麥當勞 (MCD) 2004 Q1 法說會逐字稿

Welcome to the McDonald's April 28 investor conference call.

As a reminder, this conference call is being recorded.

I will turn it over to Mary Healy, Vice President of Investor Relations.

Ms. Healy, you may begin.

Hello, everyone.

Thanks for joining us today.

The McDonald's system lost a great leader last week with the passing of Jim Cantalupo.

I want to begin by saying how much we appreciate the support the investment community demonstrated during this difficult time.

Your expressions of sympathy and words of encouragement meant a great deal to all of us.

On behalf of McDonald's Investor Relations team, and the entire McDonald's system, I want to say thanks for your thoughtfulness.

Jim truly enjoyed sharing his passion for McDonald's with investors.

He found your perspectives on the business stimulating, whether or not he agreed with them.

Rest assured that we will continue to foster an open dialogue with investors.

Today you will hear from our new CEO, Charlie Bell; our CFO, Matthew Paull; and the President of McDonald's USA, Mike Roberts.

As usual, 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 www.investor.mcdonalds.com as is our 8-K filing of the release and supplemental financial information.

Now, I would like to introduce Charlie.

As you know, Charlie was appointed CEO last week.

What you may not know is that as President and Chief Operating Officer of McDonald's, he was the co-architect of our revitalization plan.

With that, I am pleased to turn the call over to Charlie.

Thank you, Mary.

And good morning, everyone.

As proud as I am to address you as McDonald's's CEO and President, the passing of Jim Cantalupo is truly a sadness for me, and the entire McDonald's system.

As you know, 30,000 members of our system were gathered together by our annual convention when Jim passed away.

This was a tremendous shock, an outpouring of grief throughout our ranks.

Yet the remainder of the convention evolved as a rededication of our resolve to follow through on the unfinished business of McDonald's revitalization.

This is a testimony to our people and to the spirit Jim fostered.

During the past 28 years with McDonald's, I had the privilege of working closely with Jim.

His passion for McDonald's was contagious.

When Jim returned to the Company 16 months ago, he knew we could right the ship.

He challenged all of us to make the necessary changes to revitalize the business.

And he inspired us to meet the challenge.

He liked to say that McDonald's had a new boss, and he stressed it wasn't him.

It was the customer.

He brought an incredible discipline and focus to the business.

Jim was a brilliant leader and a great friend.

We know the best way to pay him tribute is to continue to execute the plan to win that Jim and I put in place a year ago.

It is about making McDonald's better, not just bigger.

It is about operational excellence, and leadership marketing.

It is also about strict financial discipline.

I recognize that this last area is of particular importance to you, as investors.

You should know that I will continue to work closely with Matt, our Chief Financial Officer.

Matt and I have had our offices next door to each other for the past 16 months and there is a well-worn path between the two doors.

In fact we spent many a night together burning the midnight oil.

I have a great deal of respect for Matt's expertise and insights.

We are intent on continuing to deliver significant and growing free cash flow well into the future.

In 2004, we will use that cash to strengthen our financial position, and return at least $1 billion to shareholders.

We are staying the course, because our strategy is working.

We have momentum.

In fact, there has been a fundamental lift in our business.

In the first quarter, we served 2.3 million more customers per day than we did the same period last year.

That's right. 2.3 million more customers per day.

This is the equivalent to adding 1,500 new restaurants.

But as you know, we added just 102 McDonald's restaurants, in the last 12 months.

Clearly, our strategy of adding more customers to our existing restaurants is working for our system, and our shareholders.

This impressive growth in customer visits is a key reason for our exceptionally strong first quarter performance.

Even when you exclude the benefit from stronger foreign currencies, sales were robust.

Worldwide comparable sales increased 9.4%, the best quarterly comp sales performance in nearly 20 years.

The U.S. delivered stellar results with same-store sales up more than 14%.

And Europe had its best performance in the past two years, with a 3.5% comp sales increase.

Across the board, all geographic segments generated positive results.

In addition to top line sales growth, margins improved.

The final results, earnings per share for the first quarter increased 38%, compared to the prior year.

Let me assure you we are not stopping here.

We are intent on continuing to drive positive results in the U.S. and Europe, the two largest contributors to sales and profits at McDonald's.

We will also continue to extend successful initiatives to Asia and Latin America.

You will hear more from Mike Roberts in a few minutes, but I can tell you we are confident that the U.S. will have another good year in 2004.

In Europe, we're out to achieve sustainable momentum.

We've gotten off to a good start this year.

We just introduced Salads Plus, a menu platform that leverages the best of the U.S. premium salads and the Australian Salads Plus menu.

This relevant menu platform is helping to continue the momentum.

In fact, it looks as if comparable sales in our largest three European markets have bounced back nicely in April, after slowing in March.

Replicating successful initiatives across the system is important to our ongoing revitalization.

A McDonald's worldwide convention of owner-operators, joint venture partners, suppliers and company executives held in Orlando last week was an excellent opportunity to do so.

The convention could not have begun on a more painful note.

But as I said earlier, our system showed tremendous unity and strength as we moved forward with the meeting.

I personally found all the support inspiring.

In addition, the alignment between the owner/operators, suppliers and the company was tremendous.

We designed the convention around the foundational elements of our business.

Operational excellence and leadership marketing.

Under the banner of operational excellence, service was the key focal point.

As it is a big opportunity to differentiate McDonald's.

