麥當勞 (MCD) 2002 Q3 法說會逐字稿

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Your conference is about to begin.

Hello, and welcome to the McDonald's October 22, 2002, investor conference call.

At this time, I'd like to turn the conference over to Miss Mary Healy, Vice President of Investor Relations.

You may begin.

Hello, everyone.

And welcome this conference call is being webcast live and recorded for replay on the Web.

Earlier today, we issued a press release with our third quarter results.

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

Our third quarter performance was in line with the expectations we outlined last month and the details are in this morning's release.

We know your primary interest is our plan for 2003.

So we will spend most of our time today on that.

I am joined by Matthew Paull, our CFO, Mike Roberts, President of McDonald's USA, and Jack Greenberg, our Chairman an CEO, who will begin our prepared remarks.

Jack?

Well, good morning!

We're here on the call again after what to our people feels like the longest month in our history.

The stock market's reaction to our September third quarter update and US initiatives has been very painful and upsetting.

In fact, it's been a difficult year for you, our investors, and for our people.

You should know that the worldwide McDonald's system has an intense sense of urgency on improving the momentum of our business as I do.

Our entire management team is committed to optimizing the existing business during this challenging economic and world environment.

You should also know that McDonald's fundamental business model is strong even with all the worldwide cyclical factors that have negatively affected us the last couple of years, there is positive news to report.

As disappointed as we are in the third quarter results, McDonald's earnings per share before special items this year and last are up 5 percent through September.

Importantly in the US, we see increases in sales in the first few days of the national value campaign.

Equally important, we continue to see improvement in restaurant operations in the United States based on mystery shop scores and the recent survey on drive-through performance.

Mike will tell you more about these in a few minutes.

In the last few months our under the circumstances company operated restaurants have outperformed franchise restaurants in sales growth and -- franchise restaurants in sales growth and profitability.

It's been an important goal.

But in part due to the US organizational changes made late last year, we are seeing progress.

In Brazil, our largest Latin-American market, we generated positive comparable sales each month throughout the quarter giving us the strongest quarterly sales performance years.

In Europe, we continue to have good momentum in France and have increased our market share against our major quick service restaurant competitors in the UK.

In Germany, we have maintained our share despite a declining eating-out market.

For perspective, it's useful to reflect on the fundamental attributes of our business.

We fill a basic need.

People want to eat out more often.

Convenience and saving time are important to people as is value.

A break from the hassles of daily life and the reward of an occasional indulgence are also clear needs.

Few of the companies you own or follow are in businesses that fill such basic needs or are so well positioned to take advantage of them.

We have a strategy to grow this business.

We have a plan.

In the short term, our strategy is to optimize the existing business.

We recognize the world has changed and right now optimizing our current restaurant base is our first priority.

Optimizing includes intense focus on building comparable sales, dramatic reduction in new restaurant openings, reallocation of capital from reduced openings to reinvest in existing restaurants to build comparable sales.

And review the small number of international markets for possible restructure.

Our success has always required an appropriate balance between new restaurant openings and comparable sales growth.

Optimizing the existing business requires a change of emphasis to more aggressively grow same-store sales.

Our longer-term strategy is about growing the business.

It's about being the world's best quick-service restaurant experience.

About evolving the brand and experience to stay relevant and about developing concepts that grow the business with examples like McDonald's with the diner inside, the recently opened three in one restaurant and Chipotle.

All of this effort is about taking one of the 10 best brands in the world and making it the world's best brand.

We are very confident of the opportunities for long-term growth just as we are committed to optimizing the existing business for now.

With that, I'll ask Matthew to update you on our capital allocation plans.

Thanks, Jack.

As you've probably noted in today's release, we expect capital expenditures to total about $1.9 billion in 2003. 100 million less than expected for this year.

I'll walk you through how we arrived at this amount and some of our key considerations.

While we don't expect total capital spending to be dramatically different year over year, how we allocate those dollars is quite different.

Please be aware, our 2002 expenditures are not yet final, so when I talk about changes versus 2002, the amounts are estimates.

Still, the direction and trends are very clear.

We are focusing on our existing business.

Thus, we will dramatically reduce the amount of capital spent on new restaurants in 2003 by nearly $500 million, or almost 40 percent.

We will invest almost $100 million of these savings in new buildings for US franchise restaurants.

As most of you know, over the past few years, US owner-operators had the opportunity to own the buildings themselves.

While reducing their rent, it had the effect of increasing their leverage.

We are making this change to where we will own new franchise buildings in order to ensure that our best owner-operators, those with whom we want to grow, have the financial flexibility to invest in more restaurants and reinvest in their existing restaurants.

Of course, as a result of our owning these new buildings, our rent revenues will increase providing a good return on our investments.

Our total expenditure on new restaurants in 2003 will be about $875 million.

Of this, about $750 million will be invested in new McDonald's restaurants and $125 million will be invested in partner brand restaurants.

