麥當勞 (MCD) 2004 Q2 法說會逐字稿

Welcome to the McDonald's July 22, 2004, investor conference call.

As a reminder, this conference is being recorded.

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

Hello, everyone.

Thanks for joining us today.

This morning you'll hear from our CEO, Charlie Bell, our CFO, Matthew Paull, and the President of McDonald's Europe, Russ Smyth.

As usual, this conference call is being webcast live and recorded for replay.

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

That release is available on investor.McDonald's.com, as is our 8-K filing of the release, and supplemental financial information.

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

Well, good morning, everyone.

I'm pleased to report that sales and profit momentum continues at McDonald's with record results for the second quarter.

Systemwide sales increased 11%.

Global comparable sales were up 8%.

The highest second quarter increase in 17 years.

Operating income growth increased 17%, and EPS increased 27% to 47 cents per share.

This strong performance is a result of our continued focus on the McDonald's plan to win.

Today I will share with you our plans for continuing the road back to revitalization of McDonald's.

But first, I want to start by thanking you for your well wishes and support, regarding my health.

I want to tell you that my health continues to be good as I undergo treatment.

To date, I've had three chemotherapy treatments.

I feel good, and I'm looking forward to a complete recovery.

And I'm focused on the business at hand.

And that business is the ongoing revitalization of McDonald's.

As encouraged as we are by our current performance, we realize we still have work to do in improving the customer experience at our restaurants.

Today, the plan to win has stabilized our business.

Globally we're increasing sales, customer visits, and most importantly, profitability.

McDonald's relevance is increasing thanks to faster service, better tasting and more contemporary food and beverage offerings, cleaner, more modern restaurants, and stronger, more consistent value on our menu boards, and hip, fresh, relevant marketing.

To strengthen our position in the marketplace and become the undeniable category leader, we must now move from being just competitive with our customer experience, to being the superior, most relevant restaurant experience.

We will do this by getting even better in each of our five P's -- people, product, place, price, and promotion.

And transferring that success quickly throughout our system.

In the area of products, we were successful in combining the best of the U.S. premium salads and Australia salads-plus platform, to launch European salads-plus menu in 15 countries in less than 5 months.

We did the same with Chicken McNuggets made with white meat, which are now in the United States, Canada, and the U.K.

They'll be launching in Australia and additional European markets over the next 6 months.

We have been refining our product development and testing process to style products even more quickly and broadly with more certainty.

As a result of this work, we'll be launching new products simultaneously in multiple markets.

And we expect more efficiency with supply chain and marketing as a result.

I'm sure you understand that for competitive reasons, I cannot be specific with the products or the timing.

But what I can say is that the items we will be pulling from our pipeline, we will be pulling them into a position of strength.

Our brand today, has more elasticity to be able to do things with premium and higher priced products, beverages, and side items than it did 2 years ago.

For example, in the U.S., our premium salads, fruit and yogurt parfaits, and Chicken McNuggets made with white meat, together represent a $2.8 billion brand.

In the area of people, our service times have improved as we have replicated successful speed of service initiatives around the world.

Our customer research tells us this is still our biggest area of opportunity.

We need to provide even quicker service, and most important to our customers, courteous, polite, and friendly service.

That's why we launched the era of I'm lovin' it! service in late April, with an emphasis on hospitality training.

Our mystery shop, where independent evaluators assess McDonald's on an actual visit, show that our friendliness scores are improving in every top market.

However, the real key to our success will be when more of our customer base recognizes they're getting faster, friendlier service at McDonald's.

Changing perception takes time, and we will not divert our focus on service or be satisfied with our progress, until service is our distinct competitive advantage.

We will apply the same aggressive approach to the areas of place, price, and promotion.

The emphasis on reimaging our restaurants will continue as we strive to make our brand and restaurant experience more relevant for today's customers.

Value platforms that include lower priced items and a premium product trade-up strategy, will roll out in more markets worldwide.

And we will continue to evolve our marketing with the I'm lovin' it! brand campaign, which has been hugely successful in connecting McDonald's with additional customers.

I in was France 3 weeks ago visiting restaurants and attending the international advertising festival in Cannes.

I think it's worth noting that an I'm lovin' it! commercial won an award there.

The reason we were there was to take advantage of the festival to bring together our marketing and advertising leadership from our top 10 most important markets to McDonald's.

Their mandate is to take our I'm lovin' it! marketing success to the next level, by infusing even more creativity into our advertising, more innovation in how we reach our key customer groups, and more relevance into our promotions.

Leadership marketing at McDonald's has increased our relevance, not just in the promotion of our brand, but across all five P's of our plan to win.

As evidenced by the first-ever adult Happy Meal, featuring a stepometer, which started in the U.S. and is now being launched in Europe later this summer.

McKid, with a new line of videos, toys, books, and clothing, that was recently launched in 25 retail locations in China.

McCafe, our coffee concept in countries such as Australia, New Zealand, Russia, Hong Kong, and Ireland, that brings new customers into our restaurants and drives additional front [inaudible] styles.

E-learning that trains our crew and managers through a medium that is in tune with their lifestyle and makes the customer experience more relevant.

Nutritional information on the back of our tray liners, and wi-fi in our restaurants.

These are all examples of how marketing leadership combined with operational excellence are revitalizing the brand.

McDonald's future is rife with opportunity.

We have come a long way, but there's still significant growth we can capture.

This growth will come on many fronts.

Better execution of [inaudible] extended trading hours, and even more targeted and efficient marketing, value, and food news.

We will not rest until McDonald's is the market leader in consumers' minds.

We have a deep and talented management team leading McDonald's into what I am confident will be a successful and profitable future.

Which leads naturally to the topic that's been of interest lately - succession planning at McDonald's.

As always, our board of directors has a plan in place should the need arise.

There are no current plans to appoint a Chief Operating Officer.

With minimal disruption to the business, we've strengthened our structure, and I'm confident we have the right people in the right places to continue our revitalization.

Vice Chairman Jim Skinner, who at the beginning of the year assumed management oversight of Japan, a market with steadily improving results, will bring the same focus to Latin America, Asia, the Middle East, and Africa.

Helping to accelerate our revitalization in these two very important segments to our growth.

I'm confident that McDonald's, USA, CEO, in partnership with President Ralph Alvarez, Mike Roberts and Ralph Alvarez, and the entire U.S. leadership team will continue to deliver good results even as the U.S. faces tough comparisons from last year.

Ralph Smyth, President of McDonald's Europe is doing a terrific job, leading the revitalization in Europe.

