麥當勞 (MCD) 2008 Q1 法說會逐字稿

Welcome to McDonald's April 22nd, 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.

At that time, investors only may ask a question by pressing star 1 on your touchtone phone.

I would 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.

Good morning, everyone, and thank you for joining us.

With me on our call today 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.

Today's conference call is being webcast live and recorded for replay via phone, webcast, and podcast.

Before I turn it over to Jim, I want to remind everyone that as always, forward-looking statements on our earnings release and 8-K filings, also apply to our comments.

Both of these documents are available on Investor.Mcdonalds.com, as are reconciliations of any non-GAAP financial measures mentioned on today's call, with their corresponding GAAP measures.

Now I will turn it over to Jim.

Thanks Mary Kay, and good morning.

I am pleased to report that the fundamental strength of our global business continues.

In the first quarter, comparable sales increased 7.4%, consolidated company operated and franchise margins grew for the ninth consecutive quarter, and earnings per share were $0.81, a 31% increase from the first quarter last year.

So a great quarter, in which every area of the world contributed.

Let's begin with this quarters system leader, Europe.

Our second largest business unit delivered first quarter comparable sales of 11.1%.

We are pleased with our results across the market, and in particular, with the continuing strong performance in the U.K., France, and Germany.

The European plan to win strategies of strengthening local relevance, upgrading the customer and employee experience, and building greater brand transparency continued to deliver results.

A local relevance strategy is being executed across Europe, mainly through the menu.

A balance of premium products, classic favorites, and everyday affordable items, that appeal to local tastes has been very successful, and we are excited about a new premium burger called the M, that we recently launched in France and Germany.

To support our menu strategy, implementation of the bridge operating platform continues.

It is currently in more than 3,500 restaurants and markets around Europe, including France, Germany, and the U.K., and we expect it will be in most all markets, or all restaurants by the end of 2009.

Initiatives to upgrade the customer experience include our ongoing reimaging efforts.

U.K.

began two years ago by reimaging the majority of their heavily traveled high-street locations.

In 2008, they will reimage 200 more restaurants, with an emphasis on those with drive-throughs, and Germany will continue their aggressive reimaging program, with the goal of having 100% of our German restaurants reimaged by the end of 2009.

Convenience initiatives also enhanced the customer experience.

Today's busy consumer expects and needs us to be available on their terms.

Currently about 70% of our restaurants in Europe offer some type of extended hours.

As we further build our breakfast business, we have significant opportunities to increase the number of restaurants opening earlier, and with only about 600 restaurants open 24-hours, this will be a major area of focus.

And lastly, Europe has done an exceptional job building brand transparency, and gaining trust in the marketplace.

Whether we are telling our quality story, setting the facts straight regarding employment, or supporting green initiatives, we are visible and in touch with our customers.

Moving on to our business in Asia Pacific, Middle East, and Africa.

Significant momentum continues with a 9.4% increase in comparable sales for the first quarter.

Nearly all markets contributed to this increase.

Initiatives are on value, convenience, breakfast, and core menu, will continue to drive results.

Let me highlight just a few of these initiatives, and how they are working in our Top three markets.

Starting with China, we are excited by how quickly successful initiatives are being scaled and executed.

For example, in the area of convenience, bite 75% of China's restaurants are open 24 hours, and we are seeing very strong comps during these extended hours, and expect that to continue into the future.

In addition, we have seen significant growth in our breakfast business.

We have an opportunity to grow this day part exponentially, when you consider that many of our existing customers have yet to discover breakfast at McDonald's.

It is a huge opportunity, that we are well-positioned to optimize and leverage.

Australia continues to deliver strong comp sales growth.

The launch of our premium chicken strategy in November of '07 has been extremely successful, with results far exceeding our expectations, and we are on-pace to double our chicken business in Australia in just three years.

Plus we have added additional convenience, with 24 hours in more than 30% of restaurants, and improved drive-through operations are also contributing to this market's results.

In Japan, our momentum continues, new food news on the 100 Yen value menu, and the McWrap on the breakfast menu have proven popular with customers.

and Japan now has more than 1,300 restaurants open 24 hours, with more scheduled to go on this year.

Turning to the United States.

We delivered solid comparable sales for the quarter of 2.9%.

