麥當勞 (MCD) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the McDonald's investor conference call.

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

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

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

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference Ms. Mary Kay Shaw, Head of Investor Relations.

Ms. Shaw, you may begin.

Thank you.

Hello, everyone, and thanks for joining us today.

With me are CEO Jim Skinner, President and Chief Operating Officer Mike Roberts, and CFO, Matthew Paull.

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

As always the forward-looking statements which appear in today's earnings release and 8-K filing also apply to our comments on this call.

Both the earnings release and our 8-K which includes supplemental financial information are available on investor.McDonald's.com.

Now I'd like to turn the call over to Jim.

Good morning everyone.

Thank you both the investment community and the media for your participation and interest in this call today. 2004 was an extraordinary year for McDonald's.

We saw some of our system's greatest triumphs as well as our deepest losses, and I want to say that I appreciate so many of you reaching out to us to express your condolences following Charlie Bell's passing.

McDonald's is an extraordinary system, through it all we stayed aligned around our plan to win, our focus on our customers and restaurants never waivered and as a result we delivered for them and our shareholders.

Comparable sales for McDonald's restaurants increased 5.1 percent in the fourth quarter and 6.9 percent for the year, the best global comparable sales performance in 17 years.

Revenues increased 10 percent in the fourth quarter and reached a record high for the year with an increase of 11 percent.

Company operated margins were up 80 basis points and franchise margins were up 90 basis points.

Fourth quarter EPS was $0.031.

And $1.79 for the year.

Both up significant over 2003.

EPS for both years includes the impact of impairment charges and for 2004 also includes impact related to these lease accountings, a lease accounting adjustment which Matt is going to talk to you about a little bit later.

These results are due to our focus on our customers and our restaurants and our financial discipline.

In 2004 we continued our commitment to strategically invest our capital, increase shareholder value and strengthen our balance sheet.

Our cash flow statement will be finalized in a couple weeks and we'll share details with you then.

But we expect cash from operations to be higher than our strong $3.3 billion achieved in 2003.

In 2004 we returned $1.3 billion to shareholders.

We increased our dividend by 38 percent to over $700 million, and we bought back $605 million of our stock.

With continued focus on our Plan to Win and cash from operations growing faster than capital expenditures we expect another strong year financially in 2005.

For 2 years we've pursued the strategy of being better rather than just bigger.

It is a winning formula.

We served 1.6 million additional customers every day over the past 12 months.

More customers are visiting us more often because McDonald's is more relevant to their life styles.

Through operational excellence and leadership marketing we are providing a better experience for our customers.

Restaurant operations are improving from faster service and added conveniences like cashless payment and extended hours to cleaner, more contemporary dining environments.

Two years ago if you said premium salads, pedometers with walking guides, Bob Green, Paul Newman and Destiny's child you probably wouldn't associate these things with McDonald's but that's changed.

Now McDonald's is fitting in with our customers' evolving lifestyle choices, through more variety on the menu, tools and information to lead active balanced life styles and involvement in local communities and relevant marketing.

And we're doing it swiftly and profitably because we have leveraged the strength of our global system and transferred success across markets.

While the results of our actions exceeded our expectations relative to our financial performance we did not always exceed our customers' expectations, and that is the ultimate yardstick by which we measure our success.

We know we can do better for our customers and I'm confident that we will.

My number one priority is to drive long-term sustainable profitable growth and increased shareholder value.

We can and will do exactly that through our Plan to Win and the financial discipline that has driven our revitalization.

In 2005 we will execute our Plan to Win with renewed energy, greater focus, and more transferring of success.

For example, we're taking the restaurant operations improvement process which has been so successful here in the United States and improving to our top ten international markets, service continues to be a top priority with our markets stepping up resources and initiatives and we're evolving our marketing to be even more fresh, relevant, and breakthrough.

My second priority as CEO is people and talent management from the restaurants to the office of the CEO we must have the right people in the right places with the right skills.

This includes continuing to develop global leadership to increase focus on the drivers of our business.

A third priority is what we call balanced life styles.

We care about the well-being of our customers.

This is an area in which we can have great impact.

We've made progress last year through menu choice, providing education and information on food, and encouraging physical activity through various programs and partnerships.

This year we will leverage our size, reach, and resources to positively impact millions of families worldwide.

We will announce a new global program in the next six weeks so I can't give you all the details today but I can say that it will involve the International Olympic Committee, comprehensive consumer outreach and a new multimedia advertising campaign under the "I'm lovin' it" umbrella.

But it will be specific to balanced lifestyles.

I believe balanced lifestyles is one of the most important things McDonald's will do this decade.

We have a responsibility to our customers to lead, but more importantly we can and will make a difference.

Our strategy of being better not just bigger is delivering quality growth and will continue to drive our business in 2005 and beyond.

We had a strong performance in '04 and I'm confident that we have the people, plans, and focus to achieve our long-term targets and up-side potential.