Our owner/operators left that meeting keenly aware that service is our top priority.

They were equipped with the tools and training systems that will help our restaurant employees deliver a new level of customer satisfaction.

And our suppliers left that meeting with a clear understanding of their role in supporting our restaurants to profitably deliver customer satisfaction.

Leadership marketing also had a high profile at the convention.

Which demanded the importance and potential of "I'm lovin' it" around the world by demonstrating its brand power and unveiling 30 new relevant commercials that will support our business plans this year and beyond.

An important component of our "I'm lovin' it" approach is to build brand relevance and excitement by partnering with global icons in the world of entertainment, music, fashion, and sports.

For example, Yao Ming, the Houston Rockets NBA superstar, will be prominently featured in our physical fitness initiatives and as part of our Olympic sponsorship.

In addition, we recently renewed our worldwide partnership with the Olympics through 2012.

As a top sponsor, we will have a very strong presence at the Olympic games in Athens this summer through our global advertising and promotions, as well as on-site activities where McDonald's will seek thousands was athletes, coaches and spectators.

We are also continuing to promote balanced lifestyles with menu improvements.

The launch of the Go Active adult Happy Meal in the U.S., and the global launch of www.goactive.com, an innovative Web site developed in partnership with the international Olympic committee.

Now, before I turn the call over to Matt, I want to leave you with a few thoughts.

First, as Chief Executive Officer, I intend to maintain the discipline and focus that Jim Cantalupo put in place.

I'm honored to have been selected to lead the strong management team that Jim assembled.

I believe that in spite of the tragedy, we have a tremendous advantage with the leadership of Jim Skinner, Jose Armario, Claire Babrowski, Mike Roberts, Russ Smyth, and Marvin Whaley who are seamlessly running our restaurants.

I consider myself fortunate to have the benefit of drawing upon the insights and counsel of the Company's talented Board of Directors.

And with Andrew McKenna as Chairman, the Board has an exceptional leader.

Second, although we have come a long way, there is still much to be done.

We know we have challenges ahead.

And we're prepared to meet those challenges head-on.

Results have demonstrated that running better restaurants is a strategy for growth.

So we are staying the course.

We will continue to do what is working, but we will do it even better.

We have alignment, we have passion, we have our customer focus, we're intent on making our restaurants our customers favorite place, and way to eat.

Finally, I'm confident that 2004 will be another good year for McDonald's and that we will consistently deliver on our financial targets that we set for 2005 and beyond.

Thanks and now I will turn the call over to Matt.

Thank you, Charlie.

Before we get to the quarter, I want to comment about last week's events.

We lost a great business leader and a wonderful human being.

People of Jim's caliber do not come along very often in life, or in the business world.

While our professional and personal loss is huge, we take comfort in knowing that Jim had more fun in the last 16 months than most CEOs have in a career.

While all of us will miss Jim, I couldn't be more pleased with the decision our Board made naming Charlie CEO and President.

If I put myself in your shoes, I would be asking whether our strategic direction or our approach to capital is going to change.

The answers are quite simply no, and no.

Our strategic direction will continue to focus on the customer, and our plan to win.

And as for our approach to capital, you should know the plans we employed in the past two years were the product of a country-by-country review Charlie and I did together, so there is no reason to expect any changes.

Charlie shares the passion Jim had for our restaurants.

Charlie's passion, his enthusiasm, and energy when dealing with market level management, restaurant managers and crew, and his unique to get others to see the brand through the eyes of the customer are just a few of the qualities he brings to the table.

Now I will turn to the quarter.

The strong U.S. performance reflects our ongoing menu, service and value initiatives.

They are working together to revitalize our business.

Mike will discuss U.S. strategies in a moment, but I will share just one example of the strength of our core menu.

Each week, we sell eight to nine times as many double cheeseburgers as we do salads and we sell a lot of salads.

Turning to Europe, our long-term strategies include a menu with the right combination of branded everyday value offerings, and premium selections, supported by the right advertising.

We are also enhancing menu relevance and the taste of our core products.

Along with our people and promotion strategies, we believe that these strategies will grow our European business.

The Salads Plus menu is an exciting example of our efforts to increase relevance.

The advertising campaign for Salads Plus will be a very significant marketing initiative in 2004.

It is also the first McDonald's campaign in Europe targeted directly to women.

The commercials feature the tag line, "New food, new people."

Because we are certain this new food will attract new people to McDonald's.

People who haven't visited us in a long time, and some who came but did not eat.

Salads Plus advertising began in Germany on April 2.

And in the U.K. on April 14.

While still very early, initial results are encouraging.

But as in the U.S., our success won't only be measured by how many Salads Plus products we sell, we hope and we expect Salads Plus will send the message that we're listening to and that we understand our customers' needs.

If successful, there are important positive implications for our brand image.

Salads Plus will continue to roll out to a total of 16 European markets by the end of the summer, notably France will introduce the program in May.

We have always known that variety is important to our European customers.

In the past, we have offered it on a country-by-country basis via fragmented, inconsistent, nonsustainable fourth flavor options.

In fact, in 2002, for example, we offered more than 500 different fourth flavors across Europe.

Contrast that with how we are providing variety with Salads Plus.

Our European food studio developed a single menu with one set of packaging for use throughout Europe.

And this one menu is supported by commercials that can be shared among all the countries.

One menu, one message, big savings, and a big step in the right direction.

