麥當勞 (MCD) 2005 Q3 法說會逐字稿

Welcome to McDonald's October 20th investor's conference call.

As a reminder this conference call is being recorded.

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

Thank you.

Hello, everyone and thanks for joining us today.

With me are Chief Operating Officer, Mike Roberts, and Chief Financial Officer, Matthew Paull.

Also joining us by phone from London is Denis Hennequin, President of McDonald's Europe.

Denny is joining us for Q&A on Europe which currently represents about 35% of consolidated operating income.

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.

With the earnings release and our 8-K is supplemental financial information are available on investor.mcdonalds.com as are reconciliations of any non-GAAP financial measures mentioned on the call to their corresponding GAAP measures.

With that, I would like to now turn it over to Matt Paull.

Good morning.

Thank you, Mary Kay.

Good morning, everybody.

Last month we had the pleasure of hosting many of you at our analyst meeting here in Oak Brook.

I know some of you may not have been able to make it.

So I want to take a minute to recap some of the key messages.

First, the strategy we put in place almost three years ago to grow by being better, not just bigger, is working.

We believe our brand today is more relevant and our entire system is aligned around the Plan to Win.

Which is all about giving our customers a better restaurant experience and further differentiating our brand.

These efforts, together with capital discipline, have delivered better financial performance.

Over the past three years, our comp sales, margins and returns have all improved.

This in turn has enabled us to return substantial cash to shareholders.

This year alone, we expect to return at least $2 billion to shareholders through dividends and share repurchase.

Over 2006 and 2007 combined, we expect this amount to be between 5 and $6 billion.

Clearly, we've made significant progress in the past three years.

Yet, we know we still have much more to do.

As we said at last month's meeting, there are several areas of the world where margins and returns are well below historical highs and below our target.

Our entire management team is focused on improving these results.

The tactics may vary by market but all will be aligned behind the Plan to Win.

We will also continue to be smart about where and how we invest our capital.

Our priority markets for new restaurant growth are those that have proven track records or significant potential relative to risk.

In addition, we will continue to reinvest as necessary to keep our brand image fresh.

With that brief recap of our key messages, I would like to turn it over to Mike to begin our discussion of the third quarter.

Matt, thank you.

Good morning, everyone.

Our Plan to Win is working.

Owner operators, employees, suppliers, and everyone are aligned and focused.

Our biggest opportunity now is to improve our customer's experience, keep our momentum going, and make our Plan to Win drive even bigger results.

To begin, results for the quarter were solid with comp sales up 4.1%, operating income up 6%, and earnings per share are at $0.58.

The U.S. is right on track.

The momentum continues on top of strong sales from the same period in '04.

In fact, we generated better comps than the QSR sandwich category every week in the third quarter and throughout much of 2005.

U.S. results are being driven by an ongoing holistic approach to the Plan to Win.

Value and convenience continue to differentiate us from the competition.

We're seeing specific success with premium chicken sandwiches, extended in 24 hours, cashless, reimaging, and, of course, the dollar menu.

In fact, in September after the promotional intro of our premium chicken sandwiches, we're now selling 50% more chicken sandwiches per week than we were a year ago.

We're generating a significantly higher average check with these new sandwiches, as well.

Extended hours are another important contributor to our success adding more than a percent to sales comps for the quarter.

Over 90% of our restaurants in the U.S. offer some kind of extended hours and 30% now offer 24/7.

And looking forward, I expect the momentum to continue in the U.S. as Ralph and the operator leadership team continue to improve the customer experience.

This month we launched Monopoly with game pieces that feature premium chicken and in November the U.S. is rolling out Arch Cards, our version of gift cards.

Moving on to Europe, I am pleased with our progress.

We've seen positive comp increases throughout the third quarter and delivered the highest quarterly comp sales increase in Europe in the last six years.

We've gained momentum in Germany with quarter three comps up double digits.

We're seeing success through a powerful combination of Ein Mal Eins, their value menu, and rotating premium sandwiches, like the Big Tasty and the Bigger Big Mac.

