麥當勞 (MCD) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to McDonald's January 7, 2004 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.

If anyone should require assistance during the conference, please press star 0 on your touch-tone telephone.

And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Miss Mary Healy.

Thank you.

Hello, everyone and happy new year.

Thanks for joining us today.

With me are 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 the earnings release we issued last night regarding forward-looking statements also applies to our comments on this call.

That release is available on investor.McDonalds.com, as is our 8K filing of the release and supplemental financial information; that includes the reconciliation of constant currency information to comparable GAAP measures.

In addition to the release and the 8K filings, we've added some slides to our web site to accompany our remarks.

You can look at these during the call as well as print them for future reference.

And now I'd like to turn it over to Jim.

Thanks, Mary and good morning, everybody.

It's been just about a year since I spoke to you about the issues facing McDonald's.

If I could summarize the past year in two words they would be momentum and strength.

Momentum because we made significant progress with our revitalization plan and strength because we are running better restaurants and beginning this year with a much stronger foundation.

So, how did we get here?

In just a year, we have moved a system of 30,000 restaurants to serve our customers better.

Our momentum is a direct result of focusing on our customers and making improvements in our restaurants.

Similarly, we are stronger as a system today because we are poised to execute.

Our business continues to demand the perfection of some of the basic tenants, QSE&B.

And this movement and progress will continue in the year ahead.

This is what we talked about one year ago and it will remain the core of what we will talk about today.

Let's begin our review with a look at sales.

We made steady improvement in comparable sales throughout 2003.

In the fourth quarter, sales exceeded everyone's expectations.

Our fourth quarter comparable sales increase was the highest in the past 10 years and provides great momentum as we kick off 2004.

Our quarterly constant currency revenue increases also improved sequentially; moving from a 1% increase in the first quarter to a 9% increase in the fourth quarter.

These top line increases are particularly satisfying in a year when we made a dramatic cultural shift in our approach to growth.

We changed our focus to adding customers to restaurants instead of adding restaurants to customers.

Understanding this change in focus is necessary to understand how we view our future.

We will continue to focus the organization on initiatives designed to grow same-store sales.

We will continue to open restaurants where we are convinced we can produce a good return, and for strategic reasons.

In 2003, this approach paid off through strong same-store sales increases and improved restaurant margins.

As we executed our plan, margins improved sequentially and ended this year strong.

We also controlled G&A during the year despite some one-time costs related to our revitalization.

We focused on our priorities and exercised discipline and we reduced G&A as a percent of sales.

We also delivered on our goal to become more disciplined in our use of capital.

We said we would substantially reduce capital expenditures and pay down a sizeable amount of debt.

We did both.

We also said we would return a significant amount of cash to shareholders.

We did this by substantially increasing our dividend and through share repurchase.

We increased the annual dividend 70% to more than $500 million and repurchased $439 million of stock.

The year 2003 was a year of financial momentum and we expect to continue the progress this year and beyond.

While discussing our results, I don't want to ignore the relatively large charges in the fourth quarter.

Let me be clear, I do not like charges.

But in 2003, I know the decisions that resulted in them were right for the business.

Let me share some details: In 2003 we said we would do fewer things better.

We sharply focused our system on initiatives that could move the business forward.

Consequently, we significantly narrowed our non-McDonald's brand activity.

We retained the U.S. businesses of Chipotle and Boston Market, and exited all other partner brand activity.

We will develop the strong potential of Chipotle and learn from and leverage the strength of the Boston Market brand.

We expect both brands to be profitable in 2004.

Our annual testing resulted in a charge related to goodwill impairment, primarily in the Latin American segment.

With a population of more than 500 million and a strong family culture, we continue to believe that in the long-term this segment is a great market for McDonald's.

The MaxiD valuations in Brazil and Argentina, and their spillover effects have taken a toll on our performance.

However, we have experienced this before and our experience gives us confidence that we will be able to succeed moving forward.

We took actions and incurred charges for strategic initiatives to turn around our Japanese business.

Including the termination of the management services agreement with our former partner.

With new management, thoughtful value positioning and leadership marketing in place, we are poised to improve our business.

Positive comp sales in November/December are signs of improvement in Japan.

We said we would review every aspect of our operations and clear the decks to focus on our customers.

As a result, we closed underperforming restaurants and abandoned technology projects that did not fit with our focus and strategies.

I believe our slate is pretty clean now.

Because of our focus and disciplined approach to running the business, I do not expect charges of this scale in 2004 or in the foreseeable future.

The items I just discussed are some of the aggressive and thoughtful actions we took in 2003 to revitalize our business.

Actions necessary to strengthen our foundation and prepare us for future growth.

As we look at 2004 and beyond, I'd like you to think about our business to-do list in two ways: execution and innovation.

First and perhaps most important, we will continue to treat the customer as our boss.

This approach has helped us make huge strides in reconnecting with our customers to the two underpinnings of our plan to win: operations excellence and marketing leadership.

Our customers will guide to us serve them and execute better.

We also strengthened our relevance to customers by improving the taste of many of our core menu products and introducing more relevant food choices.

Yet, we have more to do.

In 2004, we will innovate by creating more choices that we think will again resonate with customers and drive comparable sales increases.

We have made some progress in delivering fast, accurate and friendly service but not as much as we would have liked.

That's why executing great service will be the top priority in 2004.

We have a big opportunity in this area and we expect to make further progress through training, focus and diligent measurement.

Last year we also exercised leadership by introducing more relevant and compelling marketing through "I'm lovin' it"; our first ever global marketing approach.

Consumers have embraced it and it has motivated and aligned our entire system.

And the best part is I'm convinced this approach will result in even higher levels of customer relevance.

Another important action in 2003 was changing our management structure to add focus and firepower to the areas that need it most.

We put our most talented leaders where they will have the most impact.

Finally, we began using a more disciplined approach in tracking our performance, controlling our spending, and demanding accountability for results.

As I said, 2003 was a year of momentum and strength, and it is clear to me that McDonald's has turned a corner with a stronger foundation and a revitalization plan that is proving itself.

Going forward, we will execute and create a pipeline of innovations that gives us even more reason to have confidence and enthusiasm about our future.

