麥當勞 (MCD) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the McDonald's April 28th, 2003 investor conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Mary Healy, Vice President of Investor Relations.

Ms. Healy, you may begin.

Hello everyone.

And welcome to our call.

I am joined today by McDonald's Chairman and CEO, Jim Cantalupo;

President and Chief Operating Officer, Charlie Bell; and CFO, Matthew Paull.

This conference call is being webcast live and recorded for replay.

The language in our earnings release issue this morning regarding forward-looking statements also applies to our comments on this call.

The release is available at investor.mcdonalds.com.

Jim will begin our discussion with a brief overview of the strategies to revitalize McDonald's that we shared during our presentation on April 7th.

Next, Matthew will review our first quarter operating results.

Then Charlie will highlight the business plans of some of our major markets.

And now I'll turn it over to Jim.

Thanks Mary and thanks to our listeners and good morning everybody.

Many of you were at our presentation on April 7th or listened to the webcast.

So I don't want to repeat everything we said then.

Instead, I'd like to emphasize some key points.

We have a plan with clear objectives and specific measures.

We have a singular focus on our restaurants and our customers.

And we have a system aligned behind our goals.

Two days after our presentation in the financial community, we held a conference call and webcast with our owners-operators, suppliers and employees to ensure alignment.

This call also promoted understanding of the roles people will play in our revitalization effort.

We were very encouraged by the response.

Thousands tuned in.

We had a good open exchange of issues facing the system.

For the most part, I am confident our system supports our plan.

And one reason for that support is since January, we have taken important actions to focus our system.

We have created a plan to win with specific measurement criteria.

We have established three-year goals to strengthen our foundation.

We've shifted our focus from building restaurants to adding customers to the restaurants we already have.

We've reorganized our marketing.

We've introduced wholesome new products in markets throughout the world.

We've eliminated initiatives that do not directly impact restaurant performance.

We've changed operational procedures.

We've set more realistic growth targets.

We've reduced cap ex significantly and set new targets for restaurant margins and SG&As.

These actions will improve our food taste, service and advertising and they will produce better financial results.

We cut cap ex for 2003 by $800 million, or 40% compared with 2002.

With our substantial cash flow we expect to have $1.3 to $1.5 billion of cash available this year for other uses.

We'll use $300 to 700 million to strengthen our balance sheet by paying down debt.

We also intend to return cash to shareholders through dividends and share repurchases.

While a final decision won't be made until later this year, we are going to recommend a significant dividend increase to our board.

Beyond 2003, we fully expect cash from operations to grow and we plan to pay down additional debt, maintain a higher dividend, and buy back more stock.

Then beginning in 2005, we are targeting annual sales growth of 3 to 5% with two points coming from new restaurants.

Annual operating income growth of 6-7%, and returns on incremental invested capital in the high teens.

Keeping our focus on the customer experience requires stick-to-it-iveness and discipline.

The results won't happen overnight.

I believe we'll see improvement in the next 12 to 18 months.

Some have asked, why not sooner?

Our system is enormous.

We have more than 30,000 restaurants in more than 100 countries, and changing consumer perception and employee habits requires work.

And in some markets, we're also operating in very challenging environments due to difficult economies or world events.

For all those reasons, we think 12 to 18 months is a reasonable, realistic and achievable timeframe to build a foundation for sustainable results.

We have a lot of hard work ahead of us; however, we won't allow short-term factors to distract us or dilute our long term focus.

In a moment, Charlie will share some of the plans we've created and the strategies we've implemented to meet our goals.

First, I'll turn the call over to Matthew, who will discuss our financial performance in the first quarter.

Thank you, Jim.

First quarter EPS was 29 cents, a 7% increase versus 27 cents per share last year, excluding the cumulative effect of accounting changes in both years.

Reported EPS was positively impacted by 2 cents in foreign currency translation, primarily due to the stronger euro and British pound.

In addition, '02 results included $43 million or 4 cents per share of asset impairment charges.

Our first quarter results were impacted in part by several external factors.

First, severe winter weather in the U.S. hurt February sales, especially in the northeast.

We estimate the impact to be two percentage points for the month.

Unfavorable weather also affected Europe's sales in February.

Second, the shift of the Easter school holidays from March in '02 to April this year hurt Europe's and Australia's comp sales for the quarter by an amount less than one percentage point.

Also, events in the Persian Gulf hampered our sales because people were out and about less.

Finally, consumer concerns about SARS impacted results in a few markets.

Markets currently under SARS-related travel advisory account for a relatively small percentage of our sales and operating income.

Our business, like many others, is affected short term to the extent people change their daily activities and limit their travel.

With that backdrop, I'll discuss our sales by segment for the quarter.

