麥當勞 (MCD) 2006 Q1 法說會逐字稿

Hello and welcome to McDonald's April 21, 2006 Investor Relations conference call.

At the request of McDonald's Corporation, this conference is being recorded. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Ms. Mary Kay Shaw, Vice President of Investor Relations.

Ms. Shaw, you may begin.

Thank you.

Hello, everyone, and thank you for joining us today.

As many of you know, we like to give you the opportunity to hear from various members of our management team on these calls.

So with me today are Chief Operating Officer Mike Roberts and Chief Financial Officer Matthew Paull.

Jim Skinner is traveling on business.

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

As always, the forward-looking statements which appear in our earnings release and 8-K filing also apply to our comments.

Both the earnings release and the 8-K with supplemental financial information are available on our website at www.investor.McDonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call with our corresponding GAAP measures.

With that, I would like to now turn it over to Mike Roberts.

Thanks, Mary Kay.

Good morning and welcome.

I would like to begin by saying that I'm very pleased with our progress in the first quarter.

Year-to-date global comp sales were up 5.2% with more than half of that comp attributed to increased guest counts.

Additionally margins improved across all geographic segments of the business, the first time this has occurred on the Company margin in two years.

That said, we know the opportunities in front of us, and we are intent on building on our momentum.

This momentum continues because our plan to win is working and because our system is more aligned than ever before -- our operators, employees and suppliers.

This alignment will continue at our upcoming worldwide convention where our entire system will come together to talk about how we can create even more success in our future.

In the United States, year-to-date comps sales are up 6.6%.

Results are been driven by New Food News like Spicy Chicken, premium coffee, conveniences like extended hours, Arch Card, cashless, our ongoing reimaging work, which continues to create a more relaxing, relevant and modern experience for our customers, and of course, Monday we launched the Asian Salad.

We are also laying a solid foundation for the future with the continued development of a food pipeline, which includes the exploration of even more chicken options, additional beverage choices like juices and flavored water, and more breakfast variety like a big burrito.

Breakfast continues to be a big driver for us, and our improved coffee is adding to the momentum of our breakfast energy.

Additionally we are adding more fun, excitement and buzz to our restaurants through promotions that touch our customers' passions, including our Pirates of the Caribbean online game and a fitness CD that comes with the purchase of our new salad.

Also, this quarter Canada is building momentum in sales and margins with comps up 8.5%.

With the leadership of Ralph Alvarez and Louis Malle, the Canadians have placed a greater emphasis on quality, service and cleanliness, the promotion of our core food and an overall review of the ownership mix of our restaurants.

In Europe year-to-date comps sales are up 2%, which is progress given the fact that the QSR market there is down.

That said, we are intent on enhancing our customers experience by improving QSC, by strengthening our premium lines with more chicken and premium beef sandwiches, by continuing our leading-edge reimaging work through new decor -- enhanced lighting, decreased kitchen noise and music by Dupard, and by solidifying our pricing strategy with a combination of everyday low price, core products and premium products.

Now a little more detail on our big three markets in Europe.

First, momentum continues in France with some of the highest margins in the world.

Results are been driven by a combination of (indiscernible), their value menu.

Premium burgers like the Big Tasty and chicken products like their Mythic Sandwich, and through ongoing reimaging that enhances both the inside and the exterior of the restaurant.

Additionally France remains our best practice as it relates to telling our story.

Jean-Pierre Petit, CEO of McDonald's France, holds live Internet chats with our customers and with our crew.

He conducts open doors so our customers can see how our food is prepared and served.

He dedicates a significant amount of his advertising spend to print ads on quality, opportunity and our charity.

The good news is this model is now spreading to other parts of the world.

Related to Germany, Eins Mal Eins, their value menu, continues to drive results and shows that the power of a value menu and the power that that can have when balanced with premium burgers and chicken.

Additionally our team continues to respond to customers' tastebuds with ethnic flavors in sandwiches like Chicken Cordon Bleu and the Tex-Mex Burger.

In the UK, while we continue to face challenges, this is a very profitable market.

In 2005 our operating income was well over $200 million, representing almost 6% of McDonald's total operating income.