This year will follow much of the same script to build on our successes, concentrating on the areas that still need improvement.

We will continue to revitalize our business by listening to our customers, executing our plan to win consistently around the world, relentlessly working to deliver a great experience to every customer every time, and implementing targeted innovation.

I'm excited about our plans for 2004, but I'm also conscious of the challenges we face.

The U.S. had very strong sales in 2003 so we will be up against some tough numbers.

Still, we're optimistic because we know the U.S. business improved as a result of a combination of initiatives that continue to create momentum.

We expect to build on each of those for continued success.

Outside the U.S., some key markets must increase customer relevance while other markets have economic challenges.

We are in a better position to overcome these issues today than we have been for some time.

Using what we have learned from our successes: relevant menus, strong value platforms, creative marketing, and better execution;

I'm confident more markets will achieve success as well.

Before I turn the call over to Charlie, I want to acknowledge the decision by Fred Turner, our senior Chairman, to retire after 48 years of service to McDonald's.

Long ago, Fred taught us the importance of operational excellence.

He leaves us with this important legacy and I'm confident this management team can continue his pursuit of serving customers with only the highest standards.

Now, here's Charlie, who will tell you more about our plans for 2004.

Thanks, Jim and good morning, everyone.

What drove our results in 2003 and will enable to us deliver good results again for 2004 is our commitment to and achievement of operational excellence and leadership marketing.

While we're pleased with what we've accomplished in 2003, we do not consider our work done.

We view 2004 as the year of unfinished business.

The year we will make even more progress in our operations and marketing by sharpening our focus on those things within our plan to win, which will have the most impact on our customers.

As you may recall, our strategic framework is built around five drivers of our business.

People, product, place, price and promotion.

Let's talk about our progress and plans within each category.

In the area of people, our goal is to be the friendliest restaurant experience.

We know that customers become just as attached to a neighborhood quick service restaurant as they do a five-star restaurant.

It's not just the ambiance or the food quality that drives this loyalty, because every good restaurant is expected have these.

The difference is customer service.

Notwithstanding that we have made improvement service this past year, we're elevating our global focus on service this year because we hear our customers telling us and I see for myself, that we still have room for improvement.

In the areas of speed, friendliness, and accuracy of service.

The fact that we've created a new position, Chief Restaurant Operations Officer, speaks to the emphasis and resources we're placing in this area.

We put our best operations leader, Claire Babrowski, in charge of marshalling the resources of our worldwide system to continually improve the customer service experience in our restaurants.

Additionally, we established a new position, that of Vice President of Global Measurement, to rigorously track our progress around the world.

At the country level, each one of our major markets is implementing a speed of service initiative with a focus on friendliness this year.

Our product strategy is to enhance the relevance of our menu through seasonal and permanent products.

Many of our markets made major progress towards this goal this last year, and it showed in our business results.

In the United States, McGriddles added to our already strong breakfast sales.

Since the product's introduction, comp sales for the breakfast day part are up over 10%.

Chicken McNuggets with white meat grew Chicken McNugget unit sales by more than 30% in the last eight weeks of the year.

Premium salads drove our average check up and brought in new customers and increased sales.

These new products, in combination with the enhancements to our core menu items, including all beef sandwiches and filet of fish, contributed to increase sales and profits and improved customer ratings regarding McDonald's food.

In Australia, the salads plus menu, which features eight items with 10 or fewer grams of fat, dramatically changed customer perception around freshness, wholesomeness, and the quality of our food.

It also increased comp sales by double digits since it's introduction in mid-August, resulting in mid-teen comp sales increases for the fourth quarter.

In Singapore, Fish McDippers created a splash with our customers.

As Asians eat two and a half times as much seafood as they do beef and chicken combined.

There is little QSR competition in the seafood category.

We will capitalize on this opportunity by rolling this product out region-wide along with other, innovative seafood products.

In Europe, seasonal premium sandwiches have contributed to incremental sales and cash flow.

The bigger Big Mac contributed to improved fourth quarter results in Germany and the Big Tasty increased December comparable sales in France.

This year, our strategy is to move our product successes around the system while rounding out our menu offerings with innovative, new food and beverages.

Our strategy with restaurant ambiance is to make our places into show places.

Many of our markets, including the U.S., the U.K., Australia, Germany and France invested in contemporary restaurant interiors that are making McDonald's a destination that people want to go to.

In 2004, our capital investment will be heavily skewed toward reinvestment initiatives.

France has reimaged approximately 300 restaurants over the past several years and has seen sales increases of 5 to 15% in those stores as a result.

The U.K., Germany and Australia, just began their reimaging programs towards the end of 2003 and will continue in 2004.

The U.S. reimaged 700 restaurants in 2003, the majority of which opened in the back half of the year.

These restaurants are performing above the market and we're encouraged by the early indications on returns, which we will continue to monitor closely.

The plan is to reimage an additional 1500 to 1800 restaurants in the U.S. this year.

Another area of focus for us in the place category is cleanliness.

Our efforts in this area are beginning to pay off.

Our customers are noticing that our restaurants got cleaner last year according to our mystery shop and fast track data.

To be a leader in the price category, we must be the best value, not just the lowest price.

The markets where we have sustained consistent value programs, that have a clear trend up strategy, have been successful in increasing transactions and profits.

The Euro Save, the platform in Europe, and the dollar menu in the U.S. are two examples of how this approach to value drives both the top and bottom line.

Our plan is to move these platforms out across the system where appropriate.

Our marketing leadership efforts in the area of promotion are enabling us to use the power of McDonald's size and scale to reconnect with customers and drive brand loyalty.

United behind a common marketing direction, "I'm loving it", we will continue our strategic focus on key audiences that have the most potential to to grow our business: young adults, women and families; because the strategy is working.

The USA Today ad track poll, conducted in November, confirms our "I'm Lovin' It" launch commercials were a hit with young adults.

The 18 to 24 age group liked the ads and found them affective in the poll data.

The Wall Street Journal ranked "I'm Lovin' It" as one of the top five campaigns of 2003, making McDonald's the only restaurant brand recognized with top honors.