Total sales of the U.S. grew less than 1% while comps declined 2%.

In Europe, total sales increased 17%, driven by favorable currency trends.

Constant currency sales fell by 1% and comps declined 4.4% for the first quarter.

Let's take a closer look at Europe's top three markets.

France's comp sales were slightly positive, considering they were cycling a positive mid single digit increase in '02; and as their economy has slowed, we are pleased with this performance.

In Germany, comp sales were negative in mid-single digits against positive low single digit comps last year.

This market continues to struggle with the recession.

Economists predict very slight growth in GDP for '03; however, while the informal eating-out market has shrunk, we grew our share of both visits and sales in 2002.

The market continued to shrink in the first quarter of '03 and our share was stable.

The economy in the U.K. had been relatively stable in 2002; however, concern about activities in the Persian Gulf caused retail sales and consumer confidence to fall in the first quarter.

Our comp sales were high single digit negative in the UK against a low single digit positive increase in the first quarter last year.

The informal eating-out market declined in the first quarter, but we held our share.

Moving to Asia Pacific, comp sales were negative mid-single digits in our two largest markets, Japan and Australia.

Japan continues to experience high unemployment and low consumer spending.

And while Australia has enjoyed a strong economy in recent years, it is expected to weaken somewhat in 2003.

Primarily because of these declines in comp sales, first quarter ran McDonald's company operative margins decreased as a percent of sales.

In the U.S., 80% of the margin decline was caused by labor increases, as well as rising occupancy and other costs.

The latter were affected by a higher advertising contribution rate, higher rents, and higher utilities.

Europe posted a 90 basis point decline in margins for the quarter; the U.K., one of our largest company operator margin and Italy, accounted for almost all the declines.

Overall, food and paper as a percent of sales improved, due to many price increases since first quarter 2002 in the U.K., France and Spain, and lower commodity costs.

Negative sales leverage hurt both labor and occupancy and other costs.

In addition, wage increases in France, Russia and Spain contributed to the labor cost increase.

In a moment, Charlie will discuss our plans to grow sales, which in turn will help our margin.

Another way we expect to grow our bottom line is with lower SG&A.

We've made some progress.

Through first quarter, we are on track for meeting our 2003 goal of keeping SG&A flat or better in constant currencies with dollars spent in '02.

We will continue to identify ways to reduce G&A by operating more efficiently, eliminating duplication and avoiding things that do not ultimately enhance the customer experience.

Our goal is to reduce SG&A as a percent of sales over the next several years.

Our first quarter sales and margins were not where we want them to be, but I'd like to end on a positive note.

In the U.S., the gap between McDonald's and our sandwich competitor's comp sales has improved according to NPD's sales track weekly.

For 10 of the first 13 weeks of 2003, our comp sales were better than that of our competitors.

I think that shows the improving momentum of our U.S. business.

And I'll now ask Charlie to tell you how we plan to continue that momentum.

Thanks Matt, and good morning everyone.

Like Jim and Matthew, I'm confident we're taking all the right actions to improve our customer's experience and increase productivity, thereby improving our business results.

Over the past five or six weeks, I've been out in the market and in our restaurants with franchisees, restaurant managers and company management on both U.S. coasts as well as Canada, Brazil, Argentina, Spain, France, Australia and Japan.

I'm here to tell you that our people are energized and our leadership is focused, and we're doing what needs to be done to drive our business.

As we said on April 7, our system-wide plan is to win centers on five critical drivers of their business.

People, place, product, price, promotion, or the five P's, as we have come to know them, and with a renewed emphasis on transfer and successful programs across borders.

I'll start with the U.S., which has exciting news - and the product driver.

We know customers come primarily because of the menu.

We will offer the quality food and variety people want.

And we're off to a great start with our new premium salad line of three delicious salads, California, Caesar, and Bacon Ranch.

These fresh mixed green salads are topped by a warm juicy chicken breast and accompanied by one of Newman's Own Salad Dressings.

We're pleased with what we've seen so far.

Our initial read is we're attracting customers who wouldn't have visited McDonald's otherwise.

Our research in March showed consumers, and particularly women, cited improvement in food taste as a reason to visit McDonald's more often.

We believe salads are a big part of that.

In addition, we believe the salads will appeal to those consumers seeking more choice to fit in with their everyday lifestyles.

By the way, advertising for our premium salads, which began only on April 21, illustrates how we can target our creative messages to specific audiences.

In this instance, we're reaching out to young women and mothers through a comprehensive campaign that goes beyond television to include the web, women's magazines, and billboards.

Product innovation continues in the United States in the second quarter with the introduction of the McGriddle Sandwich, two soft warm hot cakes with a taste of maple syrup and butter baked right in.