We will double the number of Chipotle openings to about 140 in 2003, as it continues to post strong comparable sales and unit level returns.

In 2003, we will increase the capital spending on existing restaurants by about $225 million for a total of $825 million.

These investments in refreshing, remodeling and rebuilding restaurants around the world include the $300 to $400 million planned for US franchised restaurants.

The balance of our capital expenditures will be for other assets.

This gives you a broad perspective on the overall capital budget for 2003.

Now let's turn to how we will prioritize new capital investments.

A few people have suggested that we eliminate expansion completely in 2003.

We think this is extreme.

More importantly, we think it would be the wrong decision for shareholders because we firmly believe we have tremendous opportunity to grow restaurants profitably.

We develop our expansion plans considering each market's return on investment trends, comparable sales trends, new restaurant performance, the competitive situation, maturity, potential for scale, short and long-term economic outlook and finally demographics.

We also take a very hard look at returns on incremental invested capital over a period of several years.

While could you argue for a shorter time frame, we believe that a multi-year period gives a better perspective.

We combine this with the review of over all annual review of capital and expect new returns on restaurants in a marketplace.

For example, our five-year returns on incremental invested markets in some markets in Asia-Pacific and Latin America have frankly been very disappointing.

Clearly they have been affected by deteriorating economies.

In fact, returns here were generally very strong only a few years ago.

The intervening years brought a great deal of economic turmoil, and as a result, our operating results and returns declined.

Over the past few years, we have imposed much more stringent criteria for expansion.

Still, in reviewing recent results, we knew we needed to continue to adjust our expectations for growth and our related opening plans.

So in 2003, we plan to reduce capital expenditures in Asia-Pacific and Latin America by more than 40 percent or nearly $200 million compared with 2001.

We'll spend less than 15 percent of our total capital here, and most of that will go to a few selected markets.

For example, our plans call for more than 100 new restaurants in China this year and next as this market is showing great potential.

It has produced a steadily increasing return on investment from single digits in 1998 to low teens last year.

With a population of 1.25 billion people and just over 500 McDonald's restaurants we have barely scratched the surface.

As we continue to grow in China, we will achieve increasing economies of scale which in turn will continue to improve our returns.

In general, our five-year returns on incremental invested capital in Europe, the United States and Canada have been very strong.

Accordingly, we are investing nearly 85 percent of our restaurant capital in these segments.

We certainly want to acknowledge that even within these higher return segments there are certain markets where we plan very little new growth.

For the time being, in those markets, we will maintain our presence and focus on existing restaurants to grow our customer base.

The headline here is that we are dramatically reducing expansion and concentrating our openings in a few strategic markets.

In fact, in 2003, there are only 11 markets worldwide in which we expect to add more than 10 restaurants.

Overall in 2003, we'll add about 600 net traditional McDonald's restaurants globally.

This is about 450 fewer traditional McDonald's restaurants than in 2002 and 510 fewer than 2001.

Net traditional openings by segment are expected to be about 210 in Europe, 200 in Asia-Pacific, 100 in the US, 70 in Canada, and less than 20 in Latin America.

By the way, so far, I've talked exclusively about traditional restaurants because while we will open some satellite, these require relatively little capital investment and this investment is already incorporated in the capital figures I have given you.

We obviously don't have a final cash flow statement for 2002 at this time.

And we aren't going to forecast next year's results today, so please don't take this as a projection.

But just to put our capital plans in perspective, let's assume cash from operations grows about 5 percent annually both this year and next.

That would make 2003 cash from operations approximately $3 billion.

Deducting $1.9 billion for capital expenditures leaves $1.1 billion.

We currently expect to use these funds to buy back at least $500 million of stock, pay dividends of more than $300 million, increase the number of company-operated restaurants in the US, fund other investments as needed, and invest in technology.

I'll spend just a moment on our technology plan.

We will continue a long-term project to leverage our size to an even greater degree and maximize our efficiency by standardizing processes, restaurant technology platforms, and information across markets.

This project will primarily benefit the supply chain and operations aspects of our business.

With that, I'll turn the call over to Mike to update you on our US initiatives.

Thanks very much, Matt.

McDonald's USA as you know operates 13,000 restaurants and serves 20 million customers each day.

We are proud to hold a higher market share than Burger King and Wendy's combined.

And today, one of our biggest advantages is our entire system and its aligned focus behind one strategy.

That focus is working, and we're seeing results.

These strengths are why I'm extremely optimistic that we're moving in the right direction and gaining positive momentum.

We're beginning to move the needle on service.

Our mystery shop measurements prove it, and the most recent drive-through study validates it with our rise from 10th place a year ago to 4th place this year.

Let's take a closer look at these results.

We've conducted more than 137,000 mystery shops since February, and the scores indicate we are improving.

We've set extremely high standards for execution in our restaurants, and we're seeing some positive movement.

Especially noteworthy are the service scores up more than 3 percentage points since February.