In 2004, we will evolve our marketing direction to connect with our other key customer groups: moms and families.

You've started to see this already with the launch of our global packaging which features all of our customer groups engaging in lifestyle moments.

The expansion of our McKids line, in the toy category, the McFlurry maker was singled out as one of the hottest toys for Christmas by the Wall Street Journal.

And our new radio ads that feature the evolution of the "I'm Lovin' It" music style to country and western, rhythm and blues and more, which will broaden customer appeal.

This year we will also build on our marketing leadership through our Eat Smart, Be Active initiative, the Olympics, Euro Cup, World Children's Day, and global promotion of our core menu items.

McDonald's performance in 2003 signals that we have the right strategy in place to grow by being better, not just bigger.

The strategy is paying off; 47 million customers a day ate at a McDonald's somewhere in the world last year.

We have proven that we have growth opportunity and even our most mature and most penetrated markets; such as the United States, which finished the year with a 6.4% sales comp, and Australia which posted a 4.4% sales comp.

We are confident that we'll be able to replicate this success in more markets in 2004 while at the same time building on the great performance in the U.S.

Thank you, and I'll now turn over the call to Matthew Paull.

Thanks, Charlie.

Today I'll briefly review our quarterly operating results then I'll look ahead to 2004, and discuss some of the items in the outlook section of the 8K we filed last night.

First, the quarter's results.

EPS was 10 cents compared with a 27-cent loss for the fourth quarter of last year.

The quarter included primarily non-cash pre-tax charges of $408 million.

On an after-tax basis, the charges were $323 million or 25 cents per share.

The largest of this quarter's charges were $237 million pre-tax to restructure the partner brands and $137 million for goodwill and asset impairment, primarily in Latin America.

Now I'd like to turn to fourth quarter results in our three largest segments.

I'll start with the U.S.

The trend in comparable sales was strong in '03, increasing 12.5% for the fourth quarter and capping a year with nine consecutive months of positive comps.

Total sales increased 15% and revenues rose 17%.

The strong sales drove a 460-basis point improvement in company-operated margins and a 170-basis point improvement in franchised margins.

These successes continue to be driven by the synergy of new products, improved operations, extended hours, the dollar menu, popular Happy Meals, effective marketing, and an improved brand image.

Turning to Europe, comparable sales increased throughout the year with fourth quarter comps up 2.1%.

Of the three largest European markets, France and Germany generated low single digit positive comps during the quarter, while the U.K. posted slightly negative comps. 19 smaller European markets posted comp sales of 5% or better.

Total sales increased 20% or 4% in constant currencies over last year and revenues increased 18% for the quarter, or 3% in constant currencies.

Europe's company-operated margins grew 70 basis points, primarily due to stronger margins in France and in Germany.

From a margin component perspective, food and paper increased as a percent of sales, mainly due to lowering prices on Happy Meals in the U.K.

Labor improved primarily as a result of productivity improvements in Germany.

In the fourth quarter, Europe's franchise margins declined slightly when compared with '02.

This is partly due to lower initial fee revenue from opening fewer restaurants.

Moving on to Asia Pacific, comparable sales and margins have improved throughout the year.

Sales, revenues and margins for the quarter were helped by positive comp sales in Australia, but hurt by weak results in Taiwan.

I'd like to shift now to our outlook.

Our goals for '05 and beyond are annual systemwide sales and revenue growth of 3 to 5%, operating income growth of 6 to 7%, and return on incremental invested capital in the high teens.

We are not giving specific EPS guidance for '04, but I will provide some color on our expectations for some key expense items.

First, commodities costs.

We previously said we expect a 5% increase in beef costs in the U.S. and Europe for '04, with the U.S. seeing greater increases in the first half of the year.

With recent events affecting the U.S. beef industry, some have predicted U.S. beef costs will decline.

However, the market is still in a state of flux and we believe it is too soon to make a reliable prediction.

Thus, we maintain our 5% expectation with the understanding that it is subject to change.

To put this into perspective, a 5% increase in U.S. beef costs reduces EPS by about 1/3 of a cent.

Thus, modest changes in beef costs will not greatly affect our bottom line.

We expect chicken and other key commodities in the U.S. to be relatively stable.

In Europe, we expect chicken to increase slightly for the year with quarterly fluctuations.

Other key commodities are expected to be relatively stable in Europe.

Regarding labor, the average hourly rate in the U.S. declined slightly in '03 and is currently about $7.06.

We anticipate this to be relatively stable in '04.

In Europe, we expect moderate pressure on labor costs.

We expect the tax rate for '04 to be 32.5 to 33.5%, which is slightly lower than the 33.5% for '03 after taking out the effect of the charges.

This year we expect to invest between $1.5 and $1.6 billion in cap ex.

Most, if not all, of the increase over '03 is attributable to currency movements and reinvestment in existing restaurants.

The reinvestment piece of our cap ex will rise to about $725 million, as we continue to focus on building comp sales by creating more inviting and more contemporary restaurants.

We will spend about $640 million of cap ex on new restaurants.

This includes opening about 850 McDonald's restaurants, which is very close to the number opened in '03.

We will also open about 100 Chipotle restaurants.

With 400 planned restaurant closings, we expect to add about 450 net McDonald's restaurants in '04.

This compares with net additions of 162 in '03.

We continue to rigorously screen new restaurant opportunities to determine whether they will generate acceptable returns given market dynamics and potential, and the competitive environment.

As a result, more than half of our new restaurant investments will be in the U.S., France, Russia and China.

We expect to pay down between $400 and $700 million of debt in '04.

Despite this, we expect interest expense to be relatively flat; let me explain that.

We continue to finance many of our long-term investments in markets outside the U.S. with foreign currency debt.

For example, about $3 billion of our debt is denominated in Euros.

In this way, we better match our assets with our liabilities and better match our future cash inflows from selling hamburgers with future interest payments.

Because about 70% of our debt is denominated in foreign currencies, our balance sheet debt, and the interest expense on our income statement reflects changes in currency rates.

When foreign currencies appreciate against the U.S. dollar as they did in '03, both our debt balances and interest rate expense are translated at higher rates, resulting in higher reported U.S. dollar numbers.