As a result,margins and operating income improved for the quarter providing further evidence that we have the right plans in place for this market.

France is focused on a powerful combination of Le Petite Plaisirs, their value program, and the premium mythics program in which customers vote online for their favorite promotional sandwiches.

And yesterday France launched a promotion featuring music DVDs with purchase of an EBM.

France remains a consistent top performer for McDonald's.

In the U.K., we're tackling the challenges in the marketplace, and we're confident that over time we will improve results.

We're moving forward aggressively to change customer perceptions by improving service, promoting the quality of our food, and enticing customers with food news like toasted delis.

We also continue to see strong consistent performance in many other European countries as well, including Russia, Spain, and Italy.

In APMEA, we continued to experience strong sales results from our value platform, convenience initiatives, like extended hours, drive-thru and delivery, and food news like Taiwan's Rice Burger, Australia's Deli Choices and Espresso Coffees, and new Happy Meal sides like Corn in a Cup in Hong Kong and fruit options, like sliced apples, grapes and fruit jelly in Australia, Singapore, Korea and Taiwan.

An area of the world that's small on the McDonald's map, but big in results are the 13 countries that make up the McDonald's Middle East story.

We can learn a great deal from them.

We developed the Middle East primarily through a developmental licensee structure.

They have experienced consistent double-digit sales growth since 2003 and succeed by executing a holistic balanced plan that is locally relevant.

In Japan and China, we have room to improve results.

Japan remains focused on value with 105, 100 yen menu and offering new tastes, like the Tamago Double, a hearty double-burger with egg, bacon, and cheese.

And the Shrimp Burger being introduced next week.

Both are limited time offerings that we expect to appeal to our local customers.

We will serve nearly 1 billion customers this year in China, and there is opportunity to do so much more.

We're working to connect with customers by offering better value and new food news, promoting the quality and safety of our food, and increasing accessibility to our brand through restaurant development and convenience options, like the drive-thru.

In fact, our first drive-thru will open in China in December in Chen zen.

Bottom line, the results we're seeing in many markets indicate that our Plan to Win is working.

Especially, when executed across all five Ps.

We know we have opportunity to improve margins and returns in a number of markets and we're determined to do it successfully.

We remain focused on broadening our success and we're confident in our plans.

Looking ahead, we intend to stay innovative, compelling and focused on the plan.

In 2006, our customers can expect to see new food like salads in the U.S. and Europe, premium chicken in Europe and Latin America, rice burgers in Asia and so much more.

More conveniences like extended 24 hours, delivery, cashless, gift cards and reimaging.

New promotional activity in the form of music, technology and sports, like the World Cup and Olympics.

All of this work is helping us become a bigger part of our customers' lives and, of course, it is helping us deliver stronger bottom line profitability and seize the enormous opportunities ahead.

Now, I would like it turn it back to Matt.

Thanks, Mike.

Overall, we delivered another quarter of positive results.

Our focus on the Plan to Win and our alignment generated higher sales and guest counts for the quarter.

As a result, consolidated revenues rose 8% and combined margins increased about $90 million.

Reported earnings per share of $0.58 included $0.02 of income related to the transfer of the Company's ownership interest in a single market in APMEA to a developmental licensee.

The EPS number compares to $0.61 in the third quarter of '04, which included $0.07 per share for a one-time tax benefit.

This year's figure also includes $0.02 of expense for share-based compensation.

Franchise margins representing two-thirds of combined-margin dollars improved significantly this quarter based on strong comp sales.

As a percent of revenues the franchise margin improved 70 basis points, reaching its highest level since the third quarter of 1999.

Company operated margins, while a smaller contributor to our overall margin dollars are an important indicator of franchising performance and of the restaurant level health of the business.

Company operated margin dollars increased 5% for the quarter.

However, as a percent of sales they declined 50 basis points.

This was primarily due to challenges in the U.K. and short term pressures in the U.S. partly offset by favorable results in Russia.