I'm also confident that our restaurant experience will continue to get better so that we will ultimately exceed our customers' expectations, now separately since you read in the release our statement about Chipotle I want to tell you how this fits into our overall strategy.

Chipotle is a strong performing popular brand.

It has tremendous potential for growth but that growth might be best maximized through alternative strategies.

This could include raising additional equity capital in the public or private markets but what I really want you to know and understand is that we're exploring option so we can allocate more resources and money to growing sales and profits at our existing McDonald's restaurants this is where our focus is.

Now I'll turn it other to Chief Operating Officer, Mike Roberts who will give you an update on our business in each area of the world.

Mike.

Thanks Jim.

It's good to be here with you in my new capacity.

And I appreciate the chance to share McDonald's global results with all of you.

I'm pleased with the momentum generated worldwide in 2004.

It's clear that our Plan to Win is working.

We're excelling at the fundamentals, running better restaurants, and building our business around the world.

That said, I've spent the first 45 days of my new job listening, learning, and visiting restaurants around the world.

And I can summarize my experience with one observation.

Our business is strong, and our system is full of renewed energy.

All of our restaurants around the world are aligned and sharply focused on improving our customer's experience.

In the U.S. business, our momentum continues.

Comp sales were up 9.6 percent for the year with December marking the 21st straight month of positive comp sales increases, and this growth is continuing in January.

In 2004 as you know our success in the U.S. was driven by the holistic U.S.

Plan to Win with multiple initiatives working together across multiple audiences and day parts.

Premium product like salads, McGriddles and Chicken Selects as well as Happy Meal choice, extended hours, cashless, and reimaging all drove our results.

Looking ahead we will continue this focus on what's important to our customers.

This begins with our people as we'll work even harder to align and motivate our managers and crew.

In fact this summer we're gathering our restaurant managers and so many operators for the second managers peak experience, a chance for all of us with thousands of managers and operators to celebrate their success and discuss how we'll build on our continuing momentum.

In the area of food we plan to continue offering premium products at McDonald's prices.

For instance, the fruit and walnut salad will be launched this spring, premium chicken sandwiches will be launched in the second half of '05 and we'll continue our emphasis on our core menu like we're doing now with the Quarter Pounder with cheese and like we'll do with our new more robust coffee blend and packaging later this year.

Related to place, our plan is to reimaging -- is to reimage 1300 additional restaurants in the U.S. this year on top of the 1100 we did in 2004.

And to date these restaurants are generating comp sales of 5 percent above the marketplace and, of course, being met with very positive customer response.

In addition, we will continue providing customers a more convenient, easy to use restaurant experience through the expansion of cashless which will be in 12,000 restaurants by midyear.

The addition of gift cards by year end and through a continued focus on extended and 24 hours.

That said, our plan is to open approximately 220 restaurants gross in the U.S. this year, thus continuing our emphasis on being better, not just bigger.

Moving on Europe finished 2004 with comp sales of 2.4 percent, our highest yearly comp sales increase in more than a decade.

And while we acknowledge that several external factors continue to challenge our businesses, I want to point out that McDonald's Europe is outperforming the QSR competition and most other retailers.

This is evidence as to the strength of our brand, our business and our focus, and that's why I believe that we are in a solid position to succeed in 2005.

Our efforts begin with new food news, a significant part of Europe's '05 calendar.

And while I can't share all the details today I can tell you that we'll continue our focus on launching premium products including the addition of new news to our salads plus menu.

In addition, several of the major markets in Europe are testing additional beverages such as flavored water as well as other entree options for kids and breakfast news.

At the same time all of our markets in Europe will continue working to enhance our core menu with ongoing improvements to our beef, buns, fries, and chicken.

Related to value we're committed to ensuring affordability in all major markets across Europe.

Germany, as you know, committed to a value platform recently offering 11 items at one euro with heavy advertising support.

And this focus includes the introduction of the dark meat chicken sandwich which so far is the number one seller on the value menu.

Our partners in the U.K. began offering a pound saver menu in the beginning of 2004 and this currently accounts for about 12 percent of their sales.

Their plan is to reinvigorate that line by adding new items to the menu later this year.

Related to our promoting our brand, our efforts center on building trust amongst all of our customers.

As an example we'll launch a pan European open doors program this year which allows our customers the chance to visit our restaurants and see firsthand really the quality that goes into making our food and in the U.K. where brand promotion is a priority, we have a whole arsenal of tactics planned.

One in particular which I love is the brand book which was sent to 20 million households earlier this month that combines value offers with important information designed to educate our customers about our product quality, balanced choice, and social responsibility efforts.

That said, our plan this year is to open 130 restaurants gross in Europe mainly concentrated in Russia and France, and this compares to about 140 opened last year.

Related to Asia, let me begin by saying we appreciate the valued service that Marvin Whalley has offered these many years and also share excitement about the promotion of Tim Fenton to President.

I've worked with Tim for many years, and I have incredible confidence that he'll help us build on the growth that was started.

