麥當勞 (MCD) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to McDonald's October 22, 2003 investor conference call.

As a reminder, this conference call is being recorded.

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

Miss Healy, you may begin.

Thank you.

Hello, everyone and thanks for listening in today.

Joining me are Chairman and CEO Jim Cantalupo, President of McDonald's Europe, Russ Smyth, and CFO Matthew Paull.

This conference call is being Web cast live and recorded for replay.

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

Our release is available on investor.McDonald's.com.

In addition, there are several schedules posted on the Web site that were previously included with the earnings release.

Jim will begin with a brief overview of our revitalization strategies including branded affordability, menu and service improvements.

Next, Russ will discuss our business in Europe and talk about our plans in some of our major markets.

Then, Matthew will review our third quarter operating results.

Now, here's Jim.

Thanks, Mary and hello, everyone.

I'm pleased to have the opportunity talk with you today.

I'd like to spend a few minutes discussing where we are with our revitalization plan and where we're headed.

If I could leave you with a couple of key thoughts today are that we're pleased with our momentum but we still have work to do.

And then I'm confident that we are well positioned to deliver on the targets we've set for 2005 and beyond.

As know, our revitalization plan is designed to strengthen the foundation of our business and return the company to profitable growth.

This means achieving positive comparable sales and improving margins and returns on a sustaining basis.

It also means revitalizing our worldwide business and returning the system to a more customer-driven organization.

We have set ourselves on a course to become a stronger McDonald's, one that answers to the customer as the boss.

Specifically, we've made some significant strategic changes.

First, as you've heard me say before, we will grow by being better, not just bigger.

This change is significant because it focuses our attention on growth by increasing existing store sales, not just by adding new restaurants.

This is a cultural change for McDonald's and I believe it is starting to take hold throughout our worldwide system.

We are also taking a more disciplined approach in tracking our performance.

Defining our areas of focus and controlling our spending.

We've established clear accountability for results.

In April, I told you that we would be returning to the basics that made McDonald's great, operational excellence and leadership marketing.

To attract more customers, our plan includes a better menu with new tastes and variety, improved quality service cleanliness and value, a more contemporary restaurant atmosphere and marketing that is more relevant and motivating.

As you know, we have made progress with our menu.

And those changes are resonating with customers and driving sales increases.

We have improved the taste of many of our core menu products.

An example would be new cooking procedures that have made our burgers juicier than ever.

We're also responding to our customer's increasing interest in having more food choices.

This includes salads, McGriddles, additional chicken products, more beverage choices, particularly in the juice and non-carbonated categories and enhancements to our Happy Meal offerings.

As a result, our menu today is more relevant and responsive to our customer's changing tastes and desires around the world.

However, customer relevance involves much more than food.

We continue to implement initiatives that make our restaurants contemporary and more of a destination.

Examples include our reimaging work with older restaurants in the U.S., high impact design work around the world and the addition of McCafes to name just a few.

Meanwhile, while we've made significant improvements to food taste and variety, we haven't made as much progress as we need to make on service.

Our own measurement systems are telling us this and this is a reality we must face head-on.

What's important here is that we are not allowing our top line growth to distract us from addressing the fundamental QSE&B issues that remain in our system.

We need to be leaders in fast, accurate and friendly service and we are taking aggressive action to improve operations around the globe.

This is probably about getting our entire system, restaurant managers, owner operators and company staff on the same page, regarding operating standards.

We need to be aligned on how top-performing restaurants operate.

Everyone needs to know the expectations.

To that end, we are using more frequent and consistent internal and external evaluations to both measure performance and identify opportunities for improvement.

Based on what we're learning, we're focusing our efforts on improving speed and emphasizing a hospitality-based approach to service.

Russ and Matthew will cover these initiatives in more detail in a few minutes.

On the marketing front for the first time ever, we introduced a global marketing campaign.

Many of you know that I'm sensitive to the different environments in which we operate around the world and that global solutions are not necessarily the right answer.

Having said that, I also believe that the global marketplace has evolved in maturity, customer sophistication and communications capabilities.

And there is more opportunity for the application of global approaches.

This campaign is not just about Justin Timberlake, hip-hop music or new advertising story lines.

It's about presenting McDonald's to consumers in a more contemporary, relevant way.

The campaign is also about motivating the system's 1.5 million employees to better satisfy our customers.

Relevance transcends generations, interests and trends and "I'm Lovin' It" is about being forever young, especially in how we deliver the McDonald's experience in our restaurants.

Our plan is to build on this theme and to bring it to life in every market in ways that will motivate our customers and employees.

So, we're making changes and seeing improvements, but I acknowledge that we still have a lot of work to do.

The question is where do we go from here?

Our top line performance in the U.S. has been good.

We've had six months of positive comps and no one initiative is solely responsible for driving our results.

Rather, our results have been positively impacted by a number of factors.

Most important, more of the sales increase fell to the bottom line in the third quarter, as evidenced by the significant improvement in U.S. margins.

And in the U.S., we have a lot of good work under way to help continue our positive performance.

Our biggest opportunity is improving service.

We've made progress on speed, but so has the competition.

Much of our focus going forward will be helping our restaurants provide customers with fast, accurate and friendly service in a clean, fun environment.

We're introducing equipment innovations and will continue to roll out hospitality training and basic shift management improvements.

Improving QSE&B is an imperative because it is the bedrock we need to solidify our foundation and our future.

This will remain our priority this year and will be even a greater area of focus in 2004.

Our financial performance outside of the U.S. is mixed.

And the issues are varied and unique in each market.

Regarding Europe, we've seen some improvement in the third quarter, but we need to improve our performance in the U.K. and Germany, two of our largest markets.

Russ will talk to you about that in a minute.

Meanwhile, with regard to the rest of the world, we have seen improvements in Australia and Canada, Japan's performance continues to be weak, but we're taking very aggressive actions to improve results.

Finally, I'll round out my comments with some key points about our financial discipline.

First, we're on target to substantially reduce Capex in 2003.

And we continue to expect to add about 360 net restaurants this year.

Second, we are on plan to pay down a sizeable amount of debt at the higher end of our planned range.

We've indicated that we wanted to return more cash to our shareholders.

