麥當勞 (MCD) 2007 Q4 法說會逐字稿

Hello, and welcome to the McDonald's Corporation January 28, 2008, investor conference call.

At the request of McDonald's Corporation this conference is being recorded.

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

(OPERATOR INSTRUCTIONS) I'd now like to turn the call over to Ms.

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

Ms.

Shaw, you may begin.

Thank you.

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

With me on our call are Chief Executive Officer, Jim Skinner; Chief Financial Officer, Pete Bensen; and joining us for Q&A will be Ralph Alvarez, our Chief Operating Officer, who is in Europe today.

Since it's year-end and we're therefore issuing results later than normal, we will be providing an update on January sales during the call.

Before I turn it over to Jim, I want to remind everyone that 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 filings also apply to our comments.

Both the earnings release and our 8-K with supplemental financial information are available on investor.McDonalds.Com as are reconciliations of any non-GAAP financial measures mentioned on today's call with our corresponding GAAP measures and now I'll turn it over to Jim.

Well, thank you, Mary Kay, and good morning, everyone.

Happy New Year.

I'm pleased to report that our continued focus on our Plan to Win and committment to financial discipline resulted in a strong fourth quarter and outstanding year for McDonald's and our shareholders.

We delivered comparable sales increases of 6.7% for the quarter and 6.8% for the year.

Our revenues reached a record high for the year at $22.8 billion and we achieved full year operating income growth of 19% in constant currency excluding the effect of the Latin American transaction.

And we returned $5.7 billion to shareholders through dividends and share repurchases.

Looking ahead while there's been some volatility in the market we are confident in McDonald's future.

Trends are in our favor and we're operating from a position of strength.

Globally, eating outside the home continues to be a growing opportunity, fueled by consumers increasingly busy lifestyles.

And McDonald's remains one of the best positioned brands to capitalize on these trends.

We have the best locations in the industry, run by committed franchisees who are financially strong and able to invest in their businesses.

All backed by formidable marketing that resonates with our consumers.

In addition we have the right infrastructure and leadership in place, and we're more aligned than ever before in our history, and expect to deliver another year of growth in 2008.

Starting with the U.S.

we continue to strengthen our position.

Full year comparable sales increased 4.5% supported by a 2.3% increase in guest counts.

December comparable sales were flat primarily due to severe weather conditions across country which negatively impacted us by about 2percentage points.

While we don't like to single out weather as a factor the reality is that it impacts food businesses more than other retailers because we're such a convenience play and I do want to point out we captured market share dollars every month of the quarter in the U.S.

including December.

I also want to offer my perspective on the U.S.

economy.

We acknowledge that the general retail industry here seems to be impacted by the current economic environment.

Historically though, McDonald's has not been as affected by a slowdown in consumer spending as other retailers because of our everyday affordability.

We offer great value for the money and we have a convenience advantage.

So while we generate better results in a booming economy, like everyone else we've navigated through tough times before and we're confident that we can do it again.

Our best estimate on the economy is that it will impact our business by 1 to 2 percentage points in the U.S., on our same-store sales trend line, while the current economic environment exists.

In January, we do expect to deliver comparable sales increases of around 1.5%.

Looking ahead, our 2008 plan encompasses a strong value platform coupled with higher margin growth opportunities including chicken, breakfast, and beverages.

Our dollar menu will continue to be an integral part of our success.

In times of slowing consumer confidence this value component really connects with customers.

As a result, we've seen a slight product mix shift to more value menu items, but it's not outside our historical range of 13 to 14% of sales even in December, and we do not expect these levels to change much throughout the year.

On the food front we expect the McSkillet breakfast burrito, not the so easy o say, will continue to bolster our morning business.

We will also launch new menu items this year starting this spring with our Southern style chicken.

We will offer chicken biscuit sandwich at breakfast and a new chicken sandwich during the rest of the day.

And throughout the next 18 months we will rollout our specialty coffee.

This is the first component of our beverage strategy that also includes iced coffee, sweet tea, smoothies, frappes, and a great variety of fountain and bottled beverages.

Now it won't be until later in 2009 we will L see the full sales benefits of specialty coffee but we're very excited at the opportunity to grow our share in this $60 billion beverage category.

And we're extremely confident that our thorough testing has resulted in processes that will keep operations running smoothly.

We test everything very effectively before we initiate any new opportunity in our restaurants.

We will continue to deliver all of our menu items at the speed of McDonald's.

There will be investment costs to incorporate the beverage platform into our restaurants, as we've done in the past McDonald's will co-invest with our franchisees.

It's important to note that this investment fits in our 2008 U.S.

capital expenditure budget.

Overall in the U.S.

We continued to see a solid foundation and strong future.

We know there continues to be upside potential through a combination of everyday affordability and new food news, and we're in great position to optimize that opportunity and to deliver growth in 2008.

Now, moving to Europe, a strong December capped off an equally strong year.

Full year comparable sales were up 7.6% with a healthy increase in guest counts as well.

January looks like it will be another good month with an expected comparable sales increase of 8to 9%.

This year, Europe will build on the momentum through the Plan to Win strategies of upgrading the customer experience through reimaging and drive through.