This is the main reason why our interest expense in '04 is expected to be relatively flat in U.S. dollars, despite the fact that we paid down a significant amount ,of debt in '03 and expect to pay down another $400 to $700 million in '04.

This also explains why the reduction in our balance sheet debt in '02 versus '03 is less than the reduction that will be reflected on our cash flow statement.

The balance sheet reflects the higher exchange rates at year-end while the cash flow statement reflects the actual cash repayments of principal.

Currently, we expect to return about $1 billion to shareholders in the form of dividends and share repurchase in '04.

This item and others mentioned in our outlook for '04 will be updated throughout the year as circumstances dictate.

I am pleased with the starts we made in '03 toward improving our financial position, meaning both our financial strength and the discipline applied to how we use that strength.

We've made tough decisions, held ourselves to rigorous standards, and concentrated on doing more with less.

As we begin '04, we're in a good position to take additional, important steps in the revitalization of McDonald's.

Now I'll return the call to Mary.

Thanks, Matt.

At this time I'll open the call up for questions.

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

And to give more people an opportunity to ask questions, we do ask that you limit yourself to one or maybe two questions.

I think we have our first question from Adam Shiner at ARC Asset Management.

I actually didn't ask a question.

Thank you.

Okay.

Coralie Witter at Goldman Sachs.

Hi.

You had some strong improvements in a lot of parts of the world.

You highlighted weakness in the U.K., and just hoping you could talk about that a little bit more.

I know you've been testing salads there.

Can you could comment on that as well?

Charlie, do you want to answer that question?

Well, we've been working very hard, Coralie, on our U.K. business and we're confident we've got the right plan moving forward, which will be a combination of more relevant product offering and a better value -- better articulated value strategy in place, which will be put in over the course of this year.

But we're optimistic that we're on the right track in in the U.K.

It did dampen our results in Europe for most of last year, but we think we're on the right track.

And we'll talk more about our specific plans with regards to the U.K. and our product offering there at our March analyst meeting in New York.

Thanks for your question.

Thank you.

Our next question comes from Janice Meyer at Credit Suisse First Boston.

Well, it's going to be along the same lines so hopefully we don't have to wait until March to hear the answer!

Charlie, you mentioned in your comments earlier that one of your goals for '04 is to move some of the product successes around the globe.

Can you talk a little in order of magnitude which products do you think for 2004 have the most applicability in other markets, and which will have the most impact on your results?

Well, I think that, you know, the products that fit the screens of customer relevance in today's marketplace are the ones that are going to be transferred and in the U.K. we have a need to reposition our menu towards our Eat Smart, Be Active initiatives.

So, the products that we're going to do are going to fall under that strategic framework, but I will be able to give you more specifics, Janice, in March.

But, you know, along the lines of the salads plus menu in Australia and some of the chicken successes that we had, they'll form part of what we will roll out in the U.K. and in a number of our other markets around the world over the course of the year.

I hope that helps.

Thanks for you question.

Thanks.

Our next question is from Mark Wiltamuth at Morgan Stanley.

Hi, good morning.

Could you give us any details on new products coming through the pipeline for the U.S. and the year ahead?

And also in the U.S., do you think the extended hours that you've been operating at your stores will continue to impact comps into 2004?

Well, the -- go ahead.

I was going to say the -- our ability of our system to handle a rash of new products is not what the strategy is.

But in the U.S., we have some things in line and planned for this next year that involve line extensions and as we talked before, a focus on chicken.

In terms of specific products, you know, there's obviously competitive issues there and so I won't go any further than that.

I feel comfortable that we have a fairly aggressive, you know, plan to continue the momentum in the U.S.

And on subject of extended hours, by the end of the year, a majority of our U.S. restaurants were on some form of extended hours, but many of them got there in the latter half of the year.

So there will be additional wind at our backs on that issue in '04.

In addition, I think you will see extended hours spreading to other parts of the world.

I think you will also see more stores actually going 24 hours over the course of the year because we did have some success with our extended hour program here in the U.S. and a number of other markets.

And more and more stores will probably go 24 hours.

This is not something for every restaurant, but for strategically-placed restaurants, it's a good way to capture overnight business.

And, Mark, I would add that this has been an approach of a pull versus a push.

The program of extending hours sells itself, as the operators talk about their successes with each other.

Thank you.

Our next question is from Howard Penney at SunTrust.

Thank you very much.

My question is on the conversions.

Can you possibly be a little more specific as to the returns and increases in same-store sales that you're getting for the conversions?

How much money is spent on how many stores in 2003?

And how much money and how many stores are you going to spend in 2004?

And for what it's worth, I was a recipient of a McFlurry maker this Christmas.

It has yet to produce a single McFlurry due to a faulty design.

Thanks very much.

I know Matt wants to talk about the reinvestment, but on the more important note, I also got a McFlurry for Christmas, my son did.

I want to tell you that we were able to produce quite fine McFlurries, thank you very much.

I will call you and give you instructions!

I have several and will send you one of mine.

Howard, on the return issue regarding reimaging, there are answers at different levels.

There is the return issue at the store level.

That's a function of how much you lift sales and how long you sustain the lift.

Then, there's the issue about the brand level return and lifting the brand and making sure we keep our brand fresh and relevant.

I will give you a little bit of background on what our thinking is.

It is too early to give you a firm return number, but it's something we're watching very closely.

Charlie mentioned, we reimaged roughly 700 stores, most of those were finished in the last quarter of the year; so we don't have results that we can share with you, but we have seen outperformance relative to the TV markets in which those stores are located.

The way the program will work in '04 is that for qualifying restaurants, we will match up to $85,000 of the operators' investment in qualifying types of additions to the restaurant.

We think this is a good improvement over the program we had in place in '03 because, first of all, the operators investing is a good check and balance that we're picking the right store and doing the right thing.

And secondly, by sharing the cost with the operator, we can touch twice as many stores.

So, we're going to watch the store level return very carefully; but again, it's important to remember that a big part of this is about making sure that our 50-year-old company doesn't present itself as a 50-year-old brand to our customers.

We want to stay very relevant and contemporary and the interior and exterior looks of our stores are a big part of all of that.