Last month, the board declared a 70% dividend increase.

This brings our total dividend payout to a half-billion dollars annually.

We believe this is an appropriate level given where we are in our revitalization efforts.

As you know, we generate a substantial amount of cash.

And this significant dividend increase still gives us flexibility in allocating this cash.

And I would remind you that every year we have an opportunity to review our dividend levels.

Finally, because of the progress we've made in our revitalization, we were able to increase our stock buyback activity in the third quarter.

All of this represents progress toward our financial goals and we plan to continue the momentum.

We are in the midst of our planning cycle, so it's premature to provide specifics about 2004.

You'll receive more information when we release year-end earnings.

What I can tell you now is that we will continue to emphasize increasing sales at existing restaurants.

Decisions to add new restaurants must meet stringent screens in terms of expected returns and overall strategy for the marketplace.

A sizeable amount of our Capex spending will be dedicated to making our existing restaurants more relevant to our customers.

We will also stay disciplined regarding operating expenses and SG&A spending.

To recap, since announcing our revitalization plan, we've made significant, strategic, even cultural changes to set ourselves on a course to become a stronger McDonald's.

These changes are working, we are more aligned.

We are more customer-focused.

We are delivering on our commitments.

There is momentum and as I said at the beginning of my comments, I am confident that we are well positioned to deliver on our targets we've set for 2005 and beyond.

I look forward to taking your questions at the end of the call.

Meanwhile, I'd like to take a moment to introduce our President of Europe, Russ Smyth.

Russ has been with McDonald's for 19 years and has worked in every area of the world.

He currently oversees more than 6,000 restaurants in 51 countries.

Russ is a proven business leader and has a great passion for our brand.

Russ?

Thanks, Jim.

And hi, everyone.

Today I'll give you an overview of our business in Europe, what's working, where we can improve and how we're taking action to drive results.

I want to underscore that our European business is very successful and profitable.

McDonald's Europe serves over 10 million customers every day and we've generated over $4 billion of revenue and nearly $1 billion of operating income in just the first nine months of this year.

But we're currently not generating the comparable sales growth we need to drive margins and returns.

Our goal is quarter-to-quarter, sequential improvement.

Ultimately growing comp sales on top of positive comp sales.

And we're taking aggressive action to achieve these goals.

Our focus and discipline are beginning to pay off.

Third quarter results are better than the first half of 2003.

Comp sales and company-operated margins are virtually flat and operating income has improved slightly compared to 2002.

In addition, quality, service and cleanliness scores are increasing in some of our largest European markets.

We've achieved considerable supply chain savings and we think that there are more savings to come.

We're also controlling SG&A despite adding 175 net restaurants in the last 12 months.

So, all of these signs indicate that we're gaining traction.

However, we know that we still have a lot of hard work ahead of us.

The most important issue facing our business is staying relevant and connected to our consumers, whose lifestyles and tastes are changing faster than ever before.

And what makes this challenge even more interesting in Europe is that each of our markets has a unique culture, economy and competitive environment.

So, we must tailor our solutions to the local marketplace.

Today, I'll discuss how we're increasing our relevance in the U.K., Germany and France.

Combined, these three markets represent more than 60% of Europe's sales and almost 3/4 of our operating income.

So, our top three priorities in Europe are, one, improving the U.K.'s performance, two, succeeding in Germany in spite of a recessionary economy, and three, increasing momentum in France and the rest of Europe.

So, let's start with the U.K.

We know value is important to our customers.

Last year when we took some price increases to protect margins it cost us transactions, sales and profits.

This past April, we rolled back Happy Meal prices and relaunched our Happy Meal program with more choice.

The new food options included a no-sugar added juice drink, sliced fruit and chicken selects.

And as a result, the U.K. quickly recaptured the 20% drop in Happy Meal sales and has subsequently gained additional ground.

To build on this success, on October 1, we re-established Everyday Value offers in the U.K.

So, now consumers can purchase various sandwich, drink and dessert options, each priced at less than 1 pound.

New products also play a roll in getting our business back on track.

We'll compliment our value positioning with great-tasting, premium-priced products.

These keep our menu relevant, create food news and they also generate good profits.

And we've got some great products on tap for the fourth quarter and into 2004.

And let me give you one example.

We're toasting a new entree salad similar to the premium salads in the U.S.

We're cautiously optimistic that customer reaction will be positive in the U.K. and in other European markets to this product.

Now of course, great food and great value need to be delivered with great service.

So recently, all U.K. restaurant employees have completed hospitality training, and we're speeding up drive-thru service with the use of hand-held order devices.

We're also doing a variety of things from trendier crew uniforms to crew rallies to incentive programs.

And to excite our restaurant managers and crew about working at McDonald's.

Because we believe that increased morale will translate into a better experience for all of our customers.

And as we execute well against these three tactics, value, relevant menu offerings and great service, we're confident we'll deliver improvements in sales and profits.

The U.K. is also taking more aggressive actions with our public relations and communications.

We want customers to get to know McDonald's even better.

What we stand for as a business and as a corporate citizen.

This month, the U.K. is hosting an open doors program for the public, designed to promote trust and demonstrate the quality and safety of our food and the care that we take in preparing it for our customers.

More than 150 restaurants and suppliers have opened their doors to the media, public officials, opinion leaders and customers.

Additionally, the U.K. will reinforce McDonald's commitment to quality, social responsibility and other issues our customers care about through print campaigns, ongoing dialogue with key stake holders and most importantly improving our customer's restaurant experience.

So, these are some of the tactics already underway in the U.K. and we'll continue to build upon them as we go forward.

Now I'll discuss Germany where the depressed economy is a significant issue.

The overall informal eating out market and retail sectors have shrunk considerably.

This isn't surprising considering that for every economic benefit a German citizen receives, an offset seems to emerge quickly.

For example, expected 2004 tax reductions that would have increased disposable income, will now likely be offset by increases in mandatory pension contributions from German workers.

Despite these economic challenges, our German team is forging ahead.

First, we're re-enforcing our Everyday Value position.

Germany's McDeals program showcases products at attractive everyday price points.

But because value is about more than just price, Germany is also adding premium products that also create food news and generate good profits.