To add more relevance, we plan to test Chicken McNuggets with white meat in the Netherlands, the U.K. and Sweden in the second quarter.

Now I will discuss some of the other results for the quarter.

Consolidated company operated margins increased $103 million or 31% over first quarter last year.

Continuing the improvement begun in third quarter 2003, related margin percentages rose 160 basis points.

Margins improved in all segments, led by a 370 basis point improvement in the U.S.

Occupancy and other was the largest driver of the margin percentage improvement, dropping 90 basis points as a percent of sales.

This is mainly due to better leverage of comp sales against fixed costs.

As a percent of sales, food and paper improved 10 basis points and labor improved 60 basis points.

In the U.S., labor and occupancy and other expenses were the biggest drivers.

Europe's company operated margins as a percent of sales improved 60 basis points.

This is primarily due to stronger margins in Germany, France and Russia.

These were apparently offset by a decline in U.K. margins which hurt Europe's margins by 50 basis points.

The U.K. declined because the launch of value initiatives did not drive sales as much as expected and because there was no additional food news to promote trade-up.

Based on our experience in introducing everyday value menus in other markets, we are not surprised by the initial impact on margins.

And we believe that Salads Plus will provide a nice compliment to the U.K.'s everyday value program.

We are confident that as in other markets, this strategy will ultimately help build sales, and margins, in the U.K.

On a consolidated basis, franchise margins increased $149 million, or 21% over first quarter '03.

Generally, franchise margin percentages were strong across the board.

The 160 basis points increase was led by the U.S. which had a 210 basis points improvement.

This improvement reflects the leverage of fixed costs against higher comparable sales.

G&A expense increased 15% or 10% in constant currencies.

As a percent of systemwide sales, G&A remained flat.

Our guidance for full-year G&A changed from up slightly to an increase of up to 5%, primarily due to higher incentive compensation from improved operating performance.

Other operating expense was higher quarter over quarter due to higher losses on property retirements and dispositions, and lower gains on sales of restaurants.

Equity income in the U.S. and Japan was higher.

The U.S. remodeled 100 restaurants in the first quarter.

We expect to complete 350 in the second quarter.

And we will accelerate our rates as the year goes on.

As we have said, it is still very early to measure remodel performance.

But where we do have data, we continue to see sales lifts of about 5% above the rest of the market, which as you know is up double digits.

We bought back $271 million of stock in the first quarter.

For the year we expect to return at least $1 billion to shareholders through dividends and share repurchase.

I will close by reminding you that our longer-term financial goals have not changed since we first shared them with you in April of 2003.

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

Now, Mike will update you on the U.S. business.

Mike?

Matt, thank you very much.

I want to begin by saying that we are making progress against our U.S. plan to win, because of the foundation that was laid by Jim.

We're improving our service, we're adding new relevant menu items, we're growing our convenience advantage, we're reimaging our restaurants, and we're focusing on marketing that is more targeted and relevant to our key audiences.

Another critical component of our progress is the alignment we have with our owner/operators and coming out of the worldwide convention, this alignment is as strong as it has ever been with one plan centered on doing what will have the greatest combined impact on all of our customers, and as Charlie said this focus is paying off, with sales, guest count, market share, and owner/operator cash flow increases.

This momentum continues to be driven by our U.S. plan to win.

With all of the components working together, across multiple targets, across multiple audiences, and multiple day parts.

I want to emphasis, though, the opportunity in front of us is greater than the progress we've made.

The opportunity to serve more guests, improve service, and grow our convenience advantage at our existing restaurants.

The foundation of our progress is service.

And returning McDonald's to its routes of operational excellence.

And our restaurant measurement process, ROIP, indicates that we are executing more consistently.

Our overall mystery shop scores in March were the highest since the program began, with significant improvement.

And speed of service at the front counter and at drive-through.

We also measure our performance by customer feedback.

And in fact, customer praises increased 14% while customer complaints decreased by more than 10%, during the past quarter.

These are significant indicators that our restaurant performance is improving.

One of the reasons for this improvement is "shift into overdrive" training.

By the middle of this year, we expect to have more than 90,000 restaurant managers shift-certified, meaning they've been trained or retrained in their restaurants on the basics of running a shift, and this includes scheduling, positioning, production, and customer interaction.

Beyond "shift into overdrive," we're also focused on increasing drive-through efficiencies, through optimum layout, improved ergonomics, with the right equipment in the right places, and a reduced number of POS key strokes.

Another key driver of our performance is food.

We continue to see strong movement of premium salads, McGriddles, and McNuggets made with white meat.

Each of these premium products is driving average check, with the average salad check more than $8, the average McNugget check more than $7.50, and the average McGriddles check $1.50 higher than the overall average breakfast check.

What's more, customers are noticing these improvements, giving us higher marks for taste and the quality of our food.

Like white meat nuggets which are up 35% compared to a year ago.

And McGriddles which resulted in a 12.3% increase in breakfast during the first quarter.

And this represents the third straight quarter of double-digit breakfast growth.

With these important core menu items as the foundation, we will launch two new premium products this year, a Fiesta Salad and Chicken Selects.

The premium Fiesta Salad, which is being rolled out as we speak, will be advertised nationally beginning May 11.

It includes a base of mixed greens, seasoned beef, cheddar/jack cheese and tortilla strips, all topped with Newman's own salsa dressing and sour cream, if you wish.

The other new product we will launch is Chicken Selects, whole breast chicken strips with a variety of dipping sauces.