There we are focused on premium burgers like the Quarter Pounder Deluxe; increasing relevance by reimaging an additional 100 restaurants this year; enhancing the Pound Saver Menu, and offering relevant promotions like the World Cup Ticket Competition that customers play via their cellphones beginning next week.

As we previously announced, we are reviewing our ownership structure in the UK.

We closed 25 high street restaurants where the lease costs were so high it no longer made sense to operate there.

In addition, we have already refranchised 25 restaurants and planned to refranchise another 25 to 35 between now and the end of the year.

The owner operators there are very excited about this opportunity to own more restaurants.

Looking at Asia-Pacific, Middle East and Africa, year-to-date comps sales are up 4.1%, and momentum continues in this part of the world.

I was just there, in fact, and saw some of the great progress we are making firsthand.

We are connecting with customers there by continuing to improve our quality, service and cleanliness with the most improvement in the area of friendliness and accuracy.

By offering New Food News, including the expansion of the successful rice burger from Taiwan to other markets including Singapore, Hong Kong and testing in China; espresso coffees in Australia and additional kids' choices like corn in China and breakfast like the thick toast in Australia.

And by delivering innovative promotions.

This year Hong Kong continued their momentum with Jack the Dipper, a character they created to build buzz around our McNuggets.

China continues to represent enormous opportunity for McDonald's with comps up year-to-date.

We are growing the business there through food relevance with the chicken burger and the Spicy Chicken filet; drive-through expansion; compelling everyday value and telling the story of the quality of our food where we are running quality print ads and the recently launched askme.com, a public information website dedicated to food safety and the quality education of all of our guests.

Finally, in Latin America year-to-date comp sales are up 15.3%, driven by a comprehensive quality service improvement plan, the launch of the Big Tasty, and a continued focus on everyday affordability.

Related to marketing, Mary Dillon is making significant progress on improving the relevance with the next generation of "I'm Lovin' It!" on media innovation, which includes looking at different ways we reach our customers and on building relationships with moms, including innovating around the future Happy Meal.

So while we are focused on driving results today, we also have our eyes firmly fixed on the future as we continue building even deeper relationships with our customers and greater alignment with our operators, suppliers and employees.

Thank you, all, and now I would like to turn it over to Matt Paull, our CFO.

Thanks very much, Mike, and good morning, everyone.

At McDonald's our business strength is tied to brand strength.

Making our brand and the restaurant experience more relevant to our customers is essential to building the business, and we believe we're doing just that.

We had a solid first quarter, reinforcing that our strategy of growing by improving our existing restaurants and focusing on the five Ps continues to be the right strategy for McDonald's.

The global comp sales numbers we delivered this quarter contributed to improved margin percentages across all segments.

Both franchised and company operated margins were up 110 and 70 basis points respectively.

Franchised margin dollars neared $1 billion in the first quarter, making up almost 2/3 of worldwide margin dollars.

McDonald's company-operated margin dollars increased $53 million over first-quarter '05.

In the United States, company-operated margins as a percent of sales increased 40 basis points to a strong 18.3%, driven by positive comparable sales.

We had some help in the first quarter from relatively flat commodity costs, partly offset by higher utilities, labor costs and increased promotion costs, specifically relating to our launches of coffee and Spicy Chicken.

For the year we expect cost for beef and chicken to be relatively flat and (indiscernible) to be down.

Overall utilities are anticipated to increase for the year, and labor costs will be up slightly due to a higher average hourly rate.

Turning now to Europe.

The company-operated margins were up 10 basis points in the first quarter.

Strong sales in France and Russia and improved performance in Germany helped offset performance in the UK and labor pressures throughout Europe.

Labor pressures are expected to continue.

Beef costs were relatively flat in the first quarter and are expected to be flat for the year.

France, Germany and Russia all delivered strong company-operated margins; however, Europe's company-operated margin was reduced by about 70 basis points due to UK results.

Mike just highlighted our initiatives to improve performance in the UK, and we are confident we will get there over time.

Moving now to Asia-Pacific.

This segment generated a 140 basis point improvement in company-operated margins.