That said, our comp sales in 2004 were plus 5.6 percent, and the momentum continues.

As you know, China continues to be one of our biggest growth opportunities, and as such we'll open approximately 100 restaurants there this year and work even harder to meet the needs of our local customers.

Partly through the continued emphasis on new food news and branded affordability.

In Japan, 2004 marked a significant turning point in the revitalization of that business.

And our focus this year is to continue meeting the unique needs of our customers with an emphasis on value and on service.

Looking broadly at the entire region, new food news will play a significant role in our '05 plans.

That means appealing to local tastes and trends.

For example, with the introduction of a brandable rice platform in Taiwan, continued support against triangle wraps in China, and deli choices in Australia, the Aussie version of Oven Selects.

On the value front we will continue the strong momentum that has been created with the expansion of value into all markets this year.

Finally, our plan is to open 270 restaurants gross in '05 in Asia Pacific, Middle East and Africa, compared with about 175 last year, and the majority of these restaurants will be in China and in Japan.

So we are committed around the world to enhancing our focus on the holistic Plan to Win, to improve service, better training, more locally relevant premium food news, Happy Meal choice, extended hours, reimaging, value, exciting Happy Meal properties, the next generation of "I'm lovin' it," and most importantly through the continued alignment of our operators,our suppliers and all of our employees around the world working together on one plan, the McDonald's Plan to Win.

And now I'd like to turn the call over to our Chief Financial Officer, Matt Paull.

Thank you, Mike.

Good morning, everybody.

From a financial perspective 2004 was a good year.

But focusing on operational excellence, leadership marketing and financial discipline we have made substantial progress against our goals.

Today, I'd like to briefly discuss our operating results and look ahead to 2005.

First, our results.

Since Mike reviewed sales I'll focus on EPS, margins, and the charges that impacted fourth quarter operating income.

EPS was $0.31 for the quarter, compared with $0.10 for fourth quarter '03.

Our $0.31 EPS figure includes an $0.08 decrease in EPS due to change in how we account for rent expense, more on that in a few minutes, as well as an $0.08 decrease for impairment charges partly offset by a $0.02 gain from the sale of our interest in a partnership that owns real estate in downtown Chicago.

For the fourth quarter revenue was up 10 percent and comp sales were up 5.1 percent.

These strong sales numbers contributed to improved margins.

For the quarter, company-operated margins were up 50 basis points, and for the year they reached 15.3 percent an 80-basis-point improvement over '03 this is significant progress towards our longer term goal of returning Company operated margin to the year 2000 level of 16.9 percent.

U.S. sales were strong, driving a 40-basis-point improvement in the fourth quarter Company-operated margins offset somewhat by higher commodity costs.

For the year, U.S.

Company operated margin reached 19.1 percent, a 140-basis-point improvement over '03 which was itself a 170 basis point improvement over '02.

Regarding commodity costs, it's early still but our current outlook is for beef prices in the U.S. to increase about 5 to 8 percent in '05 as other commodity cost pressures ease.

Cheese, for example.

Moving onto Europe, fourth quarter comps increased 1.8 percent led by stronger sales results in France, the U.K., and Russia.

But Company-operated margins declined 50 basis points.

This was primarily because comps were not strong enough to offset the combined effects of couponing in Germany and higher commodity costs across Europe.

In Europe, our early read for '05 is for beef prices to increase between 6 and 10 percent.

In Asia Pacific, solid comp sales in China and Hong Kong drove a 50-basis-point fourth quarter improvement in Company-operated margins.

These markets and Australia drove the 110-basis-point improvement for the year.

Consolidated franchise restaurant margins which represent about two-thirds of worldwide margin dollars increased 70 basis points for the quarter and 90 basis points for the year.

The U.S. business drove much of this improvement contributing about 55 percent of the margin dollar increase for the year.

As I mentioned earlier, we recorded certain charges during the quarter.

I will describe these in more detail.

As we mentioned in this morning's release, we have identified and corrected an error in how we account for rent expense.

Like several other restaurant companies we recently reviewed our accounting practices for leases.

Our historical practices were common in the industry.

The change we made conforms the lease term used in calculating straight-line rent experience with the lease term used to amortize improvements on leased properties.

On a consolidated basis the current year adjustment is approximately $0.01 per share, one-third of which relates to Chipotle and Boston Market, and the cumulative adjustment is about $0.07 per share.

Both of these adjustments were recorded in other operating income in the fourth quarter of '04.

In 2005, we expect this higher rent expense to impact Company-operated margins by about 10 basis points.

This change accounting treatment does not affect McDonald's historical or future cash flows or the timing of payments under the related leases.

The other significant charge I wanted to mention relates to the Company's annual impairment testing.

During the quarter, we recorded charges of $117 million primarily in South Korea.

In the fourth quarter we made other decisions that affected our results.

In Brazil certain costs that related to the buy-out of some of our franchisees reduced EPS by $0.01.

As of year end 2004 we are more than halfway through these buy-outs.