Both of these products have performed very well on our test markets and resulted in higher average checks, and lifted the movement of our entire salad and chicken lines respectively.

For kids, we will roll out our Happy Meal Choice program by the middle of June and this allows children the option of choosing apple dippers instead of French fries, and milk jugs or apple juice instead of a soft drink.

Related to place, we're growing our convenience advantage with two key initiatives.

The first is extended hours.

We estimate that comp sales during the evening day part were up almost 28% in the first quarter, compared to a year ago.

And further opportunity remains.

Currently, 75% of our restaurants are on some form of extended hours, but less than 12% are on 24 hours.

We expect this number to grow during the spring and summer, as we cater to customers' lifestyle patterns.

The second initiative that leverages our convenience advantage is Cashless.

Our goal is to have Cashless in 8,000 restaurants by the end of this year and test markets, Cashless continues to drive incremental sales, higher average check, and it's faster than cash.

Related to place, as Matt said, we reimaged 650 restaurants in 2003, with very encouraging results.

In fact, an impressive 50% of our customers that we spoke to at several reimaged restaurants said they would visit McDonald's more often because of this new restaurant experience.

And this year, we will continue these efforts with another 1,500 planned.

Our national dollar menu also continues to drive our business.

And we're especially pleased with the integration that occurs between the dollar menu and the rest of our menu.

For example, one in four salads is sold with an item from the dollar menu.

And one in four Happy Meals includes the same.

Related to promotion, our goal is to be even more relevant to our target customers.

The Fiesta Salad, which I mentioned earlier, will be available in our Go Active adult Happy Meal.

Which includes a stepometer, a bottle of designing water and a booklet that contains Bob Greene's walking program.

The timing of the Go Active Happy Meal for adults, which also launches nationally May 11, coincides with Bob's 36-day walk and bike across America.

Which kicked off in Los Angeles last week and continues today, in Albuquerque, New Mexico.

The Go Active challenge gives McDonald's's the opportunity to tell our balanced lifestyle story, for 36 straight days, in both the cities in which Bob passes through, as well as many other local markets.

And you can monitor Bob's progress yourself at www.goactive.com.

Our focus on remaining relevant to our target audiences will continue throughout the year.

With continued emphasis on our Happy Meal properties that appeal to children, like ESPN mini video games, Neo Pets and our 25th anniversary Beanie Babies Happy Meal.

With our Sony Big Mac music event this summer, with the evolution of "I'm lovin' it" and with other exciting promotions we will talk about in the coming months.

So in summary, we're committed to enhancing our performance together in 2004, with the alignment of our owner/operators, our employees and our suppliers, through improved service, and better training.

More relevant food news, extended hours, reimaging, Cashless, targeted marketing, and most importantly, one collective customer focus across the U.S. system.

Thank you.

Mary?

Thanks, Mike.

At this time we would like to open the call up for your questions.

Please press one if you have a question.

And the pound key to take yourself out of the question queue.

We would like to ask to give more people an opportunity to ask questions if you could limit yourself to one, I know it is challenging, but just try for me.

And later you can press one again if you have another question.

We have a few people queued up.

We're going to start with Mark Kalinowski with Smith Barney.

Hi.

I just want to ask about Europe and sales and margin trends there.

First, it sounds like there may be more helping out the April sales trends than just the salads, for example, sounds like France has turned for the better, and if I understand correctly, France is not yet promoting the salads, so I just want to see if there is more going on there.

And also, just wanted to look at the U.K.

Margins were apparently down there year-over-year in Q1, and just wanted to see if it is McDonald's thinking that the salads will help drive year-over-year margin improvement in Q2 or if more is needed to get margins on the upswing there.

Thanks.

Mark, it is Charlie.

Matt and I will attempt to answer these questions.

First of all, we didn't have a good March, which was large in Europe, which was largely due to negative trading day, which hit us for about 2.2 points in March, so things have bounced back nicely for us in April in pretty much all of our European markets.

You're right.

We don't launch the Salads Plus in France until May and it started in Germany earlier in the month and wasn't advertised in the U.K. until halfway through the month and it has been helping us.

And you saw in the release, we have had some nice margin improvement in Europe, but U.K. is still a drag on it.

But I think what this is all about is the combined solutions.

There are a number of things that we're putting in place.

Salads Plus is one element.

More relevant restaurants.

And improving our service and having more relevant marketing.

So all of these things I think are coming to bear, which has helped to start off April a little stronger.

Matt, do you want to add anything?

Mark, we won't get into too many details about April, but we recognize we have a margin opportunity in the U.K.

We closed the quarter with a low positive comp.

It was slightly positive.

We had some rising wages.

We launched some everyday value initiatives that didn't move sales as much as we expected.

But most importantly, we didn't really have an appealing trade-up product available in the U.K., we now do, but we did not in March and in most of the first quarter.

We had a not real strong Happy Meal property in March in the U.K.

And I think we will get a handle on this, but it is not just Salads Plus, it is a combination of things.

Thanks, Mark.

Thanks.

The next question is from Coralie Witter at Goldman Sachs.

Hi, you made some interesting comments about the impact of the extended hours in the U.S. driving, I think late night up 28%, for example.

Have you considered extending the hours in a similar way in Europe?

And are there any barriers to doing that without labor laws or other situations?

I think it is certainly an opportunity for us, Coralie in Europe to extend the hours.

