麥當勞 (MCD) 2007 Q2 法說會逐字稿

Hello, and welcome to McDonald's July 24, 2007 investor conference call.

At the request of McDonald's Corp.

this conference is being recorded.

Following today's presentation there will be a question-and-answer session for investors.

At that time investors only may ask a question by pressing *1 on their touchtone phone.

I would now like to turn the conference over to Ms.

Mary Kay Shaw, Vice President of Investor Relations for McDonald's Corp.

Ms.

Schaw, you may begin.

Thank you.

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

With me on our call today our Chief Executive Officer, Jim Skinner and Chief Financial Officer, Matthew Paull.

This conference call is being webcast live and recorded for replay via phone, webcast and podcast.

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 our 8-K with supplemental financial information are available on www.investor.McDonald's.com as are reconciliations of any non-GAAP financial measures, mentioned on today's call with their corresponding GAAP measures.

And now I will turn it over to Jim Skinner.

Thanks, Mary Kay.

Good morning, everybody.

Thanks for being on the call.

As evidenced by our quarterly results, the fundamental strength and momentum of our global business continues.

Every area of the world is contributing with strong top and bottom line results.

Matt is going to take you through the numbers in a few minutes but what I want to talk about today is how we will continue to drive these trends.

Let me start by saying I am optimistic and confident about our ability to capture the opportunity in the marketplace.

Clearly our systems collecting focus and alignment around the plan to win continues to be the right operational plan.

Additionally our ability to take an idea, scale and execute it is our competitive advantage and a key driver of our growth.

For example, we've adopted tiered menu platforms around the world and shared learnings and successes across borders.

The premium Chicken Selects and value priced Snack Wraps which have proved popular in the US are now driving strong incremental sales in both Germany and the UK.

Breakfast and convenience are two more examples of our replicate scale and execute strategy.

In Asia-Pacific, Middle East, Africa breakfast is now in more than 70% of our restaurants.

The recent McGriddle breakfast sandwich launch in Japan is helping generate strong momentum.

And the recently introduced Western style breakfast in China is driving breakfast comp sales increases of about 50%.

Extended hours are now in one-third of our restaurants in APMEA.

In China half of our restaurants are running 24-hour operations, and they are generating same-store sales 6% above the national average.

Together breakfast and extended hours are significant contributors to the double-digit comp sales we are seeing in this area of the world.

In the US we are aggressively going after the $60 billion beverage industry with a focus on coffee.

We earned credibility in this arena with the launch of premium coffee last March.

To date premium coffee sales are up 20%.

This credibility gave us brand elasticity to expand further into specialty beverages.

Currently we are testing a wider range of offerings, including hot and cold drip coffee beverages and espresso-based hot and iced beverages.

We are encouraged by the preliminary results.

Including these specialty offerings total coffee sales are up more than 30%.

Further operations and consumer testing will determine our timeline for a national rollout.

And in line with our replicate scale and execute strategy it wouldn't surprise me to see these products in other international markets over time.

One last example of this strategy in action is our global promotion of Shrek the Third.

The promotion began in May in the US and launched in markets throughout Europe and APMEA this summer.

To date it has been hugely successful in driving happy meal sales, and we are confident the program will continue to drive sales as it rolls out in additional international markets through October.

Using the licensed characters to promote our food choice and variety while encouraging physical activity, has also positively positioned our brand with key stakeholders and consumers.

Moving forward we will continue to scan our system in the marketplace for what is working, scale it and deliver superior execution in our restaurants.

Last month the top 35 leaders of our global business convened to review and calibrate our strategic approach and business plans for 2008 through 2010.

These plans leverage our competitive advantages and focus our resources around key growth platforms that will drive our business in every area of the world.

Specifically we are aligned around developing new branded food and beverage products and growing sales of existing products.

Growing sales at our drive-throughs by expanding capacity and enhancing the customer experience, building our business through daypart expansion by continuing to extend hours, build breakfast and fulfill new customer needs and meal occasions.

And we will continue to grow sales and profits through tiered menu platforms.

I'm confident these are the right plans to generate growth, and I'm also confident in our leadership and their ability to execute in their marketplaces and increase sales and profits.

To lead and support these efforts I will drive direction against a few critical areas.

First is menu development.

Our track record over the last several years shows success with salads, chicken and coffee just to name a few.

Yet we have an opportunity to enhance our tools and processes in food development to increase our speed to market and intensify impact.

Next is restaurant reinvestment and ensuring the right pace and level of reinvestment by balancing the needs of our customers, operators and shareholders.