For example, on July 27, we added the chicken premiere sandwich and a deluxe salad offering.

These new offerings are also scheduled for fourth quarter and early into 2004.

Now, as you may know, "I'm Lovin' It" was born in Germany and Germany continues to be a leader in bringing this campaign to life for our customers.

Not only through great advertising, but also through excellent operations in our restaurants.

And we're leveraging this campaign to refocus our managers and crew on our customers' experience.

Germany has made great progress in improving our QSE scores this year, leading all of Europe and we'll continue to measure our progress through internal and external grading to ensure outstanding execution.

Our German team is focused and showing improvement in our key business drivers.

But because of the economy, we're not necessarily seeing the full effect yet in top line sales and bottom line profits.

However, company-operated margins have improved despite the negative comps.

But to be both realistic and honest, I don't expect we'll be able to reach our full potential in this market until the economy improves and consumer confidence is restored.

However, we are remaining focused what we can control and we're confident that our actions will further strengthen a fundamentally strong business in Germany.

The last of our big three markets is France which has performed well for the past several years.

While the stalling French economy has affected our results this year to a degree, we continue to see improvement in margins and operating income growth in the third quarter and year-to-date.

And our plan to win is helping making a good market even better.

France continues to set an example by driving an exceptional and relevant customer experience.

Yet, we know there's always room for improvement.

Like our other markets, France is concentrating on service.

Particularly speed of service because more than 80% of their daily sales occur within just four hours.

As we've seen in many other markets, premium products are instrumental in driving sales and profits and France continues to provide customers variety and relevance through new tastes and more choice.

To counter the impact of the stalled economy, France plans to reinforce its value proposition starting early next year.

And McDonald's brands continues to lead our system in creating a modern and creative dining experience.

This has certainly been a significant contributing factor to their sales growth over the last few years.

Half of our restaurants in France have been remodeled in fresh and creative ways and they'll continue to build on this very successful program.

Their proactive PR campaign continues to serve as a benchmark for the U.K. and others.

France originated the open doors program, being replicated now in the U.K. and in many other markets around the world.

So, the headline is, France is already doing well, but to be even better, we'll concentrate on improving speed of service and enhancing our Everyday Value proposition to take performance to the next level.

Before closing, I'd like to reinforce that many of our other European markets are performing very well in 2003 even though I've really only talked specifically about three of them.

For our other 48 markets, third quarter comp sales were up nearly 3% and operating income grew in the mid-teens on a constant currency basis.

These markets represent 40% of Europe's sales and 25% of its profits, so, together they afford a significant growth opportunities.

Now, as I said at the outset, our goal is to improve quarter-over-quarter, sequentially.

We're still early in our revitalization and change will not happen overnight.

But Jim, Charlie and I are spending significant time in Europe, working closely with the markets to tackle our challenges head-on.

And the bottom line is, we're on the right course and we're confident that we'll succeed.

So, now I will turn it over to Matthew.

Thanks, Russ and good morning, everyone.

I'll begin by reviewing the quarter.

My review will be brief as I'm sure most of you by now have read our release.

Third quarter EPS was 43 cents, up 5 cents or 13% compared with 38 cents last year.

In constant currencies, EPS increased 8%.

Foreign currency translation added 2 cents, primarily due to the stronger euro.

Our 12% sales improvement in the U.S. led to higher margins and a 19% increase in operating income.

Europe held both company-operated and franchise margins relatively flat despite slightly negative comparable sales.

G&A grew 4% while sales and revenues grew 11%.

In constant currencies, the G&A increase was only 1%.

We are making progress on our longer-term target of reducing G&A by 10 basis points as a percent of sales each year.

For the year, we expect G&A to grow about 2% in constant currencies and 5 to 6% as reported.

These increases are lower than current year to date results but they are slightly higher than our original plan for two reasons: Higher performance-based incentives driven by above-planned results in the U.S. and costs to introduced the "I'm Lovin' It" campaign.

Interest expense was flat on a reported basis for the third quarter.

Year-to-date, it was up 6%, we expect an increase of 3 to 4% for the full year.

We had a strong quarter, despite several factors which reduced EPS by 3.5 to 4 cents compared with last year.

Gains on sales of restaurants were about $27 million lower than third quarter 2002.

We incurred $11 million of debt retirement costs to retire high coupon fixed-rate debt.

We recorded a provision of $16 million as a reserve against receivables in Latin America and finally, our tax rate was 150 basis points higher, 33.5 versus 32%.

Brand McDonald's worldwide comp sales increased 3.9%.

This was the second consecutive worldwide quarterly increase.

It was driven by very strong U.S. performance.

In the U.S., comp sales increased 9.5%, total sales grew 12% and revenues grew 13%.

We've now had six months of positive comps in the U.S., driven by the success of new products, the convenience of extended hours, the outstanding value of our dollar menu and Happy Meals that resonate with our younger customers.

But most importantly, there's a bit more polish on the golden arches these days as our brand image has clearly improved.

U.S. company-operated restaurant margin dollars are were up 37% or 310 basis points as a percent of sales.

This improvement primarily resulted from strong comp sales and demonstrates the enormous leverage we get from comps.

Our sales leverage was enhanced by increased crew productivity.

U.S. franchise margins increased 80 basis points, also supported by strong sales results.

We are making progress in the U.S. but as Jim said, some areas still need improvement, chief among those is service.

QSR Magazine's annual survey of the industry's top 25 drive-thrus recently ranked McDonald's lower than last year.

The good news is, we got faster.

The bad news is, so did many of our competitors.

In addition, order accuracy as measured by the study shows we have room for improvement.

These results are not a surprise to us.

Since February of last year, we've measured our operations performance and know that fast, friendly and accurate service are the biggest opportunities.

We continue to work on these areas.

For example, we are introducing hospitality standards and developing training so managers and crew can meet these standards.

We're releasing a hospitality video and have just added six hospitality-focused questions to our restaurant evaluations.

Above all, McDonald's USA and our franchisees are working together, focused on providing customers with a superior experience every time.

Turning to Europe, quarterly sales increased 14% or 3% in constant currencies.

Revenues increased 10% for the quarter or 1% in constant currencies.