In extreme lines, we did see some ebb and flow in sales, partly as a result of the current economic environment, and play on days because of the Easter shift.

While March's comparable sales were down slightly, we estimate April comparable sales will improve to about 2 to 2.5%.

In this environment, our strategy of everyday affordability becomes even more important, and we will continue to emphasize our value offerings.

As we have said before, we believe our U.S.

business is not recession-proof, but is recession resistant.

That is why I remain confident in our ability to manage through these economic types, and most important, so do our operators.

This past week I had an opportunity to meet with many of them, and I am pleased to say that while they too feel the impact of this environment, they are also optimistic about the business now, and into the future.

I also want to point out that while we can and will respond to the current business environment, we continue to manage our business for the long-term.

We believe our U.S.

growth strategies of chicken, breakfast, beverages, and convenience, will continue to deliver results, today and into the future.

Our important breakfast business continues to thrive.

Looking ahead we are advancing both our breakfast and chicken strategies, with the main launch of our new Southern Style Chicken.

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

Additionally this summer, we will highlight beverages, with an emphasis on building traffic and add-on purchases, by promoting McDonald's sweet tea and iced coffee, in conjunction with core menu favorites.

And the introduction of specialty coffee continues, we are currently in about 1,300 restaurants, and expect the roll-out to accelerate and pick up pace later in the year.

So that is a look at McDonald's around the world.

Our global plan to win is working, and I am confident our global momentum will continue.

I am confident because our globally diversify business, positions us to deliver in all types of operating environments.

It is an unparalleled advantage for our system and our shareholders.

This system strength was on display last week, when 1,000 members of our system, owner operators, suppliers, and company people, gathered for our worldwide convention.

Everything about the time we spent together was aimed at growing our business, at getting even better at being better.

The 700,000 square foot exhibit floor, provided the tools to drive restaurant performance today.

We highlighted a proven plan to win business drivers, including the best strategies to deliver everyday value at predictable affordable prices, the latest new menu items from around the word, the Best Practices to expand and execute our convenience offerings, the relevant and contemporary restaurant decors for ongoing reinvestment, and the tools and training to continually improve restaurant operations, including a focus on our people and their development, at the restaurant level and beyond.

The floor also provided a look at future innovations in our pipeline, specifically we are focusing resources on increasing restaurant capacity, efficiency, and relevance.

But for me, the most exciting part of our convention was the alignment and collaboration and calibration across the system, and subsequent idea generation, but most important, the focus on execution of the restaurant, and providing our customers with a better experience.

This energy I experienced at our worldwide convention, coupled with our current business momentum, reinforces my confidence in the direction we are headed, and my optimism that our global business will continue to deliver on our revenue, income, and returns.

Thank you, and now I will turn it over to our CFO, Pete Bensen.

Thanks, Jim, and good morning everyone.

Today we are reaping the benefits of our disciplined customer-centered approach to managing our business.

This approach is reflected in how we continue to connect with customers to drive sales growth in each area of the world, how we operate our restaurants, and collaborate with suppliers to delivery solid margin performance, how we balance our ownership mix to achieve greater local relevance, and create a more stable revenue stream, and how we leverage the strength of our cash flow and balance sheet to further build our business, and return a substantial amount of cash to shareholders.

Each of those elements requires a long-term focus to sustain our momentum.

But it all starts with building greater consumer relevance, to drive increased visits and sales.

Our results for the quarter continue to prove that this is the right approach for McDonalds.

Combined operating margins, a measure that captures company operated and franchise market performance, as well as G&A control, grows nearly 4 percentage points to 26.1 in the first quarter.

Positive comparable sales were the key factor behind the quarter's strong performance.

Company operated margins as a percent of sales increased 60 basis points, driven by Europe and APMEA.

This also included a 20 basis point benefit from the transition of Latin America to a developmental license structure in August 2007.

Europe's 11% comparable sales increase in the quarter, helped deliver a 60 basis point increase in company operated margins.

The U.K.

and France were the many contributors to Europe's improvement, partly offset by Russia, where inflationary cost increases were higher than the rest of Europe.

Europe achieved the strong results despite continuing labor and commodity cost pressures.

Regarding commodity costs in Europe, during the quarter, cheese was up 36%, chicken up 3%, while beef declined 4%.