There are a number of zoning restrictions in many of our European countries that we have to tackle, but obviously the success that we've had in the U.S. and elsewhere, it is obviously a natural thing for us to gravitate to.

We have a number of 24-hour stores in many of our European markets and we're extending the number of those 24-hour stores.

But it is not something that is dramatic at this point in time.

But Canada is also extending their hours.

And had an advertised extended-hours program last year and they will be doing that again, I believe this summer.

Thank you.

The next question is from John Glass.

Thanks very much.

From CIBC.

I just wanted to go back to the salad launch in Europe and maybe if you could share any initial similarities or dissimilarities with the U.S. roll-out, for example, are you getting some decent attachment rates from pound saver or Euro saver menus along with it?

Also I'm wondering should we expect any margin impact from either the roll-out cost of the product or the incremental advertising, if it is in fact incremental advertising, using to support it.

I think we described John, for you, what we've done with the whole Salads Plus platform in Europe, is take the best learnings from the U.S. and Australia.

So it is not just the premium salads here in the U.S.

There is the fruit and yogurt [inaudible], similar to what we have in the U.S.

And there's a grilled chicken caprasi [ph] sandwich.

And then in the U.K. in particular, there is a vegetarian offering as well.

But, I think it's early days yet,.

In Germany, we have had salads on our menu in Germany in the past.

I think if you've been to that market you would have seen the salad offering that we had before, but it was more of a side salad or something that you have in addition to a meal, and this is our first attempt in there with full meal entree salads.

But we're coupling this with the value programs that we've put in place in Germany about three or four months ago.

And also what we put in place in the U.K. eight weeks ago.

And I think that the combination of these two things should be able to provide incremental sales and profitability for us.

Whilst the advertising has just launched really in the last two weeks.

It is not a significantly high media wave that we were writing the previous period last year.

I think where the power is coming is that the message is a lot more focused.

As Matt said, we are using the same advertising and merchandising in all the European countries that we are launching this in, and as we move it across Europe over the next two to three months.

Do you want to add anything, Matt?

I just want to caution everybody that while some things do transfer easily from market to market, we can't expect an exact duplication in Europe of what we saw with the salad launch in the U.S.

It could take a little longer.

There are many different issues.

And on the issue of food cost and margin effects, what we're trying to get to is to balance every day value with a premium offering.

As was the case in the U.S. and probably in Australia, the Salads Plus menu, food cost percentage is probably a tiny bit higher than the average item, but the penny profit is very significant.

So we think in the long run, we will achieve a nice margin improvement through a balance of everyday value and the premium offerings.

Thank you.

Thanks, John.

Thanks.

The next question is from David Palmer.

Hi, I'm trying to figure out how I should be forecasting the food margin going forward.

It looked like you controlled that line item very well in the quarter, and I'm thinking back to last year, when you had the unbundling of value menu items in the U.S., people maybe not buying as many fries, which has a lower food margin item, when you're rolling out the dollar menu, and that may have been offsetting some of the inflation that we would have seen in the U.S.

And perhaps you're doing some other stuff on supply chain.

I'm just trying to think about how, in light of all of that, and, obviously there is different mix changes occurring regionally, how should we think about that food margin going forward?

David, it is Matt Paull.

I will try to answer a very difficult question.

There are several things going on here.

First of all let me clarify in the U.S. our fry sales are up.

Secondly, on commodity costs and views for 2004, I will deal with the U.S. and then beef cost, we still believe will be up 5% for the year in the U.S.

They were up more significantly than that in the first quarter.

They were up about 13% in the U.S.

But for the year, we're still forecasting about 5%.

If we did not raise prices one bit, the effect on us would be a third of a penny on EPS, maybe 15-20 basis points on our margins, again if we did not raise prices one bit, and a quick reminder, we have a more than a $6 billion breakfast business in the U.S., and we sell almost no beef at breakfast.

Chicken prices for the first half of the year, we expect will be flat.

Cheese is up a bit.

But not a significant impact on our margins.

In Europe, we're forecasting beef to be up about 5% for the year.

And again, if we did not raise prices at all, that would have a one-half penny effect on our EPS for the year.

And chicken for the year in Europe, we expect to be flat for the year, but this will be quarter-to-quarter fluctuations.

Thank you.

The next question is from Jeff Omohundro with Wachovia.

Thanks.

I wonder if you could expand a little bit on the Cashless program.

And in particular, if you can give us maybe some metrics around the improvements in average check, and speed of service.

Well, Jeff, our goal as I said, is to have Cashless available in 8,000 restaurants.

We know Americans are paying with credit cards.

We've got it in almost 2,000 restaurants to date, sales are up in those restaurants above the market and you know the market is up double digit for us.

The average check is also up significantly, over 10% of the transactions now are Cashless, and speed of service is improving.

I can tell you we're optimistic about the number that I have projected here in terms of number of restaurants, and, we're optimistic about what we think it can do for the business.

It is also a drive-through application will will help speed our service there, and we're excited about it.

And would a significant increase in average check be over 10% or --?

It is less than that.

Okay.

Thank you.

One of the potentials that we have, once we have this technology in the restaurants, is to be able to do more with gift cards in our system.

And that has a lot of upside potential for us, if we can work that one out.

Thank you.

Thank you.

The next question is from Larry Miller at Prudential.

Yeah, thank you.

Can you hear me?

Yes.

First of all my condolences on your guys' loss, and I wish you good luck, Charlie, I know you didn't want the job this way, but best of luck to you.