And when we brake down our service scores, we note that fast is up 4 points, friendly is up 4 points in the same period, and the accuracy score already high, but it's even higher now increasing more than 1 point itself.

Quantity and cleanliness scores also high, to begin with but they have increased since February over a point.

The restaurant operations improvement process has proven itself as the right tool to improve our business.

It lets our restaurant managers and owner-operators collect and act on objective restaurant-specific data and identifies areas needing improvement.

ROIP also creates an environment of accountability.

We know which restaurants are consistently meeting or failing to meet our QSC&V standards.

We are ranking restaurants now based on their mystery shop scores.

In the near future we will communicate that ranking to owner-operators and managers across the system so they know exactly where their restaurants place within their regions.

They will also know in which percentile they place nationally.

Restaurants will be flagged as underperformers if they consistently scoreless than 80 percent on our internal evaluations of quality, service and cleanliness, or if their mystery shop scores put them in the bottom 20 percent of our restaurants.

We are holding company-operated restaurants to the same high performance standards.

We have sold some underperforming restaurants to outstanding owner-operators or made company restaurant management changes.

We will use this objective data to hold tough conversations and discussions with underperforming owner-operators and restaurant managers.

We continue to focus on service emphasizing staffing, especially the peak hours of 11:00 to 1:00.

Our experience demonstrates restaurants that staff up for peak periods do a better job of satisfying our customers and increasing sales.

Take, for example, South Florida.

Even though we just recently implemented this service standard on a national basis, 81 restaurants in South Florida implemented this in July.

The results demonstrated that their average monthly sales were 2.3 percent higher than the rest of the region during the third quarter.

When considering just the lunch period, these 81 restaurants showed an even larger improvement of about 7 percent versus the rest of the region.

We will implement this peak staffing program in other key day parts.

We've improved our marketing.

With our current dollar offerings and upcoming dollar menu, we have one nationally-focused message.

The introduction dollar Big and Tasty and the dollar McChicken launched on October 4 is the first nationally advertised branded value campaign we have conducted since 1997.

In November, we will introduce the dollar menu which adds six more items to provide even more value and choice to our customers including side salads and parfaits.

The campaign is supported by new creative, pairing national personalities with our McDonaldland characters discussing the art of the deal and the great value at McDonald's.

You'll see commercials with more celebrities in the future, Donald Trump, Cedric the Entertainer, the Williams sisters, and more to come.

These spots are testing well with higher-than-average unaided awareness across all demographics and the value message awareness is also extremely high.

The results are encouraging.

In the first 14 days we have seen incremental sales increases of 1.5 to 2 percent above our trend line and our comparable sales are positive.

Our average check is also relatively stable.

One other critical part of our plan is making our restaurants more contemporary, unique and inviting through our reimaging plan.

We plan to remodel, relocate or rebuild in excess of 2,000 US restaurants over the next year.

As Matt said earlier, we plan to spend $300 to $400 million for these improvements and expect to generate a return based on increased sales or rent increases.

Our objective is to create a compelling choice for the customer that is clean, comfortable, unique and competitive.

Not every restaurant needs to be remodeled.

And we won't spend $150,000 on every restaurant.

We want to provide a superior service experience with the optimal drive-through and front counter configurations.

Examples of work to be done in these areas include reconfiguring drive-through paths and adding double-lane drive throughs or outside order-taking technology.

Inside the restaurants, we'll look at improvements such as expanding front counters and installing self-service beverage bars.

We also want to deliver clear uniform messages through consistent front counter and drive-through menu boards.

These include branded signage in the drive-through and new menu boards highlighting desserts, breakfast, the new taste menu, and the dollar menu.

And we want to create warm, inviting, and distinctive interiors tailored to the local customer base and their communities.

This could include anything from updating the bathroom to completely refurbishing the lobby and the dining room.

This initiative is about making our restaurants stand out in the marketplace and giving the customer a better experience.

As we previously discussed, we believe these investments in refreshing, remodeling and rebuilding our restaurants will drive sales increases and generate good returns.

Looking at company-operated restaurant remodels over the past four years, we had an average sales increase of nearly $200,000 with an average investment of $184,000.

This indicates that reinvestment in such things as dining rooms, exterior and interior signage, drive-through enhancements and menu boards works.

We are reviewing all of our restaurants now to determine what is actually required for each of them to enhance our customers' experience.

We will prioritize these investments based on need and QSC performance, and we plan to begin remodeling early next year.

One final note about the US business.

We'll continue to address our relevance with today's customers with new food news.

For example, our premium salad line which is now in 600 restaurants will roll out nationally next month and be advertised nationally in the spring.

And next year, we'll bring back strong performers like our chicken flatbread sandwich and introduce innovative new products like McGriddles, a combination of our hotcakes and breakfast sausage.

Our initiatives reimaging our restaurants, focusing on service and value, improving our menu and people practices, were designed to create growth by optimizing our core business, enhancing the customers' experience, and moving forward with a strong and profitable owner-operator base.