We must optimize our projected $1.9 billion CapEx spend in 2007 and continue to deliver superior returns.

Third is continuing our financial discipline with an eye toward growing our free cash flow.

Initiatives to build sales and optimize margins are obvious contributors.

Additionally, we are leveraging our strength as a franchisor with world-class franchisees to increase the reliability of our free cash flow growth.

In the UK and Canada we have made solid progress toward our goal of increasing franchise ownership to at least 70% of the restaurants.

And we will soon be closing on a previously announced transaction in Latin America that resulted in the franchising of 1600 restaurants to a Developmental Licensee.

Both efforts demonstrate our commitment to improve consumer relevance through local ownership while converting corporate cash flow to a more stable rent and royalty system.

Now on a related topic I want to briefly touch on our capital structure as I know it is of interest to you.

We recognize the financial strength of our businesses growing and getting stronger.

At the same time, we also know the credit markets are friendlier, especially to a business model like ours.

As such we periodically discuss our capital structure and financial strategies with the Board to determine the amount and form of cash we should return to shareholders.

As you know, we look at various alternatives and project their impact on the strength of the business, our credit rating, our franchisees and our suppliers.

Currently we are preparing to discuss these topics with the Board and are exploring all of our options.

What I can reinforce is not new news.

We're still committed to return at least $5.7 billion dollars to shareholders in 2007 and 2008.

In closing, you've heard me say before that McDonald's is a learning organization.

By giving you a peek under the tent into our strategies and areas of opportunity going forward I hope it is clear that while we are pleased with our current business performance, we are not satisfied with the status quo.

We are focused on and committed to developing and executing the strategies that will provide sustained profitable growth for our system and shareholders.

Thank you, and now I will turn it over to Matt.

Thank you Jim, and good morning, everyone.

As Jim just outlined, today's real news is the underlying strength and momentum of our global business.

The transition of virtually all of our Latin America business to a Developmental License positions us to further leverage this momentum.

For our customers it will help us become even more convenient and more locally relevant.

For our shareholders it will reduce volatility and contribute to improved returns as a result of having a less capital intensive business model with a substantial, reliable and growing royalty stream.

As indicated in April, the approval of the Latin America transaction resulted in a second quarter impairment charge.

The substantially non-cash impact of $1.31 per share is comprised of $1.33 per share of impairment expense, which includes about $830 million for the difference between the net book value of the business and $700 million in expected cash proceeds.

It also includes $780 million in accumulated currency translation losses.

This was apparently offset by a $0.02 benefit because we stopped depreciating these assets in mid-April in accordance with accounting rules on assets held for sale.

Including the total net impact of $1.31, we reported a second quarter loss per share of $0.60.

Excluding this, second quarter earnings per share from continuing operations was $0.71, up 27% from last year.

As for our tax rate, after adjusting for the impairment charge and a minimal tax benefit from the Latin America transaction the effective tax rate for the quarter was 34.2%, bringing our year-to-date rate to 32.4%.

We are currently in the midst of an IRS tax audit, and therefore are unable to provide full-year guidance until it its resolution.

Now turning to our ongoing operations, we achieved strong earnings growth on record revenues of more than $6 billion in the quarter, up 8% in constant currencies.

Total margin dollars from McDonald's restaurants grew 12% in constant currencies to about $2 billion; about one-third of these margin dollars were generated by Company operated restaurants.

As a percent of sales McOpCo margins were strong, up some 150 basis points to 17.6%.

This increase was primarily driven by improvement in Europe and Asia Pacific.

In Europe, sustained strong sales growth throughout the segment contributed to margins rising 200 basis points.

The UK and France were the main drivers of this increase.

European beef and chicken costs were relatively flat in the quarter, which is also our outlook for the full year in Europe.

Broadbased improvement in Asia Pacific drove a 220 basis point margin increase.

China was clearly a leader here with strong comparable sales growth fueled by breakfast, extended hours and a relevant menu featuring premium, core and value offerings.

While maintaining its focus on the customer, the US achieved strong margin levels at 19.5% despite an inflationary commodity and labor cost environment in the quarter.

Chicken, which was up 9% in the quarter and dairy were the main commodity cost pressures we experienced, while beef costs declined nearly 3%.

For the year in the US we continue to expect beef costs to be flat to slightly down while our outlook for chicken is to be up 4 to 5%.

While our US business navigates through the current cost environment, its priorities will continue to be offering great value, driving customer traffic and delivering strong margin performance.