We believe the opportunity exists to increase our drive through business by enhancing our advertising operations and innovation.

Building transparency is the second strategy which comes alive through innovative marketing and communications that will continue to enhance consumer perception and drive visits.

And third is enhancing local relevance through new menu platforms.

these strategies are coming to life in our major European markets in the following ways.

In the United Kingdom we will continue improving the customer experience by reimaging restaurants for a more contemporary and relevant dining experience.

We have reimaged 140 high street locations over the past 18 months and expect to reimage an additional 200 restaurants this year with an emphasis on drive through as I mentioned.

We continue to capture more visits through extended hours.

For example, earlier opening hours are fueling our breakfast business by -- led by a 22% increase in coffee sales and there's much more opportunity to be captured.

We will also continue to run new menu promotions in the UK around chicken and premium burgers.

We recognize that certain UK retailers reported lower than expected results in the fourth quarter but others are strong.

We have not seen a slowdown as our UK business momentum continues this month and we're confident about our prospects for the year.

In Germany we are building on our value program by introducing a fourth menu tier which is priced between their version of the dollar menu, the (inaudible), and the core menu.

This fourth tier has been very successful in driving trade up and visits in France and we expect the same in Germany.

An aggressive reimaging program will continue with the goal of having 100% of our German restaurants reimaged by the end of 2009.

An integral part of this program is the popular McCafe, a separate upscale area of the restaurant offering cappuccino, lattes and pastries.

We plan to add about 100 McCafes this year bringing our total in Germany to 500 by year's end.

France continues to fire on all cylinders and report solid results as their premium sandwiches and food news continues to resonate with customers.

And Russia continues to deliver strong results.

On a per store basis they continue to be our most profitable restaurants in the world and this year we'll add another 40 new restaurants on a base of just over 200.

We will grow sales in this country of 143 million consumers through drive through expansion, a convenience that is relatively exclusive to McDonald's.

And through new menu items that capitalize in the growing consumer demand for Chicken.

In Asia Pacific, Middle East, and Africa, we had a record breaking year with comparable sales of 10.6% and a strong increase in guest counts.

We're beginning the year with another solid month and we expect January comparable sales in Asia Pacific Middle East , Africa, to be about 6 or 7%.

Our three largest markets, Japan, Australia, and China are driving these results.

In addition to our large markets it's worth noting that we have consistent results across APMEA.

In fact 24 of the 37 countries reported double digit comparable sales increases for the year.

China continues to build momentum with double digit comparable sales increases for both the fourth quarter and the full year.

These results are being driven by a focus on convenience, value, and food.

Over half of our restaurants in China offer 24 hour service and they are outcomping the national average by about 6%.

The relaunch of a more relevant value menu is driving guest counts while maintaining margins, and breakfast has sustained outstanding growth of 60%.

In 2007 we will add 106 restaurants, 106 restaurants and plan to add 125 in '08.

This is on the base of 876 restaurants going in.

Moving forward, APMEA will continue to focus on the Plan to Win platforms that fueled 2007 performance including such things as convenience which contributed most to comp sales gains through a mix of extended hours, drive through expansion, delivery, and kiosks.

These initiatives are still in their infancy, and we expect them to continue delivering growth over the next several years as we replicate and scale across the region.

Breakfast is also a significant growth driver for APMEA and represents $0.5 billion opportunity.

And continued activity in core menu extensions and value will also deliver increased sales and guest counts.

Now, turning to financial discipline.

In 2008, we will invest $2 billion, balanced between reinvestment and new restaurant openings, which is in line with our growth strategy to be better, not just bigger.

This year, we will open about 1,000 new restaurants, and after routine closing, our net new unit growth is expected to be in our targeted 1 to 2% range as we've talked about in the past.

We're increasing a number of restaurant openings in our major markets as well as our high potential markets of Russia and China.

We expect to continue increasing the number of restaurants each year at a pace that enables us to invest in our existing base and capture new opportunities.

It's a balancing act and we believe this is the right formula for us.

In addition to investing in our business we are also returning cash to shareholders.

We committed to returning at least 15 billion to $17 billion to shareholders in 2007 to 2009 through share repurchases and dividends.

In 2007, we returned $5.7 billion of that committment.

Now, before I turn it over to Pete, I want to reiterate our confidence that 2008 will be another good year for McDonald's and our shareholders.

Despite the macro environment in the U.S.

Our global business is robust.

Every area of the world is delivering strong results and we are well positioned to capture the growth opportunity in the marketplace.

Now, I'd like to introduce our newly appointed CFO, Pete Bensen.

I know Pete has been out meeting with some of you but for those who have not met him and had that pleasure I'd like to say a few words about how delighted I am to have him as our CFO.

Pete is a highly experienced McDonald's executive who has worked with us for more than 12 years.

I am confident that Pete will continue to lead our financial strategy with the same focus and discipline that has delivered value to our system and shareholders.

Thank you, Jim.

And good morning, everyone.

It's great to speak with you today on my first quarterly earnings call.

It's even better to report another quarter and year of strong performance.