Our operations and innovation pipeline for global people, product, and place strategies is in the capable hands of Chief Restaurant Operations Officer, Claire Babrowski.

Our shareholders will continue to benefit from the work Matt Paull has done in restoring financial discipline to McDonald's, and the leadership he will bring to our corporate strategy group.

And more customers will be lovin' it more often, as Larry Light advances leadership marketing at McDonald's.

Our management team is focused on our restaurants and our customers.

We are aligned around the plan to win, and intent on providing sustained profitable growth for the McDonald's system and our shareholders.

Thanks, and now I'll turn the call over to Matthew.

Thanks, Charlie, and good morning, everyone.

I'd like to expand upon the results we reported this morning.

Then I'll review some guidance for the year.

McDonald's delivered a strong second quarter.

In the U.S., quarterly comp sales were driven by a combination of menu, service, and value initiatives.

Clearly there has been a solid lift in the U.S. business.

A fundamental improvement that is not tied to promotional activity, but rather a lift due to improved relevance and better restaurant operations.

During the second quarter, we refreshed our salad offerings with the addition of the limited-time Fiesta Salad and our first-ever national Happy Meal for adults, which prominently featured our premium salads.

We actually sold more salads this May and June, than we did in the same months of 2003 when salads were launched and heavily advertised.

We also began to promote Happy Meal choice for our most discerning customers -- kids and their parents.

To keep our momentum going, we've teamed up with Ty, and its popular Teeny Beanie Babies, once again.

This promotion, which features McDonald-themed bears and celebrates the 25th anniversary of the Happy Meal starts tomorrow.

Next month, we'll roll out phase two of our strategy to improve our chicken portfolio, and build on the growing popularity of chicken.

Chicken McNugget made with white meat, the first phase of the strategy, has met with considerable success.

Since their introduction in November, the year-over-year sales of chicken McNuggets have been up about 30%.

Phase two is the August introduction of chicken selects across the U.S.

Chicken selects improve the relevance of our menu and add a premium product with a strong adult appeal, to our chicken lineup.

On the service front, we're making it easier for customers to choose McDonald's with extended hours and cashless service.

About 80% of our U.S. restaurants are now open longer, with 19% offering 24-hour service this summer.

We're finding that as awareness of our new hours builds, so does our business.

Cashless is speeding up service and increasing transactions.

Currently, about 4,500 U.S.

McDonald's accept cashless payments, and 7,000 to 8,000 will by year's end.

On the value front, the products on the Dollar Menu continue to resonate with customers as a great way to build a meal, and as add-ons.

In Europe, we've built on existing momentum during the quarter, and generated our strongest comp sales growth in more than 2 years.

Russ will expand on how our plan to win is driving European results, in just a few minutes.

Now let's turn to margins.

I'd like to start by sharing a perspective about margins.

Our goal is to increase margin dollars primarily by driving incremental sales and transactions.

So we are focused on advancing the relevance of our brand by offering products that appeal to a broad base of consumers.

As a result, not all new products will be individually accretive to the Company operated margin percentage, although we do expect them to increase margin dollars.

For example, premium salads in the U.S. have a higher food cost percentage, than the salads they replace.

Yet the penny profit-per-salad is higher, and we are selling a lot more of them.

At the same time, premium salads have not detracted at all from the sale of Big Macs which generate a higher margin percentage.

Most importantly, we are improving our relevance with products like salads, which cast a favorable glow over our brand, and the rest of our menu.

With that introduction, let me specifically discuss margins for the quarter.

Consolidated company operated margins as a percent of sales increased 90 basis points, driven by the U.S. and Asia Pacific.

I'll discuss these two segments, and Russ will further discuss Europe.

The U.S. company operated margin of 19.5%, was the highest in 10 years and 100 basis points higher than last year, despite a very challenging commodity cost environment.

Higher beef, chicken, cheese, and other commodity costs partially offset the leverage from the strong U.S. comp.

We expect some of these year-over-year cost increases to moderate in the second half of this year, and into next year, although costs will still be up.

In terms of dollars, the U.S. company operated margin increased 10%, or about $18 million in the second quarter.

Like the company, our U.S. owner-operators are benefiting from strong same-store sales.

So despite higher costs, the average cash flow per U.S. franchise restaurant was up nearly $50,000 for the 12 months ended May 31.

In Asia Pacific, second-quarter company operated margins, as a percent of sales, increased significantly to 10.9% compared with 7.5% in '03.

This improvement was mainly due to Australia, China, and Hong Kong.

Stronger sales helped margins in all three markets, and in Hong Kong, tighter food and paper cost controls also contributed.

As you would expect, part of the sales improvement in China and Hong Kong is attributable to the comparison with SARS-impacted results in last year's second quarter.

To put Asia Pacific's margin in perspective, their second-quarter margin is still several hundred basis points below where it was just a few years ago.

So we still have a long way to go.

Now let's look at franchised restaurant margins which represent about 2/3 of our combined margin dollars worldwide.

The consolidated franchised margin increased as a percent of franchise revenues by a full percentage point, reaching 79.8%.

This increase was driven primarily by strong sales in the U.S. where franchised margins increased 80 basis points to 81.3% of franchised revenue.

U.S. franchise margin dollars increased 13% or about $64 million.

In both Europe and Asia Pacific, franchise margins as a percent of revenue, increased at least 100 basis points to 76.9% and 85.4% respectively, driven by positive comp sales.

Now I'd like to update some guidance for the remainder of the year.

To start, the quarter's 4% constant currency increase in G&A, largely reflects higher incentive compensation for exceeding performance targets.

Consistent with previous guidance, we expect constant currency G&A to be up less than 5% for the year, and to decline as a percent of sales and revenues, as compared with 2003.

Next, we expect interest expense to be down 7 to 10% for the year, a slightly larger decline than previously estimated.

Our year-to-date tax rate was 32.1%.

Our guidance remains 32 to 33% for the year.

We will update you on our tax rate as more information becomes available.

Next, we continue to project capital expenditures of 1.5 to $1.6 billion for the year.

Of this, about 725 million will be invested in existing restaurants.

Given this capital discipline and our strong cash generation, we expect to have a substantial amount of free cash flow.

We will use that cash to repay 5 to $700 million of debt this year.

We plan to continue paying down debt next year, moving toward our targeted simple debt-to-total capitalization ratio of 35 to 40%.

After funding CapEx and debt paydown this year, we plan to return more than $1 billion to shareholders through share repurchase and dividends.

We were active repurchasing shares during the first half of 2004, buying back $516 million of our stock.