The U.K. and Germany generated low single digit negative comps during the quarter, France performed slightly better than the U.K. and Germany.

Europe held company-operated margins relatively flat versus last year, principally by improving labor productivity in Germany.

Moving on to Asia Pacific.

Revenues for the quarter were helped by positive comp sales in Australia and expansion in China but hurt by weak results in South Korea and Taiwan.

Australia Salads Plus program, featuring nine menu items with less than 10 grams of fat, produced high single digit positive comp sales in the quarter and double-digit comps since the program's inception in the second week of August.

With that brief operations review, I'll now update you on our use of capital.

When we announced our revitalization plans in April, we indicated our plan to return $500 million to $1 billion to shareholders this year through share repurchase and a higher dividend.

Jim mentioned our 70% dividend increase.

With that commitment in place, we expect to return a total of 200 to $300 million to shareholders this year through share repurchase.

Through the third quarter, we have repurchased $180 million of McDonald's stock.

In April, we also announced plans to pay down between 300 and $700 million of debt in 2003.

After funding our fourth quarter needs, we now expect to complete the year toward the higher end of this range.

Finally, I want to remind you that our planned $1.2 billion of Capex for 2003 was based on 2002 exchange rates.

Given the strength of foreign currencies year-over-year, we expect reported Capex will be closer to $1.3 billion.

Of course, currency translation will have a similar effect on our reported earnings and cash flows.

However, we're not in a position today to predict those amounts.

I believe we are painting a picture of disciplined, financial management.

We are doing precisely what we said we would do six months ago and you can look forward to continued financial discipline in 2004 and beyond.

Now I'll return the call to Mary.

Thanks, Matthew.

At this time, we'd like to open up the call for your questions.

Please press one if you have a question.

And you can press the pound key to take yourself out of the queue.

To give more people an opportunity to ask questions, I ask that you limit yourself to one question and of course you can press one again if you have an additional question.

We'd like to take the first question from Coralie Witter at Goldman Sachs.

Coralie Witter, CFA: Hi.

Hi.

Coralie Witter, CFA: Yes, can you hear me?

Yes.

Coralie Witter, CFA: Thanks.

I have a question regarding a comment, Jim that you made regarding the indications for '04.

I think you referenced that there would be a sizeable amount of Capex spend in dedicated to making restaurants more relevant.

And I'm curious after listening to Russ' comments about the success of the remodels in France, if that's what you were hinting at, if we're going to see more remodeling and more money spent on that next year?

It's definitely going to be predominantly spent on existing restaurants.

And that's both [MCCOPCO] and some franchise incentive amounts.

Matt, there was a program out there that we talked about before, Matt, you want to comment on the specifics?

Sure.

Coralie, we announced last year that we were going try to remodel a significant number of our U.S. restaurants.

We got off to a slow start.

We are working with franchisee leadership to see if we can find a way using both our capital and our franchisees capital to touch a greater number of stores.

We'll be sharing more details with you probably in January.

And just adding on that, Coralie, I think the place is real important to our revitalization efforts and our image and relevancy to customers and so getting some of our older restaurants up to speed in terms of, you know, brand image, et cetera, it is really important to our revitalization efforts.

But the bottom line message here, we're not talking about significant increases in our Capex spending, we're saying the allocation of what we spend will be more heavily skewed toward existing restaurants.

And it will also be based on returns expectations from returns.

Thank you.

The next question is from Mark Kalinowski at Smith Barney.

Hey, Mark.

Hi, I just wanted to ask about the salads that might be rolled out in Europe.

What differences are there in terms of the product from the premium salads that have been rolled out in the U.S.?

Which markets will that new salad go to or salad family, when might those rollouts take place, approximately, et cetera?

Thank you.

Mark, first of all in terms of the product in Europe versus the product in the U.S., the similarities are going to be that it is an entree salad about the same size and weight as the U.S. and the packaging will be similar to the U.S. with the black bowl bottom and a clear top.

Differences will be lettuce types in Europe and customer preferences about lettuce are different than what they are in the U.S. so we're adjusting our mix of lettuce although we will have a variety of different greens in the base of the salad.

We'll probably end up using a slightly different tomato although it will still be a small whole tomato as opposed to a tomato slice.

We'll probably vary the cheeses a little bit from what the U.S. is using but we will probably use grilled chicken and a fried chicken as the warm protein on the salad.

So I think very similar to the U.S. product except adjusting for European consumer taste differences.

I think the second part of that was which markets do we think we would look at rolling this out in?

We're testing it in the U.K.

We'll test in some of our other large markets.

Germany, in fact, I think I mentioned in my speech that their deluxe salad is probably 80% close to the product we've got and it's done very well there.

So they will look at this product as probably will France and several others.

When do we think we would expect rollout?

If the initial tests proved positive, we would target the first half of 2004.

Thanks, Russ.

The next question is from Matthew DiFrisco at Harris Nesbitt.

Hi.

I just wanted a couple of, I guess a little more detail on the margin picture here.

For instance, with Europe, the EBIT margin looked like it was significantly better than t restaurant operating margin lines and the franchise contribution.

I guess that looks like you're cutting back G&A at a greater rate or able to reduce some costs there at Europe.

Is that something that we should model or should -- is that something that can be continued and sustained, specifically?

Matt, do you want to take that?

Yeah, Matthew, I think that -- I can't tell you exactly how to model this, I will tell you that I expect us to have continuing discipline regarding our G&A.

It is a big focus for us.

We think we have a lot of room to improve our company and restaurant margins in Europe.

You know, we're a little bit proud of the fact that we haven't gotten all the sales going, but we have managed to maintain margins where there are.

I think there's the potential to do a lot better next year.

Thank you.

Next question is from John Glass of CIBC.

Thanks, good afternoon.

How far along are you in the U.S. in your menu development plans for next year?

For example, do you now know what you're going put against the salad launch last year or this year and McGriddles?

And how do you think about lapping those products next year?

John, this is Matt.

And Jim will jump in if he has a different point of view.

One of the things, we sat down a couple of weeks ago, actually it was about four weeks ago and tasted 40 or 45 different products.

So we have a pretty deep pipeline.