This was driven by strong results in Australia and improved results in Hong Kong and China.

Australia continues to drive transactions with locally relevant menu options like Espresso Pronto coffee and a range of seven Deli Choice sandwiches.

Regarding China, I was just in China three weeks ago and was very excited by what I saw.

We are offering customers locally relevant menu options like the ones you heard Mike describe, and we are also excited about the contest of products like the rice burger, which features Spicy Chicken or beef with red cabbage and lettuce on toasted sticky rice instead of a bun.

We are becoming a more convenient option for our Chinese customers through better site selection and drive-through expansion.

Adding drive-throughs the way we at McDonald's do drive-throughs has brought a unique convenience to the market.

Although building a restaurant in China with a drive-through costs 30 to 50% more, or about $200,000 more, we are achieving 50 to 80% higher sales volumes, clearly a very good investment.

In 2004 alone there were 2 million more cars on the road in China than in the prior year.

Both car ownership and traffic are growing in China at explosive rates.

With plans to add many more drive-throughs in the next few years, we are poised to capture the opportunity.

G&A for the quarter increased at a rate which is much higher than the rate we project for the full year.

Some of this is due to the timing of certain expenses like the Olympics.

In the second quarter, we expect G&A to increase mostly due to the timing of our biannual operator convention.

For the year we continue to expect G&A to decline as a percent of revenues and systemwide sales.

Now I would like to discuss quarterly earnings per share.

First-quarter '05 EPS was $0.56, including a $0.13 benefit from a favorable tax settlement.

First-quarter '06 EPS was $0.49, including several items that on a net basis cost us about $0.01 in earnings per share.

The charges in the quarter totaled $86 million on a pre-tax basis or about $0.045 per share.

They include $42 million or about $0.02 per share related to our previously announced review of restaurant locations in the UK, resulting in the closing of 25 high street restaurants. $29 million or about $0.015 per share related to the buyout of certain franchisees in Brazil. $8 million or less than a $0.005 per share related to the sale of a small market in Europe to a developmental licensee, and $7.5 million or $0.005 per share from asset write-offs in Asia-Pacific, Mideast and Africa.

On a constant currency basis without these items, operating income was up 14%.

On the income side, we reported a nonoperating gain of $0.035 per share from the IPO of Chipotle and the concurrent sale of a portion of our Chipotle shares.

In our January call, we described our developmental licensing or DL strategy which we planned to implement over a three-year period in some 15 to 20 countries, representing about 1500 restaurants.

Remember DLs, as we call them, have been a successful part of our international strategy for 15 plus years, and we already use a DL structure in 32 countries.

In 2005 alone two countries representing 325 restaurants were moved into a DL structure.

In a DL ownership structure, the local entrepreneur uses his or her capital, real estate and local knowledge to build the brand and optimize results.

In a DL, unlike with a conventional franchise, McDonald's collects only a royalty investing no capital.

We are making progress on this strategy.

In the first quarter, we signed a letter of intent to DL one of our smaller markets in Europe.

As previously mentioned, we recorded a small impairment loss to developmentally license this market.

As we have said, our goal with the DL strategy is to optimize sales and profitability in the long run, not necessarily to maximize proceeds in the short run.

The strategy puts restaurants and certain overseas markets in the hands of local entrepreneurs who can keep them locally relevant and growing without the use of our capital.

We are making progress in other countries as well, but it will take time to find the right candidates and to negotiate and finalize arrangements.

Though we are aggressively pursuing this strategy, accounting rules on impairment do not allow us to record possible future losses on asset sales until we conclude we are both likely to complete a sale within 12 months and have a reasonable idea of the final sales price.

With the signing of the letter of intent for the small market in Europe, we crossed the accounting threshold for that DL market in the first quarter.

In closing, the year is off to a good start.

As always, you can expect this team to take absolutely nothing for granted.

We will continue to work our plan to win for the benefit of our customers, our shareholders and the McDonald's system.

Now I will turn the call over to Mary Kay.

Thanks, Matt.

I will now open the call up for questions. (OPERATOR INSTRUCTIONS).