In the second half, our repurchase activity will be significantly less.

Finally, in the fall, we expect the board to increase the annual dividend, although not by as high a percentage as last year's 70% boost.

To sum up, our financial performance during the quarter, as well as for the first half of the year, has been strong.

Our plan to win is working.

So we intend to continue executing this plan and exercising strong financial discipline.

We know we have some difficult comparisons ahead.

We also know that running better restaurants is the right strategy for McDonald's, so we are staying the course.

We are focused on the customer and on delivering long-term, sustainable growth in sales and operating income, and high teen returns on incremental, invested capital.

Now I'd like to turn the call over to Russ Smith -- Russ Smyth.

Russ?

Thanks, Mike -- I mean, Matt. (laughter) And good morning, everyone.

Last year we set a clear focus for McDonald's Europe on how we would grow top-line sales and drive bottom-line results across our markets.

And since then, our momentum has continued to build at a steady rate.

In the second quarter, we delivered our strongest comp sales growth in more than 2 years.

We're encouraged by this progress, but particularly since we have achieved it, not with short-term activities, but with key building blocks designed to improve the operational execution of our restaurants, and the relevance of our brand in the eyes of European consumers.

We've also achieved it, in spite of the unique challenges in our part of the world.

Economic growth remains stagnant in many markets, most notably Germany.

And as you know, our competition in Europe tends to be fragmented and usually from the broader informal eating out market, rather than other quick-service restaurants.

Currently, eating out is not growing in Europe, as it is in the U.S.

So for us to grow, we must steal share from a broad and diverse competitive set.

This combination of challenges makes it difficult for us to produce the kind of dramatic improvement in sales that you've seen in our U.S. business.

But we can, and we will, continue to deliver steady improvement over the long term.

As you've heard me say before, McDonald's Europe has defined four customer-centered priorities within the plan to win: service, food, value, and leadership marketing and communications.

And our results to date show that our focus on these areas is working.

So they will remain our priorities going forward.

In recent months, we've increased our activity related to food and leadership marketing and communications.

So I want to focus my remaining comments today on these two priorities, since they contributed additional momentum to our business in quarter two.

Let's start with food.

Our efforts here fall into 2 categories -- improvements to our core menu and the introduction of new products across Europe.

On the core menu side, we've already implemented new growth procedures and cooking standards that are producing juicier, tastier burgers.

Going forward, we'll be rolling out additional operational improvements to continually improve the quality of our core menu items.

And we're coordinating these efforts with our marketing calendar so that the improvements will be in place ahead of any promotional activities.

In the area of new products, we've introduced Salads Plus in 15 of our largest markets across western Europe.

Customers are buying the new products at very encouraging levels.

In fact, the average number of premium salads sold during the launch period in Europe, has been higher than what we saw in both the U.S. and Australia, during their respective launches.

And we're very excited about Salads Plus, and its prospects not only for driving sales, but also for attracting new or lapsed customers.

Now, it's still early, but anecdotally, our restaurant managers and franchisees are telling us they are seeing new faces in their restaurants.

Salads Plus markets have also experienced an increase in average check.

For example, in Germany and the U.K., when customers purchase a premium salad, the average check is about double the typical amount.

Now some of this increase is due to existing customers adding on new items from the Salads Plus menu, but we're also seeing moms, who used to come in with their kids and not eat now starting to order salads along with their Happy Meals for the children.

The launch of Salads Plus was just the beginning, though.

During the month of August, we will refocus customer attention on the new menu, with the introduction of the Go Active Adult Happy Meal.

It will consist of a premium salad, bottled water, a stepometer, and and instructional booklet, featuring Olympic Race Walker, Robert Korzeniowski.

In addition, many of our markets will use local, well recognized, Olympic athletes to endorse the new meal.

Now I'd like to spend a second to address the subject of margins, which I know is of great interest to all of you.

As you saw in the release, Europe's franchise margins are up 120 basis points to 76.9% in the second quarter.

In addition, our operator cash flow is improving nicely, as our sales increase.

Our company operated margins were down 10 basis points to 15.5%.

Germany and France saw modest margin gains this quarter, but there was a continuing decline in the U.K., which accounts for nearly 40% of our European company operated margin dollars.

In the second quarter, U.K. underperformance negatively impacted our year-on-year margins by 40 basis points in Europe.

We've taken some important steps to address our issues in the U.K., and these are starting to have an impact.

Our food is better tasting, thanks to the core product improvement efforts and the introduction of both Salads Plus and white meat Chicken McNuggets.

Since their launch in May, the new nuggets have already added a couple of points to top-line sales.

We've also been investing in crew and manager incentive programs to help drive better QFC in the U.K.

We're seeing improvement in our mystery shop and consumer scores, particularly in the areas of service and cleanliness.

This is the first step toward increasing transactions and positively impacting margins.

And finally we've got more aggressive in the area of public relations to combat the negative British press.

And we're starting to see an increase in the number of positive stories about our brand.

All of these efforts will help improve our relevance in the eyes of British customers, which ultimately will give us more brand loyal customers, who also happen to be less price sensitive.

Now we're encouraged by the U.K.'s performance in June, which was higher than Europe's overall comp.

But one month of strong, positive results is not a trend.

We have a lot more work ahead to better position our brand and optimize our business performance in the United Kingdom.

Salads Plus has also put some additional pressure on margins in the second quarter.

Some of this is due to the higher food and paper costs, because the nature of the Salads Plus products, makes this an ongoing reality for us, and frankly one that we don't expect to improve in the short term.

On the labor side, we saw less improvement in Germany than we have in previous quarters, because a labor initiative that they have had in place has now pretty much run its course, and is moving into more of a steady operating state.

In addition, our Salads Plus markets have temporarily added a crew member in their restaurants to help with sampling and to ensure a smooth transition to the new menu.

But we expect this additional labor need to diminish over time.

Overall, we remain very focused on improving Europe's margin leverage for both our franchised and our company-operated restaurants.

However, I do want to point out that margin percentages are less of a concern if we're attracting new customers.

As Matthew said earlier, our goal is to increase margin dollars by broadening our customer base, and driving incremental sales and transactions.

We believe that it's very important to grow operating income in a sustainable way, rather than focus solely on driving margin percentages.

The second priority I want to cover is leadership marketing and communications.

This is about making sure that we're delivering consistent messages, more powerfully to our customers.

Particularly females and young adults.

Our Salads Plus marketing remains clearly targeted to female customers.