In the U.S. we made decisions that reduced earnings by about $0.02 per share primarily related to three items.

Costs related to U.S. legal issues, the decision to discontinue a supply chain initiative, and some cost sharing with our franchisees to fund the rollout of cashless and eventually gift cards.

We are approximately half-way through this roll out and expect to complete it in 2005.

Despite these charges we reported strong results.

We have and will continue to maintain financial discipline.

In '04 G&A increased just under 5 percent in constant currencies in line with plan, and our target for '05 is more aggressive as we expect G&A to be relatively flat to up slightly.

Along with financial discipline our goal is enduring profitable growth.

Our average annual targets for '05 and beyond continue to be systemwide sales and revenue growth of 3 to 5 percent, operating income growth of 6 to 7 percent, and return on incremental invested capital in the high teens.

Our ability to achieve these goals rests on continuing customer focus, strengthening our operations, and disciplined use of operating cash flow.

Our cash flow statement for '04 will not be final for two weeks, but I can tell you now that we expect to see an increase in both cash from operations and free cash flow as compared with '03, and I expect we will be within our previous guidance on CapEx and debt pay-down.

For '05, we will continue to reinvest in the business, return value to shareholders, and pay down debt.

We expect to invest approximately $1.7 billion in CapEx.

Of this amount, approximately 960 million will be for reinvestment, and 580 million is for new restaurant openings.

We expect to open about 700 McDonald's restaurants gross primarily in the U.S., China, France, and Russia.

This compares with about 625 in '04.

On a net basis, this is 350 openings in '05 compared with approximately 300 in '04.

There will be about 100 additional traditional openings and approximately 50 fewer satellite openings in '05 compared with '04.

The '05 CapEx increase over our target for '04 stems from four principal factors.

First, reinvestment in the U.S.

We plan to complete more rebuilds in '05 and to continue our reimaging efforts.

Some of the restaurants originally scheduled for reimaging in '04 will be completed in '05.

Second, growth in China.

Although returns are not yet where we want or expect them to be, China is clearly a significant growth opportunity and we are confident returns will improve steadily as we leverage our infrastructure.

Third, expansion in the U.S. where returns have been very strong.

The number of openings is similar to '04 but more openings are traditional and fewer are satellites.

Lastly, we expect stronger foreign currencies to account for about $50 million of the CapEx increase.

In '05 we expect to pay down between 6 and $800 million in debt and to return at least 1.3 billion to shareholders in the form of dividends and share repurchase.

Our customer focus and financial discipline have put us in a very strong position.

We are encouraged by our '04 business results and very optimistic about our future.

Now I'll turn the call over to Mary Kay.

Thanks, Matt.

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

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

To give more people an opportunity to ask questions please try to limit yourself to one question.

We'll come back to you for follow-up questions as time allows.

Our first question is from John Glass at CIBC.

Thanks.

Good morning.

I'm wondering if you could talk a little bit more about the recent gains in European same-store sales.

You used some more conservative language somewhere else in the release that says you're still cautious.

Is there some reason to believe you don't think the near term gains you're seeing are sustainable, for example, are they beg supported by an unusual amount of advertising or promotion?

John this is Mike.

A multifaceted approach as we used in the U.S. is currently underway in Europe.

We're excited about the new food that's being rolled out, salads plus is doing very well.

The value messaging that I mentioned in Germany is now a part of the U.K. portfolio as well.

France is obviously watching very closely, and with our leadership there, you know, we're very encourage with the continuation of the focus on our restaurants and the expansion of our ROI P process to ensure that we have the appropriate metrics in place.

So we're confident.

We're confident.

The continuation of the momentum in 2004 is continuing in January.

Thank you.

Our next question is from David Palmer at UBS.

Sorry.

I had it on mute.

It seems that McDonald's has become a little bit more efficient in its innovation strategy particularly in the U.S. introducing fewer products which have perhaps been bedded more thoroughly both internally and maybe even in testing in restaurants.

Could you perhaps give us some insights as to what really has changed at McDonald's and perhaps give us some confidence that your innovation wins haven't been a fluke and that they can continue not only in the U.S. but in Europe?

Thanks.

David, good morning.

Jim Skinner.

I think we've learned quite a bit from the United States in the last two years relative to robust test cells and the way we go about innovation in the marketplace.

Not to make sure that everything is fail-safe, because I think without some risk you certainly won't have any reward, but I believe that our innovation process, particularly around products, and innovation at the restaurant level in the United States, has given us great learnings on making sure that we understand the consumer insights, what's going to be relevant to them, then making sure that we test that in a robust sell environment before we roll it out across 13,600 restaurants and I believe that learning is going to be able to be transferred to other parts of the world.

Mike probably wants to make a couple of comments about that as well.

No, he says he doesn't.

Thank you.

Our next question is from Mark Kalinowski at Smith Barney.

Hi, my question --.

Could you speak up, Mark?

Is that better?

Yes, thank you.