To give as many people as possible the opportunity to ask questions, please limit yourself to one question.

We will come back to you for follow-up as time allows.

David Palmer, UBS.

Matt and I guess it is Mike, congratulations on the quarter.

I wanted just to ask kind of a theoretical question.

I was thinking you have -- it seems to me you have four options with every restaurant these days.

You can operate them, you can franchise them, you can license them, and of course, you can just simply not own them, you can just sell it.

I was wondering if you could give us some insights into your decision process about these options?

In particular, I was wondering about hurdle rates.

When you think about the returns for a restaurant, you may be considering for ownership or perhaps even refranchising or licensing.

Do you consider regional overhead and even a market rate return for the real estate in assessing the earnings of the restaurant?

I realize that you are a global company.

If you want to use an example, that would be fine too.

David, I will take the first crack at it, and then Mike will probably want to comment.

First of all, when we are deciding how to own and operate restaurants, staying locally relevant is very important.

But I want you to know that we have different hurdle rates for different parts of the world which are a function of risk.

We look at borrowing costs in different countries.

We look at the environment we would be operating in.

What kind of legal system is there?

Are property rights respected?

Can we execute our brand the way we want to?

We assess that risk, and the people in Oak Brook assign hurdle rates to every market we do business in.

Obviously in some parts of the world the hurdle rates are much higher than in others.

We also consider regional overhead.

So we definitely have different hurdles rates for different parts of the world, but in looking at different markets, we also look at how much risk is there relative to the upside in their market.

So we have gone on record as saying we are extremely bullish on China.

Even though we are not earning the kind of return there that we earn in the U.S., we are very optimistic that returns which are probably high single, low double-digit today are going to grow very fast.

We see a lot of potential, and so we are not applying an overlay drastic hurdle rate to the situation in China.

In other parts of the world, we have a very high hurdle rate to justify further investments.

And the only thing I would add is that, David, as you look at the markets that we are going to be growing in, as Matt said, the hurdle rates are high here, but the bulk of our openings this year will go to Australia, China, France, Russia, Spain and the U.S.

In those markets, we are showing significant movement in margins.

Mark Kalinowski, Buckingham.

I just wanted to ask about the share repurchases and their effect on the diluted share count.

I was disappointed that the diluted share count in the Q1 income statement was not down more from the Q4 levels given all the money that was applied to share repurchases in the quarter.

I just wanted to understand better why that was, and perhaps going forward maybe if the share repurchases are not having a meaningful effect on the diluted share count, it might make more sense for McDonald's to meaningfully raise its dividend yield into the 3% plus range.

I just want to get your thoughts on that.

We don't think that you nor we will be disappointed by the time we get to the end of the year on the share count issue.

We said last year at our analyst meeting we're still committed to it.

We are going to return 5 to $6 billion to shareholders in '06 and '07.

We have preserved the right to be flexible on how much in each year and how much takes the form of dividend versus share repurchase.

None of that has changed.

Let me comment a little bit on what is going on.

We used to grant options to employees at a much higher rate than today.

If you looked at '04 and '05 together, our employees exercised options and turned them into shares for a total of 60 million additional shares out there in '04 and '05.

The annual grant we did in '05 was I believe 7 million shares, roughly 6/10 or 7/10 of 1% of the outstanding share base.

We brought down the grants.

Employees are exercising options that were granted many years ago.

We're starting to be much more aggressive about share repurchase, and I think by the end of the year this will come together and you will see some meaningful reduction.

We bought back $1 billion worth of stock in the first quarter.

We were a little bit disappointed ourselves about the sequential decrease in the share count.

Part of what you're seeing is driven by fourth-quarter activity on the part of our employees.

We're going to continue to be aggressive in the second quarter, and again by the end of the year, we don't think you will be disappointed with what happens to the share count.

Steven Kron, Goldman Sachs.

A quick question on the developmental license agreements.

Matt, you mentioned and you wrote in the 8-K that you don't expect a material impact in '06.

I'm just wondering -- and you emphasized that it is going to take time -- I'm wondering whether kind of progress to date in identifying these candidates might be proving to be a bit more difficult in some of these regions, or is this kind of tracking as you planned?