As for young adults, we spoke directly to this group last month with our sponsorship of the Euro 2004 Soccer Championships.

This month our big-three markets are offering free music downloads through Sony Connect, when customers purchase a Big Mac Extra-Value Meal.

During events like Euro 2004, historically we have typically seen a decline in sales of customer accounts, since people were home watching the matches instead of eating out.

Knowing this, our markets were aggressive with Euro 2004 promotions in June, and these efforts along with our new Salads Plus launch, were more effective at maintaining our sales and customer accounts than in past years.

We also took our sponsorship activities to a different and to a different and uniquely McDonald's level this year, with our player escort program.

This offered kids, almost 700 kids from across Europe, the opportunity to escort their favorite players onto the field at the start of each match.

The response to the program was overwhelmingly positive.

And it's a program that is only something McDonald's could do.

Overall, our marketing communication efforts related to Euro 2004 gave our brand great visibility with consumers.

Recent independent studies across Europe have showed that we achieved the highest awareness levels of any of the Euro 2004 sponsors.

And by a significant margin.

These are just some of the activities in the areas of food and marketing and communications that influence Europe's performance in quarter 2, and going forward we'll continue to focus on all 4 of our priorities within the plan to win, to continually differentiate ourselves and aggressively pursue top-line sales growth in 2004 and beyond.

We're also looking after the bottom line, by taking a more pan European approach to common business opportunities, such as supply chain, restaurant design, and product development.

As we develop new products with broad appeal across Europe, we use a common approach to marketing and communication, as we did for the first time with the recent launch of Salads Plus.

In the area of supply chain, our consolidation efforts saved the European system 31 million euros last year, and we expect to continue to generate similar savings in the future.

This will help us offset or minimize the effect of any cost increases, and it's another reason we feel confident that we can improve restaurant level margins.

Today I can assure you McDonald's Europe is re-energized.

We're encouraged that our results have improved, but we also know that we have a lot of opportunity and hard work ahead.

Because our goal is sustainable, profitable growth.

And we're confident that as our comp sales continue to grow steadily, we'll be able to sustain operating income growth in line with the broader company target of 6 to 7% per year.

Thanks, and now I'll turn it back over to Mary.

Thanks, Russ.

We're now going to open the call to your questions.

You know that you can press 1, if you want to queue up for a question.

If you want to take yourself out of the queue, you press the pound sign.

To give everyone an opportunity to participate, we do ask that you try to limit yourself to 1 question.

We'd be happy to come back to you then, if you have some more, and queue up again.

So, thank you.

I think our first question is from John Glass at CIBC.

Hi, John.

Good morning.

Two questions, related though, on the sales building initiatives.

Does the extended hours opportunities, maybe elsewhere in the world, and then on the cashless system, competitors boasting that they're seeing substantial increase in their average check.

Are you seeing a similar lift in yours?

Thanks.

Well, extended hours -- here's an opportunity.

In fact, many of our international markets were already on extended hours, before it actually became a program in the United States.

But there's still an opportunity to expand it even further as people see more success.

And also big opportunity for us, John, is when we get critical mass in a television market is actually advertising.

That we've got a large percentage of the stores open either 24 hours or longer hours.

And your second part of the question was --

Was on cashless. his is Matt, I'll take that.

I want to follow up a little bit on extended hours.

Canada has been on it for a while.

Japan is looking very carefully at extended hours, they're likely to do something there.

As successful as it's been in the U.S., all of our markets are looking at it.

But you have to understand that in some parts of the world, we don't have as vibrant a breakfast business as we have in the U.S..

It might not make quite as much sense.

On the cashless issue, there is no doubt that the average check of cashless transactions is higher.

There's also no doubt that it lifts the overall average check.

But John, you have to be very careful with these statistics because, some element of that is the people who otherwise would have paid cash for a large purchase, just choose to pay on a cashless basis.

We think, though, for us it's a convenience issue, and for us it's all about being more convenient and more accessible.

It's about speeding up service because cashless is a faster way to pay, and a quick reminder -- we're in the very early days of cashless in the U.S.

We have 4,500 stores currently up out of 13,600.

And the platform will allow us to do some other things systemwide, such as gift cards, as we -- as we move to more critical mass here in the United States than elsewhere around the world.

Thanks for your question.

Thanks, John.

Joe Buckley at Bear Stearns, is our next questioner.

Thank you.

I wanted to ask you a question about the management in the U.K.

I know there's been a change recently, and just curious on Peter Beresford, the choice -- in fact, the choice of Peter Beresford to lead the U.K. business, what kind of drove that?

Thanks for the question.

First of all, I want to say that Andy Taylor has played a very critical role in the growth of our U.K.business.

For the seven years that he was the CEO, the market grew from 700 restaurants to almost 1,250.

We're currently serving over 2 million customers every day.

But the reality is that the business has changed a lot over the last several years in the U.K.

And as we look at our long-term plans for the future, and what the needs of the business are, we believe that Peter's skill set, which is a very high customer focus, strong marketing background, excellent strategic business thinking skills, are really ones that play well what our business needs are in the U.K. for the next several years to come.

And Peter's been a big part of the turnaround story in Japan.

He had helped build our business in Canada for many years.

So his knowledge of both McDonald's, his ability to work in different cultural environments and be successful, and kind of the technical expertise that he brings are skills that we think are really going to help us going forward to build the relevance of our brand in the U.K. further, from where we're at today.

Thanks, Joe.

Our next question is from Matthew Difrisco from Harris Nesbitt.

Hi.

I wonder if you can give us some greater detail on the difference of the launch that you do for the salads, and the U.K. versus the other continental markets that seem to be both generating sales gains in tandem with profitability.

And then just a follow on to that, if -- where do you stand currently with refranchising the U.K. market, or I guess improving the franchise mix relative to company-owned stores?

Relative to the positioning of the Salads Plus menu in the U.K., compared to the continent, there's really no significant differences.

You know, we took a pretty common approach to this launch across Europe.

So the marketing is common, the positioning is common.

The menu choices are all the same.

Other than the fact that the U.K. has also offered a corn, vegetarian sandwich as part of the Salads Plus menu to replace an existing vegetarian product that they had previously been selling in their restaurants.

So the positioning is no different.

In fact, the unit sales in the U.K. are pretty comparable to what they are across the rest of Europe.

So, If by implication, you're saying why hasn't it had as big of an impact in the U.K. sales, I think it has had as big of an impact.

It's just that their trend, their baseline trend was worse than on the continent.

So it hasn't brought them up to as high of levels as we've seen.