And Matt, isn't it true than the operators are spending a lot more than their $85?

In the vast majority of cases, while we are limiting our investment to $85,000 per store, the operators are spending more.

And just to give you a perspective, on the rebuild front, we rebuilt about 70 restaurants last year in the U.S.; and are expecting to rebuild about 100 this year and we only rebuild those if we believe we're going to get a sales lift of over $300,000 a unit.

So, those are the perimeters we're using and the number we're going to rebuild this year.

Thanks.

Thank you.

Our next question is from David Palmer at UBS.

Hi.

Could you talk more specifically about incentives that you may be offering employees, in particular managers, with regard to driving improvement in certain service metrics?

And/or just any other specifics you can offer around your friendliness initiatives?

Thank you very much.

I just said one was a few months ago.

The U.S. had a friendliness initiative and questions were added to the mystery shops and awards were paid out to stores based on scores, based on the mystery shops.

I think it was a month, Charlie, wasn't it?

It was basically a quarter and it was specific on the friendliness part and the cleanliness areas of the restaurant.

And they went into a draw for a big prize.

And because we focused on fewer things, did them better, they were the attributes that moved the most over the quarter so we recognized that when we focus on a few key things and incentivize our management and crew, we can move the needle.

As I've said, you know, this is going to be our big focus over the course of the year, systemwide.

The focus on fast, friendly, and accurate service.

And not a choice of the three, but all three, the winning trifecta.

And there will be reward mechanisms and incentive programs put in place, country to country, market specific things that turn our people on.

Thank you.

Thanks.

The next question is from Mark Kalinowski at Smith Barney.

Yes, two things I wanted to ask about.

First, there's apparently a Reuters article out headlined "McDonald's 2004 same-store sales: The top 2003" and kind of gives the impression that Jim may have said '04 comps are going to be better than the good number posted in '03.

I just want a clarification on that?

And then the second thing is just looking at the other operating expense line, excluding the charge amount in '04.

Very unusual number in there, just wanted more clarification on what were the items in there, breakdown of that?

And what's the outlook for that line item in 2004?

Yeah, Mark, this is Jim.

Those quotes, if you will, were taken from an interview that I did do yesterday and, you know, the comment was more about how are you going to have positive increase or positive comps going up against what you did this year?

That was my response.

It wasn't anything that indicated I expected to have the same comps as we did this year, particularly the 12.2% in December in the U.S.

But I do feel confident that next year we will be able to show positive comparable sales, certainly for the year in the U.S.; and actually around the world and so I feel pretty good about, you know, our plans in place.

I mean this year, I'm talking next year, I'm getting all kinds of points at me!

I'm in this year, 2004, 2004!

I gotcha.

You got me, Mark?

Does that clarify it for you, Mark?

Yes.

And in that regard, we're not measuring our success one day, one week, one month at a time.

We will look at the whole year.

I say that because being involved with how we're achieving these sales increases, it's not a one-item thing like I see eluded to a lot about a product or whatever.

It is a very holistic approach to improving our business and getting results from all areas.

And I will cover the other operating question.

You said ignoring the significant charge.

There were several items in there.

I will deal with the three biggest, sort of in descending order of significance.

For the year we had about $60 million less in gains in '03 than we had in '02.

We aged our receivables, as you might expect, and we booked reserves for receivables that were more than a certain number of days old.

And then the third significant item is earlier in the year, as you know, we adjusted our development plans to reflect reduced cap ex.

As a result, we ended up writing off about $25 million in development costs on sites that didn't make it through these new screens.

In addition to those three, individually significant items there, were a number of other items, none of which by itself was very large.

Looking forward to '04, I think our gains in '04 will be much more like they were in '03 than in '02.

So, I expect them to be, you know, smaller than in '02, maybe even a little bit smaller than in '03.

When you look at the receivables situation and the issue with writing off the site development costs, those are things that we don't expect to see happening in '04.

So, I would expect that category to be much smaller than it was in '03.

Thanks, Mark.

The next question is from Joe Buckley at Bear, Stearns.

Thank you.

I had two questions, as well.

First, going back to the U.K.

I think last conference call you described a value plan, a new value plan that was being initiated or had been initiated as of early October.

And Charlie I think you mentioned, you know, a changed or modified value plan again in '04.

So, maybe if you would just talk about what you did in the fourth quarter?

And if it didn't work, why and what you're trying to do differently?

And secondly, a question on the reimaging.

I'm curious if there's a specific focus of the reimaging, you know, in terms of functions within the store or look within the store?

You know, if it's targeted in some way?

Okay.

Well I'll take the value one.

I mean specifically I think we learned a lot.

We had a program that was called McChoice, which started off in the first part of the year quite well in Europe.

But it seemed to have lost relevance and we will be out in the marketplace, I think, within the next two to three weeks with our new value strategy and that's called Pound Saver menu , which is very similar to the dollar menu in the U.S., except it's a pound.

So that's the strategy and we've got some very well-merchandised tradeup options will be part of it in the restaurants.

So, that's what we're doing in the U.K. and they will be in the marketplace within the next couple of weeks.

In fact, Jim Cantalupo and I will be in the U.K. tomorrow for the next couple of days, reviewing our plans and talking to our customers and our employees about the execution of this new strategy.

Joe, I think I recall the comments we had on value net.

There was nothing really ever executed in the fourth quarter specifically, but Choice actually goes back earlier in the year.

They revisited it in a minor way, but the real power is going to be put behind this Pound Saver menu.

And Joe, this is Matt.

On the issue of reimaging, first of all, the stores that qualify are stores where there is an opportunity to lift sales where the operator has a history of good operations scores and of appropriate reinvestment.

The kinds of things we're investing in are intended to be noticed by the customers and to lift sales.

Examples are updated seating and decor, dining room remodels, indoor and drive-thru menu boards, double-lane drive-thrus.

In some cases you might see a small amount of money spent on point of sales systems, not something the customer would necessarily notice, but it is important to us to someday position the U.S. to have an integrated cashless system, that allows us to sell gift cards and getting the right point of sale system into as many stores as possible will move us further in that direction much more quickly than we thought we could move.