Steve, it is definitely tracking as we planned.

Just for perspective, we mentioned that we DLed two markets in '05 that had 325 restaurants.

We began that work about two and a half years ago, a full two years before we got the market DL.

It takes some time to find the right partner.

We are on track.

We believe we will get this all done within the three years, and we have other countries that are moving along rather quickly.

So we think it is absolutely on track.

If we were in a hurry to do this, we would end up with the wrong partners, and in the long run, the business would be hurt.

The people doing this work have done it in 32 other countries.

They know very much what they are doing, and in the long run, we think this will be a good thing for our shareholders and for brand McDonald's.

Jeff Bernstein, Lehman Brothers.

Specifically on Europe, I know we've heard on a number of occasions it is difficult to come up with a timetable for the UK turnaround.

I'm just wondering what kind of targets you have set or what measures you're looking at to assess your ongoing turnaround efforts, specifically look through '06.

I'm just wondering if you could talk about the balance between driving traffic perhaps through discounting versus tolerance in terms of potential margin deterioration?

Well, Jeff, in terms of our comps in Europe, they were some of the strongest we have had in 2005, well over 2%.

I think the strongest in 10 years, and to begin the quarter up to is very encouraging.

France continues to lead the way with all of their activities related to the fives Ps.

Germany now has made a major move with their Eins Mal Eins and New Food News.

The UK is back focused on Quarter Pounders with Cheese, the relaunch of their Pound Saver, as well as their reimaging work, including some refranchising of restaurants.

So the overall margin in Europe improved quarter-over-quarter, and we are optimistic about that area.

Russia continues to outperform all of our expectations.

So the combination of France and Germany and Russia and the movement that we're seeing as well in the UK now with their focus on improving QSC and their calendar related to New Food News gives us optimism about the rest of this year.

And Jeff, the measures we look at they would not surprise you.

We look at our past track scores from polling customers, their experiences at McDonald's and their impressions of the brand, margins, returns, growth and guess counts.

We like what we see in all of Europe, and we see the beginnings of some progress in the UK, but we still have a long way to go.

On the issue of couponing, you know the two markets that probably did the most of that back in '04, '05 were the UK and Germany.

The UK will be couponing about half as much as it did in the prior year and Germany maybe not at all in '06.

So we are relying less on couponing.

We're trying to build loyalty the right way.

Thanks.

John Glass, CIBC World Markets.

My question is on the U.S. product pipeline.

This year it seems that the new product introductions are front-end loaded, at least the ones we know about today -- coffee, Spicy Chicken, etc.

I guess is that accurate, and why did you choose to cluster them that way?

Mike, are you suggesting that maybe some of the new products you are testing now may be available for rollout in the second half or they may be '07 events?

John, as you know, we have got a very robust pipeline that we have been working on there for four years.

We probably have 20 products in test now in the U.S. and are very encouraged with all the movement they have had on chicken.

You're absolutely right, John.

We launched the Spicy Chicken, our new coffee and our breakfast platform.

And Monday we launched the Asian Salad.

So three very very important products for us, and we continue to look at the third and fourth quarter and our test sales to see what is possible.

But, John, you know with all the New Food News, with extended and 24 hours, cashless now, gift cards, the Dollar Menu, our reimaging, there is a lot of reasons to visit McDonald's, in addition to all the New Food News.

Lastly, I would tell you a part of what we are doing I think much better there now is that we are relaunching and we are reintroducing products that we launched a year ago.

So you know we just launched Premium Chicken, and it is hard for us to understand this, but even after three years, some 40% of our customers don't know we have salads with Newman's Own dressing, which tells us there is a really important thing there that they need, which is the continual mentioning in our marketing plans of the products we already have.

So looking at the rest of the year for the U.S., they have products in test.

We will see what develops here.

But they have got a lot of products that they launched the last two years that they can re-hit.

Larry Miller, Prudential.

First, if I could just follow up on the share count.

Matt, maybe you seem to imply that the actual share count at the end of the quarter might be much lower.

Do you have that number handy?

Yes, Larry, I'm not going to get into a discussion of numbers.