But, in terms of incremental lift, it's had a pretty comparable impact in the U.K.

If I could just add on to that, Russ, on the continent -- many of our countries on the continent -- we had a pretty good salad offering for over 20 years, unlike the U.K. that had never had salads on the menu.

So we had some equity in the salad market, in markets like Germany and France.

Although we didn't have that in the United Kingdom.

So I think that is a contributing factor, as well.

And the second piece on the refranchising, you know, our business issues are not about shifting stores between company operated and franchise stores.

We need to run better restaurants.

We need to make our brand more relevant to the customers.

There are probably pockets of opportunity where franchisees might be more effective at running the restaurants than we are as a company operated operation.

We continue to look at those on a regular basis, as we have historically.

And we'll make those changes on a, you know, market-by-market, case-by-case basis.

But, right now, we have no plans to shift -- to significantly shift the overall mix of restaurants in the United Kingdom.

Thanks.

Our next question is from John Ivankoe at J.P. Morgan.

Thank you.

The question is actually on remodels, and if we could just have an update on the U.S. and how that's progressing and if you're getting the returns.

Maybe for Russ, if you think additional remodel capital, like many of us saw when we were in Europe, is something that's necessary for the brand and if you're getting the returns there that you expect.

Thanks.

Hi, John, it's Matt.

I'll take the U.S. side of the remodel.

Quick reminder, through December of last year, we had remodeled about 650 stores if you combined McCopco and franchise.

We're targeting to still to remodel 1,500 this year in the U.S.

Through June 30, we had completed remodels of about 250, and we had another 185 in the pipeline.

The sales lift is about what we reported last quarter.

It's about a 5% sales lift generating a first-year return that is into the double digits, the neighborhood of 12 to 13%.

And we're learning as we go along, about what works and what doesn't, and I expect if anything, as a result of learning from the first thousand we'll do a better job on the next 500.

I'll pass it to Russ for the European side of this.

On the European side just from a perspective this year, we're spending about as much reinvesting in existing restaurants of our CapEx as we are on new stores.

So we've kind of shifted the balance already this year from what it had been previously.

Overall for Europe, the age of our restaurants are not on average as old as they are in the United States.

However, there are some markets, the U.K. and Germany in particular, that we've been in for about 30 years, where I think there is a lot of our assets that we need to reinvest in.

And that's been provided for in the CapEx numbers that Matthew and team have talked to you about already.

In the cases where we've done the reinvestments that you saw on the trip, they are having the desired result.

And the sales growth and the return on invested cap tall that we're getting, is consistent with our overall company target.

So we're happy with where it's going.

And I think from a brand elevation perspective, we are seeing a lot of benefits.

You've heard us talk, I think, quite a bit in the U.K. about the great PR and kind of the brand halo effect that we've gotten out of the 50 remodels we did in the fourth quarter of last year, and we're continuing to see that uplift in the press and with consumers, as we continue to do more this year.

Thanks, John.

Our next question is from Andy Barish at Banc of America.

I guess one more on Europe, in terms of the U.K.

I believe in the first quarter you had some kind of initiation cost with the pound saver and a discounted chicken sandwich, and then the Salads Plus in the 2Q.

Did you make progress, or did Salads Plus from, you know, the 1Q to 2Q kind of take away some of the benefit you might have had from -- from passing through the first quarter issues?

No, we made continual progress in the U.K.

And Salads Plus has helped to give that another uplift as have the white meat chicken nugget launch.

I mentioned in my formal remarks that they've given us about a 2 point lift on comp sales.

So we're seeing continued improvement.

But we do have a lot of cost pressures in the U.K..

I think those of you that were on McTrip, heard that they probably need nearly a 3% comp to keep their margins flat.

We need to continue to build the momentum on top line and watch, you know, make sure we're managing our costs effectively to drive the market more.

So we are making progress.

June was a better month on top of better months in April and May.

So Q2 was better than quarter one.

But the reality is I think our brand is capable of much, much more than what we showed in quarter two.

And that's what we're driving for.

But quarter two was -- was a good step up over quarter one.

Thanks, Andy.

The next question is from Peter Oakes at Piper Jaffray.

Hi, actually I have a couple.

I was hoping Russ could share some more thoughts about the comment about Europe as a whole, the informal eating out market really not growing.

How much of that do you think is cyclical, particularly in Germany, and is there something else that you've uncovered relative to maybe when we all saw the European story with the major markets here a couple of months ago?

And then secondly, given the great success you've seen with plan to win, here in the U.S. over the last year, even, you know, say a year and a half, at what point, Charlie, would you start thinking about stepping up some U.S. expansion?

Thank you.

Thanks, Peter.

Peter, on the European kind of eating out market.

This is clearly an issue of economics as opposed to changes in consumers' eating habits.

In countries where the economy has been, you know, even flat, you know, we're seeing growth in eating out in those marketplaces.

But unfortunately in some of our larger markets, Germany most noticeably, when the economy gets tough, German consumers are very fiscally conservative.

And so they choose to react by not eating out at all.

And it's had a significant impact on the overall eating market in Germany.

And in a couple other markets, as well.

But, you know, most importantly Germany.

I don't think we've uncovered anything structurally that says people are eating out less.

In fact, all the other pressures on European consumers' lives, lead toward a long-term increase in eating out.

You know, they're more pressed for time.

More two-income households.

So all those things are working in our favor.

It's just the economy that I think, in several of our key markets is holding out, holding down the growth in the informal eating out category.

The second part of the question -- good to hear from -- is that we're committed to balancing new store sales growth with existing store growth.

You know, continuing a share repurchase and a high dividend in terms of our overall structure.

And we, therefore, expect to, you know, moderate CapEx with an emphasis on restaurant remodeling because that is a big issue for us here in the U.S.

Our restaurants are oldest in the system, and we're in the most need to remodel.

Having said that, you know this year we'll open a gross number of restaurants in the U.S. of 200.

Due to a whole range of reasons, that will net out to about 60 additions across the United States.

So the approach that Matt and I and Russ, Mark, and the team are taking is the markets that produce the best returns are going to be the markets that we invest more capital in.

So there's a competition for capital at McDonald's.

Which we've never run the business that way before.

And obviously, based on the results, you would say that we put more capital in the U.S., and we'd probably take it from somewhere else to do that.

In terms of being specific for next year, we're just into our capital allocation process now, where all the areas of the world are making their pitch on what they need.

Matt and I and Jim Skinner will make some ultimate decisions on that over the next few months and get it into our budgeting process at our financial models, and take a look at what it looks like.