The issue is, what can the restaurants handle in a way that allows to us deliver the service we need to deliver?

I think we reached the conclusion that the U.S. restaurants can successfully rollout one or two nationwide products a year.

So, we do have some things we're looking at.

But we don't expect that we're going have a massive number of new products thrown into our stores in '04?

John, just adding on, you know, part of the successes we've had have been built around a focus and discipline about approaching the business.

And as I said in some of my comments, service is our biggest opportunity.

And next year, certainly, and continuing to the end of this year, that's where our primary focus is going to be, on service.

Thanks, John.

I think in terms of the specific products and the timing of that, consider some of that competitive, so, we probably won't be announcing that for quite a while.

The next question is from Brian Ear at Holmgren Capital.

Brian?

I didn't request a question or anything.

Thank you.

Then I think we have John Evans from Coker and Palmer.

John, do you still have a question?

Okay.

We'll come back to John if he has a question.

Robert Manduke at Wachovia.

Robert? [ background noise ]

Hello, Robert?

Okay.

Jeffrey Omohundro from Wachovia.

Jeff Omohundro, CFA: Hi, can you hear me?

We sure can! [ Laughter ]

Jeff Omohundro, CFA: Great!

We're excited! [ Laughter ]

Jeff Omohundro, CFA: There's a question, in a way a little bit of follow-up from the last one, but, you know, I've been intrigued by the success of McGriddles in that day part and I'm just curious, what was your current thinking about breakfast?

And the incremental opportunities there?

Perhaps with new products in that day part?

Well, I think, you know, we have a huge business at breakfast and we're certainly the leader in terms of quick service breakfast and, you know, the success of McGriddles I think just shows the opportunity out there and, you know, that's going to be an additional focus for us, because it is 26% of our business.

It's 26% -- it's a $5 billion business.

In addition, it's a business that isn't compacted into a short period of time.

It's spread out over several hours and also, our pricing power at breakfast is probably greater than in any other part of the day.

Thank you.

Thank you.

Next question is form Janice Meyer at CSFB.

Janice Meyer, CFA: Thank you, can I actually have four since those other people didn't ask? [ Laughter ] Can I ask their questions?

They're about Germany! [ Laughter ]

Janice Meyer, CFA: Okay.

You keep indicating that service is your biggest opportunity for next year and you also, I think, have said in the past that it's not just franchise stores, it's company stores that aren't necessarily, you know, meeting the mustard or the ketchup.

So, would you adopt a zero tolerance type of policy where you just take your company stores and say, you know, 12 months from now, these stores have to be graded A and do what you have to do to lead the way to show franchisees how they can improve their performance and what benefits could come of that.

And could you share for us, again, since it's such a big initiative for you, what some of your benchmarks are.

For example, Taco Bell about a year ago or so said their goal was to get rid of all D&F restaurants.

And here a year and a half later, they've actually done that.

Could you comment on both of those things?

Yeah, I can, Janice.

But I think it's a little bit more complex than maybe the question would imply.

You know, our grading systems are not about, you know, got you or getting rid of operators.

To me, it's about a calibration of our standards, or if you will, a recalibration.

And this is not something you can do in a month or a week.

And, you know, we have issues of turnover out there, of training, of equipment that makes it harder to get the job done.

There's a lot of things that impact our service levels and so, to me it's about continuous improvements.

And even beyond, when we think we've gotten -- I'm sure there will be opportunities to continue to improve and that's what really the grading and measurements are about.

Now, in terms of standards, we have benchmarks.

We know what we want to achieve and we measure ourselves against those and we now have very robust data to deal with the chronic underperformers and the substantial underperformers.

You know, we didn't have a lot of that going back a year or two.

And this comes, you know, various ways.

It comes in the form of our, you know, our full fields, we call them, which is a, you know, several graded visits and follow-up visits and, you know, our 1-800-numbers, our mystery shoppers.

And then we do what we call our marketing surveys where we're asking customers about their visits to us and our competitors.

And all that data is put in a holistic way, it gives us a pretty good read on how our stores are performing and what's important to our customer.

We need some track record in terms of dealing with the, as I said, the ones that are chronic underperformers, but this is about helping everybody raise the boat, if you will.

Because raising one boat will raise all ships because we recalibrate our standards.

I think we've accomplished a lot -- some of that, certainly, the last, you know, year in the U.S in particular.

But even outside the U.S., because we can tell by the grades our customers are giving us from all those measurements, but there's still a long way to go.

And, Janice, we certainly agree with the point that our company-owned stores need to lead.

We can't be much of a franchiseor if they don't lead.

A starting point there is to minimize the turnover in the people running the company owned stores, that's been a big focus, because in earlier years people were moving around much too quickly.

Thank you.

Thanks.

The next question is from Larry Miller at Prudential.

Thanks.

I just wondered if you can give us any initial reads on what beef costs could be in the next quarter or even going out further into '04?

It's kind of an issue out there.

And maybe, you know, if you are seeing increases, what kind of comp you might need to offset those increases that you're going to experience?

Sure, Larry.

Consistent what we have said in the past, we still expect in the U.S. our beef costs to be up about 5% for the year this year.

And we're expecting a similar increase across the board for the full year next year, they're going to be in the 4 to 6% range.

Having said that, the increase will be much more significant in this fourth quarter, but, again, that's not really new news, that's something that we've been expecting because costs were quite a bit lower last year in the fourth quarter than they were in the first part of the year.

I think --

Yeah, Larry, this is Matt I want to jump in here and just kind of frame this issue a little bit.

This isn't the huge margin issue for us.

Just some perspective, we just got done talking about our breakfast business, it's between a 5 and a $6 billion business and during that time period, we sell almost no beef unlike some of our competitors who are probably more beef reliant,

But if you assume that costs go up as Mary described for next year in the 4 to 6% range, and you assume the same mix next year and absolutely no increase in our menu prices and odds are we will be increasing menu prices, but if you assume no increase, the effect on our company-operated margins at that 4 to 6% price rise would be somewhere between 10 and 20 basis points, so it would not be very significant.

Thank you.

Thanks.

The next question is from Mitch Speiser at Lehman Brothers.