And while today I may be new to my role, I'm not new to the numbers, and not new to helping manage the intersection of strategy and discipline, to optimize our focus on being better, not just bigger.

Our 2007 results reflect the success of this constant focus.

Fourth quarter earnings per share of $1.06 included a net $0.33 of tax benefits consisting of $0.26 per share resulting from the completion of the IRS review of our 2003 and 2004 tax returns, $0.09 related to the recognition of certain foreign tax credits, partly offset by $0.02 of expense due to a tax law change in Canada.

These items resulted in a significantly lower effective tax rate for the quarter and brought our full year rate to 34.6%.

Excluding the Latin America transaction, the completion of the IRS review, and the tax rate change in Canada, the rate would have been 30.5%.

In 2008, we expect our tax rate to be in the range of 30 to 32%.

Full year earnings per share from continuing operations of $1.93 included $0.24 of tax benefits, including the IRS review offset by the higher Canadian tax rate, plus $1.30 of net expense related to the transition of our business in Latin America to a developmental licensee organization, a transaction that better positions us from a customer and shareholder perspective.

Our customers will see us become even more convenient and locally relevant and our shareholders will benefit from improved returns and a more reliable cash flow.

As previously disclosed, last year's earnings from continuing operations of $2.29 included $0.09 of expense primarily related to strategic actions to improve profitability.

Adjusting for all these items, earnings per share from continuing operations increased 26% in 2007 or 21% in constant currencies.

Overall profitability improved in 2007 with our combined operating margin excluding impairment and other charges, up 250 basis points to 24.4%.

Our goal is for this measure to steadily improve on an annual basis as we continue to grow Company operated and franchise margins as well as continue to exercise G&A discipline.

I'll discuss each of these components in a little more detail, starting with G&A.

In constant currencies, G&A was down for the quarter and flat for the year primarily due to the reduction in G&A expenses in Latin America.

We remain committed to controlling G&A.

In 2008, we expect G&A to decline in total dollars and as a percent of revenues and sales versus 2007; however, there will be some fluctuation between quarters as we lap the Latin America transaction and incur expenses related to our worldwide owner operator convention and the Beijing Olympics later this year.

Turning to margins, total consolidated restaurant margin dollars increased by nearly $1 billion in 2007, reaching a record of $7.9 billion.

About one-third of this was generated by Company operated restaurants.

As a percent of sales, the Company operated margins were 17.3% for the year, the highest level since 1999.

In the fourth quarter, Company operated margins rose 70 basis points to 17.2% due to improvement in Europe and Asia Pacific, partly offset by a slight decline in the U.S.

Positive comparable sales in all our European markets was the key driver behind the Company operated margins increasing 140 basis points for the year to 17.7%, the highest level since 2000.

For the quarter, margins rose 60 basis points.

The UK accounted for about half the quarter's margin lift due to improved sales and the change in store ownership mix.

Europe's strong results were achieved despite continuing commodity cost pressures, primarily higher cheese costs which rose 16%.

Our current 2008 commodity outlook for Europe is for cheese costs to increase in the 20 to 25% range, beef to remain relatively flat, and chicken to be up 6 to 8%.

At 15% for the year, Asia Pacific Company operated margin achieved a seven year high.

In the quarter, margins rose 210 basis points to 14.9%.

This marked the segments eighth consecutive quarterly increase.

Double digit comparable sales drove margin improvement in China and Hong Kong.

The primary contributors to the segments increase.

In China, margins benefited from successful initiatives surrounding breakfast and extended hours and economies of scale, partly offset by higher wage rates.

Over the long term, we expect margins will continue to improve in Asia Pacific as we further leverage our size and scale.

In the U.S.

our 2007 priorities included building loyalty and visits by delivering customers great value.

We balance this priority against our goal to maintain strong Company operated margins.

Achieving margins of 18.7% for the year and 19% for the quarter.

While this was down 40 basis points for the quarter and year, we are pleased the U.S.

business attained this high level in an environment of rising commodity and labor costs.

We currently expect the pressures on U.S.

Commodity prices will continue in 2008.

Our outlook is for chicken prices to rise 4 to 5%, cheese to be up 8 to 9 and beef to remain relatively flat.

Given that this outlook is relatively similar to what we experienced in 2007, we believe these pressures will be manageable.

The strength of our supply chain has proven to be a key competitive advantage by leveraging our scale, close working relationships with suppliers, and effective risk management practices, we're able to lessen the impact of higher commodity costs.

As a result, our restaurants grocery bill rose by less than half the amount of the food component of the producer price index.

We believe that as we leverage our supply chain strength and continue to focus on dollar menu, breakfast, chicken, beverages, and convenience, we are well positioned to further drive the business.

Moving to franchise margins, in 2007, this reached $5 billion or two-thirds of the total margin dollars.

As a percentage of revenues, franchise margins increased 80 basis points to 81.5% for the year, the highest level since 1996, driven by strong sales around the world.

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

We expect this contribution will continue to grow as we evolve into a more heavily franchised, less capital intensive business.

We made significant progress in this respect in 2007.