I also want to point out the 200 basis points of the improvement in Latin America's margins was driven by double-digit comp sales growth in Brazil, Argentina and other markets while the elimination of depreciation contributed 300 basis points.

The other two-thirds of the $2 billion in total margin dollars is from our rent and royalty stream, less occupancy expenses due to the franchising side of our business.

As a percent of revenues franchise margins increased 50 basis points to 81.5%.

Franchise margin dollars are a steady and reliable driver of our free cash flow.

We expect free cash flow will continue to grow as we evolve to a more heavily franchised, less capital intensive structure.

The Latin America transaction represents more than two-thirds of the restaurants we targeted for conversion to a DL structure.

This single transaction result in the percentage of franchise restaurants worldwide increasing to 77% from 74% at year end 2006.

As for the remaining markets on our list our current thinking is that it may take a year or two longer than originally contemplated.

Throughout this process our goal has been to make sure that we have the right licensee, that the market is in good condition for transfer, and that we optimize the long-term profitability and reliability of our cash flow.

Our teams in the UK and Canada are making good progress toward our goal of having more than 70% of the restaurants in these markets franchised.

In the UK the percentage of franchise restaurants increased from 37% at year end '05 to 47% today.

We are on track to have 50% of our UK restaurants franchised by the end of this year and 55% by the end of next year.

In Canada we've increased our franchise percentage to 66% and are well on our way to meeting or exceeding the 70% threshold.

These efforts will enhance the continued growth and reliability of our free cash flow, the primary source of the cash that we return to shareholders.

Year-to-date through June we repurchased nearly 36 million shares for $1.7 billion as part of our previously communicated commitment to return at least $5.7 billion to shareholders in '07 and '08.

Our priority remains to create long-term profitable growth for all stakeholders by sharpening our systems alignment around, and focus on our customers and our restaurants.

We are confident we can continue to deliver strong results.

Now on a much more personal note I want to share some of my plans with all of you.

When I accepted this job more than six years ago, there were certain things I wanted to help this Company accomplish.

Gratefully, through the hard work of the people who comprise the McDonald's system, we have made very good progress.

The Company and the McDonald's three-legged stool are at least as strong today as at any time in the last two decades.

When Jim became CEO in 2004 we discussed then that I expected to work for three or four more years.

Well, that time is almost up, and I want all of you to know that I plan to retire in the near future.

I have spent a significant portion of my time in this job interacting with all of you in the investment community, and I have enjoyed every minute of our interaction.

It is important to me that you understand why I am retiring from McDonald's.

This is not about me wanting a bigger job at McDonald's; I have a wonderful job, and this Company and this CEO have been extraordinarily good to me.

This is not about me going to work for some other company.

It is all about what I want out of my life.

I have always dreamed of going back to a college campus to teach, and because of all that McDonald's has done for me, I can now afford to do so.

When Jim and I discussed this, we decided we wanted to be very transparent regarding the search for my replacement.

We have some very strong internal candidates, but we will also be interviewing external candidates in the next few months.

We expect it will take at least several months to identify the best candidate and effect a smooth transition.

So in all likelihood you'll have to put up with me at least until the end of the year.

Now I know that Jim wanted to comment.

Thank you, Matt.

And I truly mean that, thank you.

You continue to make a remarkable contribution to our business.

You helped us turn this business around thanks to our emphasis on operations excellence and marketing leadership, and of course financial discipline.

Our system and our shareholders owe you a huge debt of gratitude for your commitment and your passion.

You helped us be better, not just bigger.

Now as you announce your decision to pursue a lifelong dream, you leave McDonald's on a business high in a position of continued success.

Or for continued success.

And I know I am stating the obvious when I say that Matthew's future students will benefit tremendously from his financial expertise, his world view and his vast experience.

They will also benefit from his less tangible qualities.

I know that I certainly have.

Matt is a great listener, a deep thinker, a strong communicator and has been a great thought partner to me.

As it pertains to his future role, quite frankly we've all benefited from Matt's tutelage for years.

And so it is with obvious mixed emotion that I applaud Matthew's decision.

As he mentioned, Matt makes his announcement with several top candidates, both inside and outside the McDonald's system.

But we will take our time, that is needed to find and transition his successor.

Matt has also made it clear that he will be available to us beyond his official retirement date, and while I hope that won't be necessary, certainly considering his intellectual capital that he brings to the table his offer certainly is reassuring.

Before I close my comments about Matt, I would like to emphasize the fact that McDonald's management team remains in line on our plan to win.