The message I'm trying to send is, that some of the things that show up in the first-quarter numbers might be the result of things that happened in the fourth quarter of last year.

If we had employees exercise options during the fourth quarter of last year, on average those new shares were only outstanding for a part of the fourth quarter of last year, but they were outstanding for all of the first quarter of this year.

It is a very complicated computation, and I don't want to over the call try to get into the details.

But I assure you by the end of the year you will be satisfied with the amount by which we have reduced the share counts.

Joe Buckley, Bear Stearns.

A couple of questions on the U.S.

In the quarter U.S. operating income was up 17%, and it looked like your margin dollars were up about 11% or so.

It sounds like you spent a little bit more on SG&A.

So I'm wondering just if you could close the gap?

Maybe at the same time talk about the U.S. check experience, and if you would maybe some of your product mix experience over the past six months or so?

I will deal with the SG&A issue.

Joe, we were a little bit concerned at the growth in SG&A in the first quarter.

We went back over our plans for spending.

We are very satisfied that by the end of the year the relationship of our SG&A increase to our sales increase will be healthy.

We target that we don't want our SG&A to increase more than 70% of our sales increase globally.

We think we are on track to have that kind of the year.

We were very concerned by the front-end loading of the SG&A this year, but it is mostly driven by the Olympics and when our convention is taking place.

So I think you will see a good relationship there.

And Joe, I will just add, our average check is up.

As you know, over 50% of our comp the last few years is derived from our chicken play now.

The coffee that we launched along with our breakfast platform not only has increased coffee sales, but our breakfast daypart is increasing.

So the combination of all three is very good.

Rachael Rothman, Merrill Lynch.

Can you just remind us or myself if I have forgotten what percentage of your stores in the U.S. are currently operating with extended hours?

What percentage have been remodeled?

And then I believe you have cashless everywhere, is that correct?

Yes, we have cashless everywhere.

We have over 13,000 now -- almost all of our restaurants -- on some form of extended hours.

Nearly 4000 of those are on 24 hours, either seven days a week or at least Friday and Saturday nights, which in some markets is a really important play for our operators.

And by the end of this year, we will have reimaged in the United States over 5000 restaurants.

Andy Barish, Banc of America.

Going back to the UK and its potential improvements, you actually saw in the way you guys talk about the margin impact about half the impact in the fourth quarter.

You mentioned about 70 basis points of an impact on European margins overall, and it was about 150 in the fourth quarter.

Was that purely the actions you have taken that showed up in the first quarter, or have those not really shown up in terms of store closures and refranchising yet?

The actions we have taken really have not shown up yet.

You are right, the drag on Europe's results from the UK has lessened fairly significantly.

We are encouraged by that, but we are still not anywhere close to being happy with what we are producing.

And, Andy, we are excited about their focus on our core menu in the UK.

We've got the Double Cheeseburger.

We have got the Double QPC combined with the Pound Saver Menu.

They just finished Monopoly.

It is the first time they have run it in about 11 years.

We are encouraged by the progress there on the calendar, and they have got a very assertive calendar the rest of the year with a bigger Big Mac, some "I'm Lovin' It!" desserts over the summer, free Coke glass promotion with an EVM in August.

This is our core menu.

I'm really encouraged by this.

One last thing.

In the UK we have seen some very nice activities surrounding opportunities at McDonald's.

We have received some nice coverage, and it is a part of making sure that we position the brand in the right place.

Mike, a quick follow-up on Toasted Deli over there.

You did not mention that, Mike.

Well, I think delis are doing reasonably well over there, Andy.

I'm not overly impressed with how well we have rolled that out there.

The UK consumer, you know, loves sandwiches.

We have made modifications to our delis in Canada, and I'm excited about that possibility.

The UK is focused now on our core menu, including breakfast, and breakfast is doing better over there.

Peter Oakes, Piper Jaffray.

Mike, you had mentioned upfront when you were discussing Europe that the QSR market as a whole is down there, and that is something that has been discussed quite a bit at least as far as Germany for a number of years.