In addition to the nearly 1600 restaurants encompassed in the Latin America transaction, we began the process to transition another five smaller markets in Central Europe to the developmental license structure, and specifically, in the UK and Canada, our teams collectively refranchised about 130 restaurants during the year.

As a result, in the UK, franchise restaurants now represent 51% of our ownership mix, and in Canada, this percentage rose 4 points to 69%.

Because of these efforts, today 78% of our restaurants worldwide are franchised versus 74% a year ago.

Looking ahead, we expect this percent to continue to increase as we refranchise 1,000 to 1,500 Company operated restaurants over the next three or so years.

Our continued efforts to optimize our mix of Company operated and franchise restaurants will enhance the strength and reliability of our free cash flow.

The primary source of cash that we return to shareholders.

In closing, I want to underscore that McDonald's is operating from a position of strength.

We will alway face challenges, as will any business but we have a strong brand, resilient business model, the best franchisees and suppliers, and a proven strategy, our Plan to Win, that provides a dynamic framework for delivering relevant value, menu choice, and restaurant experiences to consumers worldwide.

I'm confident that as we continue to execute our Plan to Win and exercise financial discipline, we will create greater value over the long term for our owner/operators, suppliers, and investors.

Before turning it over to Mary Kay for Q&A, I want to say it was great to meet many of you earlier this month and I look forward to working with you in the future.

Now, I'll turn it over to Mary Kay to begin the Q&A session.

Thanks, Pete.

I will now open the call for questions.

(OPERATOR INSTRUCTIONS) The first question is from Matt DiFrisco at Thomas Weisel Partners.

Hi, Pete.

If you look at the comp trends that we're hearing in January and the comp trends from Europe and the U.S., it sounds like Europe is doing very well and U.S.

Is coming down a little bit.

Are you able to -- are those offsets or is there a way to build on the European margins, you set a record in '07, doing a comp in the range of high single digits like you are now, 8 to 9.

Can we get margin improvement on top of the achievements in '07 to offset perhaps the slowness or the deleverage going on in the U.S?

Matt, this is Jim Skinner.

Thanks for the question.

Pete will certainly weigh in on this and Ralph is in Europe actually working on margins right now, aren't you, Ralph?

That's right.

Okay, and I think we've said all along that in the United States, a 2% comp is important for us to be able to maintain and grow margins, and in Europe that's around 3% and so when you look at those numbers, you would certainly be able to argue that we should be able to have margin improvement and we would expect that we will.

To the extent that we're able to leverage that differential of what is required at 3% and then the additional points of top line improvement remains to be determined, but we certainly have plenty of leverage there with the upside growth in terms of the European markets.

Thank you.

The next question is from Jeff Bernstein at Lehman.

Great.

Thank you very much, a question, Peter on your annual comp sensitivity guidance.

You mentioned a 1 percentage point annual change and the U.S.

Comp would impact annual earnings per share by I think $0.025.

Just wondering if you could provide some color in terms of the range of comps within which that guidance is reasonable versus perhaps the comp at which leverage or perhaps deleverage would make earnings more sensitive than that?

Just trying to obviously figure out EPS vulnerability to slowing U.S.

sales which is obviously a wildcard for most in the industry as we look through '08 and perhaps which line items might have the greatest deleverage effect, thanks.

Yes, Jeff.

We look at that really as general guidance so we don't look at whether it's at a 1 to 2% comp or a 6 to 7% comp.

We just look at kind of overall if the comp declines or increases by 1 point what does that kind of mean on average, so that's really just our general guideline.

The next question is from David Palmer at UBS.

Just a question I guess in the U.S., if you're seeing increased disbursion in growth rates between regions, for instance if you're seeing weakness in the West Coast versus the East Coast or in the middle of the country, could you maybe tell us about that, why you think that is?

Also, I guess ,daypart wise, I'm wondering if perhaps you aren't seeing those dayparts that had been such wonderful growth dayparts perhaps not being quite the growth drivers that they once were, most notably breakfast, I was wondering if you could comment on those two things, thanks.

Okay, David.

We don't get into breaking down our comp by region, so we would prefer not to comment on that.

Regarding the dayparts, we continue to see the strength from our breakfast business and our extended hours and convenience plays so we're not seeing any slowdown in the parts of the business that we're continuing.

If you remember in the U.S., our strategies are breakfast, convenience, chicken, and beverages, and we're still seeing the strength of focus focusing on those strategies.

David, just to comment on the business across the United States although we don't comment on it, we don't project it, I would have to say that it remains about the same as it has been over the past couple of years, that there's not been a great disparity and so I think we've said that before, so there's nothing that we can point to geographically that's making some significant difference in terms of the overall business.

Thank you.

The next question is from Steven Kron at Goldman Sachs.

Thanks, good afternoon.

A question or a couple questions tied to each other on the U.S.

Same-store sales.

I guess can you just maybe talk about the competitive landscape, certainly everybody is focused on value, everybody is focused on driving the traffic in their stores.

Can you talk about rational the competitive landscape seems to be?

And then I guess to that question, maybe comment December and then January to date, what you might be seeing from a mix standpoint in the items you're selling on your menu?

Well I talked about the mix already.

This is Jim, Steven.