For the first time, customers can hold their pancakes and eggs in their hand and eat on the go, which is an important part with our busier than ever lifestyles.

Consumers score it extremely fine in terms of likability and repurchase intent.

That version has a recommended price of $1.59 and the bacon, egg and cheese variety has a suggested price of $2.19.

Results from our non-test market are very encouraging.

In keeping with our plan to simplify and optimize operations, most markets will keep only the two best-selling breakfast bagel sandwiches when we introduce McGriddles.

Offering great tasting food isn't limited to just new menu choices.

Our existing menu must be delicious and look appetizing as well.

In the United States, we're enhancing the flavor of our beef patties with new seasoning and improved operating procedures.

Hamburgers will be made with an improved recipe and toasted longer.

Large sandwiches will be packed in boxes, which will take less time and improve burger presentation.

Everyday affordability is the key in the industry, and being an initiate provider of great tasting food at great value is what a price driver is all about.

One way the U.S. is providing value to the customer is through its dollar menu.

Comp sales and transactions for the first six months of the national program improved more than one percentage point over the three months prior to its launch.

And since being advertised in February, purchases of desserts have increased up to 28%.

During the quarter, we opted to replace the Big and Tasty on the national dollar menu with the Double Cheeseburger, which has a lower food and flavor cost.

While all markets will opt for it, a small percentage have chosen to offer the Big and Tasty for a dollar as well.

These markets generally sold the Big and Tasty for 99 cents for many years and found it to be a competitive advantage.

You may be interested in knowing that the percentage of national advertising dollars targeted the dollar menu in 2003 will be substantially less than 2002. [INAUDIBLE] and accountability is the key to our success.

Restaurant grading, when the U.S. began in February 2002, is helping identify and correct operating issues focused on improving the commerce's total experience.

We're currently reviewing the program's structure to allow business consultants to spend more time with those restaurants that need more assistance.

Another way the U.S. is measuring performance is through the mystery shop program.

The quarter got off to a strong start in January.

Not only did scores in all categories improve, they were by far the best results since the program began.

The hard percentage point increase was in service, driven by a four point improvement in speed.

Performance since then has remained relatively constant, and our goal is to consistently improve upon our results, particularly in the area of service.

We believe these scores will continue to improve with our focus on people.

By training and rewarding our managers and crew, we can raise the level of customer service, communicate consistent standards, and improve productivity.

Our crews served one less customer every two hours in the past five years, which cost us 135 basis points in company-operated margins.

Training staff to do their jobs more efficiently should help recapture some of that.

We're rolling out our interactive learning training tool.

Restaurant managers will receive additional training and service in hospitality this summer at conferences, where we will calibrate standards of performance.

Managers will return to their restaurants to share their knowledge and enthusiasm with their restaurant crew.

Managers of both company-operated and franchise restaurants are eligible for a new incentive program called, "Managing for Millions. " It's designed to achieve consistent execution, reward achievement, and raise overall performance.

Managers are eligible for monthly prizes and a grand prize.

Under place in the U.S., we will modernize and improve the relevance of our restaurant through re-imaging.

The plans call for remodeling up to 1,000 franchise McDonald's by year-end.

We will continue to monitor the results.

While we believe each initiative will improve our customers' experience and, therefore, our bottom line, we think an even greater benefit is possible from the synergy of implementing the five pieces simultaneously.

A number of markets are testing a comprehensive program that optimizes and simplifies operations.

This program includes such things as fewer sizes of drinks and fries, fewer extra value meals, simplified pricing, streamlined merchandising, and an intensive hospitality training.

Early results are more efficient crew and more satisfied customers.

Now let's turn to our three largest markets in Europe: France, the United Kingdom and Germany and what they're doing to implement against the plan to win.

The French team in recent years has strengthened its lunch and dinner part with innovative popular products such as the Chicken Premier.

These sandwiches provide value to the price, taste great, and are easy to make.

McDonald's is showing customers they can also satisfy other meal occasions using campaigns that highlight snacks, smaller menu items and desserts.

Food quality is important to our French customers.

McDonald's franchises and several suppliers have participated in the national agricultural fair for the past three years, and in March ran advertising that featured our high quality ingredients and our agricultural best practices.

In the United Kingdom, people initiative emphasizing improved service.

The U.K. has developed workshops to teach management and crew those behaviors and attitudes that impress customers.

These workshops are a springboard for implementing a service enhancement program at the restaurant level of which learning is an important part.

Offering food and beverage variety is a competitive issue in the United Kingdom.

Our New Taste menu concept imported from Australia was launched in response to this on March 5, and currently features a chicken salsa flat bread, a pasta salad, a McFlurry, and toasted ham and cheese melt called McToasty.