But to characterize Europe as a whole, QSR market being down, I would be curious if you could delve into that a little bit more as to what other geographies you're seeing that kind of macro pressure, and is it weather-related, etc. that can distort the first quarter?

And also, Matt, I think you mentioned you are starting to get better coverage in the UK.

Can you add a little more color what you mean as far as some of the media support and how that is swinging in that direction?

Well, on the media issues, in all of our restaurants now there are posters that describe the kinds of flexible schedules and opportunities we give our crew.

We have seen a lot of favorable coverage of that, coverage that we might not have received a few months ago because the media and the UK was looking to find a negative story.

So we are encouraged that we are receiving a little bit fairer treatment on some of these issues.

We still have a very long way to go.

And, Peter, I would just tell you that globally the IEO is growing roughly in the neighborhood of $35 billion a year.

Overall the QSR market is growing.

You know, in my mind we are competing more and more in the IEO market vis-a-vis our products and all the look and feel of our restaurants.

I would tell you that Germany is a great example, even in a very difficult market with unemployment high and inflation high, etc.

They are posting very solid results, which is an indication to everybody in McDonald's, that when we do what we can do best, which is focus on our plan to win and our five Ps and our customer with a very solid everyday low price platform, plus New Food News, plus reimaging, plus McCafe, that we can do very well.

John Ivankoe, JPMorgan.

I know you mentioned the extended hours which is great, but could you talk about other speed of service or operational initiatives that might be out there to increase throughput at the stores or traffic at the stores from an operational perspective?

Well, one example certainly is the cashless is helping speed service.

Mike taught me this.

The cashless transaction takes maybe 4 seconds to ring up.

Making change with cash takes an average 15 or 16 seconds.

As that piece of our business grows, our service will speed up.

That is one example.

And, John, I think you know in our plan to win we have measures against everyone of the things we have spoken about -- quality, service, cleanliness and value.

And in Latin America, in Europe, in AMPA, we are making a lot of progress.

North America is making progress as well, not as much as we would like on fast and friendly.

But a lot of progress there and the program internally is called "Shift into Overdrive."

It is a program whereby leadership from around the region can visit each and every restaurant and discuss all of these attributes with our management and with our crew and work to help them do a better job with hiring and with retention and with training.

I would tell you there is no secret here.

It is just everyday effort around the world in terms of improving our customer's experience.

David Palmer, UBS.

Just a follow-up on that, Mike.

I was just reviewing that article from QSR magazine where they have their drive-through survey, and it looks like McDonald's among others continues to go the wrong way on drive-through speed, and I think McDonald's continues to have some struggles here on drive-through accuracy.

Could you may be address that?

It seems to be an ongoing issue, but meanwhile your sales are telling obviously another story about consumer satisfaction.

How should we interpret this stuff?

Well, let's see, first of all, David, what is really important is that our drive-through business as a comp is growing.

So we are doing the right things.

We are attracting guests to our restaurant.

In terms of speed, this is something that with our customer order display, with our new POS system, we are making it easier for crew group people to take orders.

A significant percentage now of orders in drive-through are using cashless.

As Matt said, this is about a 4 second transaction.

That really helps our crew people execute in the drive-through.

We've got a lot of initiatives that we are working on related to accuracy in terms of positioning of equipment and having all of the right product at the presenter's booth, which is important.

I would just tell you that related to our mystery shops we continue to make progress there, and all of our teams are incentivized to improve where we are today.

We are making progress here.

I would like every order to be fast and accurate and friendly, and that is what are our area of the world share as well.

And with our operator leadership around the world, it's a major focus for '06.

Larry Miller, Prudential.

I think in some of the recent sales releases, you have talked about improved coffee results.

I was just wondering, are you seeing, therefore, incremental sales and incremental margin, or is it a swapping from other beverages like soda and juice?

Also, I had one other question if you could let me do that.

Larry, our coffee business since we launched is up significantly double-digits.

In fact, our breakfast comp is up in the first quarter as well.

What we learned here is that we had some breakfast rejecters, if you will, who did not think our coffee was as good as it could be.

Now that they know it is better, they are coming to McDonald's.

So coffee combined with our breakfast sandwiches is leading our breakfast comp.