And Joe, I'd also add, on that list that Matt talked about, we do have a focus on having the cleanest restrooms in the industry; and as a result of that, we are retiling a lot of our restaurants and upgrading the restroom facility in our restaurants so that we can have the cleanest, best-looking restrooms in the category.

Thanks, Joe.

John Ivankoe from JP Morgan has the next question.

Hi, great, thanks.

Thanks, sorry.

The question is on China, actually.

Just -- kind of looking at 2003, I think you opened on a net basis of about 30 units.

Certainly, you know, covering the industry, we hear a lot from a number of large competitors, are expanding aggressively into that market.

Could you comment on comps and returns and what you feel the growth opportunity is in China?

And when it might be appropriate to start thinking about an acceleration of new units in that market?

Thanks.

Well, I think I've been attributed with an acceleration this year in terms of some of the quotes.

We are going to open more restaurants this year than we did last year and Matt talked about them, our new restaurants being in the, you know, five markets; and China was one of them.

I tell you, John, I feel very positive about China.

We're making money there.

We went about it in a way that had a very long-term view.

We built a lot of infrastructure in China, but we did it because of the size of the market, you know, maintaining our standards and building our business the right way.

And I feel very good about the future in China for us.

So, we're accelerating this year.

I think we've got a lot of product initiatives going on and, you know, we're going to, you know, as we move forward, look at acceleration; but we do a good business in China and I feel very positive about the market, and I think we've done it the right way in terms of both distribution, product plants and factories and we're positioned well for the long-term.

Thanks, John.

Next question is from Andy Barish, Banc of America.

Hi.

Could you refresh my memory on kind of the long-term company margin goals and G&A goals that you've talked about?

And just one specific thing on European labor, I guess a little bit more color on that.

I thought you had seen some progress with some of the governmental easing of regulations in say Germany in 2003.

Is there something going on there?

Or is it more kind of internal staffing that leads you to think labor will be up a little bit?

Andy, I will cover the first part and I think Charlie will cover the second part.

On the long-term goals for company operated margin improvement, I believe that we said and we're certainly sticking to, beginning in '05 we believe we can improve company operated margins across McDonald's by 35 basis points a year; and I think we said long-term but we didn't say, you know, we didn't define long-term.

We think we can get back to year 2000 margin levels, eventually.

And on the G&A front, we said for this year -- for '05 and probably a year or two after that, we think we can take G&A as a percent of sales down by 10 basis points a year; but we don't think, given the technologies that exist today, that we can take it below 3.5 or 3.6.

We think we can get it to that point, and we think we can get there by 10 basis points a year; but circumstances change, available technologies change, so we will review that each and every year.

Andy, thanks for the question.

I just wish to clarify that we meant that labor rates will be up in Europe in '04, not necessarily as a percentage of sales.

Having said that, what basically drove our improvement in specific to Germany last year was based on our initiatives, and not something that really the government did, is that we found a way to better utilize our labor with a more effective mix of part-time and permanent employees; which allowed us to make the margin improvements that we did in Germany despite negative sales comps.

So, when we start to see sustained comparable sales increases in Germany, we should see even greater flow-through to the bottom line.

But labor rates are going up in all key European markets and we believe we'll be able to offset most of them with productivity gains as sales go up, but it's something we're faced with and it faces the whole category.

Thanks, Andy.

The next question is from Peter Oakes at Piper Jaffray.

Hi.

Hello?

Peter, it's hard to hear you, are you on speaker?

Peter?

Hi, can you hear me now?

Yes.

Hi, I'm sorry about that.

I actually had a couple of questions, if I may, given that you actually are opening the door for two.

The first one is on Europe.

As you noted, comps have definitely improved throughout the year, but when you look at operating income and particularly on a local currency basis, ex charges, it was stubbornly flat.

So, you have mentioned, obviously, the U.K. and a little bit of labor; but I am curious if there is anything else that's clearly limiting your success as far as fueling operating income growth?

And the other actually, is a competitive question, which normally you refrain from, but I just thought I'd give you the opportunity here, with a major domestic competitor clearly showing increased vulnerability, I'm wondering if you're thinking a little more about going for their juggler?

Thanks a lot. [ Laughter ]

With regards to Europe, as you know, Peter, our largest company operated base pretty much in the world is in the U.K.; and it's really been the U.K. that has been our lagger in the last 12 months.

Although we are seeing some signs of some improvement.

But because we have a disproportionately high number of company-operated stores there, it weighs heavily on the overall income.

And then there was also -- we had some nice increases in sales in Italy but we're still going through our revitalization program there with regard to some of the difficulties some of our franchisees were facing after the last couple of years.

So, that has taken a toll on our profit growth across Europe.

With respect to the major competitor, you know it's in our blood here;

Ray Croc once said it, if you see a competitor drowning he'd stick a hose down the throat.

We do know the one you're talking about is vulnerable, and we're going to work hard to make us continually successful and they'll have to play catch-up.

So, that's what we're focused on.

Joe, I don't think it's about one competitor -- Peter, I'm sorry.

It's about all the competitors.

You heard me before, I don't like to talk about market share because you don't want to share anything and that's how we've approached our business around the world; including the United States.

Thanks, Peter.

The next question is from Larry Miller of Prudential Securities.

Larry?

Hi, can you hear me now?

Yes.

Yes.

Sorry about that.

I wondered if you could give us a little more detail around your plans for service in 2004?

It looks like it's going to be a major focus?

And maybe if you could update -- you're working on a simplification process at your stores.

How many stores is that in?

And can you talk about the results thus far?

Thanks.

Thanks, Larry.

Well, with regards to service, there's three components to the whole service focus; and the first one is a program, we call in the United States shift into overdrive, which is a focus on better training of our shift managers.

Many of them are part-time employees, swing managers, as we call them.

And we're going up with a certification program for all of our shift managers across the United States.

That's the first thing.

The second thing is that, as you heard me say earlier that, you know, we want to be known as one of the friendliest places you can eat.

To do that, we're going to have a focus on hospitality and we're rolling out hospitality training across the system.