So you could expect a few more openings in the U.S.

Certainly not to the level we were at our peak.

But it will be something that will evolve over a number of years rather than be a dramatic increase in any one year.

Thanks for your question.

Good to hear from you.

Thanks, Peter.

The next question is from Janice Meyer at CSFB.

Thanks, Mary.

You know, and this is probably mostly focused in the U.S. given the competitive set, but with the exception of McGriddles and your term of leadership marketing, you really haven't been much of a leader, you've been more of a follower, albeit a good one, with salads, chicken strips, cashless payments, operating initiatives.

Do you think over time the right strategy for McDonald's is to be a follower and let others take the risk with new initiatives, before you adopt them?

Or do you think you need to take more of a leadership role across a broader array of areas in the business?

Janice, we might agree to disagree on your -- on your ultimate -- your first premise there because I think we have been a leader.

I mean, our premium salad offering was the only salad offering in the marketplace when it came to market that had a hot piece of protein on a top-quality salad.

And I think you've seen some of our competitors react to that.

Because they saw it was a great opportunity for them.

So I think that we've done a great job, and we've also innovated with our existing product range.

I mean, we were the first, we were the first to market with Chicken McNuggets back in the 1980's.

Which was a product revolution for McDonald's.

And I think we've built on that.

We're enhancing that product by changing the specifications of serving Chicken McNuggets made with all white meat.

But, you know, at the end of the day what we're focused on is giving our customers what they want.

And the big trick to that is knowing what they want before they know it.

And bringing it to marketplace in a very compelling way.

I think if you look at our history, up until the last 18 months, I think our new product launches were pretty lackluster.

I think you've even written about that yourself, Janice.

And yet we've brought 3 great new products or 3 great new products and then one product enhancement to market that has been very, very successful for the overall business.

But McDonald's, as the leading restaurant company with the most amount of locations has a responsibility to lead, and that's what we've challenged our product development and our marketing people to do.

And I think that the power of our brand -- customers expect us to lead.

And that's exactly what we intend to do and will be doing.

Thanks for your question.

Thanks.

Our next question is from Mark Willsmith at Morgan Stanley.

I wanted to explore the commodity costs.

The entire protein complex is up and we're seeing beef production down and demand still strong.

And I think that's led to a market that's tighter than everyone would have expected.

And Matt, if you could just give us an update on your thoughts on beef and chicken and any other commodities that you think are concern.

Sure, Mark.

Good to hear from you.

You know, we still expect in the U.S. for beef costs to be up 5% for the year.

They were up more than that in the second quarter.

They were up about 12%.

Again, 5% is expected increase in beef costs in the U.S. for the year.

That translates to 1/3 of a cent in EPS, 20 basis points in the company-operated margin.

A quick reminder, we have a -- more than $6 billion U.S. breakfast business where we consume almost no beef.

Chicken, we expect to be stable for most of the year with a slight increase in the second half of the year in the U.S.

Cheese, we saw very significant increases in the second quarter, but that's already come down off of the highs.

And we expect a further drop in the fourth quarter in cheese.

Switching to Europe, beef we expect to be up about 5% for the year.

Chicken to be flat for the year with a little bit of quarter-to-quarter fluctuation.

And cheese we expect to be flat for the year.

Long run, though, you know, we don't ever want to use commodity cost increases as a reason we aren't profitable, because what we're doing with the plan to win is we're creating a more differentiated brand.

And as Russ said, that will give us a customer base that is a little less price sensitive than it used to be, and that is our long-term goal.

Thanks, Mark.

The next question is from Dean Haskell from JMP Securities.

Good morning, and congratulations on a great numbers here in the second quarter.

I have 2 questions.

The first is on the Sony download.

I acquired a Big Mac recently and enjoyed the product, but went to the website and required a credit card through the Sony download website.

And I wondered what kind of negative impact you were seeing on that with the tech-savvy kids who maybe don't have a credit card.

And then the second question for Russ, congratulations on the great sales increases in the U.K.

I think to repeat what I think you said was that the U.K. had a lower AUV than the rest of Europe and is now equal to Europe.

Then the question responds to, but why very limited or no margin gains in the U.K. on the great sales numbers?

Dean, this is Matt.

I'll take the first question on the Sony download program --

I think because Matt's been downloading these things himself.

And I -- when we announced the program, I went to the site and did it myself, and it did not require a credit card when I did it.

We're going to look into this to be sure there's not an issue.

You know, let me remind everybody who's listening, Sony is a terrific global brand with 500,000 titles.

We're very excited about this partnership with them.

And we think that it sends the message about McDonald's relevance.

So we're very excited about it, as Russ mentioned.

It's about to spread to Europe.

Dean, thanks for mentioning this.

I will look into it.

And Dean, on the U.K. piece, I guess I need to clarify a little bit because I didn't say anything about the U.K., you know, going from lower average unit volumes.

My comment was about their comparable sales growth rate in the month of June.

And I believe what I said, or what I at least meant to say, is that in the month of June, the comp in the U.K. exceeded the overall comp for Europe, which had not been the case for many months previously.

And so it was about the comp for the month, not relative to total average unit volume growth.

So hopefully that clarifies that piece.

The other segment relative to why the margins then didn't improve, it was because it was about a comp for one month, not the comp for the quarter.

And as I mentioned earlier, in the U.K. we probably need close to a 3% comp to maintain our company-operated margins there.

And you know, we're not exceeding those levels on, you know, a sustainable basis yet at this point.

So I hope that helps.

You know, in the U.K., we've got a lot of other cost pressures.

Some of it is, the points I talked about with Salads Plus.

But, you know, in particular, we've got a lot of rent increases in the U.K., which has had -- continues to have a significant impact on our margins, particularly as a percentage of sales.

And this is Matt.

I'd like to just clarify something.

What Russ is saying about the need for a 3% sales lift to cover cost increases, that's unique to the U.K.

That is not a Europe-wide statement or brand-wide statement.

As Russ mention, very unique circumstances especially in London, where every 5 years they have a rent review where the landlord raises rents, and in some parts of London that can be very expensive.

Thank you.

Thanks, Dean.

The next question is from Howard Penney at FBR.

Thanks, Mary.

Good afternoon.

I was hoping you could comment on, Matt, where you are with your return on incremental capital getting to the high teens, and maybe if you could put that in perspective with the overall company margins relative to history, you're still significantly below that.

I know we're in the early stages of the turnaround there.

But if you can kind of put your returns in perspective to where your margins are today and what the opportunities are for margins as we look out over the next 12 to 24 months, and included in that would be the optimization and the business performance for the U.K.