Mitch Speiser, CFA: Thanks very much.

Got a question on U.S. margins which hit 18.6% in the third quarter, which I think is one of the highest levels in years.

Now, as we look forward, you start lapping the dollar menu in the fourth quarter, the rollout, I should say, the dollar menu in the fourth quarter and the first quarter '04.

The margin comparisons get easier, perhaps comps could decelerate a bit.

My question is the improvement in margins that we saw in the third quarter, up over 300 basis points, can you give us any reasons why we should not see that type of year-over-year margin improvement over the next couple of quarters?

And you did mention menu price increases, I was wondering if you can clarify that, in terms of direct price increases or new products that are at higher prices than substituted products?

Thank you.

Mitch, I have to start this and Matt might want to add on.

First, you know, we're not really interested in providing direction on, you know, next quarter and the quarter after that in terms of what the margin increases might be.

I think we're more focused on trying to recapture some of the margin we've lost over the last couple of years and we've given direction that our long-term goal is to try to recapture at least 35 basis points of company-operated margin percentage, as a percent of sales, each year, beginning in '05.

So, you know, clearly a lot of this is going to depend on the comparable sales performance, as you noted.

And I'm quoted as having said that if we get the sales performance, you know, we should get some margin flow through and I think you've seen that this quarter,

But having said all of that, you know, we've talked about some specific issues that everybody is aware of.

Beef costs are going to be higher in the fourth quarter year-over-year than they were in the third quarter, but we have some offsetting factors as it relates to the support we provided last year in the U.S. for our dollar menu to franchisees.

Again, I think that our focus here is that we're focused on the long-term, we're all about giving our customers a better experience, which will bring more customers in the door, cost increases are a part of doing business as long as it's a level playing field.

We think that we can, you know, compete effectively.

The pricing decisions, as you know, are made individually by our owner operators here in the U.S., where 85% of our restaurants are franchise so we can't give you a specific percentage because we're not controlling most of that price increase.

And I think the point we were trying to make is that clearly over time, if costs are going up, at some point that has to flow through you're, you know, your pricing.

We don't like to go to the menu board to take care of those problems, but over time that will happen.

And this is Matt.

I just want to add that we've focused a lot on our brand image and lifting our brand image and increasing our relevance and we're talking a lot about service.

We're trying to create a more differentiated experience and one of the reasons for doing that is to have, at some in time, some pricing power so the cost increases don't immediately automatically go to the bottom line.

Thank you.

The next question is from Joseph Buckley at Bear Stearns.

Joe Buckley, CFA: Thank you, just a follow-up on the comments about the remodel focus for 2004.

If that steps up and Capex doesn't change very much, does imply that the total openings, new store openings in '04 will come down from the '03 levels?

Hi, Joe, it's Matt.

We're not going to get into the openings for '04.

We'll be talking to you about that probably in January.

Joe Buckley, CFA: Okay.

Can I ask another one, then if you're not going to answer that?

Can I just add Joe, I don't think we want to say we're not talking about, you know, 80 or 90% being spent on remodels or reinvestment, but I think we said a significant amount will be spent on reinvestment.

So, I wouldn't want people to read this as some fundamental shift.

We spent a lot of money on reinvestments this year as well, relative to new store openings.

So, it's consistent with what we had been saying.

The focus is on, you know, same store sales and existing restaurants.

Thanks.

The next question is from John Ivankoe at JP Morgan.

Yes, hi, thanks, are you there?

Yes.

Can you speak up a little bit, John?

Okay, great.

Actually, I am sorry, thank you very much.

The salad is actually, excuse me, the question is on the salads in Germany.

If you could talk about the introduction in late July of, you know, of how that affected August and September, compare that to the U.S., and maybe just give some comments of how relevant, you know, a salad product is in Europe relative to the U.S., just in terms of whether this could be as significant a part of your business in Europe as it was here over the past year.

Thanks.

Well, first of all, just to remind everyone, the U.S. success is not just all about salads, it's about a lot of different initiatives working together.

Okay?

The salads, combined with the chicken premiere sandwich that were introduced in late July in Germany, certainly helped move our sales in the month of August.

They were supported by strong marketing and some other good Happy Meal promotional activity, but it certainly had a very positive impact, which, combined with the success we've seen from it in the U.S., I think really drove us to accelerate this salad test initiative across more countries.

So, we're very happy with the early results.

It is sustaining, they're going to continue to enhance it with some additional salad offerings in November of this year and that will give us another read on the benefit of it.

But again, I don't want to oversell what the potential is here, but, you know, early results are fairly encouraging.

And the -- and this is Jim, to me, in my view, won't show up as dramatically because the economic recession in Germany is masking a lot of successful initiatives because the high street retail sales are down more significantly than our sales are down.

I use that as a benchmark to view the success of our initiatives over there.

Now you want to see it move in positive territory and we had one month of those in August, that was.

And so, you know, that's another perspective about the success of those initiatives.

And, you know, I will say that salads have had a bigger effect in other countries, like Australia, for one.

Which has a huge -- had a huge salad program called Salads and More.

Salads Plus.

Salads and More.

It was a very successful program.

It is a successful program.

And it is actually achieving better results than we had here in the states.

Thanks.

Andy Barish at Banc of America has a question.

Thanks.

Can you give us an update, haven't heard about kind of restaurant optimization or garner as a simplification means in your stores to, you know, help some of these speed issues.

And on the speed front, I mean with some of that maybe impacted by just the extremely strong comp numbers that probably even surprised you guys and maybe you weren't ready for that kind of a strong turn-around?

Andy, I'd say in terms of the initiative, we're doing a number of things in the restaurants, kind of taking a holistic approach in terms of making some changes to help our crew deliver a better experience to customers, including faster service and also help our customers have a better experience through like better merchandising of the menu board and such.

We are moving ahead with that initiative in the U.S.

There are going to be more and more stores that are making those changes, including reducing the number of extra value meals on the menu board, reducing some of the sizes of items that they're offering, fries and drinks.

So, I think you'll continue to see those changes made throughout the system.

In addition, we continue to roll into more stores some of the productivity improvements, such as the automated beverage systems and the drive-thrus allow them to speed up service and the automatic oil cleaning and filtering machines.