We will continue to stay the course and remain as committed to the financial discipline that has helped us turn our Company around.

Matt, you are a great executive.

You are retiring with class and dignity.

You are a great friend, and I wish you and Eileen the best with the next chapter of your life.

And again, thank you for your many contributions to the McDonald's system.

Thank you, Jim.

Thanks.

I will now open up the call for questions.

(OPERATOR INSTRUCTIONS)

Joe Buckley, Bear Stearns.

I wanted to ask a question on margins, both on the US side and the European side.

First on the US margins, second quarter in a row despite pretty good same-store sales increases the margin has been down a little bit year-over-year.

Are we -- have we basically seen peak levels in the US?

And with respect to Europe, curious if you could sort of lay out for us going back several years ago to sort of the goals on margins, where the European segment fits into that and where you think you are in terms of the margin recovery process.

And before I get cut off, Matt, I wish you the very best and on your retirement from McDonald's.

Hi, Joe.

Thanks very much.

I will comment on US margins, and then get to Europe.

On US margins we have said for quite some time to maintain our margin percentage in the US we need a 2.5 or 3 point comp.

And in the cost environment we see right now in the US obviously that was not enough because we produced a 5 point comp and we did not further grow margins.

I do not want to leave you with the impression that we have peaked.

We are in my view in an aberrational cost environment to give you some idea of the cost increases that we are seeing and the effect they have.

I think you will agree that it is not the norm.

So just some examples.

You all know this, our beef and chicken sales are about at equal levels in the US these days.

A 5% movement in the price of beef or chicken costs us 20 basis points.

So if chicken was up 9% and beef was down 3%, that hurt us a bit.

In addition, cheese was up 14% in the quarter and a 5% movement in the cost of cheese cost us 15 basis points.

But on top of that because of minimum wage issues in the States that started hitting in the third and fourth quarters of last year, we've seen labor cost increases almost 100 basis points at the store level.

So with all that as background obviously a 5% comp was not enough in this particular cost environment.

But we view this as being an aberrational cost environment, and the brand has pricing power.

We raised many prices roughly 3%; we were able to do that while keeping guest counts growing, and we do not think that we've peaked, but we think that given the cost increases we are seeing this year it may be for the year we've peaked.

But in future years I'm very confident US margins could go higher.

And 19.5 is a nice number.

If we ended up settling at that number for a year I could easily live with that.

And I want to get to the European issue.

Europe delivered a really nice number, 18% is a good number.

But when you look at the makeup of it, Russia and France are very strong.

The UK still has a ways to go.

We've seen improvement there; but about half of the improvement we got in the UK came from the refranchising.

And we know that the UK is still very far away from where it was a few years ago; we are not ready to set new goals.

We still have not reached the overall global goal that we set three or four years ago which was to get back to an annual global [comp effort] margin of 16.9.

We will see where we are when we close this year; we might be there.

And if we get there, then we will talk about whether or not we should set new goals.

David Palmer, UBS.

Congratulations, Matt.

What a great career.

Sometimes you tell us what the Company margin gains in Asia were due to China and how much the gains in Europe were due to the UK.

You were kind of touching on it there a little bit.

Could you perhaps give those numbers if they are handy or if there is any way to add some texture to the margin gains from 2Q?

And just one little small one that is with regard to the cash back to shareholders and the leverage questions that people inevitably have, are we going to get into a bigger discussion of that only in the fall at your big meeting in November?

Thanks.

I will deal with the Europe issue, and you want to talk about --.

David, good morning.

The basis point improvement in China was 400 basis points, and we are very delighted with where we find ourselves in China right now.

We are growing new stores more profitably and really driving the growth there through the leadership that we have in the marketplace.

We are actually looking at our resources there and the infrastructure and our opening levels to see whether we can ramp that up over time and pick up the pace because the story continues to get stronger.

But you know, and the headline is that we've got to be able to make sure that we get the right locations and the right operating excellence to deliver relevance for our consumers; that is the number one goal.

And we are in it for the long-term.

But we are very pleased with where we find ourselves and we have substantial profit increase in the market.

And David, on Europe, about 75 basis points or so of the improvement in Europe's margins, 75 of the 200, came from the UK and about half of that was from refranchising, about half of the 75.

So that gives you a perspective there.

I just want to go back to China for a second.

We are particularly proud of the margin performance in China and the operating income improvement because as I am sure you have read, there are commodity cost pressures in China which are significant.

And in spite of that, we had a substantial increase in our margins in China.