I talked about the mix already and we've seen a little bit of a movement toward the value and yet with our transaction measurement of that 13 to 14% that we've seen throughout the history of the dollar menu really so there's not been an extraordinary shift there.

And then I'd like to have Ralph just comment on the competitive environment and where we see ourselves now relative to value and that whole perspective.

Ralph?

Yes.

From a -- January is always a very competitive situation, so I don't think it's any different than what we would normally see in January, whether that phase of a sustained way with the other folks.

We work our plan, value is a big component.

It's alway a bigger component of our advertising in January, and it's obvious both from a weather and a disposable income point of view, so we don't see that as having an impact and like Jim said on the product mix shift, it's been a very slight product mix shift, nothing that would tell you that something more dramatic is going on.

Okay, thank you.

The next question is from Glen Petraglia at Citigroup.

Thanks.

Good morning.

In terms of the commodity outlook, Pete, I was hoping you could comment in terms of your confidence level in terms of the increases that you're anticipating.

Have you contracted for that or are these negotiated before the year starts?

Thanks.

Glen, we have a mix of practices that we use depending upon the commodities, so we do some contracting.

We do some open market purchasing.

Our suppliers will do some hedging if it's appropriate based on where they see markets going, so this is our best look today.

We feel pretty good but it's hard to say if things from an economics standpoint worsen, then it would be hard to believe maybe that some of these commodity increases would hold, so I suppose that would be the good news if things start to worsen a little bit, but kind of where we sit today this is really our best look and we feel pretty good about these estimates and we look at this and update this quarterly, so the first quarter we'll be able to give you another perspective.

Thank you.

The next question is from John Ivankoe at JPMorgan.

Thank you.

Just two questions, I think they're both actually pretty short.

The first, Pete, in your prepared remarks, did you make a comment that you expect the Company and franchise margins to be up in '08 and a if you did, was that also by region or on a consolidated basis?

And the second question, because you've given us some help on U.S.

pricing before, could you help us with projected Europe pricing in 2008?

Thanks.

John, in my prepared remarks, I did not give an outlook or a projection for '08 margins.

What I was talking in the context of us growing our combined operating margin, which is a combination of Company operated and franchise margin dollars as well as G&A discipline, so that was the context with which I was talking about growing Company operated and franchise margins.

And I think Jim wants to address the Europe question.

Well, Ralph may want to weigh in on pricing.

We were very specific about what we took in '07 in the United States, which was 3, 3.5% and the good news is we have very very good pricing tools today that maintain a relationship of everyday affordability as well as value across each item on the menu as very very balanced.

Always keeping in mind that we are not going to simply pass on all of our costs to the franchise side of the business as well as passing that along to our consumers through price increases, and so we use the same tool in Europe and I don't know what they would expect to do this year on the pricing since we've not taken those price increases yet.

And Ralph maybe you'd like to make a couple comments about it?

Sure.

We use, as Jim said, the same tools.

Inflation is very different in countries like Russia than a lot of the rest of the balance of Europe, so it's important that we do it by country.

If you look at '07, half of our sales growth, comparable sales growth in Europe came from growth in guest counts and then we had some growth because of the great new premium products we've had.

So we will take our price increases throughout the year and we will stay below the inflation that -- the food away from home inflation that's in the marketplace in order to continue to increase the value reception what our customers similar to what we've done in the U.S.

Thanks.

The next question is from Joe Buckley at Bear Stearns.

Thank you.

First just a clarification question.

The 12 to 14% mix for the dollar menu, is that transactions or actually dollar sales?

And then we would like to, just ask about the U.S.

U.S.

economy has been softening for quite awhile.

This is the first time that your numbers have reflected it at all.

What if anything would you point to as to what sort of caught up with you in the U.S.?

And then maybe relate that to Europe, do you think you're in kind of a sweet spot where you can continue to buck trends or if the European economy, particularly the UK continue to soften, will we see the same kind of reaction some time down the road?

Joe, it's Pete.

To clarify that, 13to 14% on the dollar menu is actually dollar sales, so the percentage of sales.

In the U.S.

economy, you got to remember, December was hit pretty hard by weather, as Jim mentioned, we don't like to give weather reports but it was 2%, which was a pretty significant hit and so going forward, he mentioned maybe 1 to 2 % slowdown in sales.

Again, everything we're seeing in Europe right now is not showing any of those signs.

There were some retailers in the UK that have reported some weakness but yet some that reported some strength.

And our business there is really doing great, focused on some of the reimaging and new products that they're driving, and we've got the Plan to Win that has all of these components that will help us really manage and execute through an environment like that.

So we're confident that we continue to drive the business and profits will be there.

Joe, if I could just to comment in terms of you said that it looks like it's caught up with us.

This is our snapshot today.

If you look at what happened in December, which as Pete mentioned we had some extraordinary weather events and we don't like to look at that unless it was extraordinary, which is what we really felt it was and when you look at January when we look at the impact of what we see today, we think is 1 to 2% and the good news is I think the way our infrastructure has been developed over the past three years, including the pricing relationships and everyday affordability and the kind of Company we are today, we're prepared to operate better in that environment than we were three or four years ago, if we end up being subject like everybody else to a downturn.