In Europe, company operated margins were primarily impacted by weak sales, labor and brand building activities in the U.K., as well as higher beef costs across Europe.

Germany and France both positively contributed to margins, as did our next tier markets, Russia and Italy.

We've discussed our plans to improve performance in the U.K.

To put the U.K. opportunity into perspective, consider that by itself the U.K. negatively impacted Europe's company operated margins by more than 150 basis points this quarter.

Though our issues in the U.K. are more long-term in nature, and may take time to resolve, we have plans in place to drive improvement.

We've implemented a wide ranging communications program to tell customers about our quality food, our commitment to their communities, our advocacy of balanced life styles, and our willingness to literally open our doors to our restaurants so customers can see for themselves the kind of care and attention we put into action each and every day.

In September, as Mike just mentioned, we launched toasted deli sandwiches to offer more relevant choices.

As we mentioned last month, we will franchise about 50 of our U.K. company-operated restaurants in '06.

Restaurants where, we believe, a franchisee will do a better job of growing sales and profits.

Across Europe, beef costs increased almost 17% this quarter impacting margins by about 50 basis points.

We expect European beef prices for the full year to increase about 14% over last year.

Turning to the U.S., company operated margins as a percent of sales declined from third quarter of '04, but remained very strong at 18.7%.

These margins were hurt by higher beef prices, our strategic decision to increase restaurant manager compensation and benefits at the beginning of this year, and higher occupancy costs in part driven by the change in lease accounting.

Beef costs in the U.S. were up about 10% in the third quarter, which is higher than we initially anticipated.

We expect beef costs in the U.S. to be up about 8% for the year at the high-end of the range described earlier in the year.

As a reminder, every 5% increase in beef costs impacts U.S. margins by about 20 basis points.

Company operated margins remain an important area of focus for all of us.

We will continue to drive sales, manage costs, and where it makes sense re-franchise restaurants to optimize our performance.

Consolidated G&A for the quarter was up 15% due primarily to the early adoption of FAS123 stock option expensing.

Year-to-date, currency fluctuations and $140 million in compensation changes driven by expensing of options account for substantially all of our G&A increases.

Other operating income added about $0.02 to earnings per share for the quarter.

This is primarily due to the previously mentioned transfer of the Company's ownership interests in an international market.

An increase in non-operating income added $0.01 to earnings per share reflecting higher interest income and lower translation losses.

Finally regarding capital, our plans for '05 have not changed.

We still expect to invest approximately $1.7 billion in CapEx consistent with our focus on growing by being better. 55% is allocated to existing restaurants and 35% to opening about 750 new McDonald's restaurants.

In 2006, we plan to invest about 1.8 billion in CapEx allocating 50% to existing restaurants and approximately 40% to open about 850 new McDonald's restaurants.

In summary, our financial performance for the quarter and the year has been solid.

We are focused on the customer and on delivering long-term sustainable growth in sales and operating income and a high-teen's return on incremental invested capital.

We believe our commitment to operations excellence and leadership marketing is the right strategy to achieve our goals over the long-term.

Now I would like to turn the call back to Mary Kay.

Thanks, Matt.

At this time, I'll open the call up for questions. [CALLER INSTRUCTIONS]

Our first question is from John Glass from CIBC.

Thanks, good morning.

Since my attendance at your analyst meeting, another iteration of the restructuring proposal emerged namely the spinoff of your company operated units to create kind of two companies with different characteristics.

Can you comment on that proposal?

How you look at it philosophically?

Does that violate the same penance that may be a real estate spin-off would?

Or do you view it differently?

Thanks, John, for the question.

As you all know, we're a public company and we are McDonald's.

And because of that, we get a lot of input from a lot of sources and a lot of suggestions about how we could run this business better.

We get valuable input from certainly our owner-operator community, shareholders, and the analyst community.

We welcome the input.

We always have and, frankly, we always will.

The process of listening to ideas and evaluating outside ideas we think is critically important as a learning experience for the Company and our management team.

And experience that we know over the long run helps us produce a stronger, more customer-focused McDonald's.