My question centers around the other operating income/expense line item.

It was very large in Q4 once you exclude all the one-time stuff, and as best as I can tell for the year as a whole it was the highest it's been in the last 11 years.

What should we expect going forward out of that line item, and also according to the filing this morning there was $161.4 million in the quarter of other expense, and there's a little bit of explanation what that is, but given that that amount is so huge, if you could maybe provide a little bit further detail on some of the items, like asset dispositions, acquiring restaurants in Brazil.

What, roughly, did those contribute to that $161.4 million number?

Mark, this is Matt.

I will address the fourth quarter other-other that you're asking about.

First, let me say that we can't predict what will be in there in the future.

We're not happy with how big it was this year.

And I'll give you a sense for some of the components.

Some we can quantify exactly, others are a little bit harder.

The buyout -- the costs related to buying out our Brazilian franchisees was 20 million of that number.

The current year impact of the change in rent expense, not the cumulative but the current year piece, is in other-other, that was 21 million.

Some of the other items that are in there, as you know, we're aggressively reimaging.

In the U.S. we reimaged 1100 stores.

Outside the U.S. it was 600, if you exclude Japan.

When you reimage a restaurant sometimes there are costs remaining on the books related to the assets that are being replaced and you have to write those off.

So some of the losses on asset dispositions relate to that.

And, again, I can't predict what it will be in the future, but if we're doing our jobs well, it should not be as large as it was this year.

Thank you.

The next question is from Matt Difrisco at Harris Nesbitt.

Actually it's a follow-up on that.

Just a little clarification.

The reimaging though is going to kick up it seems like the activity in '05, though you say you don't want that number in aggregate not to be as high so are you susceptible to greater write-offs?

Did you have a good handle on how many of those 1300 stores or what the volume of the or the size of the write-offs might be?

Also, sort of as a follow-on to that, the other portion was litigation in the U.S.

Does that already encompass or include for reserves of the reinstated obesity lawsuit that hit the tape about a week ago?

Matt, this is Matt.

On the -- let me be clear that the reimaging write-offs were a factor in the 160, far from being a majority of it, and we will have some of that as we re-image around the world but I don't want to give you the impression it's like $100 million of the 160.

It's well less than that.

And we will continue to have some activity in other-other, but, again, it should not be as large as this year.

When it comes to litigation we don't want to talk about what we've reserved for and what we haven't because it affects our negotiating positions.

The next question is from Howard Penney at FBR.

My question is on China.

You've repeatedly said that it's a significant growth opportunity and that you're confident returns will improve.

Matt, you said they're going to improve as you leverage your infrastructure which implies something which I had thought that maybe you weren't getting the returns at the store level which is why you weren't growing as fast as in the past and maybe there's other management issues.

Is it a China issue or is it a store issue, and if it's not a store issue, why aren't you growing faster in China?

Howard, I would say -- let me first explain that when we go into a market like China we're investing for the long run.

We want to have dedicated infrastructure to the extent we can, and so when you build an infrastructure bigger than the number for a system that's bigger than the number of stores we currently have.

So a piece of this is leveraging fixed costs relating to infrastructure, but another piece is certainly getting the average unit volumes up from where they currently are.

So I would say it's both factors.

Howard, if I could just weigh in on China, I know we talked a little bit about this when we were in New York but we've committed not only to the supply chain infrastructure, because it gives us the guaranteed supply safety of supply and the sophistication we need to scale the market and we've now put in place the team necessary to scale the market.

Now, you know, we have 600-some restaurants there, and our returns are getting better, and by the way we are profitable in the market, but we have a ways to go and the sophistication around our development and then the expectation we have of the benefit of the sales in those restaurants and we're also opening five drive-thru's there this year which I had mentioned and that's another competitive advantage for us.

I think it's important.

We're opening 100 restaurants next year leaning towards the Olympics there in Beijing in 2008 and we hope there will be over 1,000 restaurants by that time so a lot of our focus and management energy is going to be on maximizing the potential there in China.

Our next question is from John Ivankoe of JP Morgan.

Thanks.

Hi.

I guess given what sounds like higher beef costs in the U.S., higher than that, in Europe, you know, what sounds like globally a greater use of a value menu in some way, or branded value menu across many markets, could you talk about your attitude of pricing and your belief that you can move the average ticket beyond just that of premium product?

In other words, to what extent can you and will you use pricing as a way to offset some of the commodity prices in the 2005 across markets?

John, it's Matt.

Certainly our goal when you look at the Plan to Win, we've been talking about more customers more often, more brand loyal, more profitable.

The more brand loyal part is about creating differentiation so that if costs go up we do have some ability to raise our menu prices.

On the other hand we know we're a mass market brand and we're about being affordable.

And so I don't want to leave you with the impression that we're going to pass along every cost increase to customers, but if we have a strong brand we will always have some ability to do that.

I also want to be clear that beef costs going up 5, 6, or 7 percent is not an issue that worries us.