It's about reinventing McDonald's USA.

It's about who we are today and who our customers want us to be in the future.

I remain supremely confident in the course we're taking to drive the US business.

We have the unprecedented support of our entire owner-operator community, our employees are engaged, and my management team and me are committed and determined to make a difference.

To recap, we're improving service.

Not just the speed of it, but the experience of it, as well.

We've got a highly competitive value offer that's on national TV and print and radio that our customers are really responding to.

We have marketing now that people are talking about, creating a buzz, cutting through the clutter.

And as for our food, the best is yet to come.

All of this is my way of illustrating that McDonald's USA is on the move.

Thanks so much.

And now I'll turn the call back over to Mary.

Thanks, Mike.

We'll now open the call for your questions.

Please press star one if you have a question and Star 2 if you want to remove yourself from the question queue.

We would like to get to as many of you as possible so I'll ask for your cooperation again.

I'd like to you try to limit yourself to one question and press Star 1 again if you do have another question.

We do have one question that was presubmitted.

So perhaps I'll start with that one.

The questioner asked if we could address the $100 million that's being allocated to the new buildings for the US in terms of some flavor on how this will be spent.

I think we might have answered a little bit of this in our comments, but wondered if it was remodel money, relocation money and are we taking a more active position in real estate?

I can not tell you this is all new restaurants.

So it's not remodel money.

This is all new restaurants.

Some are relocations.

And keep in mind that the 100 openings, new additions in the US we talked about is a net number, so the gross number of traditional restaurants openings is higher and that would be where we are with the spending money on buildings.

And also keep in mind that we will have a higher rent percentage when we pay for these buildings that we'll collect from our franchisees and that will result in us earning a good return on these investments.

So the first question we have is from Michael Sharison.

Michael?

Thanks.

You talked about reducing unit openings.

Historically you talked about 4 to 5 percent of your growth coming from unit optimization.

What can we expect as we look at sort of a two to three-year time frame in terms of unit openings?

I know you have commented before that '04 would be lower than '03 and is part of this -- does part of this also include the acquisition of underperformers in terms of the cash that you are talking about for Cap Ex?

Thanks.

Michael, I'd like to clarify one point on that is first, the growth that we'll get from new unit openings in '03 really will come from our 2002 openings because as you know, most of our openings occur towards the end of the year.

So in terms of it looking at next year, you can probably look at around a 4 percent new sales growth rate from new unit openings.

And then the other thing I'd like to clarify is I don't think we have definitely decide what our 2004 openings will look like yet compared to '03.

As you know, we have just completed that process.

So clearly, I think that Jack sent the message that we're focused for the near term on optimizing our existing business but we'll have to take a look what the that level of openings will be as we move through the year.

And Michael, this is Matthew.

Your question about acquisition of underperforming stores to the extent, you know, we engaged if that activity and we will have some of that.

That is not in our Cap Ex number, it shows up in the other investments category.

And we are allowing for some of that during 2003.

Thank you.

And again, I guess just to put your -- to tag on to that, that we're opening about 600 traditional restaurants in 2003 compared to a little over 1,000, more like 1,050 in 2002.

So you know, you could presume that the new sales from new restaurants will go down by about that same relationship.

Thanks.

The next question is from Coralee Whitter at Goldman Sachs.

Hi, actually just want to follow up on that question.

How are you thinking about longer term, what the appropriate rate of growth is?

Should we be thinking about this cut in unit growth in '02 as a, uhm, somewhat temporary measure in order to refocus on increase the comps, or has there been a fundamental shift in how you view your growth opportunities?

And related to that, what do you see as your long term earnings growth rate potential once we get past the next couple of years?

Coralee, this is Matthew.

I'll answer the first part of that question.

In terms of how we think about this, we're trying to optimize the business for now and when we see our returns comps and margins returning to the levels we like, we will give ourselves permission to begin opening more stores again.

But we're not predicting that is going to happen in 12 months f things get better in 12-18 month, I think we'll do more openings in 12-18 months but if they don't, I think we'll stay where we are.

This is Jack Greenberg.

I think it's also important to point out that the reduction in new traditional openings that's been described on this call and the release isn't proportionate.

We have been very careful about selecting restaurants that will open that have the high returns on profitability that we expect and that I know you do.

And so I don't think this is a pro rata thing.

As economies change, your markets change, we'll be making individual decisions that way.

But clearly, our intense focus now is to optimize the existing business.

I think to try and predict the long-term growth rates at this point, Coralee, would be a mistake.

Thank you.

Thanks.

Our next question is from Mark Canowski of Solomon.

I apologize if this was addressed earlier, but in the release today it's looking at ways of trimming G&A spending.

There had been a Dow Jones news article out on October 15th saying that a significant round of layoffs could be coming up in coming weeks.

And just wonder if we should be looking for an announcement on this front in the near term.

And to that extent, any comments that you can make on a preliminary basis at this time.