The New Taste menu will feature a rotation of 12 new products in 2003, and incorporate a value price component.

We believe this concept will contribute to positive momentum in the long-term and will change consumer perception of McDonald's as just a hamburger place.

The largest activity under promotion in the United Kingdom is the relaunch of Happy Meals.

The new program includes new graphics and a new advertising campaign, and new menu additions, a chicken selection, and other food and beverage choices.

The response to the new program, which began on April 1, has been strong, and we expect positive results from this initiative.

To appeal to its economically challenged marketplace, McDonald's Germany is executing a national advertised menu price point.

The McDeal menu, which starts today, is the German execution of the Euro safer menu program.

Germany also has a number of product introductions planned for the summer with the goal of increasing relevance to the customer.

Moving on to Asia Pacific, McDonald's Japan is focusing on product and providing a variety of relevant wholesome menu items.

They've also launched the New Taste menu.

When I was in Japan last week, featuring a premium hamburger, the largest beef sandwich on the Japanese menu, the Tofu Sandwich, which I had and was delicious, and an omelette breakfast sandwich and a refreshing honey lemon dessert.

McDonald's Australia is putting a large effort behind products and people.

Later in the year, customers down under will have the opportunity to choose from a range of wider choices as part of a new menu offering.

They're also building on their reputation as an outstanding employer by implementing new training programs and rewards.

They have a new service program called Customer Delights that focuses on strong hospitality attitude.

They are holding crew capture competitions to improve skills and service and ultimately to grow sales.

McDonald's Australia's excellent reputation was reaffirmed last week as an employer when they won a survey conducted by a leading financial newspaper in several top employment consulting services, named them as one of the top 20 best employers in Australia to work for across all fields.

That concludes the tour of our major markets and the tactics that they're implementing against our plan to win.

Let me end by reinforcing that our entire system across the globe is aligned and moving towards the same goal of attracting more customers, more often through more brand world and doing this more profitably.

I know it because I see it and experience it every day, whether I am with our employees or in our restaurants with the owner, operators, and crew.

The unity, passion and sense of purpose in all of our people leaves no doubt in my mind that we will concede in changing the [INAUDIBLE] of our business.

Now I'll turn the call back to you, Mary.

Thank you, Charlie, and I do want to apologize, I understand we've had some difficulty with the so-call-in number, so I think some of you may have had trouble signing in.

This broadcast will be available on our website as a replay, and we'll have a replay phone number if you need to catch up on our introductory comments.

But at this time, we would like to open the call up for your questions.

So please press 1 if you have a question, and the pound key to remove yourself from the queue.

We'd like to give as many people as possible an opportunity to ask questions, so we'd like to ask you to try to limit yourself to one, and later you can press 1 again if you have another question.

So again, we'll try to get to as many questions as possible.

Our first question comes from Mark Kalinosky at Salomon Smith Barney, or at the Citigroup.

I guess they call us Salomon Smith Barney now.

I'm still confused but we'll catch up.

We're more use confused than you are.

Two things: First on SARS, you might have seen brands into [INAUDIBLE] do what I consider to be a fairly interesting analysis the other day, saying if in mainland China they suffer two to three months' worth of sales being down about 20% because of SARS, you know, a certain type of EPS impact that that would have.

Has McDonald's looked at that and done any sort of similar back of the envelope-type calculations to say, what if mainland China does suffer through two to three months of a little bit of bad times?

I'll ask the second question after I get the answer to that.

This is Charlie Bell.

We're obviously monitoring situation very carefully.

This is a situation that's impacted the daily routines of customers, primarily in Hong Kong, China, and Singapore.

Like most retail businesses, we've experienced some impact in each of those markets.

I think the interesting thing to note is that China, Hong Kong and Singapore represent 3% of McDonald's consolidated sales and 2% about consolidated operating income.

So the impact on McDonald's overall is not expected to be material.

Thanks, Mark.

Do you have a follow-up or a separate question?

I think they've -- we'll come back to you.

The next question then is going to come from Coralee Winter at Goldman.

I have a question that centers around your long-term earnings power.

You outlined goals starting in 2005, part of which is achievable through G&A cost cutting reductions.

But I wanted to dig more into the restaurant-level margins that have continued to decline, not surprisingly; but over the past 10 years, 19% to 12% in the latest quarter, what I wanted to understand is theoretically with a 1% comp., where do you think the margins can get back to?

I'm assuming not to 19%, [INAUDIBLE]

Coralee, this is Matt.

We think the company operated margins within a reasonable period of time, probably two to three years can get with [INAUDIBLE]-- back to where they were two years ago.

Two years ago they were in the high 16's, and we think we can get back there, it might take more than 1% comp.