And I think the last part of your question had to do with the timing of when we talk about cash being returned to shareholders.

It is, as Jim mentioned in his prepared remarks, a Board matter, and we don't want to preclude our Board's ability to weight in on this not only as to what we're going to do, but the timing.

So our normal timing is sometime in the fall; we will probably end up keeping it to that.

Thanks.

Jason West, Deutsche Bank.

Thanks a lot.

I was wondering if you could talk a little bit about what you are seeing on the comps in the US and Europe in terms of ticket versus traffic.

Are you seeing any -- I guess in the US more importantly -- any response when you are taking prices up?

Any changes in terms of the mix on the menu, people mixing towards the dollar menu, etc.?

Globally what we've seen for the quarter is and this is true in almost every area of the world except maybe Asia, we've seen between 50 and 60% of the sales growth coming from guest counts, between 50 and 60% in just about every area of the world for the quarter.

Asia was somewhere between 70 and 80% coming from guest counts.

And in terms of recent trends we have seen a little bit more movement in the US towards guest counts but it is still again for the quarter, the US was right around 60% of the sales growth was from guest counts.

And that is a very healthy relationship.

We have seen maybe a little bit more movement in the direction of our Snack Wraps.

The dollar menu in the US has trended at almost the exact same percentage, somewhere between 12 and 15% for the last three or four years.

It has never gone outside of that range; we've seen a little bit more uptake on the Snack Wraps.

And those are the trends we are seeing today, and some of that may be influenced by gasoline prices and disposable incomes.

And we very much like the balance we have between guest count growth and sales growth.

John Glass, CIBC.

Good morning.

You talked in your comments about optimizing CapEx over the next couple of years, and historically looks like you've spent about half on maintenance and then the half on growth and it seems like the maintenance component of it, whether it is the US remodels or the fact that you're selling Latin America so you don't have that -- it isn't going to be there going forward.

So my question is are we going to enter a period here where you believe capital expenditures could flatten out or even decline versus prior years?

Or does inflation and things like other growth initiatives offset that reduction in the maintenance, if in fact that is what you're going to see?

I can comment on that, and Matt may want to weigh in.

We've been spending about 55% of the CapEx on the reimaging and the portfolio still has a ways to go before we reach the reimaging of the entire portfolio.

So I don't expect that balance to change a lot over the near-term, and the remainder of course was on new openings.

And then rebuilds and remodels.

So I think the balance will stay about the same, and it is possible we could have a slight reduction, but I wouldn't necessarily say that is in the strategy.

And John, you referenced inflation and one of the factors that is clearly helping our results but also affects CapEx is the euro is at $1.38 and some change this morning.

And that has an affect.

So if you were to index this for inflation for currencies, I think we would expect CapEx to be flat.

But because of inflation and especially because of currency values in Europe, I would expect it to go up.

Jeff Bernstein, Lehman Brothers.

Great.

Thank you very much.

Just in terms of the company operating costs follow on to prior distance, we did see some modest pressure on the blended food and paper line after eight straight quarters of leverage.

Yet with all the talk of significant pressure on commodities, we were surprised not to see greater pressure on that particular line item.

I was just wondering if you could talk about just the operating structure and your ability to protect margins in the current environment.

And then just kind of as a follow on to that as you look out to '08 should we expect greater pressures as you renegotiate annual contracts or you protected based on your supplier ingredients, agreements I should say?

Thanks.

We have a very good supply chain.

Around the world we tend not to take short cuts.

We have a lot of dedicated suppliers who understand how important it is to protect the brand name and do things the right way.

Having said all of that, we do have some opportunities that might not available to everybody.

A good example is in the US with chicken.

If you look I think we said our chicken costs were up in the quarter 9% but for the year we think they are going to be up 4 to 5.

And part of the way we get there is we are using a lot of white meat from the bird in the US, and we've been exporting the dark meat and the value of that dark meat in Asia is higher than it has ever been.

And so we get a lot of credit in our cost structure for the fact that we are selling the dark meat to Asia.

And if you look all around the world you will see that our people on the supply chain side are very creative at finding ways without sacrificing food safety to keep costs down.

So in China with very significant increases in chicken prices we've managed to keep the food and paper percentage at a reasonable level.

And regarding '08, we generally don't hedge more than a year ahead, and the biggest single hedge that we probably make is on beef where we tend to hedge about 25% of our beef costs.

Part of the reason we do is so that we can go to our franchisees and say we are protecting the food and paper costs on the double cheeseburger and it is important to keep it on the dollar menu.

