's comp was a little worse that the overall Latin America comp for the quarter.

And Brazil's was a little better than the overall.

Thank you.

And our next question comes from

of Victory Capital Management.

Hi, Matt.

Hi, Mary.

I had a question about your presence in the salad category in the U.S.

I'm wondering if you could give us some information on salads as a percent of your sales, how they performed in the first quarter.

And then, if there are any kind of new salad products in test market right now.

Thank you.

, we don't disclose, you know, product mix data.

So, I can't give you what salads were as a percent of product mix.

I think it's fair to say that salads at McDonald's have typically been what we - what we call a product we have on the menu somewhat to offset a veto vote.

So, if you're with a group of people and one person wants a salad, we want that group to be able to come to McDonald's.

It's not a huge driver of our business.

You know, most people are not coming to McDonald's for salads.

Having said that, I think that our new Shaker Salad program kind of reinvigorated our salad business when we introduced it a couple of years ago.

And we certainly have been watching what one of our competitors has recently done with their new salad program with interest.

Now, again, I think, you know, they're customer base is a little bit different than hours.

I think it's probably always been a little bit more - a customer that's a little bit more driven by that type of a product.

But we are right now looking at a couple of options with our salads but it's way too early to comment on where we'll, you know, where those decisions will come out.

But there is some work being done.

I don't believe any of it is in the restaurants right now.

So I don't think there's any test markets that I could point you to.

The shaker salads did improve our mix of business that was driven by salads, but it's not one of the major drivers clearly of our business.

With that, I think we'll wrap up.

We're right at the hour timeframe here.

So I'd like to ask Matt to conclude with a brief comment.

Thanks, Mary.

We've done a lot of work in our markets around the world implementing our initiatives to grow sales and profits.

And in the first quarter we've seen some signs of improvement as a result of those in initiatives.

But let me be completely clear we still have a lot of work to do.

But I believe we have taken the right steps to meet our customer's needs and to achieve our goals.

Mary and I thank you for your interest in McDonald's and goodbye.

Thank you for attending today's conference call.

You may all disconnect at this time.