My question was on "made for you" used in the U.S., but not in the international markets, and yet you do produce a lot of premium products in the international markets and I was just curious maybe if there's differences between the U.S. and the international markets that let you do that, or if maybe it suggests something about one system being better than the other.

Well, first of all, thank you for your kind words and wishes earlier.

I appreciate that.

As does the whole team.

I will tell you, about 50% of our system is on the "made for you" system.

And the other 50% of the system is on the, what we call the "grill direct" system.

And the operating systems that are used really depend upon the menu complexity that we have and the average store volumes of a particular market.

And I think we've got the right operating systems in the markets that we have today.

And we're working on improving both.

So I think we will continue to have both operating systems at play in McDonald's and we will continue to make enhancements to them.

Some tweaking here and there.

But no major changes planned.

Thank you.

The next question is from Joe Buckley at Bear Stearns.

He has removed himself from the queue.

Thank you.

The next question is from Janice Meyer at CSFB.

Thank you.

My question is on your U.S. food initiatives.

If I look out to 2005, you've done Salads Plus in a lot of the globe, but the U.S. seems to me at least to be positioned more as salads.

So is there an opportunity in '05 to make that Salads Plus maybe add flat bread sandwiches or something like that?

And Burger King and Wendy's have recently upgraded their chicken sandwiches, that sounds like it is in line with your comments of adding premium products, you've upgraded the Chicken Selects, you upgraded your salads, is there any reason why we shouldn't think you would look at something like that as well?

Yeah, Janice, this is Mike.

We are looking at it right now.

We have it in three test markets, the Salads Plus, it first appeared in Los Angeles, and Southern California is having a very robust first three months of the year.

In terms of premium chicken improvement we are also testing that product now in our core lab here and I expect the test market to develop before the end of summer.

So we will have plenty of new food test sales in place this year for a potential launch in 2005.

Our customers will ultimately decide what products are launched and we are excited about what we've got in place.

And we're not taking our attention off our core menu, because salads of our core menu, our core brand of products like Big Macs and Quarter Pounders with cheese and enhancements we've made to the Filet of Fish, and our Chicken McNuggets, approving big winners for us in the U.S. and Mark and his team, a concentrating on improving the quality and improving the marketing of the core menu as well.

As Charlie said, right after we improved those products, we informed our customers of new news on the core menu, and the marketing was terrific and had a great impact on our results.

Thanks, Janice.

Thanks.

Our next question is from Robert Shweitz [ph] at Burnham.

Perhaps.

Let's go on.

Joe Buckley I think is back in queue.

Joe, are you there?

Mary, can you hear me?

Yes.

Question on Europe.

You gave us some pretty good color on the U.K. in March.

But, obviously I think more than just the U.K. was soft in Europe in March.

I know that's reversed itself here in April, but we would appreciate just a little bit more color on some of the other major markets in Europe in March.

Joe, it is Matt.

Let me just give a perspective.

I think what happened when we did our March sales release in early April, people looked at the February number, this is one of the issues with releasing monthly sales, and February was really -- it looked strong in Europe, I think it was more than plus 7, and in March, we were minus 2.9, and that shift of 10 points looks very significant.

But the trading day effect, which was plus 4 in February and minus 2.2 in March, that explains 60% of that perceived change in momentum, so I don't want to overreact to what happened in March.

And one month is not a trend.

I mean I think we've had five consecutive months of comparable sales increases in Europe, and until we had the blip in March.

And as Matt just said, a lot of that was mainly due to the trading day adjustment and there were some other issues I think going on in Europe at that time, a lot of snow in the last couple of weeks of the month, and there was some other events that caused a lot of media concern and hype down in Spain, as you know.

So it is a combination of things.

But, we've been working at trying to achieve a sustainable turn-around in Europe.

And we were on track, we had a blip in March, April is looking good for us.

And we're confident with the types of combined solutions that we're putting in place in the marketplace as we should be able to have a nice performance moving forward.

And I want to add one other thing, Joe.

While there was this event that was well-reported in Madrid, and there was some weather effects in the latter part of March, we don't think either one of those had a significant effect on our sales.

Thank you.

The next question is from Peter Oakes at Piper Jaffray.

He dropped out of the queue.

Then we will take the next question from Matt DiFrisco at Harris Nesbitt.

Hi.

I have one original question and one clarification if you can take the time to do that.

You mentioned 10% transactions are on Cashless, I assume that is in the 2,000 stores that are up to speed or is that a full system number?

And then my question to you, or original question is, you spoke about the breakfast business, and the McGriddles seem to be a driver of average check, not necessarily as much of a traffic gain, is there anything in the forefront that we could be seeing coming out soon to drive traffic a little bit more on the breakfast side, maybe even an espresso-based coffee drink, perhaps.

Matt, Mike, the Cashless transactions and average check are a result of the nearly 2,000 restaurants that are on board now.

That was our test sell.

And in terms of McGriddles, the goal here now is to continue to make America aware that we have McGriddles and to relaunch them.

Our guest counts at breakfast are up.

Our sales have been up double digit since we launched McGriddles.

Profitability is very strong on that product.

So obviously, in our menu work, we continue to focus on coffee and orange juice, and other opportunities, on our menu, but the focus now will be on really making America aware that McGriddles is a great-tasting product and we've done well with it so far.

And Matt, this is Matt.

The guest count issue is very important to us, you might remember Charlie started the call by saying compared to first quarter of '03, we're bringing in 2.3 million more guests per day.