But we never go beyond a year, and probably beef is the single biggest hedge that we make.

Paul Westra.

Good morning and best wishes to you, Matt, as well.

I have sort of a follow-up question on your capital structure.

I guess just straight out is it safe to assume that you're no longer officially expected to maintain your current capital structure?

Because I noticed into this morning's 8-K that language was removed from the K, but was in the first quarter and your comments of the contracts and the Board.

So are we just waiting to find out how much you should expect to potentially lever and when?

Thanks for the question.

I think my comments were really meant to say that we are not wedded to our capital structure right at the moment.

We never have been.

But we do review it with the Board.

It is a relationship that we have with the Board and the decision-making around capital structure that we review every year.

And as I said, we are taking a close look at it right at the moment and we expect that any of those decisions were made in the course of time over the next few months, and normally it happens around September and the expectation is that any decisions be made about that time.

Jeff Ponce, Citigroup.

This is actually Glenn Petraglia from Citigroup.

Thanks.

In terms of unit additions I think if I looked at my past 8-Ks correctly you've lowered your net unit addition expectations for this year a bit.

Maybe if you could talk about what has driven that and I think some of the things that have been, I've seen in the past have suggested that perhaps you would be ratcheting up your unit growth, whether it be US or internationally.

And I am a bit surprised to see your plant addition this year down a little bit.

What that is all about is really what is happening in one country.

In Japan they had about 100, almost all satellites, meaning very small stores that they decided to close.

That was not in the plans coming into the year, so it has nothing to do with the gross additions.

It has to do with the fact that our closings of some very small units, very low volumes, came up recently.

And that is what explains this 100 unit adjustment.

If I could just chime in with one --

Sorry about that.

Sorry, I guess you got cut off, we will put you in the queue again.

The next question is from Jeff Omohundro, Wachovia.

Just a quick update, please on the POS system rollout and if you are still seeing the order accuracy improvements that were currently or previously discussed.

The POS system rollout we are up to about 10,000 stores globally, but very little has touched the US at this point.

It is 100 or 200.

And the order accuracy improvements that we discussed were what we saw in a laboratory setting.

We have not measured it yet in the stores we've rolled it out but we are very confident that it is making the crew's job easier and if you make the crew's job easier there is a very good chance that we are doing a better job with our accuracy.

Our overall mystery shop scores are better around the world by a fairly significant amount but we still know we have a long way to improve.

[Victoria Hart], Merrill Lynch.

Good morning.

I am calling in for Rachael Rothman.

I just wanted to follow-up on your previous comments on the CapEx plans.

And with all the refranchising that has taken place, I would expect that some CapEx would fall out.

Can you kind of guide us a little bit better as to what you would expect to be a more normalized rate when they are refranchising the (inaudible) structure complete?

And then a little bit more on the reimaging if 55% of the CapEx is on reimaging, where does that process stand?

Which markets are benefiting from reimaging, and how much longer will it take to complete the process?

Victoria, we will give you a point of view here.

I would say that the normalized rate is about where we are now and it is true that we are probably doing away with the need to invest $90 or $100 million a year in Latin America because of the DL-ing of that market.

We have taken up the number of rebuilds we are planning in the United States.

A rebuild is where you have a piece of real estate, you like the location but you need a completely new building.

So we're doing almost 300 rebuilds this year versus 200 last year.

And our expectation is that we're going to continue rebuilding the store base and when it comes to reimaging, I believe that the model we are evolving towards is to touch the system once every ten years in terms of remodeling.

We haven't committed to that firmly but I don't think we're going to reach a point in time when we are done.

Because when we reach that point in time it might be time to start on the stores we began with.

So we are thinking this through; we think maybe once every ten years, about 10% of the system per year might be the right answer.

For this year we are only targeting to do 1900 or so remodels.

And it is possible that we will bring that number up per year to closer to 10% of the system.

And every market in the world benefits where they have mature restaurants that need to be reimaged and so it is sort of spread across the globe.

If you look at Europe and the United States in particular relative to the reimaging dollars.

And this is an issue we study very carefully.

It is very hard to connect exactly what is happening in the business to reimaging but we think it is a very important part of brand relevance.

And we think it has distinguished us from competitors in the eyes of our customers.

And lastly, just one factoid that I am sure most of you are aware of, but we looked at the last 20 years and probably up until mid-90s we were spending in excess of 20% of our systemwide sales on the Company's CapEx.

That ignores what the operators were spending in CapEx.