And yet this is a snapshot and more to be determined as we go through the year and the months here in the United States and when you look at the UK, where there's been some reports of potential downturn and then most economists will say that Europe lags by 18 months and all of those kinds of things, we're not seeing that right now and we think in particular the flexibility that we have by country, to manage our business effectively as compared to a sort of macro European environment as Ralph was talking about, I think that flexibility and the position where we find ourselves in the countries that we do well in that we're well positioned to ride out a problem if it should happen to come to the European continent and then to the UK.

Jim, let me add something on the UK.

The other piece in the UK is we have an acceleration of the Plan to Win.

It took us a little bit longer to get some traction, as all of you know.

We had significant operational score improvements in the UK this last year that continue.

We are accelerating our reimaging, which was critical for our brand, especially in the high street locations, and so we're seeing that traction, and you've seen that as we've recorded here in the last few quarters and that continues.

Thank you.

The next question is from Mitch Speiser, at Telsey Advisors.

Thank you.

First question is, I know that your global relative food costs were down 40 bips in the quarter and down about 20 bips for the year, and is that mainly due to mix shifts and given your cost outlook for '08, is it possible for the global relative food and paper costs to be down like they were in '07?

And then I have a separate question.

Okay, Mitch.

On the global food cost, that's really driven by sales, so you're seeing the sales leverage push through there and so we think that's something that could continue.

Great, for relative food and paper to continue to go down in '08.

Okay, thank you.

And separately, just on the chicken biscuit launch later this Spring, could you just give us a sense of how long that product was tested and maybe how many stores it was tested in non-Southern markets and perhaps what the experience in test it was versus the McGriddle and the Mc Skillet?

You're the chicken biscuit expert, Ralph, could you weigh in on that for Mitch?

Yes.

We tested obviously in the Southern markets which was important, where that's already a staple because we wanted to make sure that we had the right taste profile but we also tested in both the markets with the right level of diversity and both geographic and ethnic.

So we've been in test for over a year, over a thousand restaurants and so we've got a good handle on what we know the product mix will be for the chicken biscuit.

Thanks.

The next question is from Rachael Rothman at Merrill Lynch.

Thanks.

Can you just give us a little bit of a history lesson maybe in the U.S.

or globally about how your business trends during a weak consumer environment?

Do you see the contraction later in the cycle or earlier and then how long does the softness last after demand or general consumer demand rebounds?

Rachael, this is Jim.

Thanks for the question.

It really depends on how severe the recession is, and as you know, we alway talk about McDonald's being recession-resistant but not recession-proof, and the last I suppose specifically defined by two consecutive negative quarters of growth was in '90 and '91, and we're a completely different Company today than we were in 1990 and '91.

We saw a little fall off in our sales in '90 and '91 compared to the growth rate which I think was probably around that 1 to 2% that we're talking about but at that time, the United States represented 58% of the revenues.

Today it's 35% of the revenues.

Today, we're more convenient through extended hours, through a drive-through and through cashless and convenience every day affordability is in place, we didn't have that in place back in the day, if you will, and our margin opportunities are better because of that and we have more franchisees today delivering at a very high level in the alignment of the organization, and so -- and I think we were in 58 or 59 countries then.

And the penetration of those countries outside the United States was very low and so we're a completely different Company.

So I think the way to look at it really is this recession resistant, certainly not recession proof because of the way we're positioned today and the affordability and the convenience and where we find ourselves as a business model and the relevance for our customers here in the U.S.

Thanks.

The next question is from Howard Penney at FBR.

Thanks very much.

I was wondering if you could provide an update on some of the learning that you're getting from your coffee test and maybe provide a target for the number of stores it might be in by mid year or year-end?

Howard, I'm glad you asked that question.

This is Jim.

The first thing I'd like to say, what we're finding in our testing is very positive and robust results.

Both in terms of the overall customer acceptance as well as the sales themselves and the sales test and most importantly , our operational capabilities to deliver that initiative and those beverages at the speed of McDonald's.

I know that there was some concern about whether we would be able to deliver that.

That was the reason we do an operations test.

It's been very robust.

Ralph, I don't know, maybe you want to talk about the number of restaurants we're in today but we are seeing very positive results there and I would just say that we're a Company today because of our robust consumer insights.

We wouldn't embark on something like this had we not felt very strongly that we had our act together, if you will, around the operating side of the business.

Ralph?

How

Yes, and on the timing, definitely won't have any kind of critical mass until much later into 2009.

We've -- we're going through the permitting process.

It takes time to build these out and we're doing it in a way that it's integrated with our drive through business and so there's actually more involved in that construction than just meets the eye, and we have a very specific training program.

So that as we do this, we are able to make sure, as Jim mentioned that the operation is sound.

Not just for the coffee customers but for the customers that are buying Egg McMuffins and everything else at that clime, so you won't see that level of critical mass until later in 2009.

Thanks.

Next question is from John Glass at Morgan Stanley.

Hi, thank you.

I wanted to go back to the competitive environment for a minute.

In the past the Company has defended its market share, even if it required a reduction of discounting on a temporary basis so I guess two questions.