That's very significant movement.

And we're getting our share of those at breakfast.

Thanks.

Right.

I guess I was looking at more the espresso-based coffee being similar to salads and bringing in a different customer that you might not be reaching now.

I think Mike indicated that when we talk about improving our core menu, our coffee offering would be part of that and that is something that we are looking at working on.

No immediate plans.

You're not going to see something in the next 60 days.

But certainly it is an area of opportunity for us.

We are one of the largest sellers of coffee and certainly one of the most convenient places to get coffee through our drive-through service.

And I think as America's taste for coffee has changed and evolved over the next decade, we need to respond to that, and it is something that is on our agenda, but not in the near term.

Thank you.

Thanks.

Next question is from Howard Penny at FBR.

I'm good, Mary.

Thanks.

Hi, Howard.

You're good?

Yeah, thanks.

Okay.

Paul Westra, SG Cowen.

Thank you.

Good morning.

Multi-part question on Europe here.

Can you update at least me on where the Euro saver is currently installed now and, in particular, is it in all the 16 countries that are going to get the salads, and if not is there some reason why in some markets that one-two punch does not apply?

And then part B and C, can you just talk a little bit more about the opportunity in Europe for breakfast, given the cultural differences and maybe the extended hours that work so well here in the U.S.

Thank you.

Okay.

Well, Matt and I will have a stab at this.

And you got several questions here.

The breakfast Euro saver and so forth.

Euro saver is in place in Ireland, Spain, Belgium, Italy.

We have the pound saver in the U.K. and a program called McDeal in Germany and they're all extensively basically the same thing but just a different marketing name.

Some of them vary in terms of the number of items.

We do not have a sustained program in France at this point in time.

It is being looked at and researched.

And we'd hope to have something in place in March -- in France over the coming months.

But we also have had good success with the premium products that we have put in place in those markets.

Such as the Big Tasty, which has been in some of our markets that have the Euro saver that has worked well as a trade-up mechanism.

Insofar as breakfast goes on the continent, I think it is an area of opportunity for us.

We haven't quite cracked it yet.

We just launched breakfast in Hungary in the last three months.

And it has been a terrific success.

And so we think if we can sell breakfast in Hungary, and get double-digit sales out of it, that we ought to be able to do that in other European markets.

But eating habits are very different at breakfast on the continent than they are in certainly North America or the U.K.

We have a strong breakfast business in the U.K.

But it is an area of opportunity for us that I know Russ Smyth and his team will be pursuing over the next year or so.

And for perspective, as you know, we're just over 25% breakfast business in the U.S.

Across Europe, it would be somewhere in the low single digits right now.

Across Europe and many marks aren't offering it yet.

Thank you.

Okay.

I believe we have a question from Vinny Muscaleno at David L. Babson.

I was just wondering what operating cash flow was in the quarter?

Vinny, we don't have that information yet, but we will have that when we file our 10-Q, in probably about 10 days or so.

Okay.

Thanks.

Let me emphasize that, as we said on March 8, we are committed over the long term to growing cash from operations faster than we grow Capex.

And so we expect free cash flow to continue to grow over the long term.

Great.

The last question is from David Palmer at UBS.

David?

Hello?

Hi, David, go ahead.

Sorry.

The Happy Meal choices basically the apple slices and the other beverage choices, I'm just curious, if you can give any color as to how those have tested?

Has that really moved the needle as far as driving Happy Meal sales?

David, in test these options have generated an enthusiastic customer response.

In fact, what we're finding is they become add-on products.

The apple slices as well as the milk jugs.

We're frankly selling more than we had planned.

And it is helping.

Obviously, for us, this is about offering choice, and it is about physical activity, and information about all of our products, and customers have asked for more choice, and so have moms, and salads and Happy Meal choice are a big part of our relevance play here, and we're excited about the offering.

It will be in all restaurants here in the next month or so.

And moms and kids are going to have a choice.

So we're excited about it, David.

Thank you.

Thanks.

I think we have a few more people who queued up for a question.

We will try to go through some of those.

Larry Miller at Prudential.

I'm hung up on value.

Do you think you have a value issue in the U.K. maybe last month when you launched the dollar menu.

Was there anything in particular of that menu that caused the value proposition to run askew.

I wouldn't say it ran askew.

I think if you're alluding it our issue of margins in the U.K.

I think at the same time we had a big push on service, and I think we might have pushed the needle too far, because our labor costs were up, which was the major issue for us in the U.K. last month.

But I think now that we have got the Salads Plus on top of the pound saver, I think the two things will compliment each other and give us the desired result as we move forward.

Thank you.

You're welcome.

Mitch Speiser at Lehman Brothers.

Mitch, are you there?

Yes, thank you.

A question on returns.

I know, Matthew, you mentioned your targets return on incremental invested capital in the high teens.

Looking at it from a pure ROE standpoint, I believe your ROE was about 17% this quarter.

It did peak at about 22% about three, four years ago.

And just wondering if there is any constraints to reaching that target again.

I take it you are leasing more stores now, better capital discipline, and just wondering from your perspective, if you could perhaps reach or surpass that peek that you reached about three or four years ago.

Thanks.

Mitch, I don't want to make any predictions, but I don't see any constraints.

And, let me reiterate, we said that we expect next year to deliver returns on incremental invested capital in the high teens, without the benefit of any currency effects, and for this year, we expect to hit the mid-teens.