And now you look at where we are trending.

We are running between 7% and 8.5% of systemwide sales ,is what we are spending on CapEx.

So we made a big adjustment.

None of us are trying to tell you that $1.9 billion is a small number, but relative to systemwide sales it is much smaller than it has ever been.

And the number I gave you really isn't on systemwide sales; it's really on revenues.

But if you track our revenues and CapEx as a percentage of those revenues, you see it has gone down dramatically over the last few years.

Thanks.

Mark Wiltamuth, Morgan Stanley.

Question for Matt.

I'm sure you've watched all the securitization of franchise fees happening at the other restaurants.

We sure have.

I am curious if that could play a role for you, or is that just not an avenue that investment-grade companies head down?

And as you are looking at the international markets, are there any restrictions or difficulties in securitizing in international franchise fees?

Mark, I'm going to answer the first part of your question, and I think that will deal with the second part.

We've looked at it, and we've concluded it makes the most sense when you've got a company that is not investment-grade.

And it is a borrowing cost and flexibility issue, mostly a borrowing cost issue.

So if we were to do something in the area that Jim described, I do not expect currently that would be in the form of a securitization.

And since we've given you that answer, it doesn't make sense to talk about what it would look like globally.

Thanks.

Stephen Kron, Goldman Sachs.

Thanks.

Matt, congratulations.

Best of luck to you.

Question on pricing, just to follow up on that.

Matt, you mentioned pricing was 3%.

Can you just put some context around how that compares to maybe what you guys had priced in the past and any thoughts going forward, particularly given it seems as those you guys have been able to maintain the type of mix on the menu and product mix that you had hoped for.

So it seems to be little pushback on the pricing.

Might we see that go higher?

And if I were to slip one more in there, can you just maybe, Matt, also comment on the remaining deal stores that are delayed a little bit beyond the expectations?

Is this just a question of not finding the right individual, or are you having a difficult time getting the value that you guys think you should get out of that?

Steve, if I could start off on the pricing in the United States, it is very consistent with what we do typically year-to-year, depending on where inflation finds itself and the economic environment we're in.

This year the 3% is very consistent with our pricing models that we look at.

We don't typically simply take whatever cost issues are in front of us and pass it through the menu.

We have a very robust menu pricing process that leads us to the proper conclusion regarding maintaining that value relationship with our customers and the pricing.

And so some of it of course is reflected in terms of the cost, but most of it is really about maintaining the relationship with our customers and allow them to understand the value experience at McDonald's and continue to visit.

And we are not really seeing a lot of pushback I think on that pricing, you said that.

I don't know that we are really seeing any pushback on that 3% pricing relative to guest counts; actually guest counts are up a little bit.

And Steven, on the DL issue just a little background, the biggest block of restaurants that we targeted to DL were about to close on in Latin America.

We've learned a lot as a result of this transaction.

And one of the things we learned is we do not want to put ourselves under too much time pressure if we intend to do it right, and believe me we intend to do it right.

And especially to select the right licensee.

Having said all of that, I do want to point out if you looked at the last page of the supplemental release and this doesn't even yet reflect what we've, what we are about to do in Latin America, you will notice that year to year we are up 564 franchise restaurants and down 203 company-owned restaurants.

So even without the effects of Latin America we are making progress.

Some of that DL-ing of other markets and some of it was refranchising existing McOpCo's without using DL-ing.

And again for perspective, the remaining markets on our list carry a combined book value of in the neighborhood of 500 million, and we said as recently as a couple of quarters ago we expect to receive about half of that in proceeds.

So what is left on the list is not real significant.

Thanks.

John Ivankoe, JPMorgan.

A question for you I guess, Jim, and as a follow-up to your comments that you alluded to on China in your prepared remarks.

Year-over-year it looks like you opened about 50 stores and in this current quarter you opened about 10.

You know obviously comps there sound good, margins are good and you mentioned that you wish that you could open stores quicker than you have been.

Is there anything that is changing in the relatively near-term to allow China's store development to accelerate from recent levels?

There is nothing specific at the moment other than the fact that as I said, one of the things we did in our planning meeting in May, was to take a look at the revenue generators and whether we are resourced properly as a company to drive the growth over the long-term.

And certainly openings of new restaurants in those markets that we've targeted with the great returns we are getting and the great opportunities you see in China was one of those.

And so we are looking at that right now.

We have another couple of sessions coming up with the top 12 people in the organization just to take a look at how we are resourced to really drive the revenues that are so important to long-term growth.