The opportunity here I think is enormous related to other plays with coffee.

You know we've got a very competitive price point at about $1.00 for the 12 ounce cup with the new packaging and the new lid and a robust cup of coffee.

I think we have got a pretty compelling offer for our guests.

And the breakfast business is really nicely positioned for us.

It is very large.

We get very good value stores for our customers, and it produces a very attractive margin for us.

Thank you.

Joe Buckley, Bear Stearns.

I wanted to go back to my first question.

I phrased it badly.

What I was asking is, how the U.S. operating income was up so much, 17% given the margin dollar increases of maybe 11 or 12%, and it sounds like higher SG&A.

And then the second question that I would like to ask is, how far back has China come?

Do you think your business there is back to a normalized level, or put some parameters around the improvement that you are seeing?

Joe, this is Matt.

We are going to have to probably have you talk to IR 101 about the U.S. question because I'm afraid it is not you, it is probably me, I just don't understand your question.

On China we have not come back as far as we would like to.

Our margins are improving.

Our comp was positive.

We love what we see from the drive-throughs.

We love what we see in terms of future opportunity.

We are growing into the economies of scale that we enjoy in a lot of other markets.

We are not all the way there yet.

We are very positive you are going to see a lot of movement in building drive-throughs in China from us.

We think we can do it better than anybody.

So China is going to be a big investment and a big opportunity for us.

Having said all of that, I have to remind everybody that we can build a restaurant in China with about 1/4 of the CapEx it takes to build a restaurant in the U.S.

And once in awhile, we are not perfect, if we make a real estate mistake in China, you can get out of a lease at no penalty in 95% of the locations we have by giving three months notice.

So we don't expect to make mistakes, but we can afford to be a little bit more aggressive than we have been in the past.

And I can add onto the G&A question, Joe.

This is Mary Kay.

We don't give you the G&A by segment for the quarter.

But keep in mind one of the things Matt talked about that drove the increase was the Olympic costs in Europe, so that was a big part of the increase and corporate was higher.

So U.S.

G&A was more in line as what you would expect.

So that is probably why operating income looked the way that it did.

Steven Kron, Goldman Sachs.

Just to follow up on the UK and the refranchising that you have done so far and that you plan on doing on a go forward basis.

Are these refranchised stores going to existing franchisees or new franchisees?

I guess given the negative comp pressure that you have there and other cost pressures, are you giving any kind of concessions to that rent and royalty which I think for on average from the 10-K was around 17% in the European region?

Steve, the bulk of these restaurants will be franchised to existing owner operators, and our leadership there, Peter Beresford and Steven Easterbrook and I and Denis Hennequin, our President in Europe, we have all discussed this.

The operators there are very excited about growth.

We have not opened many new stores there, many new restaurants in the last couple of three years.

And on a case-by-case basis, we're looking at pre-debt cash flow and sales, and the opportunity in front of us to make it right for those operators to be able to compete in that marketplace effectively.

So we are going to look at those P&Ls on an individual operator to operator basis.

But the bulk of those restaurants will go to existing owner operators.

And Steve, I'm pretty sure that we covered this on the January call.

But if we did not, I will say it here.

You know, we look pretty carefully at the differences in P&Ls between us running a restaurant and an operator running a restaurant in different parts of the world, and we described in great detail what those differences looked like in the U.S.

We commented back then that the part of the world where we saw the greatest difference was in the UK where our operators seemed to do a much better job of running the restaurants than we could, and they did a better job of making the restaurant more locally relevant.

So I think in the area of concessions I think it is much less likely to be necessary there because our operators simply run better stores there than we are capable of running.

Thank you.

It looks like we are out of questions.

So thanks, everyone, and I will turn it over to Mike for a couple of closing comments.

Thank you again, everyone.

We appreciate your interest in McDonald's.

In closing we are pleased with the quality of our first-quarter earnings, and through our intense focus on building relationships with our customers and through the execution of our locally relevant plan to win, we intend to build on the momentum we are currently enjoying.

Thanks so much.

Thank you.

This concludes today's conference call.

You may now disconnect.