John, having said all of that, we do meet on a regular basis with people who have suggestions on how to further improve McDonald's.

However, we don't make a habit of commenting publicly on each and every idea we listen to.

And when we do choose to comment, we like to do so only after we've had adequate time to assess any such idea.

A good example, which you mentioned, came up at last month's analyst meeting.

You saw how we handled the issue that arose surrounding our real estate and the potential use of a real estate investment trust.

In analyzing the reach, we conducted a thorough analysis and only after completing that analysis did we share our thought process with all of you.

That's what you can expect from us in the future.

Thanks very much for the question.

Thank you.

Next question is from David Palmer at UBS.

Hi, guys.

Just in terms of the investments you're making and one of the things -- there are a lot of different things that you were working on besides menu innovation.

There is also investments that you're making at the restaurant level, which I didn't really appreciate until I got into that meeting and hearing how excited some of the folks at your organization were about some of those, including the bridge operating platform kitchen in Europe, the new point-of-sale systems in the U.S., of course the ongoing reimaging.

Could you maybe give us a sense of why you might be excited about these things from a return on investments, or at least from a ultimately a customer-satisfaction perspective, whether it is this year or two years or three years from now?

Thanks.

Thanks, David.

This is Matt.

I think Mike and I will probably both comment on this one.

First of all, let me begin by saying that everything you saw described at the meeting last month is contained in the $1.8 billion figure we gave you.

There is no incrementals or add ons.

Wanted to make that clear.

When you take a look at brand McDonald's of three or four years ago and compare it to brand McDonald's today, there were certain constraining factors that affected our ability to serve our customers well.

We had issues behind the counter with our production system.

You heard us talk about bridge operating platform, flexible operating platform, which will help us address that.

And we had issues on the customer side of the counter with what the brand stood for and what customers would give us permission to do.

So when we look at where we're making investments, and you mentioned the point-of-sale-system which will help us be better behind the counter and more efficient and more customer friendly.

We talked about the operating-production system, which will improve, especially in Europe.

And then on the brand image side of things, the customer is giving us permission to do more and more things.

So there is a whole world of possibilities.

When we look at returns, we try not to look at returns on a project-by-project basis because in some cases we're lifting the whole brand and making many things possible.

Reimaging is a perfect example.

If you looked at reimaging on a store-by-store basis, and you look for a return at the store level, you might conclude that it is not the best use of our money.

But when you look at what it does for the brand, making the brand more contemporary, we think it is an excellent use of our money.

Thanks very much for your question.

Our next question is from [Christa Napolitana] at First New York.

Christa?

Christa, are you there?

Okay.

We'll move on.

The next question Joe Buckley from Bear Stearns.

Thank you.

Can you talk a little bit about your unit expansion goals?

Looks like your net targets for '05 actually came down a little bit.

I think you indicated your gross opening target for '06 was going up by about 100 units.

Will the net go up again, as well in '06?

And maybe can you talk about geographically where you are expanding?

And just to add one more on there.

Looks like U.S. company units are up by about 100 restaurants on a year-over-year basis.

Is that a part of a strategic plan to increase the Company mix or is that just sort of opportunistic?

Joe, Mike, I would tell you that in '06 the plans include expansion in U.S., China, Canada, France, Russia, Spain, Germany, Italy, Australia, the markets where we're gaining some significant traction with our Plan to Win, and we're really excited about our new restaurant growth.

In the U.S. now, our new restaurants are opening at the 2,100,000 range, which is a really exciting piece of the business.

Our new Wal-Marts in the U.S. now are averaging nearly 800,000 in first year sales.

So some really good movement there.

Our rebuilds here in the U.S. are averaging now between 500 and 600,000 in net new sales.

So we have a lot of traction here.

In '05 we'll open in the neighborhood of 340 net new by the end of the year and in '06 that number will be higher, primarily concentrated in roughly the 10 markets that I have outlined.

And Joe, we're still targeting to be between 1 and 2% net new unit growth.

You'll see a slight uptick in '06 versus '05.