One is would that still be your view if it comes down to that that you need to defend market share, say above temporary profitability, and maybe secondly, what are the tools available to you besides that?

For example, could you increase advertising in '08 if necessary or could you shift it from a national to local windows if you thought that was a benefit?

John, thanks for the question.

This is Jim Skinner and I want Ralph to weigh in on this specifically but as you well know, with our flexibility and resources we can do anything we want, and if you look at marketing and the potential of repositioning ourselves as appropriate as the environment dictates, but I think in terms of the overall menu and the everyday affordability, we're positioned appropriately today around that but I want Ralph to talk specifically about the potential of discounting.

Yes, and we're really focused on supporting the everyday affordability platform of Dollar Menu We will do other items, as we did this last Summer with a significant push on drinks, on affordable drinks, but still within that platform, relative to local and national, we spend more than half our money locally versus national and that's on purpose, so that our franchisees who are closest to the business in their specific markets can have the right programs in place that are best for that market and so that's the way we're set up.

We have been for the last five, six years and so we think that gives us great flexibility and we will do what it takes to make sure we grow the business profitably.

Hey, John, it's Pete.

Just adding one thing and we've talked about this here is that you're not going to see an all out return to burger wars where we're discounting our core sandwiches and getting into strictly a price competition, as Ralph said.

The local co-ops have the opportunity to see what's going on and do what makes sense for them, but discounting our core sandwiches will not be a big piece of that.

Next question is from Keith Siegner at Credit Suisse.

Thanks.

You've talked before about the benefit of the pricing tool particularly for some of the U.S.

Company owned stores.

Can you update us on the rollout of the status of the rollout which regions are yet to get the pricing tool?

And then also in relation to the franchisees, which, if any, have it or which ones might be getting the pricing tool this year?

Ralph can you talk about the pricing tool?

And the universality of it?

Yes.

We actually -- it's both Company and franchise restaurants so franchisees have been using the tool.

We have significant penetration, critical mass penetration throughout the U.S.

We are now in the majority of the large countries in Asia and the same thing in Europe with the pricing tool.

What changes to match those marketplaces but it is a piece of our arsenal that we've gotten our best learnings and then gone ahead and scaled throughout the world.

Thanks, the next question is from Paul Westra at Cowen.

Great.

Good morning.

Just a couple questions.

One more on the U.S., if you don't mind.

You commented on 1 to 2% hit from I guess the macroeconomic environment.

Can you give us an idea of what that hit is off of?

Is that what you're referring to as your last years run rate of 4.5 or some other run rate?

I think you could look at it any number of ways.

It's really off of what you've seen as the run rate we've had over the past 12 to 18 months.

But that's a snapshot as I said earlier.

That's just with the information we have right now as we look at 28 days in January and as I said, as it plays out over the year, I would expect that number will change.

Even when you look at commodity costs and other issues, with the consumer attitude and the jittery nature of the markets today, those are only projections based on what we see today.

I think some of those costs could ease up some, but that's only an opinion.

Okay, the next question is from Matt DiFrisco at Thomas Weisel Partners.

Hi, can you give us, or comment on what we've been seeing a little bit in the New York area here that some stores seem to be advertising that they're going to pull out the double cheeseburger off of the Dollar Menu?

Is that something that is just confined to the Northeast or is there a potential for that to be broader?

Well, I think that's pretty much confined to New York but Ralph do you want to talk about the double cheese in New York?

Sure.

The advertising was voted in by over 95% of the system.

We've been anywhere between 90 and 95% penetration over the last five, six years and that number is pretty steady right now.

New York and New York really being mostly Manhattan has not been on the Dollar Menu exactly the same way throughout that whole time, so it's an isolated item obviously, especially in Manhattan you have a significant different cost of operation, but it's not an issue that we have around the U.S.

And Matt, this is Pete.

There was, this gets to Ralph's point earlier about our local co-ops, there was a promotion for a few weeks in January where they were running a, kind of a special on the double cheeseburger, but it was not part of their consistent Dollar Menu.

The next question is from David Palmer at UBS.

Jim and Ralph, in the U.S., it seems like the share gains might be slowing a little bit for you guys in addition to all this other stuff about the industry growth rate.

If we look at the fourth quarter '06 and first quarter of '07 and kind of the year ago numbers, your same-store sales were spectacular versus what the average of your peers would have been at that time.

Maybe 4 to 5 points better and I get a sense that your same-store sales at these levels may be converging with the industry same-store sales while the industry same-store sales is also slowing.

A year ago you guys said the Taco Bell being in the tail spin it was in with the E-coli and the rats incident wasn't really a benefit but I'm wondering if that might be somewhat of a factor here?

So broadly speaking about competitor, about gaining share how do you see that?

Thanks.

You asked two different questions in two different things.

One was on the comp sales, and the impact our competitors have on that, are we converging with their numbers and I would say that the answer to that is no, and yet I don't remember us saying any specific thing about our competitor a year ago.

I'm sure that was a question that we answered because I don't think I would allow our people to talk negatively about a competitor and their current environment.