Thank you.

Thanks.

We have a question from John Ivankoe.

John, are you there?

Yes, I am.

Can you not hear me?

Yeah.

Go ahead.

Okay, great.

Thanks.

Actually my question is on Canada, noticing the big comps and margins there.

I was curious where that market was in terms of Salads Plus or value or perhaps your other things, looking at performance at that market that could be learned from markets elsewhere.

Thanks.

Well, they actually launched, I think about 18 months ago, a healthy choice menu.

And it took some while do to get some traction.

But what we have been on about in the system is transferring proven success.

And so we had success with McGriddles and Chicken McNuggets made with white meat in the U.S. and that is certainly something that we put in place in Canada.

Plus we have a 169 McDeal menu that continues on in the marketplace, that was put in place about mid-last year.

And all those things combined giving us a nice turn-around in Canada and I think our team is doing a very good job there, as well as all the other things we're doing to enhance the brand with more relevant marketing and so forth.

But we're very pleased with our Canadian results.

And, Charlie, they have been a part of our core menu improvement team, here, as a part of a global effort to improve it.

Sure.

So that all the enhancements that we make with the core menu here in the U.S. are being immediately transferred to Canada.

They're both on the same operating system so it makes that transfer of procedures a lot easier and that is happening and we're getting much more synergy of our efforts, as we get more focused on the things that count to our customers around the world.

Thanks.

I believe we have a question from Peter Oakes at Piper Jaffray.

Hi, good morning.

I was hoping we could go back to Europe for a moment and I would be curious, Charlie, what all does your research tell you as far as how big of a barrier has relevancy been for the major European markets, and maybe you can bench mark that versus what you faced in the U.S. and Australia?

Thanks.

Well, first of all, I think our issues in the European countries are very different to each other.

I don't think it is one issue across Europe.

I think our brand is very relevant in France, our team in France has done a very good job of making themselves part of the French culture and we have had pretty good results out of France and good returns and good margins for a number of years now.

Obviously, we would like to do better, and we will.

Germany's issues were basically external, because the economy, as you know in the past has been the laggard of Europe, they're basically in recession.

And I think that we were slow to respond to that economic condition, and now that we have, certainly in the last six to nine months, our results have trended better.

The issue in the U.K. is one that I think I would mirror the same issues that we had in Australia a year ago.

The whole focus of the government on obesity issues, potential fat tax, et cetera, et cetera, McDonald's unfortunately became the poster child for that in both those countries.

In Australia, we did a better job of responding quicker to that, because we basically said that, look, we don't think we're the problem but we want to be part of the solution and we're going to take certain actions in our product offering and in our marketing, and let people know in that country that we're serious.

And there goes the Salads Plus menu.

I think what we're doing in the U.K. is the same strategy.

We're being more open and transparent about what we're doing.

We're making nutritional information available and I think the Salads Plus launch is a step in the right direction.

But it is going to be a number of things that we need to do.

But thanks for your question, Peter.

Thank you.

I believe we have a question from Robert Shweitz at Burnham.

Last year, you spent $900 million on stock repurchase and dividends.

You've now said that you plan to spend at least $1 billion this year.

You've already expended $391 million, I believe, in the first quarter -- or $271 million in the first quarter, versus $391 million in all of last year.

I wonder if you could give us a little bit more flavor on this subject, including why you spent as much in the first quarter of this year.

Robert, this is Matt.

We repurchased about $271 million of stock in the first quarter.

We have committed to returning at least $1 billion to shareholders through dividend and share repurchase.

There were some opportunities to acquire the stock at what we thought was a good price.

And I don't want to reveal when we're in the market and when we're not and why, but I will say this, that we're going to generate a lot of cash flow this year, we will have a lot of financial flexibility, and I'm sure that we could afford to spend more than $1 billion, which is why we've signaled that the amounts returned to shareholders will be at least $1 billion.

But it is important to us to maintain financial flexibility and so we're not going to be a lot more specific except to say it will be at least $1 billion this year.

Thank you.

And do you envision a dividend increase?

Our Board of Directors meets on that subject in the fall.

And they will certainly consider a dividend increase.

But I want to control expectations.

We should not be expecting anything like a 70% increase that we had last year.

Thank you.

Thank you.

I think we're about out of time.

I'm going to ask Charlie to close with a few comments and we appreciate your participation today.

Thanks, Mary.

As you can imagine, it has been a difficult week for us at McDonald's.

I want to thank you for your understanding that my first priority during the week had to be the 1.6 million members of the McDonald's family.

I also want to thank you for your support.

So many of you sent notes and we really appreciate all the condolences.

I'll look forward to working with you more closely in my new role.

As we finish this call, I want to leave you with these thoughts.

We will stay the course and to continue to execute our plan to win.

Our strategy of being better, not just bigger, is firmly entrenched in our system.

All of our plans revolve around being more relevant to our customers so we can drive business at our existing restaurants.

We will maintain strict financial discipline.

I'm confident our business trends will continue because we are aligned and focused.

Yes, we went through one of the biggest and unexpected changes that an organization can.

But our customers were able to go to their local McDonald's without interruption, because we have strong leadership in place through our dedicated owner/operators, suppliers and employees.

I am confident that we will deliver good results this year and be in a position to deliver on our targets in 2005 and beyond.

Thanks and have a great day.

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

This concludes the program.

You may all disconnect.

Everyone, have a great day.