But it's a matter of 50 or 75 restaurants.

It is not a huge number.

When you look at the increase in, I think you said, U.S. company operated stores increased by 100.

It is not a strategic signal.

We buy and sell and we happened to buy a few more than we sold.

You shouldn't read anything into that.

Thank you.

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

Hi.

Thanks.

Since there is so much focus on it, I have two margin questions.

Could you comment on the outlook for beef costs in '06 and U.S. and Europe just in percentage change?

And secondly, the franchise margins, specifically in the U.S., is there a cap to that number or will that franchise margin continue to go up as average volumes on the franchise side go up?

Thanks.

I can go ahead and answer the beef cost question.

In the U.S. beef costs were up 10% in the third quarter.

We expect them to be up about 7% in the fourth quarter and 8% for the year.

In Europe, beef costs were up about 17% in the third quarter, 8% in the fourth quarter is our expectation for a total of about 14% for the year.

And, John, on the franchise margin question.

There is a mathematical answer and there is a practical answer.

The mathematical answer is that since we're collecting percentage rent against mostly fixed costs, mathematically, the number can just keep going up.

We like to look at the franchise margin percentage and compare it to the company operated margin percentage, because we know that if we don't achieve the operated margins we want, that that puts pressure on store level profitability and it will become more difficult to make the math work on the franchise margin side of the business.

Thanks.

Matt, the franchise margins consolidated were 80.6 up 70 basis points, due primarily to the U.S., Germany, and Brazil.

Okay.

Great.

The next question is from Mark Wiltamuth at Morgan Stanley.

Hi.

Matt, I just wanted to focus on the U.K. margin impact a little bit.

You said it was 150 basis points impact on the European company operated margin.

What was the primary driver there?

Was it just the negative comps, or was some of that brand building and communications program built in there?

I am just trying to get a sense for how much of it is recurring?

And how much of it might just be one time in nature from the communications program?

Mark, this is Matt.

Denis is on the line but we're not sure that he can hear.

So I'm going to ask Denis to answer if he can hear and if not we'll jump in.

Can you hear me?

There we go.

I think as you said the impact of the margin for Europe was primarily driven by the U.K. with an impact of 150 basis points for quarter three, but it makes a combination of various things.

There's, first of all, higher labor costs.

And as we've been doing a lot of building activities around impacting our image positively, we did spend a little more money.

The good news is that it is working out as most of [Inaudible] measures for the Fast Track, which is a company I trust and food I feel good about eating, and eating for my children who are growing up.

So part of it is -- there is a return cost in there, but part of it is non-recurring.

I would add that on the commodity costs impact on food costs, part of that gets offset by change in mix, average check, and price increases.

Thanks.

Our next question is from Jeff Bernstein at Lehman Brothers.

Thank you very much.

I know in the U.K. you mentioned you're currently working on a number of different initiatives.

You mentioned the toasted deli sandwich in September, which I believe was aided by a sampling program.

And I know you also conducted that open door program.

Just wondering if you can give us your assessment of the early success of these roll outs and initiatives and what we might expect in terms of new initiatives going forward?

Thanks.

Jeff, it's Mike.

In looking at the plan and Denis, Denis will add further texture here, the operators in the U.K. and our management team just met that approved the '06 plan.

Really exciting from my standpoint they'll launch the Monopoly property in the Spring of '06.

They have new Food News that we're really excited about.

The focus on quality, service and cleanliness related to ROIT is continuing and the alignment that Denis and Peter [Barasford] have been working on with the operators is vast improved over a year ago.

We're optimistic and as Denis said, our trust scores have risen as a result of Peter's work with the brand book that was sent to over 20 million households in the U.K. describing how much of our business there in U.K. is supplied by U.K. farmers, et cetera.

So we're optimistic about what can develop there.

As I said in the opening, this is going to take a minute.

Denis, what else would you add?

Denis, are you there?

Can you hear me?

Yes.

Yes, I would say it is early now because we launched selling the 15th of September.

So you see the impact for that quarter is marginal.