Mark, Jack Greenberg.

We are absolutely in the middle of reviewing G&A.

Matthew pointed out that we have some G&A spending that will make a difference to our efficiency and effectiveness in the long run, and we want to make sure that we cover a good deal of those costs from our existing spend levels.

We are going through a review of all of our G&A around the world right now.

It's too preliminary for to us give you any specific guidance.

We obviously are intent, if you going to optimize the exit existing business and running it as efficiently and as effectively as we can, so I think you are going to have to give us some time.

I this it is likely there will be some job loss.

We don't expect or hope -- we hope that it won't be a significant, but we don't know yet.

Thanks.

Thank you.

Next question is from John Glass, CIBC.

I wanted to go back to the $100 million you are going to spend on the US franchise stores, and I guess I am unstill is the motivation for change the strategy.

Is it because franchisees are unwilling to spend money as they have in the past opening and building their own buildings?

Are they overleveraged?

Could you give me a sense of, you know, is it a financial condition issue?

Is it a willingness issue?

Sure.

Can you address that Matt?

John, I'd say it's a combination of things.

I think a significant majority of our franchisees weren't in love with the program, but more importantly I think we are in a turning point of the history of the US business, and we are trying to be ascertain as many of our stores as possible are in the hands of our best-performing owner-operators.

And if we let them overleverage themselves by asking them to pay for buildings, when opportunities come along to acquire new stores, or to invest in their existing stores, they might not be in a financial position to do that.

So it was that combination of circumstances that led us to eliminate this opportunity going forward.

Let me clarify that it has no effect on the buildings that have been purchased by operators in the past.

We are not going to change that situation.

And Jack Greenberg again just to add a thought to that.

I don't think this was a lack of interest or willingness on the majority of operators because in fact our experience where they were given the option was that the significant majority of them, vast majority of them, took the option.

I think we're more worried -- worried in our operator leadership, more worried about the implications for the future in terms of having all that additional debt and what its impact might be on their acquisition opportunities and their reinvestment opportunities.

Thank you.

Thanks, John.

Next question is from Janice Meyer at Credit Suisse First Boston.

I tell you, I have so many it's hard to cut it back to the one you'll let me ask. [ Laughter ] Uhm... let's see.

Uhm... if I, uhm, -- if your goal is to get the stores in the hands of the good operators, $100 million, I guess at your current cost per store fully loaded, not leased, and I don't know how you're going to do this, is about, you know, 70 stores or something like that.

So on a base of 13,000, that doesn't really do it.

And the the 300 to 400 remodel program is nice, but again that touches a couple of thousand stores depending on the, you know, how much per store and that's going to your best operators.

So, you know, how many stores do you want to get in the hands of the good operators, and how long do you think it's going to take to you get there, given these programs?

Janice, this is Matt.

I'll take the first stab at this.

We don't have a specific number of stores in mind.

I think you heard Mike say earlier that be you know, we're flagging anybody whose mystery shop scores are in the bottom 20 percent.

You know, the issue for us is that we just want to do everything we can to make this happen quickly and because of the opportunity to invest with our best operators $150,000 per store, we have a chance to accelerate the process.

So however long it was going to take, the fact that we're in discussions with our operators about with whom we want to grow and with whom we don't, it gave us a chance to accelerate the process.

So I can't give you a specific time frame or a specific number of stores.

I would just add the $100 million in terms of the amount we are going to spend on buildings, I think it's important to also understand that, you know, many owner-operators do have capacity today to take on additional debt to buy new stores and so it's not as if only those operators that, if you will, are not going to ask to buy a new store next year because we're paying for the building, uhm, are going to be in the situation to be capable of buying out operators so I'm not sure I would look at that $100 million as some kind of a limitation.

In addition, I think we also commented just in terms of movement within the system that we are interested in increasing our company-operated restaurant base somewhat next year.

So that will be another use of funds.

To put this in context, we had this program for the last few years in the United States only on new restaurant buildings only.

Not every new restaurant operator took the option.

And so this is a relatively modest change in the scheme of this worldwide business.

We wanted to be sure to let you know about it because it's an element of the capital expenditures.

It's not meant to change the world.

It will not.

But we think it's philosophically right to do, and we know that many of our operators support this and agree with it.

So I don't think we should make so much out of it in terms of the overall restaurant operations a proven process.

I think we have a lot of things working toward improving our restaurant operations and this is just one small element of it.

Thanks.

The next question is from Joe Buckley at Bear Stearns.

Thank you.

Just got another question on the capital allocation announcements.

You are taking $500 million out of unit expansion, $100 million is going to go for the franchisee buildings and $300 million will be reinvested in existing restaurants.

Is that the company operator restaurants, is that going to be primarily in the US and what kind of projects is that $300 million going to be targeted for.

Can I clarify something, Joe?

That is, that the incremental spending on existing restaurants is the $225 million that we mentioned in the -- in this speech, and that brings that number up to about $825 million total worldwide across the board.