Earlier in the year, you heard us speak about our e-learning modules that were in development that we're rolling out through the course of the year.

We haven't penetrated them through 100% of the stores as yet, but it is our aim that by our worldwide convention in April, those modules will be in all the restaurants and being utilized for our crew and management training.

And then the other thing is that we will have a number of incentives and competitions at each market level to compete on the fastest drive-thru, the friendliest store; and this will be done on a market by market basis, depending on what's most relevant to that popular particular marketplace at a given point in time.

Then, we will measure the right things through our fast track and our mystery shop ratings.

We're thinking of changing the weighting on some of these things to give them more focus as we move forward.

I think that answers the first part of the question.

Matt will take the next part.

The simplification issue, this is a pull initiative, meaning the regions of the U.S. are pulling it into their stores.

And we think it's in something just under half of our stores currently.

By the end of the year, we expect to be on a national core menu and we will be reducing the number of products in our stores.

It is a big focus of U.S. management team to simplify the business and of operator leadership; but I don't want to make a commitment what we talked about and referred to as garner or simplification, three months ago, I'm not sure that that exact format will be in all the stores by the end of the year.

Thank you.

The next question is from Matthew DiFrisco at Harris, Nesbitt, and Gerard.

I just wanted to follow onto that question regarding reducing the number of products in the store.

Is that also -- or in tandem with the revitalization plan, are there also labor savings, whether in the back of the kitchen or at the point of sale?

Well, there are a number of things that we've been working on to put in our restaurants to help either reduce labor or reallocate labor in our customer service areas.

One specific one is our automatic beverage units for our drive-thrus, which is only in about 3,500 of our stores domestically here in the U.S.; and we have few of them internationally at this stage, but it's something that we're looking at.

But, you know, we have a number of things that we're looking at to improve our productivity at the store level.

In most cases it will result in us being able to reallocate labor to customer service areas.

Okay.

And then just two bookkeeping questions.

It doesn't say in the 8K, your cap ex for 2003 or depreciation at the end of the year?

Matthew, we have not finalized our cash flow information yet.

We will release those numbers in a couple of weeks.

In terms of cap ex, you know, we expect it in the $1.3 billion range.

And the cash from operations for the year will be in the neighborhood of $3 billion.

And our free cash flow will be, you know, almost double what it was the prior year.

But you will get those final numbers in the next couple of weeks.

Thank you.

The next question is from Bob Coldman at Gardner and Russo.

Yes, good morning, thank you.

One question is a point of observation.

I noticed on your drinks, there's no Coke badging and I was wondering if you renegotiated your contract with Coke or what should be the takeaway?

And then I have a follow-up.

Well, you know, the Coke badging is on several of our sizes, it's not on all of them.

You know, we talk with Coke all the time about positioning.

There's no contract to renegotiate!

We don't have a contract with Coca-Cola.

We have a -- you know, an understanding and arrangement and a partnership.

And our policy is, Bob, on the sizes that are the most suitable for young children, it's only the McDonald's logo that is on there.

We don't put any Coke branding on those cups.

But on the larger -- on the larger serving sizes, which are more likely to be carbonated soft drinks for our young adult customers, that's where we'd have their branding.

Great.

Thank you.

The follow-up question is dealing with the definition of incremental capital.

I was wondering if Matt could take us through that to keep us all on the same page so we know what this metric means to have a return in the mid-teens on incremental capital?

Thank you.

You know, it's basically the change from year-to-year in gross assets.

That's how we're defining incremental capital.

Right.

And then the numerator is operating income plus depreciation.

So, I know mean it's a fairly straight forward calculation.

So, you know, the change, year-over-year, but that's the numerator.

Thanks, Bob.

We have a few follow-up questions.

We're going to try to get to them.

Howard Penney -- or -- well, sorry.

Howard Penney at SunTrust.

Then we will come back to somebody who didn't have a first question.

I assume you don't have your cash flow information that the cash that you don't have, what you actually paid down, the cash payment on your debt?

Yeah, we have -- we don't have final numbers, but we have a pretty good idea.

It might be slightly higher than what we signaled last quarter.

Which was --

We thought it would be at the high end of the range, $700 million.

We actually think we will come in even higher than that, but don't have the final number yet.

Does that help?

Okay.

So, Mitch Speiser from Lehman Brothers.

It's clearly a catalyst for the stock.

This year --

Mitch, I'm sorry, not to interrupt you, but you didn't come through at first.

Can you repeat that?

Sure.

In 2003, capital discipline was a -- was a big catalyst for the stock and this year it looks like you plan on returning about a billion dollars to shareholders, which is about the same as '03.

And the cap ex budget is higher than '03, and just want to understand the decision making as to why you wouldn't want to return, perhaps, more capital to shareholders.

And secondly, the other operating expense line, just want to follow up that, that $107 million, excluding the charges.

That's usually an income line.

I'm wondering, in terms of '04 guidance, should we model that as a swing to income or just less of an expense line?

Thank you.

Less of an expense line, Mitch.

And on the capital discipline issue, when we looked at our business and looked at what it needed, we said we're not going to open as many stores as we did a few years ago; but we've looked at what happens in the business this year and we think we've made our brand more relevant in many ways.

The menu, the marketing and now we've got to do something about some of the buildings in the U.S., which are over 20 years old.

And so there's a significant part of our cap ex increase that is going to reinvestment in existing stores, very consistent with our strategy and almost all of the balance of the increase is due to a change in currency values.

The change in currency values will also drive our cash from operations higher.

And when we said we're going to return about a billion dollars to shareholders in the form of dividend and share repurchase, that is not a firm number.

It's about.

It could be higher, it could be lower.

We're going to wait and see how the year evolves.

We don't think this is a significant shift in strategy.

We are spending a little bit more on reinvesting in existing stores.

It's about brand relevance and we think it's the right thing to do for shareholders.

This is Jim, you know, as those cap ex numbers went up a little bit, so did our cash flow, certainly coming from Europe, in terms of things -- so, this currency issue is a big one with regard to those differences.

I mean it makes up a big difference -- you know, part of the difference.

And the reason we did not give you a constant currency number for cap ex, that 1.5 to 1.6 is intended in '04 to cover all reasonable movements in currency.