But I would say that very encouraged by the results that we're getting.

It has a [Inaudible] effect on the perception of the brand as those products are fresh products.

They're fairly innovative for the U.K. market, which is a big market for sandwiches.

So it is really helping to turn around the negative trends over there, and -- but it is a long-term, it is a long run.

So, as I said, it is early results, very encouraging.

We'll move our projections on dailies and average dailies sold per store, and we do have new start up costs in sampling the product and getting labor aligned.

That will fade away within the next 45 days, and we should be driving very positive momentum to our business.

We will [rehit] delis in November and the plan is to balance it with core food news next year, premium burgers and delis, as well as affordability platform all year long.

We have a very balanced menu, new food news, premium food and gaming for next year that we're aligning around Europe.

I feel very confident.

Denis, you're going to reimage another 50 to 70 restaurants next year as well in the U.K., right?

Absolutely.

We also had a reimaging program in the U.K. from the earnings that we had in [Fall] very successfully, and in Germany.

And so we're doing that, as well as we're improving the food perception.

Thanks, Denis.

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

Want to know if you have a target domestic company owned margin?

I think last year you were probably a little bit above trend and expectations and this year you're having some cost pressures.

What do you think about in terms of what you're shooting for on a three, four, five year basis?

Rick, I would tell you that if you looked at the last three years, the U.K.

McCopCo business is one of the most profitable businesses we have in the year.

I am sorry, U.S. U.S.

McCopCo margin is very strong, and we believe that trending forward if we're in the 18 to 19% range, we'll be doing very well.

There are going to be some issues that will develop as they always do, but the 18 to 19% range for McCopCo in the U.S. is a historic high for us that we intend to maintain.

Thanks.

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

Just dovetailing on that U.S. margin question.

I mean, it appears as if you're making some one-time, I guess I would say labor-cost investments this year in terms of manager comp programs and staffing up for 24 hours and things like that.

Is that correct to view that a little bit as one-time investment?

And then maybe that kind of flattens out looking out to '06?

Andy, this is Matt.

When you try to break down the pieces of what we are facing with the U.S. margin percentage, there are three things that ought not to recur and be a continuing problem.

One is beef costs.

That's about 40 basis points during the quarter.

We'll have commodity cost increases we'll have to deal with but they've been higher than we would expect on a recurring basis.

We had 20 basis points in the U.S. was simply due to the change in lease accounting.

We'll be lapping that by the time we end the fourth quarter.

The last piece of this was, we decided to offer more compensation and, especially, a better 401(K) plan to our restaurant managers.

We think it is an essential linchpin to running better restaurants.

We don't expect those increases to continue at the rate you saw this year.

Thanks.

Next question is from Steven Kron at Goldman Sachs.

Great, thanks.

I also had a question on the U.S. margins and Matt, you just talked to it a little bit.

On the occupancy line, I know you just mentioned 20 basis points coming from lease accounting adjustments, but I was wondering if you could talk briefly about utility costs?

Anything that you're seeing there?

And anything kind of hedging of energy going forward that you can do to kind of mitigate pressures going forward?

Steven, utility costs I think explain maybe 20 basis points of increased costs for the quarter.

Wasn't huge.

We don't have a huge hedging program in this area.

We get hit a couple of places by energy costs.

It has a small effect on our distribution costs.

It is not at the top of our list of things that we're worried about.

Thanks.

The next question is from Peter Oakes at Piper Jaffray.

Hi.

I actually want to delve into that U.S. margin just a little bit more.

The year-over-year pressure tripled actually in third quarter versus second and you were down 90 basis points versus 30.

Matt, those three components that you ear-marked, all three of those were there in second quarter and beef was also up 10% in the second quarter.

Besides utilities, is there anything else in there?

Is it chicken-mix because of the premium sandwiches and, more importantly, how does that make you think about U.S.

McCopCo going forward?

And what level of comp do you need to kind of keep that in stable range?

Thanks.

Peter, we're very confident about our ability to maintain the profitability of U.S. McCopCo.