We've shared with you in the past that we have a very diversified basket of goods that goes into the back doors of our restaurant.

Beef is a part of it, beef is the biggest single item but using the U.S. as an example if beef costs went up 5 percent and we chose to have absolutely no change in mix or menu prices, a 5 percent increase would only affect earnings per share by one-third of one penny, so it's not something to worry about and I have to remind you that when you look at the everyday value menus going in place in places like Germany the biggest seller is a dark meat chicken sandwich.

Thanks, John.

Thank you.

Next question comes from Andy Barish at Banc of America.

Hi, folks.

Question on Europe.

In the past you've mentioned kind of obesity and negative publicity have probably been as large a factor in some markets as the economy.

You talked about your new lifestyles approach that's going to be launched I guess in the next six weeks or so, balanced lifestyles, is that really kind of a program focused on some of these issues in Europe and other parts of the world?

Andy, first of all, balanced life styles really is generated by the fact that we care about the well-being of our customers.

This is really about choice and common sense regarding balanced lifestyles as everything is in life and we're committed to provide our customers with choices on our menu, committed to communicate those choices and committed to communicating the importance of physical activity and all of those things that are so importance to balanced lifestyle and we're prepared to walk the talk because we can make a difference.

The other thing that I would say it's not new.

We've been working around the balanced lifestyle initiative now for the last 18 to 20 months, and before that we called it something different but the most important thing, is whether it's in Europe or the United States or in Asia or any other part of the world, McDonald's is committed to making a difference around this very, very important issue, and we're positioned to do so and so it's not really about Europe, it's really about the wholesale expectation around balanced lifestyles for our Company, to benefit our customers.

Thank you.

Our next question comes from Rick Lyle at J. W. Bristol.

Can you guys address what determines the pace of reimaging?

What kind of returns are you earning there?

Should we expect the pace of that to accelerate?

Thank you.

Rick, this is Matt.

Just to -- first of all, I have to share some perspective with you.

We've said this before.

We absolutely have to, and we'll continue to measure returns and reimaging at the store and restaurant level, but it doesn't stop there because it's also about the brand, and giving the brand more elasticity to do more things, offer premium product, et cetera.

Having said that we certainly measure returns to give you an example, Mike mentioned that the lift over and above the lift we're getting in the rest of the market has been about 5 percent.

Our contribution is $85,000.

For the average store that 5 percent lift over and above the market is 95 to $100,000 of incremental sales.

We collect between 13 and 14 percent rent and service fees so we're getting 13 to 14 percent $95,000 more in sales so we're getting about $13,000 for our $85,000 investment, so at the store level for us and for our operators it's a good return but believe me we're not just doing it because of what happens at the restaurant level, it's about the brand as well.

Thank you.

Our next question is from Jim Bakker at Neuberger Berman.

Yes, good morning, or good afternoon.

I wanted to ask you about your ability to leverage some of the expenses like payroll and benefits, occupancy and other expenses that you've been very successful at leveraging over the past year.

Do you think that you will be able to continue to do that in 2005 in order for those things to grow at a rate less than your revenues?

Also could you comment on how you're going to contain your SG&A costs to the levels you're talking about?

I'll have Jim talk about G&A and I'll cover the leveraging of occupancy and other.

When you look at the three big components of our margin percentage, the cost side, and you get the food and paper, labor, occupancy and other, clearly occupancy and other has the bulk of the fixed costs, and there is, believe me, a lot of room to continue leveraging the fixed components of those costs.

Now, there's more room in geographies outside the U.S.

The U.S. is up to over a 19 percent margin but even the U.S. has room.

But outside the U.S. substantial amounts of room.

So I don't want to leave the impression that we've hit some kind of a ceiling on being able to leverage our fixed costs that.

That would not be an accurate statement.

And, Jim, do you want to deal with G&A?

Yes, Jim.

I believe so strongly that the most important -- one of the most important things we did other than grow the top line was have great discipline around the financial side of our business and SG&A plays such a big role in that, our focus and discipline regarding allocating the appropriate resources to grow the business around a revitalization of the Plan to Win was one of the biggest reasons we had the success that we did and we have been able to do that effectively.

We expect to continue to do so in the future as we align our management team to best drive our business results.

And as well how we spend our time and money on innovation to provide future growth for the business.

And, Jim this is Matt again, just a quick reminder, we didn't repeat what all of our financial targets are, but one of our targets, and we've delivered it consistently the last two to three years, is to lower G&A as a percentage of system wide sales by at least 10 basis points a year, and we believe we have room to continue to do that without any dramatic adjustments to the business that would distract our system.

Thank you.

Thank you.

Our next question is from Peter Oakes at Piper Jaffray.

Hi.

Good afternoon.

Actually I wanted to go back on the premium product front in the U.S. burger category we're actually seeing some pretty interesting popularity with the Angus beef product from a couple different operators.

I'd be curious to get Mike's impressions as to opportunities for differentiating the beef.