Does that include taking or possibly closing some stores in the U.K.?

Thank you.

Thanks, Howard.

On the issue of our long term target, our long term target is to have incremental returns on invested capital in the high teens.

We said that was a target beginning in '05 and extending all the years thereafter.

You know, last year, 2003, we didn't get there.

We -- we reversed our momentum, but we did not achieve -- if you ignore currency effects -- we did not achieve high teens incremental returns on invested capital last year.

This year we're having a very strong year.

I think there's a pretty good chance we're going to get there this year.

But I want to remind you, we said this was a long-term goal, so we weren't targeting it for this year.

And I also want to remind you, it's really about the $25 billion of our installed asset base and getting a better return on that.

Because what we're spending on new stores is between 600 and $650 million.

And we're watching that return very carefully.

But, it's all about the 30,000 stores we already have building the same-store sales, the relevance of the brand, and that will drive our overall return up.

We're seeing nice trends.

We like our momentum.

We're not quite there yet.

And again, the goal was for '05.

And on the issue of closing stores, I don't think we have plans, or you'll see us closing any significant number of stores.

A quick reminder, in the course of a normal year, we close around 300 stores.

nd specific to the U.K., you know, as Matt mentioned, if we have underperforming stores in any market, we will review them as part of our normal course of business, and see the things we can do to improve their performance.

And specifically in the U.K., that's always been done.

And I would not see anything out of the normal course of business in terms of restaurant closings in the U.K.

Just to add another perspective on the U.K. in terms what have we've got to do there, it's not too dissimilar what we needed to do in the U.S. 2 1/2 years ago.

And that is, improving the customer experience, more relevant marketing, and more focus and discipline on the business and stealing share.

And that's exactly what we're going to set about doing in the U.K.

We've done that in the U.S.

We've proven we can do it here.

And we need to do that in the U.K.

And I'm confident that Russ and the new team will get that done.

And then Howard, it occurs to me I didn't really answer your question about operating margins.

What the opportunities look like.

I think we said either on last quarter's call, or the one before that, that we think, you know, by '05 we can have an operating margin percentage that's in the neighborhood of 20%.

I know historically we had been higher, and there are probably opportunities to get higher.

But the goals we've set, we're going to stick to for now.

We have a goal for the top line, 3 to 5%, operating income 6 to 7.

High teens, incremental return.

And part of the way we're getting there is with G&A leverage and improving our margin percentage in dollars.

Thank you.

Thanks.

The next question is from Larry Miller at Prudential.

Hi.

I was wondering, you guys rolled out salads in several European markets.

And I was wondering if there's anything you would have done differently in hindsight, maybe about sequencing or advertising or operations, and then how many more markets are slated to get that program?

Are we complete there?

And then just one other question, Mary, if it's okay.

In terms -- let me start with the middle question first, Larry.

There's only one more market to go, and that will launch Salad Plus in August.

So right now as of the end of the second quarter, it's in 15 of the 16 markets that we plan to launch it in.

I suspect that, you know, over the course of the next 18, 24 months, that we'll probably -- other markets that weren't part of the original 16 planned, that we'll launch it, as well.

Because it's been a good success for us.

Are there things that we would do differently?

You know, I'd be less than honest if I said that there aren't some things we could have done better.

And we're continuing to look at with this platform, ways that we continue to build on the momentum that we've started and make it even more powerful because the reality is we're trying to get new customers and lapsed customers into our restaurants.

That's hard work, and that's a long-term proposition.

But when you bring new people in, it's a great way to build sustainable, profitable growth.

And that's our key objective for building our business for the future for Europe.

So the things that we've learned, the lessons we've learned, we're going to apply as we re-hit Salad Plus in August.

And as we continue to look at this platform, and other food platforms in the future, to take those learnings and make sure we're even more successful going forward.

Okay.

We're going to take a couple of questions from some people who haven't had a chance to ask one yet.

Mark Kalinowski at Smith Barney.

Hi, I wanted to ask about customer feedback in general.

If you look at the 800 number in the U.S., maybe you can chat about trends and complaints and praise that the Company's seeing or, you know, just in general, looking for for more feedback on how we might gain a greater understanding of how service is improving.

Mark, Charlie.

Thanks for the question.

In fact, I was on a conference call with Mike Roberts with each of our divisional leadership franchisees just a couple of days ago.

And this was an issue that we're sort of focusing on, because the trends are very good.

Customer complaints are down and customer praises are up.

And I won't get into the specifics, but the praises to be up in our industry, or what we call praises or compliments, is quite a feat.

But the fact is that our customer complaints have trended down, and the correlation we're also seeing is this -- is our mystery shop scores have improved.

And certainly the mystery shop scores over the last quarter have been the highest we've seen, as a result of that, customer complaints are down to the lowest levels, and we've seen these praises increased.

So there's a bit of a correlation there, it's something that the franchisees and us feel pretty good about.

But we've still got a long way to go.

We're not complacent about it and resting on our laurels.

And our franchisees, as certainly evidenced by the discussions that Mike and I had with them on the conference call a few days ago, are very committed to increasing the level of service that we have in our stores through programs like Shift Into Overdrive, which our operators in the east division are very much behind.

We've taken that national throughout the U.S.

And with a big focus on crew training, crew retention, and crew motivation.

And our operators get what we need to get done there, and they are spearheading that, and I'm really pleased to be in partnership with them in doing it.

Thanks for your question.

The next question is from David Palmer at UBS.

Hi.

Thanks.

This question is for Russ.

Russ, it intrigues me that the obesity issue is such a big one in the U.K., and that the early trial for salads is as great as it was in the U.S.

And I may be kind of putting your words together from a couple of comments, but it sounded like you were saying that the trial was as great as the U.S.

But it seems like the halo effect to the brand is not as great.

Do you think that is true just as a general statement, or maybe do you think the impact of other initiatives, you know, and there's also parallel initiatives here, that are not driving the sales as greatly, for instance, the every day low pricing of Dollar Menus versus Pound Saver, for instance?

You know, David, the point about, or the question about the halo effect in the U.K. not being as great, you know, if you go back, I think relative to the U.S., I'm presuming you're comparing to the U.S. results.

We've told everyone all along that the U.S. success was not just salads.

Salads was an important piece it, but it was extended hours, it was improving food quality, improvements in service, it was McGriddles, it was white meat nuggets, it was a combination of a bunch of different initiatives working really well together, where you get a synergistic benefit.