For perspective, we do separate return analyses on U.S. McCopCo.

We said what would happen if we were charging them the same rent we charge franchisees?

And any way you measure it they have a very healthy return.

We're very confident it will stay that way.

When you look at the comparison of '05 versus '04, there was a mish mash of tiny little things that explained some of the other headwinds we were facing.

There were some unusual small credits last year that didn't recur this year.

But there is no overall trend in the business that worries us that our margins in the U.S. are in trouble.

We're very confident we can maintain a strong company operated margin in the U.S.

Frankly, our issues are more outside the U.S. than inside the U.S. Thanks.

The next question is from David Palmer at UBS.

Hi, thanks.

This question is on share count.

In the third quarter, it looks like you're flat versus a year ago.

You repurchased $1.2 billion in shares year-to-date.

Your stock, I think it is up a dollar year-to-date and that doesn't exactly speak to big stock option dilution.

We know your plans are 5 to 6 billion of cash to shareholders in the next couple years and that includes a step up in share re-purchase.

But it is a bit surprising that we're not already down year-over-year.

Can you maybe give us a sense of where share count leverage might be over time in terms of a lift to earnings?

Thanks.

Thank you, David.

I agree with you that it is a little frustrating.

It is not in the money options.

We agree with you on that.

And so what we have is, it is a combination of employees having exercised options and I want to speak to that.

We used to grant options at a pace of almost 2% of the outstanding share count each and every year.

I think we're down to less than 1% per year now.

The grants we made 9 and 10 years ago are potentially still out there.

So I would expect over time with fewer grants being given, fewer options will be able to be exercised.

We are going to be more aggressive.

We signalled that at the analyst meeting last week and buying in shares in '06 and '07.

And I would expect that you'll see, compared to the last couple of years, a fairly dramatic reduction in share count.

I can't tell you exactly what the number will be.

But if it all works out the way I expect, that count will start going down.

Thanks.

Hi.

The next question is from Lee Cooperman at Omega Advisors [Background Overlapping Speakers].

Okay.

Lee, are you there?

Okay.

The next question is Lee?

The next question is from Joe Buckley at Bear Stearns.

Thank you.

Matt, would you talk about the cash build up on the balance sheet?

Is that in preparation for the repatriation of funds or is there anything else going on there?

And as the cash builds does it diminish the amount of money you might have to borrow on the repatriation?

Thanks, Joe.

The cash build up, 840 million of it roughly will be to fund the dividend that we'll pay in the next couple of months.

So that's a piece of it.

I know that we dealt with this issue in the first quarter.

It came up then when our cash balances were even smaller than they are today.

We said then that we expect that within a year our cash balances would return to normal levels and for our business that's something well under $1 billion.

What happened between then and now, as you mentioned, is this Homeland Investment Act and our decision to deal with it.

I want to talk about that a little bit and tell you where this should all come out when the dust settles.

The Homeland Investment Act said to us we have to bring home earnings from overseas in '05 but you have several years after that to spend the money on qualified uses.

So our overseas markets will be tapping into about 800 million of cash that was already there, borrowing another 2.4 billion, repatriating to the U.S. and then the U.S. has several years to spend the money on nonexecutive payroll, CapEx, things like that.

We looked at paying down more debt, but there would be penalties involved.

What will happen is our balance sheet at the end of '06 and to a lesser extent to the end of '07 will be grossed up a tiny bit.

By the time we're done with all the moving parts involved with the Homeland Investment Act, I expect our cash balance on a recurring basis will settle at a number below $1 billion.

Thanks very much.

It looks like we are out of questions.

There are no other questions.

I would like to thank everyone for participating and Mike would like to make a couple of concluding comments.

We very much appreciate your interest in McDonald's and your support.

Once again, I would tell you that we are all very confident in our Plan to Win as we develop it across many geographies.

We're confident in the ability of our people and the alignment that we have with our operators is the best we've had in many years.

The combination of all of these factors tells us the business opportunity in front of us is great.

Thanks very much.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.