But we think it's achievable, I think we've gone through analysis in the past where if you -- you have to make an assumption about where the comp is coming from.

If the comp is coming from higher prices, you don't need as high a comp to drive the margins up.

If it's coming from more transactions you will need a higher comp to drive the margins up.

And then, you know, also remember that we're targeting many things to help us restore our margins.

Comp sales is the biggest part of it.

We've targeted significant supply chain savings over the next two to three years that will probably account for half of the restoration of our margin.

And lastly, we've pointed out crew productivity and crew productivity around the world isn't what it used to be, and we're putting a strong emphasis on that as well.

Also, with our emphasis on menu as being a driver, some of the premium product introductions we had and will have down the road, I think will help margins also, for example, the salads.

Thanks.

The next question comes from Janice Meyer at CSFB.

Thank you, young Mary.

I was wonder to go you could comment a little bit about your product initiative.

Certainly in the past recent and not so recent, your consumer testing hasn't translated into broad results, whether I look going back to campaign 55, arch deluxe, dollar menus, you're realizes you didn't need the full line of bagels, just maybe the one or two better sellers.

What difference in your consumer testing now or product development, and what might we see different in the next year or two that's going to help make your product and your menu initiatives more successful?

And I know you're excited about salads.

Was there something different in that process?

And again, is there more changing?

This is Jim, I'll make a few comments and turn it over to Charlie.

The difference to me is discipline and focus.

I talked about, originally in January, about reorganizing all of our growth initiatives under one point of leadership.

I think that's going to add a success rate, increased success rate, because of that focus and discipline about how we're going about developing our menu around the -- around the world as well as sharing ideas.

I would point to that as being the difference going forward.

Charlie, why don't you add to that.

I think the other key thing is really going to be about execution.

I think in the past, we've tended to launch new products, launch them and then abandon them.

That's not the way to build a brand, build brand equity.

So what we're going to do is when we -- like the salad launch, you'll see continued salad appear between now and the balance of the year.

So that we keep our new product launches alive in the eyes of the customers.

Consumers' faces evolve and do change over time, and so does the competitive set and we're constantly reviewing our menu to make sure it as relevant as possible.

As I said when we were together on April 7, we'll be as ruthless about what we take off the menu as we are about what we're adding on to our menu.

Additional point, too, I think is the foundation, rebuilding a foundation.

You know, you improve your chances of product launch successes to better your operations to the point of execution in the restaurant.

I think as we improve that also, you will see better product introductions, better new product, better results.

And you'll see that in the advertising, which will be more targeted for each product that we offer.

And you may have caught our advertising over the past few days for our salads throughout the United States.

I think it's very clear who our customer is and how we're connecting with them.

Thank you.

Next question is from Jeff Wells at Wachovia.

Thanks.

Two salad questions.

I guess first on the execution point, could you go through how you're executing the salads across your owner-operator side in order to ensure success, quality and consistency.

And then the second question would be an expansion upon that last point relating to the message here on the salads, and the potential demographic opportunities there.

How are you pursuing that in terms of channels and in terms of broader channels to market the salad?

Well, first of all, we've had intensive training of our restaurant crews, restaurant managers, and our owner-operators.

All the procedures for the salads, our people are very focused on serving the freshest salads available in the marketplace today.

And from judging by the restaurants that I visited over the weekend, I think we're executing that very, very well.

With regarding the types of media channels that we're using to connect with customers, as I mentioned in my prepared remarks, we're using the web, really for the first time with pop-up advertising on the web, a lot more print campaigns and magazines that McDonald's hasn't necessarily been an advertiser in in the past, and some very creative radio and television advertising.

And that advertising is in programming that we haven't traditionally advertised in the past on television.

So that way we can connect with who our target customers for this particular product.

On the salad also, I think the system recognizes that that is a strategic product launch.

And the focus and discipline about introducing it, I think, has been higher than, you know, in the past.

Or at least my benchmarks.

I think that the addition of Newman's Own all natural salad dressings are giving this product a bit of differentiation out in the marketplace.

A top salad with one of the best-known salad dressings available make it more relevant to more people.

And this is Matt.

We were a little bit criticized in the past for the length of time it took for us to get the salads launched nationally.

We wanted to be sure we got this right nationally, executed it well and we wanted to do it in the springtime, the best opportunity to launch the strategic product.

Thank you.

The next question from John Iventhal at JP Morgan.

Hi, thanks.

Two related questions.

The first, if you could discuss the decision to take pricing in the U.K. and France, I think you said in the quarter, given this economy, and what response, if any, there was from the consumer.

And secondly, if it's possible to focus specifically on that new taste menu in the U.K., especially with the different merchandising you're using in that market, thanks.