You know, Peter, with the double cheeseburger as part of the dollar menu we continue to sell 2200 of those a week and you know how important that product has been, so a great tasting, you know, product, my favorite, this January we've promoted the Double Quarter Pounder with cheese, sales of that product are up 25 percent.

Our young adults love the Quarter Pounder, and we marketed it I think beautifully, POP in all restaurants so it's been very very successful.

Beef is obviously a very important part of our lineup, and you're going to see more in terms of the way we -- the way we promote our hamburger business in the U.S. and really around the world.

Thank you.

Our next question is from Larry Miller at Prudential.

Yes, hi.

Just wanted your thoughts on the cash buildup on the balance sheet there.

It seems like it really increased maybe about $800 million this past year.

Is there more that you can return to shareholders?

And if I could just follow-up quickly on China, you mentioned maybe store level returns are not where you want them to be.

Where are they now, and where could they be, especially relative to the U.S. returns?

Larry, it's Matt.

Yes, there is more cash than normal on our balance sheet at year end.

We've said in the release at least $1.3 billion will be returned to shareholders.

It's important that we maintain flexibility.

I'll remind you last year at this time we said at least a million -- at least a billion and we've returned 1.3.

So that is the floor we're putting.

It's certainly not necessarily the target or the upper limit, and China we're not going to get into tremendous detail, we will tell you that our returns are in the high single digits.

That is, a little bit more than a third of the U.S. return we're currently earning.

Thank you.

Next question is from Janice Meyer at CSFB.

Going back to Chipotle, you really don't need the money for selling it.

You're buying back stock, you're paying down debt, you have all the money you need really to invest behind brand McDonald's so maybe you can talk about the qualitative reasons to potentially spin off or sell this brand as opposed to the quantitative reasons.

And also, since now you've sold what didn't work, you're potentially selling what does work, where does that actually leave Boston Market, and where does that also leave Motts?

Well, first, Janice, let me just say it leaves Motts in a very good position.

He's doing a great job for us over there.

This is Jim, by the way.

I'll let Matt talk to you about the Boston Market question.

But on Chipotle this is really about discipline and focus for us.

As you know, Chipotle is a very popular brand it's been very successful.

We're simply looking at ways that we can leverage the opportunity to provide more focus and discipline against the McDonald's business and not against the Chipotle business necessarily so we're looking at ways to get that done.

We're not sure exactly what it will be yet.

But that's really the reason we're doing it.

And, Janice, you know, I want to reiterate what Jim said about Motts.

Motts is a very valuable member of our team, and on Boston Market, let me be absolutely clear, the announcement we're making about Chipotle has absolutely nothing to do with Boston Market.

Boston Market is in a completely different stage of its maturity.

It is not a huge unit growth story as Chipotle is.

It is not absorbing substantial amounts of capital.

Our focus on Boston Market is getting more out of the brands.

They are looking at handling prepared food offerings in grocery stores on the East Coast and the brand has a lot of legs and it's probably going to require less of our capitol so we have no plans to do anything with Boston Market other than grow it.

Next question is from David Palmer at UBS.

Hi.

Could you perhaps give a little bit more color as to what was the specifically done with the menu in Germany and perhaps how you're marketing that and also separately in France there seems to be -- food deflation is the norm there now particularly at the supermarket level.

Could you perhaps talk about doing something similar to Germany being more with a everyday low pricing strategy there?

Thanks.

David, I'll be -- this is Mike.

I'll be in Moscow and Germany and London next week and really submerging myself in all of the issues related to those three very important markets but related to your question in Germany their version of the dollar menu has really caught on, it's been a short period of time, but we're encouraged by the early results.

The addition of a dark meat chicken sandwich has really made it popular.

We're excited and encouraged by what we see there.

In France with reimaging and new food news and the testing of their version of a dollar menu, we're encouraged that France will continue its upward migration, if you will, and so both countries are a part of the holistic Plan to Win which is about new food news and branded affordability as well as improving the taste and quality of our core menu and, of course, leadership marketing with "I'm lovin' it" and the work that Jim spoke about related to balanced lifestyles those announcements that are forthcoming.

Next question is from Joe Buckley at Bear Stearns.

Thank you.

I had -- really two questions.

I wanted to ask about the European margins.

Obviously a little bit of erosion in the fourth quarter.

It sounds like there's an even greater emphasis on value going forward I'm curious if you expect to make any progress regaining margins in Europe in '05 and just a follow-up on the other operating expense discussion earlier, Matt most of the things you mentioned you seem to imply they were half-done.

I think the Brazilian buy-outs, maybe some of the U.S., I don't know what it was, maybe litigation issues or something, or even the remodels.

What's in that fourth quarter number that's not half-done, that's more one-time?

Anything large that you could identify?

Yes, the -- well, there's nothing else I want to call out to say it's completely done.

We did want to say that there are still some stores in Brazil where we might be buying out franchisees and we haven't completely rolled out cashless and gift cards so we wanted to signal that.