Thanks, Mitch.

Mark Kalinowski at Citigroup has a question?

Yes, just looking at Latin America, I hope I'm calculating this correctly.

But if you exclude all the charges, I'm showing double-digit negative margins in Latin America in Q4.

Is that accurate?

And if so, what is going on there that's led to even more margin deterioration?

Mark, I think you're talking about operating margin.

Yes.

Like --

Operating, exactly.

We had issues in two markets principally that drove the results to where they are.

That's Brazil, which a few years ago was a very strong market for us, and Argentina.

If you look at the northern half of Latin America, if we broke it out that way, which we don't, you would see fairly strong numbers, good margins, decent returns.

So, we have -- what we believe is a temporary situation with underperforming economies in Argentina and Brazil and we think when the economies come back we will like what we have there.

In the meanwhile, we've put very little additional capital into those markets and we stopped expanding in those markets a couple of years ago.

I would add, Mark, this is Jim.

It's been well publicized, we have some issues with our business in Brazil, with some of our franchisees there.

So, some of the numbers are impacted by that, which, you know, we're working diligently to get resolved so we can move forward on that side of the business.

We talk about Europe being overly influenced by the U.K., well, Latin America is overly influenced by Brazil.

And -- and that's really the cause -- and Matt talked about -- I think writing off the receivables is in that number.

And is the goodwill write-off --

Mark was excluding that when he was talking about the trends.

Thanks.

We have a follow-up question from Janice Meyer.

Thanks, Mary.

On the remodels, assuming the remodels work terrific in 2004 and you want to do even more stores in 2005, can we expect cap ex to go up again, assuming the returns are there?

Or do you have some sort of a -- you know, an absolute dollar limit in your head where you say, you know, if these remodels are working that's great.

Or if new stores are working, but there is a cap ex number, at least for the near-term we do not want to go above, excluding currency, obviously.

Yeah, Janice, I don't have an absolute number, but I can tell you there's not -- in my scenario there is not a major shift in strategy on the cap ex line.

We're about the discipline about running the business.

But, you know, some of it, as I said, most of the difference we're talking about.

We're opening the same number of new stores and we have a, you know, a program with our franchise an incentive program here in the states, which we are not, you know, we intend to go forward with it and make the adjustments that you would make based upon returns and performance; but I don't see any huge increase in cap ex numbers moving forward for any of those particular reasons, but, you know, as I said, the currency moves around and that's what accounted for a little more of the jump this year.

And I'd add, Janice, the -- the range that we gave you, the 1,500 -- I think the 1,800 stores is probably about the level that we can handle and do them right.

Because in many cases you need to get some approvals by third party authorities, governments, et cetera and we don't want to overstock our construction and design area and we think in balance that's about the right level.

And -- and really, longer term, you know, it -- it's impacted by where we get the -- do we get a good return on the incremental capital, as Matt is talking about.

I think as our business improves, you know, we have a -- we have had and have in many markets a very good business model.

But as I've said initially, our challenges are not convenience.

We have most of our markets, we are the dominant player and it's not about, necessarily about building more restaurants.

There are some markets out there and I mentioned, when John asked the question about China, you know, we I think lost a little bit of focus on China.

We made some changes in management in the area because it's such an important thing for our future.

And really can be a very large market for us.

And, you know, and as I said, as we move forward and our returns are there on the capital, you know, that's one market where we could open a few more stores.

Thanks, we have two more questions, then we will close the call.

Larry Miller at Prudential Securities.

Yeah, thanks a lot.

I just wanted to follow up on some of the issues that you're having it sounds like in some of the Asian markets: Taiwan, South Korea, Hong Kong.

If you can talk about that, any of the impacts from the food safety things going on over there, bird flu, SARS, mad cow and so forth.

And just to clarify, it sounds like ex foreign currency exchange your cap ex budget would be relatively flat with last year, is that correct?

No, that's not correct.

The currency movements explain some of the incremental cap ex, and the balance is explained by additional reinvestment in existing stores.

Thanks, Larry.

Well, with regarding those markets in Asia that you mentioned, Hong Kong, Taiwan and so forth, as you know, the SARS had an effect on our business last year; but we believe that we can rebound from that and we're going through our whole supply chain to make sure that we have continuous supply of our chicken products, despite the issue that has developed in Thailand with the chicken supply situation there.

But we're confident we will have continued supply of our chicken products to our markets in that area of the world.

And McDonald's prides itself on having the highest standards of health and safety when it comes to food.

A lot of the beef for that part of the world comes from Australia and New Zealand and that has a good reputation for high quality-safe products, and we will continue that focus going forward.

Thanks, Larry.

Okay, our last question is from Matthew DiFrisco.

Hi.

You gave the number for the number of stores to be revitalized domestically, 1,500 and 1,800 range.

What is it on a global basis?

Yeah, I don't -- I don't know that I have a global number for you, Matthew.

I think we mentioned that there are a number of markets in Europe that are going to be reimaging some of their restaurants, but the number's probably not going to be much more than, you know, say about 1,000-plus worldwide, maybe. 1200?

We will certainly be able to pin the number down for you by March.

I would just add, Matthew, the average age of the stores outside the U.S. are much less than they are in the U.S.

So, the need to reimage isn't quite the task it is here in the United States.

Thanks.

With that, Jim has a concluding comment.

Okay, thank you everybody.

We thank you for your questions.

As we move into 2004, with hard won momentum, with still see this year as a year of unfinished business; and as a year of even more progress and more opportunity.

Last year we accomplished a tremendous amount in and the progress we've made has inspired our entire system to do even more.

If there's one thing I'm most pleased with in terms of our performance in 2003, it's our people.

Specifically I'm pleased with the ability of our organization to embrace change.

We shared a vision of how the company needed to get back on track.

Our people around the world showed power of what they can do when they put their minds toward the same goal.

This shared vision and shared focus is why our plan to win is delivering.

It's also why I expect continued improvement in the year ahead as we relentlessly focus on execution and innovation.

Thank you all for your questions.

Ladies and gentlemen, thank you for participating in today's program.

This concludes the call.

You may now disconnect.