So that's the restaurants, that also includes the 300 or 400 million that we'll spend on US franchise restaurants, that amount.

So $300 million that you might have seen in the release and might be thinking of we said that was primarily towards increasing investment in existing restaurants, but there's also a little incremental investment in the other categories.

So hopefully that clarifies that.

But again, we're in the investing and a couple of restaurants as we always do as well as a significant increase in the amount spent on franchise restaurants here in the US with the special program.

Does that respond to your question?

Thank you.

I know.

We didn't let you tell us that but I think that answers it.

Thanks.

The next question is from Alan Hickock at Piper Jaffrey.

Good afternoon.

Say in Mike's remarks there was a comment I just want to make sure that I understand this correctly.

That in the remodels, you expect to generate a return based on increased sales or rent increases.

I assume you're saying by "we," you're saying McDonald's Corporate does.

And maybe you meant to say "and," but I can understand increased returns on increased sales but... increased returns strictly on rent increases benefits McDonald's but not the franchisees so I was just wondering if we could get a clarification on that comment.

Sure.

Alan, this is Matt.

I'll try to clarify.

You might remember this, the way this investment works is that in effect, we are putting 30 percent up in saying we'll take our chances with getting a return on net.

The other 70 percent that we put up is sort of a financial perk that's potentially imposed on the operator if we don't get a very large sales bump in the first two years, and so what we are saying we think the primary way we are going to get a return is that sales will go up and on average we get 13 to 14 percent of every sales dollar as rent and service fees.

But if at the end of two years we haven't seen a 15 percent sales bump, then the rent percentage we collect in year 3 and beyond increases and we'll get some return there, as well.

Thanks, Alan.

The next question is from John Ivanco.

Hi.

Thanks.

Actually, just to switch subjects to Europe, if I may, it looked like comps did some a little bit in September, so I just wanted to get a sense of what was done in September to drive sales from what was a disappointing previous two months but I guess more importantly, what's really upcoming, now, on the continent or kind of in your European business to drive sales in the near term.

Thanks.

I can't start it.

Our think our Europe -- I can start it.

I think our European sales situation as I think we discussed with you last month and I think had talked about since then is that Germany's sales situation is disappointing and difficult.

There's a serious economic issue in Germany that I think you all know about.

I think the whole informal eating out market has contracted based on all the work that we've done, and you got a declining economic situation, unemployment is almost 10 percent.

You have what's been called a Euro hangover and there are a lot of other issues that have shaken the confidence of the customer in Germany, and we're struggling with the sales situation there.

I talk about Germany specifically because of its importance to all of European results.

We have aggressive marketing plans that should start soon and be for the rest of the quarter.

They involve price value propositions, as well.

Again, we are dealing with a very difficult economic situation.

I think it's hard to predict the results of those.

The only thing I would add, John, is that the comparison in some of those market was a little more difficult in September than it was in July and August.

Going against last year.

Thank you.

The next question is from Andy Barish.

I just wanted to get some clarification back on the US same-store sales.

Mike talked about the comps moving positive from recent trend line levels or incrementally moving up 1 1/2 to 2 percent to get positive from recent trend line, even though the trend line was down 2 1/2 or so in the third quarter.

So trying to get some sense of the base or trend line that you're using.

And then do you expect the national dollar menu advertising to continue to keep some of that momentum moving just given it's a broader effort than the two products you're doing?

Andy, this is Mike.

We do -- we have seen an incremental move that's very, very encouraging through the first 14 days.

I just have been handed 21 days.

And in our company-operated restaurants, you know, we're plus both in sales and in TCs.

We're very encouraged by this two regions that are really excelling and executing let's do lunch at the front counter Indianapolis, is up over 8 percent.

And Florida is up over 5 percent in comp in our company-operated restaurants.

And this of course is after three brief weeks of our national program here that's holistic as I know you know.

We start the middle of November with our advertising of the dollar menu.

I'm very excited about it because as I discussed and I think you know, it's about choice.

And it's about value.

People can have a large red meat or white meat sandwich plus a parfait and side salad all for $3.

The celebrity accompaniment I think is going to add a lot more excitement to it.

And so, Andy, we're very encouraged by what we z we know we have to execute better at each and every restaurant but the data is suggesting that we have made significant improvement here since February.

Thank you.

The next question comes from Mitch Spieser at Lehman Brothers.

Thanks very much.

A question on the dollar offerings and the dollar upcoming dollar menu.

You know, I guess over the past 21 days, can you give us a sense of how -- of how extra value male sales have been performing you?

Did say that sales are up incrementally for your company-operated stores.

I was wondering what the level of extra value meals sales are and how perhaps the margin side of the equation is holding up.

And along those lines, Jack, just a bigger picture question.

Along these lines, while focusing on the dollar men usual what do you think the risk of of conditioning consumers just to come for the dollar menu versus your extra value meals, which are I would think probably higher margin in nature and have a higher average check?