Openings in China is one of them.

We are planning 100 a year now, and the question is whether or not we can ramp that up substantially particularly on a base of 800 restaurants, which for us at McDonald's is a fairly substantial growth rate in itself.

The most important thing is quality, profitable sites that we are bringing on.

Numbers don't matter if they are not quality profitable new unit sales growth.

And then whether the infrastructure of the organization can drive the operation's excellence in those restaurants because it takes people to get that done.

We have to develop the real estate properly, that you have to operate these restaurants in.

It is not just getting then open.

And so whether our staffing is appropriate, whether we have enough resources against that; we think we do currently.

But the question is whether we can ramp it up a bit somewhere in the future and we are looking at that right now.

Virginia Chambless, JPMorgan.

Thanks.

I had a follow-up question to the discussion on evaluating the capital structure and just curious if you can give us any guidance on how much lower in your credit rating you might be comfortable in going.

Thanks.

Virginia, we've said publicly that we know we could run the company well at something other than an A rating but we're going to wait until we've discussed this with our Board before we comment.

But I think we can safely say we are not talking about anything below investment-grade.

Matt DiFrisco, Thomas Weisel.

In respect to the comments that you talk about on the Snack Wrap and Premium Roast coffee in the US helping, should we also assume then, that you saw most of your or there is a shift to greater sales distribution to pre noon hours in the breakfast time?

I'm sorry, can you hear me?

Yes, sorry, we are deciding who is going to answer.

I didn't hear the last piece of that.

I was curious on the breakfast mix as a percent of overall sales in particular in the US market and given that Premium roasted coffee and the Snack Wraps seem to be successful and conducive to pre noon hours.

I am just curious if you are seeing the distribution of your US sales shift more and what they stand right now as far as breakfast, lunch and dinner.

They really haven't shifted much as an overall percentage just because of the size of the numbers first of all.

Some movement, as Matt said, to the Snack Wrap, but on an overall basis the breakfast business continues to be strong, continues to grow at about the same rate.

And the rest of the dayparts as a percentage the breakdown is about the same including the extended hours, which the extended hours really on an overall basis are not adding a lot to the same-store sales growth and yet it is incremental.

And so I think the percentages remain about the same.

Joe Buckley.

Just wanted to go back to the Developmental Licensing, because the 8-K outlook section did seem to indicate that there might be some deals this year.

But Matt, it sounded like you were pushing expectations on that out a bit?

Yes, Joe, if we left that impression, we didn't mean to adjust anything except to say whatever it is we had in mind, it might take a little longer.

So we weren't trying to imply that we think we are going to get something done this year.

Other than the closing of the existing deal.

Other than the closing of the existing deal.

Thanks.

David Palmer.

Could you perhaps go over the timing and the rollout of the new kitchens in Europe?

And perhaps give us some color as to what that might mean in terms of enabling more innovation, better innovation, anything with regard to the costs, just overall what it might mean for Europe?

Thanks.

Right now, David, I think the number in Europe is around 1600 restaurants have the bridge operating platform, which as you know facilitates the opportunity between products that are grilled direct and those products that are prepared in advance.

It simplifies the operations, improves quality, enhances the work environment.

And about 50% of the European restaurants have BOP or will have BOP by the bridge operating platform by the end of '07, and we expect the majority of the restaurants in Europe will have it by the end of '09.

And it does give us some flexibility to do things, as I have mentioned on the operating side of the business and create more flexibility.

John Glass, CIBC.

This quarter Burger King pushed into late at night for the first time nationally.

Also did some value promotions at breakfast or value menu at breakfast.

Did you feel an impact from either one of those businesses, either in absolute or maybe in a kind of mix shift or ticket shift as a result of it?

No.

It looks like we are out of questions.

So I will turn it back to Jim who has a few closing comments.

Thanks again for being on the call.

In closing I just want to reiterate what I said at the beginning of this call, that our business is strong and we are looking to the future with one goal in mind, building on our momentum.

We will continue to leverage our competitive advantages, namely our ability to scan our system for what's working, replicate the initiatives and scale them around the world for maximum consumer and business benefit.

Coming off our 2008 2010 plan review I can say with the utmost confidence that our people and our plans are aligned around the right consumer initiatives to drive growth into the future.

And we remain committed to the financial discipline that supports our growth strategy of being better, not just bigger and will enable us to continue to deliver sustained profitable growth for our system and shareholders.

Thank you.

Thank you.

This concludes today's conference; we do thank you for your participation.