Joe, on the margins in Europe, I'm not going to predict margins.

I will tell you I expect to see improvement in '05.

We all expect to see improvement, and the U.K. is 35 percent of our margin dollar story, and we are going to have a premium offering in Europe that we're not going to discuss the details of right now.

We're focused, though, on getting more customers into our store.

We're not trying to manage the business to produce a margin.

If we take good care of our customers and we balance everyday value with premium offerings we will like the margin results.

Bottom line, we do expect to do better in '05.

Thanks.

Next question from Matt Difrisco at Harris Nesbitt.

Can you give us I guess specific guidance given the fluctuation in the tax rate what your guidance or what we should model for '05 and also just had a follow-up question regarding Europe.

Can you give us sort of a time line or where you stand, what is your measure for success in '05?

Is it going to be building on the sales, or is it going to be sales and also reaching an inflection point where you're driving sales and margins in the same direction?

Because I guess what's behind some of the questions here seems to be also on Europe is how long is couponing or how long is aggressive discounting going to carry on and can you make a margin turn in that environment as well.

I'll take the question on taxes.

There's a lot going on in the tax world.

Due mostly to external factors.

As you saw from the outlook section we weren't in a position to give you an '05 tax rate at this time.

We believe we'll be in a better position to do so on or before the date we report our first quarter results but I do want to give you some more perspective.

Over the next few years, our tax rate should average in the low 30s.

But that's an average, and the world -- the way you account for income taxes is shifting a bit.

And I think it's going to be harder for McDonald's and every global company to predict and produce a very stable tax rate so the average we're telling you will be in the low 30s, there will be quarters and even years that will fall outside the range that's described when I say low 30s.

Matt this is Jim Skinner, on the question on Europe, then Mike might want to add a couple comments about some strategies or tactics.

First of all Europe had a good year last year by our measurement.

When you compare it to the United States, however, it pales in comparison as does every other geography in the world because we had our best result in the United States in 30 years.

Having said that our expectations for performance in every part of the world and every discipline is to show improvement around all the metrics, particularly around Plan to Win metrics but then when it comes to top-line sales growth and margin we do expect performance improvement in Europe next month.

And Matt you alluded to the.

We've had fits and starts over the past five or six years in Europe for any number of reasons but it is all about the same store sales growth and the expectations around getting better versus getting bigger.

But we have full expectations of all of our leadership in any part of the world to have sales and margin improvement and performance.

Matt, I would just add the combination of the dollar menu and premium new premium products and leadership marketing and extended hours are part of the reason why we've had increases in margin in the U.S. three of ten customers who say they've come for the dollar menu purchased only dollar menu items.

The other seven add more products to their purchase.

We view branded affordability as not discounting.

It's an everyday price that customers can count on.

So the combination that our leadership there has committed to is this notion of new food news at premium prices which will help average check and in many of the markets it's helping increase guest counts which is another really important measure and that combination of new food, the branded affordability, and leadership marketing has translated in many markets to increases in margin.

Without regard for the increases in food and paper costs that Matt has referred to.

So we're confident.

We have their commitment, and, you know, I'll be there next week and we intend to make a -- an impassioned plea to continue this focus because it's working.

Thank you.

Our next question is from Peter Oakes.

Hi.

For Matt, actually, a little bit bigger question.

Wasn't that long ago when McDonald's had quite a bit more embedded unit growth in the equation and part of the repercussions of that higher unit growth was pressure on the franchise margins as you implemented more leases.

Now that unit growth has slowed fairly dramatically from where it was just four or five years ago, Matt, can you give us a sense as to how much margins are -- franchise margins are being impacted today by that phenomena versus where they kind of peaked, and if you want to give us a date on that, that would be great.

I'm not sure you have the exact numbers but if you at least give us kind of the spirit of what's behaving with that line item.

I'll try to give you my best sense of it, Peter.

Because we're not opening as many new restaurants our initial fees are not going into the franchise margins as much as they used to but the trade-off of being more customer focused is well worth it.

In addition something else that's going on that you've got to factor into your thinking as you look at that number, we touched 2,000 stores in 2004 with reimaging, and that money we spend is depreciated and also goes into franchise margins.

So I'm not displeased with where we are.

We made good progress this year.

But as you try to think about the next year or two you have to remember that the reimaging money we're spending will all eventually hit that margin line.

Looks like we're out of questions, so I'll go ahead and turn it back over to Jim to make some closing comments.

Thanks, Mary Kay, and thanks, everybody, for participating today.

We begin the new year with two things in mind.

First we're operating from a position of strength, our business and brand are strong, the strength is due to our focus on our customers and restaurants and we do not plan to change that focus and it will not waver.

Second we will execute our Plan to Win with renewed energy, greater focus and more sharing of success.

We will continue to raise the bar on operational excellence and leadership marketing.

Our goal is to always exceed our customers' expectations.

We're not going to be satisfied until we do.

Thank you.

Thanks, everyone.

Bye.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.