Thank you.

In terms of your first question I don't think we are going to get into that level of detail for competitive reasons, but you will recall that in our comments we mentioned that average check was relatively stable.

So I think that speaks to the whole issue of what are we seeing in terms of the impact from the dollar menu.

Right.

I think also that -- it's Jack Greenberg.

I think our whole historic experience is that when you have a compelling offer that people know about, they come into the restaurant more often.

And we have found through all kinds of programs like this and particularly the latest one but even for a lot of things we have done in the past, that people start to buy what their favorites are and start to experiment with our menu and so I don't think that advertising a national price point which says that you have everyday low prices at McDonald's is something that gives you more choice is a problem of conditioning the customer other than to reestablish our leadership as the price value leader which is what built this business.

And Mitch, just two other points that are very important in terms of operator profitability.

Our average check is only down about 2 cents which is very encouraging and speaks to the point Jack is making that they are buying a lot of other things and our food costs is up less than a half a percent.

Are very, very good signs for us and barometers of profitability in the business.

Thanks, Mitch.

Our next question comes from Peter Oaks at Merrill Lynch.

Hi, uhm.

Good afternoon.

Jack, I wanted to follow up on what's going on in Europe.

You did mention, you know, some.

Weaker trends, particularly in Germany.

About the sales have definitely slowed down here the last few months.

So do we need to think of some of the tougher markets in the Europe being a hostile environment to the macro program or are these programs capable of moving the needle for new that contrast?

And for the second question, real quickly, Mike Roberts, how are the sales tests going give that this time of year probably is not probably top of mind for sale through program.

I think that the answer to your first question about whether these macro problems can be dealt with a specific price value tactics is a question that will be answered by each different market.

I don't think they are all the same.

I think the problems in Germany are very different than the problems in the UK as I think we've indicated, France continues to do well and our customers continue to respond.

There are a lot of markets in Europe that are doing reasonably well.

Of course, when Germany and the UK aren't doing as well it has an impact overall but I think we are going to have to wait and see in Germany.

We're obviously hopeful.

We are going to do everything we know how to do to make that economic environment as benign as possible with aggressive advertising and price tactics.

But I think time will have to tell.

I think the UK is probably a little different story and their problems economically aren't as serious and, you know, I'm very hopeful that you'll see improvement there.

The salad news, I'm going to ask Mike.

He has some exciting news about salads that I want him to share with you, you about the fact that we're accelerating the national rollout tells you we really like what we see so far.

Peter, we're selling on average 3 to 400 salads a week in the 600 stores that are in test.

I know you have had them and I know you told me in New York you liked them.

The salad shakers that we currently have are selling on average about 150 a week.

So we're very encouraged that we have a product that's very compelling.

Here at our Arch at McDonald's headquarters we're selling 100 of them a day.

So we like them and our customers are telling us they like them, as well.

And it's not just about how many units we're selling.

The price point on these new salads is much, much higher.

They're generally 3.99.

Thank you.

Thank you.

Our next question is from Michael Sharison at Morgan Stanley.

Thanks.

Just a follow-up.

I think it was Jack's comments or Matthew's, you talked about relooking at international and potentially restructuring some relationships.

I was wondering if you could elaborate on that comment.

And also if you could just -- yes.

Go ahead, I'm sorry.

I was going to -- if you could just comment a little bit, European unit level margin was much stronger than I would have thought while the US was soft.

If you could just give us some color behind those too.

I'll deal with the first piece of your question, Michael.

I did make a comment that we are looking at a small number of of international markets for possible restructuring.

That work is very early in the process.

I thought it was important that investors know that everything is on the table, that we're examining this business to optimize our current business.

That's part of it.

I think it's way premature for us to speculate on what that result is.

And I think you'll just have to give us some time.

But I thought the fact that we're looking at it carefully and trying to figure out what our options are in some of these markets, whether it's changes of ownership, et cetera, is what I had reference to.

So on the second piece, I'm not sure, Mary --

Michael, I think -- I guess I'm a little surprised by your question because your company -operator margins declines more quarter over quarter in the third quarter versus what we saw in the second quarter, and we would attribute that, of course, to the weaker comps, most -- is the biggest impact, and then we continue to see pressure on labor in a number of key markets and those are the two key factors.

Thanks.

We are going to take another question, the next one is from Vladimir Ivelcom of Tudor investments.

Hi, everybody.

Did you -- could you run, please, through the advertising and promo calendar as we go through the year through the end of the year?

Thanks.

I tell you, I think you are asking about the US marketing question.

Vladimir, it will primarily focus on the dollar menu.

We will, between now and November 15th, be featuring the dollar big and tasty and the dollar McChicken.

The middle of November, we will start the national launch of the dollar menu and you'll see this through the end of the year.

Thank you.

We have another question from Coralee Whitter at Goldman Sachs.

Hi.

I just wanted to clarify a couple of factual points.