Having said all of that, I think that -- and then the second part of your question is whether that has impacted share growth and market share growth and as -- market share growth, and as I said, even in December, we gained share on a dollar basis in the United States, which is obviously against our competitors, and so having said that I'd like maybe Ralph to weigh in a little bit on this.

Ralph, do you have a perspective?

Yes.

I think the piece here when you're looking at comps only is the average volumes that we have which are significantly higher than any other player combined with the number of restaurants which are also significantly higher than any of the major players, when we have comps on top of that, we keep on taking market share, and our comps continue to be and have been greater than the other players, but on top of much significant both existing share and from a distribution and average volume, so because of that, and we look at it.

We've continued all year long to take market share in the QSR category.

Thanks.

The next question is from Steven Kron at Goldman Sachs.

Thanks, two quick follow-ups.

First, Jim if we could just go back to the little history lesson if you will.

Certainly a lot of discussion about fiscal and monetary stimulus into the economy.

Maybe if you could just talk to us a little bit about historically how your consumer has responded to fiscal stimulus and I recognize your business is a little bit different today than it was, but I suspect that despite maybe getting some customer -- new customers from the higher side maybe trading into your business, you still might be losing some at the lower end, so maybe you can discuss a little bit of that?

And then secondly, just on the beverage platform in general in the test scores can you discuss the margins within those stores?

I would imagine that this beverage platform is a higher margin product, but maybe if you could just talk a little bit about that?

I'll let Pete or Ralph talk about the margins and beverages but relative to a stimulus, and the expected stimulus, all of us are customers at McDonald's and any opportunity for us to have some cash in our hands relative to the opportunity to stimulate the economy is a good thing, for all brands and certainly for McDonald's.

Whether or not it's the right stimulus package or whether it's going to make the most sense for the most number of consumers and all that wouldn't be my place to weigh in on, but we certainly look upon it as a positive thing for McDonald's in the side of the business that we're in.

Steven, regarding your question on the margins, not going to get into specifics what's happening with the stores but for the beverage products themselves, we see that as a gross profit percentage nearing 80%, which is higher than our average menu items, so we think that's obviously a positive for margins and the other thing about the beverage is, through the results of our testing is if we look at the beverage initiatives like a new product launch, the beverage initiative has delivered the highest level of incremental new customers compared to any other product launch we've had.

So we're very optimistic that that combination of it being a higher margin product along with new incremental traffic are both good things for that initiative.

Thanks.

Another question from Rachael Rothman at Merrill Lynch.

Hi, can you just give us whatever specifics are available on the five units converted to DLE's in Europe?

Can can you say how large they were or what Markets and if they were represented up to 600 target?

I suppose anything you'll give us.

Rachael, about five different countries, it was around 40 restaurants all together in the Baltic states and a few others in Central Europe.

Thanks.

We have time for one more question it looks like, Glen Petraglia from Citigroup.

Thanks.

I was hoping maybe to get some clarification in terms of how much G&A will be remaining in Latin America following the transaction.

Glen, we think it will be less than $20 million on an annual basis.

Thanks.

But we're not there yet.

We're moving through the year.

It will continue to go down as we structure ourselves, Glen, regarding how we'll continue to have a relationship with Latin America and as you can imagine, in the short-term, the relationship requires a few more people as we transition and then over the long term, it will become a smaller number but as Pete said ultimately, it will be 20 million or less.

Looks like we have one more question from [Bob Coleman] at [Gartner Russo].

Yes, thank you very much.

With regards to the U.S.

system and dealing with a very tight credit cycle and the availability of gathering loans, if you were to put into context the overall spending either by corporate and the system side, is it at all out of balance in terms of overall spending in the way that it should be appropriated, i.e., is the McDonald's Company spending more in the system on a per dollar of sale versus the franchisees?

And if this is occurring, how would you either correct, mitigate, or assist the franchisee system to get through this credit cycle?

Bob, it's Pete.

We don't look at the spending on a per sales basis.

The credit markets today are, as you acknowledged a little bit crazy but we're not seeing any slowdown in the lending to our franchisees.

There's plenty of liquidity out there for them to borrow to not only do their normal reinvestment but for the beverage initiative and so as we look at the credit markets, we're not seeing anything that's negatively impacting our ability to drive the business forward either for our franchisees or from the corporate side.

Pete, if I could add our franchisees from a debt point of view are very strong in how they manage that, and are not highly leveraged at all, and so it's something that they watch closely that we watch closely with them, and because of that, they have access to the credits and have access at favorable rates.

I think the headline is we are very well positioned, if you just look at our balance sheets and their balance sheets relative to operating successfully in the future in this environment that we find ourselves in.

With that, I'd just like to make a couple of closing comments.

And reiterate our optimism and confidence that business momentum will continue in 2008.

The diversified nature of our Company positions us for continued growth.

We have strong operations in 118 markets and countries, I should say, and a brand that is loved by customers around the world.

Every area of the world is contributing to our results and that will continue this year.

We have the right infrastructure and plans in place to increase our share of the growing eating out market and we fully expect to deliver another year of growth for our business and strong returns for our shareholders.

Thank you, all for being here today.

Thank you.