John just to clarify, the pricing in the U.K. and France wasn't necessarily in the first quarter, I know it wasn't specifically in the U.K.

But we're preparing first quarter margins against first quarter last year.

So last year there was a price increase.

Certainly not the case this quarter.

But the other thing on this, on the new taste menu for the U.K., I think you've got to view the new taste menu launch as something that is in addition to our Happy Meal relaunch, because the two things really go together.

A better offering for our child customers that come to McDonald's.

There's fresh fruit available with an [INAUDIBLE] for the Happy Meal, and also premium products on the new taste menu.

So when the two things go together, we've got a very compelling offering to the family, to young adults and to people, we've got a price for every pocket, so to speak.

And we've got something that I think will encourage a lot of repeat visitation.

The majority of our marketing between now and the balance of the year in the United Kingdom will be against those two key initiatives.

Thank you.

Next is Andy Barish at Bank of America.

Hi, a question on the franchise margins, which continue to decline, and obviously comps play a role in that.

But can you try to give us a sense of any one-time or sort of above ordinary franchisee support going on in any of the markets, or do you think you're behind a lot of the dollars you've got to kind of get back to the franchiseee?

Andy, it's Matt.

We are behind.

One item we should be over with, we have been supporting the U.S. operators through the first quarter, but it's over with now.

From items on the dollar menu, specifically the Big and Tasty.

If an operator sold an extraordinary amount of them, we were subsidizing the margins to the extent of 30% of the short fall.

But that was -- that had an effect on the fourth quarter '02 franchise margin, and it had an effect in the first quarter of '03, but we will not be doing that going forward.

Thank you.

Next question is from [INAUDIBLE] at Lehman Brothers.

Thanks.

On U.S. margins going forward, can you quantify what the new packaging is going to cost to margins?

I know you talked about new technology and new beverage machines.

I just want to get a sense of you said, Matt, I think you want to get back to the upper 16 at some point, but given that you aren't expecting any comps improvement over the next 12 months or so, so should we expect margins to continue to deteriorate given the investments in the store?

What type of bomb should we expect in U.S. margins until they expect to improve?

It's Matt.

We have not forecast any kind of margins for the year so I don't want to agree with what you said before what the rest of the year might look like.

We look at everything we're doing in the U.S. or any part of the world as a package of initiatives.

Along with some of the items you have described, we're launching two premium products that will bring healthy margins to the table for us and for our franchisees.

So I think that we can offset the cost that you're describing through the penny profit we bring to the P&L, from the premium sale launch and McGridles.

Thanks, Mitch.

Next question is from John Glass at CIBC.

Thanks, a question on advertising expenditures for '03.

You indicated you're going to de-emphasize maybe the dollar menu, launching a couple of new products.

Have you changed the rate of advertising spend for the year?

And/or have you changed the weightings year-over-year, something that we should be aware of?

There's no material difference, John, in our advertising expenditures this year over last year.

Thanks.

The next question is Mark Kalinoskii at Salomon Smith Barney.

Hi can you hear me?

Yes.

Great.

I wanted to ask about the salads, while you were in test.

I'm not sure if you've made comments in the past, but I wanted my memory refreshed.

How did those salads in test affect the average check in the markets they were tested?

This is Jim.

Mark, my recollection is that the test markets were up 6 cents an average check.

6 cents.

Yeah, I don't know that that's going to be indicative going forward, but I would expect an increase in average checks.

We do know, I guess, that owners with the salad the average check is closer to $7, but, you know, in terms of the numbers movement, that's still out.

Thanks.

Our next question from Matthew [INAUDIBLE] at GKM.

Hi.

Regarding the breakfast side of the business, is there any attention going to be paid to, I guess, bringing up the coffee profile, begin in light of Starbuck's new thing with CISCO and the Seattle's best brand?

Could you potentially add that across more McDonald's domestically?

Well, we, Matthew, it's Charlie, if you couldn't tell by the accent, we're already one of the largest retailers of coffee in the country.

We have an enormous and very profitable coffee business.

But having said that, you know, we are always looking at what we can do better.

We have the McCafe initiative going in a number of countries around the world.

I was just in some last week and we're very encouraged with the way we're evolving that offering.

In Canada, we just launched a new premium coffee that's available, a new blend of premium coffee.

We have a very strong coffee competitor in that marketplace called Tim Horton's, and we believe that we can gain additional coffee business through our better coffee offering.

We will be opening McCafe's throughout the United States, I believe with several [INAUDIBLE] scheduled for 10 over the course of the year and with a few that we could roll it out on a more systemwide basis if the testing in the United States proves successful.

But we're focused on coffee, there's a great margin with coffee, we already sell a lot of it and we want to sell some more and we plan to do that.