I think what we're seeing in Europe, is exactly the same in terms of the impact of salads or maybe of salads alone, maybe even better.

What we don't have is all the other things, layering on top of it.

Obesity is an issue that's top of mind in Europe.

Absolutely, there's no doubt about it.

And salads, the launch of the Salads Plus menu is our first phase of repositioning food at McDonald's to make it more relevant to our European customers.

And we will continue to build on that.

As we've done with Happy Meal Choice.

Where the U.K., if you remember, was the first one -- actually the second in Europe -- second in the world to launch Happy Meal Choice.

They did it in April of 2003.

And we saw about a 20% lift in Happy Meal sales.

I think we're selling now over 12 million bags of fruit to U.K. consumers each year.

So this is -- this is part of our continuing evolution of food at our brand to position our menu, to be more relevant for our European customers.

Other issues in the U.K. that are specific to them -- I talked a little about the press.

We have been, you know, the symbol of everything they want to blame is going wrong in the U.K. relative to nutrition and obesity, they want to blame on us.

And they are a very aggressive and sarcastic press, and they've made us their target.

We are responding much more aggressively in the last several months.

And we're seeing much better results.

We tracked the articles that are written about McDonald's.

When we looked at it in the past, a year ago, most of it was negative, a little was neutral, and very little if anything positive.

We've now seen a significant shift in the balance of positive, neutral, and negative articles about McDonald's.

Much more positive to neutral, than negative.

So we're encouraged by that, and we think that bodes well for us for going forward.

But, you know, our issues are very complex.

There is no one silver bullet that is going to get everything done, it's going to be a combination of solutions, that are going to continue to build momentum and help us turn the business around there.

I would also add that on a world-wide basis, you know, we're doing a better job listening to our customers.

And they're responding with the changes that we're bringing to market.

You know, we don't think we're -- we're the problem.

We want to be part of the solution, and McDonald's is a leader.

We have a capability to bring things to market in a big way that satisfies customer needs.

And that's exactly what we've been on about the last 12 to 18 months at McDonald's.

And we're going to do more of it as we move forward.

Thank you.

We're going to take a couple of follow-up questions.

Joe Buckley, are you still there, with follow-up from Bear Stearns?

I am.

Thank you.

I wanted to ask about check.

We talked a little about the elasticity of the brand, and I think McDonald's and other QSR companies have enjoyed much greater than normal check average increases over the last year, much it driven by the premium product.

I'm just curious what your thoughts are about the sustainability of that looking into 2005.

Want to go ahead?

Sure.

Joe, this is Matt.

I think that one of the developments that we're probably the proudest of, is that we have taken what the brand stood for and we have expanded it as a result of the plan to win focusing on the five P's.

And what we're capable of delivering and bringing to market, and having it be accepted by customers, a much broader range of products than it was 18 months ago.

And so I think that the trends we've seen, where about half of our improvement in the U.S., for example, has been increased guest counts and half higher average checks, I think that is something that we can sustain.

And the brand stands for more today than it used to.

And I also think that customers will tolerate products that carry higher price points from us, than they would have tolerated 2 years ago because we're delivering value at those higher price points.

I just -- I'd just say -- add that if we continue to enhance our customer experience in the store, we'll build more brand loyalty for McDonald's.

And with more brand loyalty, we'll have greater price elasticity.

We're going to be careful because it's a balance.

McDonald's is about a value meal.

And -- not a value meal as opposed to the meal on the menu board, but we've got to be a good value at McDonald's.

But with greater loyalty, we will have greater availability to have price elasticity at McDonald's.

And I think you've seen some of that come into play over the past 12 months with what we've done in certain key markets around the world.

And Russ has got a comment on this, as well.

Yeah, Joe, I mentioned briefly in my comments, but just to expand on it, what we're seeing with Salads Plus, is many of the new customers that we're getting in are actually part of maybe an existing average check.

So some of our new customer penetration, I think the way we measure average check, it's actually reflected in the average check number, as opposed to the way we measure our customer count.

The example of a mom coming in with two children, that before the mom would not eat, is now buying a salad.

That shows up in the way we measure our numbers, as an increase in the average check.

So it's not just about higher priced items on our menu.

I think to Charlie's point, as we increase in relevance, we'll get other groups that we weren't getting before, where people -- not everybody was eating.

And that's going to be reflected in our average check numbers the way we, at least measure it.

You know, one -- you know, just give this more editorial.

Is, you know, one of our biggest opportunities in McDonald's over the next 5 years is to increase penetration.

Now in the old McDonald's, we used to talk about penetration basically as unit density, of McDonald's restaurant density.

What we really are focusing on now is increasing our customer base for our existing restaurants, and getting a wider percentage of the population to use and choose McDonald's, and have McDonald's as their favorite place to eat.

And that's a big opportunity for us, is increasing penetration in every key market around the world.

By being better, and having a better offering, it's not going to be brought about by just adding new units.

Thanks.

I think we have one final question, Matt Difrisco at Harris Nesbitt.

My question is regarding minimum wage in the U.S., and it looks as though inevitably we'll have an increase in '05.

What is into your model right now, as far as your guidance for the turnaround in expectations for minimum wage and an increase?

Would -- would it be presumably met with a price increase?

Matt, this is Matt, I'll answer your question.

We're not real concerned about where the minimum wage might go in the U.S.

You know, first of all, we're 15% company owned, 85% franchised.

Most of our employees are already well above the minimum wage, and well above where even the Democrats are proposing it might go.

And so it's not an issue that we're overly concerned about.

All of our competitors would face the same issue, as well.

So we don't have a specific model on minimum wage, but it's not something that worries us in terms of our margins and our store level P&Ls for '05.

Thank you.

Thanks, Matt.

Charlie, did you want a couple of closing comments?

Sure, Mary.

Thanks for joining us today.

As we finish this call, I want to leave you with just 3 important points.

First, we've made great progress in the revitalization of McDonald's, but we recognize that we now have to move from just being competitive with our customers' experience, to being the superior, most relevant restaurant experience.

We're going to do this by getting even better in each of our five P's -- people, product, place, price, and promotion -- and transferring that success quickly throughout our system.

Second, as you heard Matt say earlier, we will stay the course and 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.

And third, we will maintain strict financial discipline systemwide.

I'm confident our business trends will continue because we are allied and focused as an organization.

And I'm confident that we'll deliver good results this year, and be in a position to deliver on our targets for 2005 and beyond.

Thanks for joining us today.

Thank you.

Good-bye.

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

This concludes the program.

You may now disconnect.