In addition to some of the other changes we've made systemwide, which is using boxes for our premium sandwiches, cuts a few seconds off the time that it takes to prepare those sandwiches.

We have some other equipment changes that we think all of these things added up together will help us achieve savings and service speed times.

Having said that, you're right, that I think with the number of customers that we were serving over the summer, which was well above what we, you know, what we had ever served before, that probably caused to us take a little bit of a step back in terms of achieving increases in service speed times, but that will be high on the agenda over the next quarter and into next year and we're optimistic that we will be able to accomplish faster service a year from now.

I was saying the garner project was a bunch of initiatives in a lot of restaurants.

I think the good things that can be scaled fast are being taken out of that particular program and scaling fast along with a lot of other things.

On the operational side of things, we have these quality bundles that we've rolled out, I think we're on number six already.

And have several service bundles that we've dealt with over the years.

So, the stores have been hit over the last several months with a lot of initiatives and it's pacing those things as we move forward.

There is still a lot of them to get out there.

Many of which do impact service, but required a little bit more lead time and through that involved equipment, et cetera.

So, you know, I feel pretty good about the pipeline on getting out the stuff that is going to impact our service levels and it's just a question of rolling them out along with all the other things we're doing.

Thank you.

Our next question is from Peter Oakes at U.S. Bankcorp.

Hi, folks.

Jim, you shared with us about how the robust data is helping you get the information you need to get your hands further around the service opportunity.

I was hoping we could shift over to your new marking tagline with "I'm Lovin' It".

How are you, over time, how are you going to be measuring its success besides comps?

And I'm curious, what else you could share with us as far as your plans as to how it translates more so into the store experience to keep the brand image going the right direction that Matt was talking about?

Well, I think, you know, in my comments, I talked about "I'm Lovin' It" as more than just Justin Timberlake, and to me, you know, the employee motivation side of it was equally as powerful as the marketing objectives.

You know, I was in Shanghai a couple of weeks ago and went to a crew rally with "I'm Lovin' It" and the Chinese version of Justin Timberlake and it was really motivating.

And for me the power of it is I can't think of too many things that would excite and motivate a million and a half people around the globe, but this particular campaign and the way we've approached it has really had that kind of power.

And when you translate something as concise and simple as that as to what the mission is for a million and a half people, it really has power in our stores and for our customers.

So, it's a big piece of it.

You couple that on with all the initiatives we have in place to make it easier to execute in the restaurants, with garner project, eliminating SKUs, et cetera, bun buffers, all the equipment changes we're making and I know we're impacting service, but we're going to impact it more.

And it's just about focus and discipline, about putting the priorities in the right place and over time, you know, as I said it has a positive impact on the brand.

Matt, did you want to add something on that?

Yes, just, Peter, anytime we spend money, we want to figure out a way to measure success.

It's a little hard in this area, you know, two of the things that we're thinking about is, we take employee commitment surveys in the U.S. and we can measure commitment and retention and the quality of the labor pool that's available to us.

But I think adding on there, Peter, I think the ultimate measure is more customers in the stores.

Long-term.

That's what tells you you're doing a good job.

Thanks.

The next question is from Stewart Freo at Hunter Cap Global.

Could you just comment on the -- what kind of response you're seeing to the Best Buy Monopoly promotion so far?

I know you haven't it in several years and there was some controversy around it.

Have the customers responded to that?

Is there still some kind of, you know, overhang from the prior problems?

Stewart, it's Mary.

We can't comment specifically on the response because it's an October promotion and we haven't released our October sales yet.

But I will tell you we did research on this and it was clear that consumers did not hold McDonald's responsible for the issues that we had, it was in connection with the previous Monopoly promotion.

So, I think we felt very good about the decision to run Monopoly again, which has, in the past, been a very successful promotion for us and as you pointed out, this time we've got some new twists in terms of the affiliation and the connection with Best Buy, which, I think, is perfect, particularly for our target audience, you know, there's lots of products that are available at Best Buy that just fit in perfectly with some of our target audiences.

And you'll, again, when we release our October sales, that you guys can judge for yourselves in terms of how the promotion went.

Thank you.

The next question from Mark Woltemuth at Morgan Stanley.

Hi, good afternoon.

I wanted to get some more details on the supply chain initiatives that you have and what kind of timing you think we can see on some of those hitting the bottom line?

Russ, do you want to comment on Europe initiatives?

Sure.

In Europe, the focus on supply chain, the opportunity there is to really look at further consolidation of our supply chain in Europe.

A lot of this has been made possible by some of the legislation and tax changes within the EU and we think that that will continue.

Several countries are joining the EU next year, which is going to give us even greater potential to leverage our size and buying power, across the continent.

We've seen significant benefits from it already this year and I think year-to-date, September we had saved $35 million in supply chain from these initiatives.

And we would expect that this would continue probably over the next two to three years at a similar rate.

You know, this is Jim.

I'm just adding on that the same, you know, principles apply around the globe.

I will say, this is a dynamic situation.

Those same principles have always applied.

And as our product mix shifts, new products come about, there's always opportunities to consolidate, to run volume through other plants, to, you know, do things that give you more efficiencies and lower your costs.

So, you know, it's a constant dynamic thing that we're about.

We set our goal internally, you know, to go after a 1% food cost reduction.

And that's what we're, that's what our programs are geared up to do.

Thank you.

The next question from Howard Penney at SunTrust.

Thanks, Mary.

It's been asked and answered.

Thanks.

Thank you.

We have a couple of follow-up questions.

The first is from Joseph Buckley at Bear Stearns.

Joe Buckley, CFA: Thank you.

I just wanted to ask a question about the U.K. market.

You talked about Germany, you talked about the economy being an issue.

I was wondering if you could put your U.K. experiences in the context of the overall restaurant market there?

You know, whether the underlying conditions are good and you're struggling?

Or what the case might be?

It's a very competitive marketplace.

But having said that, more folks are eating out than ever before in the U.K.

And our brand is still strong and we've got a good market position in the U.K.

I think this is a matter of us reconnecting with our customers in terms of the relevance of our offering.