Thank you.

Next is Peter Oaks with Merrill Lynch.

Morning, actually I have a couple of questions.

Could you share with us the mixed shift that you're seeing about the dollar menu, now that the ad dollars are diminishing there?

And what you see as far as a trend in average check.

You were kind of alluding to it, there, Jim and Charlie, curious if you can give us a sense of where we're looking year to year.

You mentioned salads are facing a new customer, can you give us specifics as to what you mean by that?

Peter, it's Matt.

In terms of the mixed shift, we were monitoring the units per week when we launched the dollar menu.

There were a lot of Big and Tasty's and McChicken's sold.

Many of the markets in the U.S. switched to the Double Cheeseburger unit level sales were very high there.

But I think as you see a shifting our advertising in the direction of the premium salad launch and the McGridle, you will probably see those sandwiches on the dollar menu sold in a lesser amount on a units per thousand basis.

And I think, Peter, with regards to the new customers that we were talking about, you know, we're basically targeting a female audience between the ages of 18 and 35, and mothers with children primarily.

But also we're communicating to other people as well.

But what we're seeing in the restaurants is we used to have a lot of business, what I would call the coffee-only mom.

She would come in with a child are or a couple of kids for a Happy Meal and sit there.

But now she's coming seeing there's something for her and she's buying a salad in addition to the Happy Meal.

We're also getting customers into the restaurant that may be late McDonald's users and an increased amount of traffic from office workers.

A lot of female office workers.

So the mix of our consumer base is changing, which is basically what this salad launch is all about.

It's to make McDonald's more relevant with the right offering for key target groups.

Plus, Peter, I don't think the -- it's totally exclusively women.

I saw something 30% of the salads are being purchased by men.

It has a broad appeal.

This is Mat.

On the average check issue, Jim referenced that we saw roughly a six-cent increase in the test market.

The average check for a guest counter, that included a salad was among the highest we have ever seen, that was not test market.

We need to be careful back now we're talking about 13,000 stores, not a couple of thousand.

But I think we'd be disappointed if it doesn't have a favorable impact on our average check.

The average check in our store at the office is up here because Jim Cantalupo, along with his hamburger and fries is now buying a salad as well.

The next question is from Howard Penny at SunTrust.

Thanks, good morning.

Hi, Howard.

I have a couple of questions if you don't mind.

First is on the use of cash.

And Jim, I'm not sure who wants to answer this question, but when you think about your use of cash, I know the rating agencies put a little bit more pressure to bring down debt levels, but is that the first focus to get the balance sheet back to where you're relieving the pressure rating agencies?

The question is why are you waiting to raise the dividend?

Is that good you're talking about and something you can do?

And I assume [INAUDIBLE] talk about but why wouldn't that be something you do now versus waiting?

The other question I had is you talked about higher short-term financial support to franchisees.

But is that the only support reflected within the McDonald's system supporting the franchiseee or is there other additional support through the system [INAUDIBLE] corporation that's helping either franchisees and/or its suppliers?

Thanks.

Howard, let me make a few comments on your first question about the use of cash.

You know, we're 120 days into the new administration, if you will, there's a lot of things, a lot of moving parts right at the moment.

You know, particularly in the world of [INAUDIBLE] category, too.

So as we move through the year, as we get a clear focus on where we're going to end up during the year, we'll make better decisions about what we do with our cash in all three areas.

I don't think there's any pressure on any one of them to do it sooner rather than later.

We're going to do it in a disciplined way as we move throughout the year and get a better handle on where we're headed for the year.

On the issue of other support, Howard, there are other forms of support in a small number of countries.

There is rent assistance given of any magnitude.

I think Italy had some last year, there were a couple of countries in South America.

So that is the other issue of support.

There's nothing through system capital, though, that would affect our franchise margins and there's no other support given.

System capital is sort of a stand-alone co-op that allows or franchisees to borrow in a cost efficient manner but there's no financial support given through system capital.

Thank you.

Next question is from Mitch Fie at Lehman Brothers.

A question about Canada, which is down over 6%, and what you're seeing in Canada, I know you did some healthy choices there that supposedly were like a leading indicator of perhaps what might happen in the U.S.

Why the weakness that we're seeing in Canada?

Thank you.

Well, we've had some issues in Canada.

It's not been performing to our expectations.

I was up there a week and a half ago sitting down with our magistrate team, reviewing our plans there.

We're continuing to improve relevance by introducing new menu items to the choice menu initiated last June.

In April, they launched a Caesar salad, Chicken Fajitas, and two Warm Chicken Oriental Salads added to the menu.

Customers in Canada rate McDonald's the Number 1 destination for a hot breakfast on the go.