The first is the 600 net opening rate, can you also tell us what the gross opening rate is?

And then the second one is I just want to make sure I understood what you said about the impact of the dollar menu.

You said it was positive for company-owned stores.

Is it also positive for the whole system or just the company-owned stores?

Matthew?

On the openings, net versus gross, Coralee, in general, year to year, normal closings, probably run between 200 and 350 in a normal year.

Our closings for '03 will be in that same range.

And Coralee, in terms of sales, I don't have 21-day sales yet for our operators or had that read, but in 14-day sales I indicated they were up and they are up.

Thank you.

We have a follow-up from Janice Meyer.

Yeah.

On your unit the scaling back your units it seems to be centered in Asia-Pacific and Latin America.

Yet, you know, those markets relative to profitability are very, very small contributors.

Why not focus more in Europe, you talked about Germany being weak, and it sounds like you believe Germany is a longer-term issue as opposed to short term and since Europe is so important for you and can really have a meaningful impact on improving your returns, would you consider focusing further unit cutbacks in Europe?

Janice, this is --

Sorry.

Janice, this is Mary.

When you work through the numbers you will actually see that we have cut back substantially in Europe in terms of net traditional holdings.

By my calculations, I'd say it's down more than 100, you know, maybe 120 or so against what we expect for this year.

On a base of roughly 330 for this year, which is a little lower than where we even started out expecting the year to be.

So you can see we have cut back.

Importantly, though, too, I think is as much as we have discussed some current issues in Germany, in fact you know, there are incremental return on invested capital continues to be pretty strong and when you look at the return on investment, over the, you know, kind of the trailing 12-month period it's very high, it's about 20 percent.

And incrementally, it's in the mid-teens.

So it's not necessarily where we want to open zero stores but we are being very careful about where we open stores and as we mentioned, we're concentrating our openings in a small number of markets.

I think if you recall, we said that there are only 11 markets next year worldwide that -- where we'll open more than 10 stores.

Clearly, we've also made some reductions in the US which I know you didn't ask about and the US has good returns as well on new restaurant optimizations but I think there we do want to focus more on the existing business and on the midsizing our existing assets but you'll notice that that probably another cut back of a couple of hundred on a net basis.

So the -- a lot of the dollar cut back in total capital is Asia and Latin partly because in the US we're reinvesting more in the existing business.

But as you go through the numbers of openings, I think you'll see that we have made adjustments in a number of markets.

Thank you.

We have time for about one more question.

Joe Buckley has a follow-up.

Yes.

Could you talk about plans to buy units from franchisees and give us a rough sense of how many and how much money you might expend on that?

Thanks, Mitch.

Joe, this is Matt.

Sorry.

We don't have a specific number in mind.

We have, you know, set aside some amount of capital to do this because we can see our company-owned store base growing from maybe 15 percent to 16.

It's not going to go from 15 to 18 or 15 to 20 or anything like that.

So we don't have a specific number of stores in mind.

But you can kind of do the math.

Going from 15 to 16 isn't the huge number of stores but we think it's important message to send because we have a lot of faith in our ability to profitably grow McCopco.

As I made my comments, Joe, in my opening remarks, I think one of the pieces of good news here is the fact that our company-owned restaurants are performing very well both operationally and financially.

And are now I think in general leading the US system.

And we consider that a big positive because it has implications not about what we own, because we're a franchising business, but what it means to our franchisees.

So we're very pleased about that.

Thank you.

With that, I'd like to ask Jack to make a couple of quick closing comments.

I thought I would just mention because nobody asked, I thought I would ask myself a question-and-answer t Mary doesn't let me do this very often so I didn't get permission.

But we did open this three in one concept in Lincoln, Nebraska, a week ago and it's an interesting experiment.

I thought it would be useful to just take one minute and tell you about it.

The 3-in-1 concept specifically involves a planner and sandwich section of the restaurant which is made to order hot and cold sandwiches and matters.

It's got a bakery and ice cream, homemade ice cream section and it's got a traditional McDonald's.

And we were doing in this one restaurant we were doing a couple of million dollars of volume is my recollection in the final year before we did this change, this experiment.

The first seven days here, it's generating over $70,000 in volume in that first week in that first 7 days and that's with no advertising and no particular promotion.

And it just -- again, it's one of the experiments.

It's not a national program, but I thought it would be interesting to share with you.

If gives you an example of the kinds of things that our people are working on that creates I think a very strong pipeline for innovation.

I think this morning it's clear that we've talked about several strategic changes in our business.

They're all designed to build comparable sales and optimize the performance of our core business.

We've covered a lot in this call.

But I think I can sum up most of it in a few sentences.

We are making the tough decisions necessary to optimize the business.

We are focused on our core business.

We are generating momentum and we are moving forward.

I thank each of you for your interest in McDonald's.

Good-bye.

Good-bye.

This concludes today's McDonald's teleconference.

Thanks for attending and have a great day.