And so a lot of this, I believe, is within our control and as I've mentioned, you know, value and getting back to be a value leader in the U.K. market, menu relevance and improving hospitality of service, are the three things that I think will give us the quickest and biggest impact and really differentiate us in this very competitive marketplace.

Thank you.

The next question is from Coralie Witter at Goldman Sachs.

Coralie Witter, CFA: Follow-up on the earlier margin question.

You had a very strong U.S. margin, based on very strong U.S. comps.

I wanted to just understand better how much of that do you think is attributable to the sales leverage?

And how much of it is to other things, like the crew productivity that you sited?

And was there any impact from beef during this quarter or is it really all in the fourth quarter?

Thanks, Coralie.

I would say the vast majority is driven by the sales leverage.

So, I don't think there's too many other things that are significant.

There was some beef cost pressure in this third quarter year-over-year, but at a lower level than what we expect in the fourth quarter, but yes, there was food and paper cost pressure in terms of just the cost being up quarter-over-quarter.

And, Coralie, this is Matt.

We mentioned crew productivity because it's a focus for us.

It did improve and we wanted to mention it, but clearly the vast majority of the margin improvement is due to the sales leverage.

Thank you.

Next follow-up from Mark Kalinowski at Smith Barney.

Two quick questions.

First, the next monthly sales release date, when that might be?

Second, just wondering if the Del Rio taco salad is one of the products that is being considered for national rollout at some point next year?

November 7th and yes.

Thank you.

Next follow-up from Janice Meyer at CSFB.

Janice Meyer, CFA: Hi, thanks.

Just one clarification, Jim, on my earlier question, when I said Taco Bell eliminated their DNF stores, they didn't eliminate the people or the franchisees as it seems like your answer was addressing.

They just moved the scores up, they may have eliminated some people, but it wasn't about, to your point, pulling people out of the system.

Yes.

Janice Meyer, CFA: As a follow-up on the U.K., Russ, seems to me that in terms of the salad program that the U.K. does have an adult population with nutritional concerns, but if I'm also not mistaken and correct me if I'm wrong, the U.K. as a high extremely incidence of Happy Meal sales.

So as you look to Europe, would you think that kind of all the major markets, that the salad program might in fact fit the best in the U.K. or no?

Yes, Janice and that's why there's no coincidence that we're testing it there first.

Thank you.

Larry Miller at Prudential Securities.

Yeah, I wondered if you could -- two things, actually, come out -- I know [inaudible] productivity was an issue in France and since we have Russ on the call, maybe he can comment on that.

And then also it looks like you lost some money in Latin America and the franchisees there may be suing you.

I was wondering if you could comment on that as well?

This is Matt.

I'll take the Latin America question first.

Let me reiterate our belief in the long-term potential of Latin America and results specifically, strong family-oriented culture and we have very good QSE and a loyal customer base in Brazil but I need to give you some background on what's going on there.

As you know, they've gone through major economic dislocations, a significant devaluation in the late '90s.

The middle class, instead of growing, has probably shrunk.

In addition, most of our stores there, most of our stores in Brazil have about 25% of their costs directly or indirectly tied to the dollar and to make matters a tiny bit worse, many of our franchisees in Brazil chose to finance their store purchases in dollars in the mid to late 90s when the maxi devaluation occurred.

It put pressure on their profitability.

That led to some of our franchisees being upset with the percentage rent we charge and they took us to court.

We believe we have the better legal argument, but we're concerned because our franchising system in Brazil is under a little bit of pressure.

That's what led to these suits and the publicity.

It's also what, you know, led to the receivable reserve that we set up during the third quarter.

But long-term, we still believe in the market.

Thanks.

Larry -- Russ --

Larry, on the France productivity, productivity has not declined in France.

It's improved slightly, but we have had several mandatory wage increases in the course of the last year, so, I am presuming that you're looking maybe at a labor line as a percentage of sales and it's driven by wage rate increases as opposed to labor productivity at our restaurants.

Thank you.

The next question is Mitch Speiser at Lehman Brothers.

Mitch Speiser, CFA: Thanks very much.

Two real quick ones.

First, your partner brands were almost at breakeven this quarter, I was wondering if we should expect profitability going forward?

And an update as to what you might be doing with the partner brands.

And separately, in Europe you mentioned that the other markets have been doing well with comps up.

Can you give us of just a sense of what's different?

I guess probably less competition in the other markets, but perhaps other factors that are driving healthy comps in the other markets versus the big three?

Thank you.

Just on the partner brands, you know, I've said that we were going to give more specific, you know, direction about where the partner brands are headed in this quarter.

It hasn't been a priority for the organization.

And my objective for the last nine months was to keep it out of the way of the golden arches in getting revitalization plan, you know, on track.

Having said that, we haven't, you know, totally ignored it from the management standpoint.

And I think what you're seeing there is, you know, the success of those brands.

And in particular, Chipotle as well as Boston Market and that's what, you know, you're seeing.

It's not unexpected.

And it's -- they are doing well.

But as I said, this, you know, this is about the golden arches and I believe it was breakeven in the quarter.

Which is a lot improvement over last year, but...

Thanks.

We have time for one more question.

Matthew DiFrisco at Harris Nesbitt.

Hi.

Can you give us a little color on the average check at each meal?

Specifically I was looking at how the promotions had an effect on breakfast and lunch and dinner.

Matthew, this is Matthew.

The average check is up nicely in the U.S., you know, across the day, you know, somewhere depending on which of the last few months you look at.

Somewhere probably between 3 and 5% over the last couple of months.

And I would say it's because of McGriddles.

The average check on McGriddles, I think is almost a dollar or more higher than the average check on a non-McGriddle purchase.

So that's had a big effect.

I think we're out of questions now so I'd just like to make a final point.

In April, we unveiled our plan to revitalize our business.

We said that within the next 12 to 18 months we would reverse the negative trends and build a foundation for sustained profitable growth.

We're in the middle our effort and if I were bringing home a midterm report card today, I'd say we are ahead of where we need to be in the U.S. but we still have a lot of homework to do on the international side of our business.

Rest assured we will get the job done everywhere in the world and we're confident in our plans and most important we're confident in our people.

Thank you for joining us this morning.