So to improve the breakfast experience in the category, we introduced the new high quality coffee blend which I referred to earlier, that's with 100% Arabian coffee beans.

McGriddles will be launched in Canada in June, and we expect that will bolster our business up there.

We have an umbrella $1.69 McDeal menu there which is coming now a price point for Canada.

And we're also focusing on refreshing our washrooms in all our company locations to make sure that our place is the most relevant for our consumer.

We get a lot of travelers throughout our restaurants in Canada.

I was in some of those restrooms a week and a half ago and they're absolutely first class.

So we've got a lot of things going on in Canada.

It's a very competitive marketplace.

There's been a few issues there concerning current world events.

But our team is focused and we look forward to improving our results.

I think some of the numbers last year are going up against the big value initiative the year before that, which frankly they got away from in terms of supporting it.

Additionally, they were one of the markets that was heavily involved in in evaluating which is the has been now cleared off the decks.

So I think creating more focus on their business.

Thank you, your next question is from Coralee Winter from Goldman Sachs.

I wanted to follow up on your response to my prior question.

You had mentioned that the improvement in margins depended on whether it was price versus transactions.

And I'm not sure as to whether you intend to take price or whether you're just going after a mixed shift with higher-priced items such as salads?

Secondly, supply chain, you mentioned half savings would come from there. [INAUDIBLE] with a system of [INAUDIBLE] that you would be pretty efficient there already.

If you could go into more detail there.

Finally, G&A, if you can help us understand what it is that can be cut out of there and go through those components a little bit.

Thanks.

It's Matt.

The issue of moving the comps, I think that our target is to do it through a combination of means.

I think that we want to increase transaction counts, but we also want to sell more premium-priced items.

So I think you'll see the emphasis there.

We're not going to target reducing transactions and charging more, that's not our goal.

On the issue of the supply chain, we're not going to get into the details because it's sort of an internal McDonald's matter, but we are convinced we have the opportunity to take a full point out of cost through the supply chain by 2005, without affecting the quality of our products or our ingredients.

On the G&A issue, we debated this, we're taking a very careful look at what headquarters-type people do, what our role is in the company.

And whether or not we're duplicating things that are being done in the field.

We're looking very carefully at that, but we don't really have the stomach to take a big charge and go through a big layoff.

Whatever we do, I think it will be gradual, and we're setting targets for two years now, and we expect each department and each business unit to manage to a target.

There's a whole lot going on that deals with outsourcing, alternative ideas.

But also in terms of benchmarking, I think everybody feels pretty comfortable that we've got some opportunities at the staff G&A level to be more efficient.

And it's really a big system in 100 countries and now that we've changed our emphasis strategically to adding more customers to our existing restaurants as opposed to opening new restaurants, that also creates a different need at the staff level going forward.

And so we're looking at all of that.

So I think you'll see, you know, a renewed emphasis on improving our if you and should see results on the P&L from it.

Thank you.

We still have a question from Janice Meyer at CSFB.

Hi thank you.

You changed out your leadership in the eastern division, a good 5,000 of the stores in the U.S.

I was wondering if you could maybe compare and contrast the differences between the old leadership and the new and what you expect to change other than sales and margins.

But, you know, maybe a little more to be down.

Janice, I can -- and I know Tim very well because he really spent a lot of time in the international side of the business.

He's got a real broad range of experience.

I think he's going to bring a lot of benefit to the U.S. organization from his international experience.

I'm looking for, you know, a different approach to the business and the challenges and the agenda in the U.S.

I know Mike and Ralph are also excited about what Tim will bring to the management team.

And I think the other thing to add is in the course of our history we've always reviewed our efforts, our actions, our [INAUDIBLE] and how we do everything at McDonald's.

And based on these reviews, we sometimes determine that changes are needed within our organization.

So we're going to continue to make the necessary changes on all the things that we've just identified.

But this team, this management team, Janice, is very focused on driving the business and driving results.

We're going to do things for the short term, but also with an eye for the longer term as well.

I think the team is alive and focused on the key things we need to do to drive the business going forward.

Thank you.

That's all the questions we have.

I would ask Jim to make a quick closing comment.

Thanks.

Our message should be pretty clear.

We're going to grow by being better, not just bigger.

The McDonald's system around the world is aligned behind the drivers of our business.

Every member of our system will do what is needed to move the business forward.

In the next 12 to 18 months, you're going to see this company take strategic, focused and disciplined steps that I firmly believe will restore us to a position of undisputed leadership.

We have work to do, we have the tools to do it, and we will succeed.

I want to thank you for your interest in McDonald's.

Bye.

This concludes today's teleconference.

Thank you for your participation and you may disconnect at this time.

Have a good day.