For the full year, our outlook for chicken continues to be up 6 to 8%, and cheese to be up 20 to 25%.

And now we expect beef to be up 3 to 4%.

APMEA had an excellent first quarter with comparable sales up 9.4%, and company operated margins up 170 basis points.

China and Australia were key drivers of this performance, along with many other markets.

I am extremely pleased with the ongoing contributions of this important business segment.

U.S.

company operated margins were relatively strong at 17.8%, driven by comparable sales growth of 2.9%.

Higher commodity costs more than offset the comp sales increase, netting U.S.

margins down 20 basis points for the quarter.

In the first quarter, U.S.

cheese costs rose about 30%, while beef and chicken both increased nearly 4%.

For the year, we currently expect U.S.

chicken prices to rise 5 to 6%, cheese to be up 13 to 14%, and beef to trend downward and end the year relatively flat.

Around the word, we serve a large variety of products.

Beef, chicken, fish, eggs, buns, cheese, and many other items.

In general, about 75% of our grocery bill is comprised of 10 different commodities, of which no single item individually represents more than 15% of the total.

As a result, no single commodity materially impacts margins.

Consolidated franchise margins were up 140 basis points in the quarter, also driven by strong global sales.

In addition, the 2007 Latin America transaction benefited margin growth by 60 basis points.

We believe locally owned and operated restaurants are at the core of our competitive advantage, and make us not just a global brand, but a locally relevant one as well.

To that end, we continue to evolve to a more heavily franchised structure.

Today our worldwide system is 78% franchised, up over 4 percentage points from first quarter 2007.

We expect this percentage will continue to increase, as we make progress on our goal to franchise 1,000 to 1,500 company-operated restaurants over the next few years.

In the first quarter, we refranchised about 130 restaurants, primarily in our major markets.

Our refranchising efforts help us provide customers a more locally relevant experience, and while it has direct positive implications for the predictability and reliability of our cash flow, it initially impacts total revenue dollars, because we only collect rent and royalty income, versus 100% of the restaurant sales.

This more stable revenue stream supports our goal to return 15 to $17 billion to shareholders from 2007 through 2009.

Last year we returned $5.7 billion.

In the first quarter, we were opportunistic with our share repurchases, buying back $2 billion in stock.

We also paid a quarterly dividend of nearly $430 million.

Our ongoing share repurchases and disciplined compensation practices, combined to decrease diluted shares outstanding by 57 million shares, or 5% year-over-year.

This decline contributed about 6 percentage points to the quarter's EPS growth rate.

Looking ahead, we expect our share count will continue to decline, and benefit our EPS growth rate.

Our commitment to return a significant amount of cash to shareholders is not a barrier to restaurant growth.

Our robust global business generated nearly $5 billion of cash from operations in 2007 alone.

In addition, our healthy balance sheet and strong credit rating gives us ready access to capital.

We demonstrated this in the first quarter, when we secured attractive financing earlier than needed, do prefund certain debt maturing in the second half of the year.

As a result, cash and long-term debt will be substantially higher on March 31st, than we expect it will be at year-end.

Accordingly, our current outlook for interest income and interest expense is higher than initially projected at the beginning of the year.

It is our better, not just bigger strategy, that influences our capital expenditure plans.

This strategy guides our decisions on the amount, location, and nature of our capital investments.

In 2008, our planned capital expenditures of $2 billion, will be almost equally divided between new restaurant openings and reinvestments, including reimaging, and other opportunities such as the combined beverage business in the U.S.

We expect to open about 1,000 new restaurants this year, up 20% from the number we built in 2007.

This increased number of openings reflects an aggressive 20 to 25% unit growth rate, in our high-potential markets of Russia and China.

So far this year, nearly 1/4 of the 170 locations we have added were in China.

Our restaurant additional target also includes higher new unit openings in affiliate and developmental license markets, such as Japan and Latin America, where we invest no capital, and collect a royalty based on sales.

Looking forward, we continue to run our business with disciplined fiscal practices, balancing growth from comparable sales and new units, to drive strong cash flow and returns.

From ongoing initiatives to deliver great customer experiences, to strategies that strengthen cash flow and returns, our disciplined business approach is working.

I am confident that as we maintain this focus, we will continue to deliver shareholder value into the future.

Thank you.

Now I will turn it over to Mary Kay to begin our Q&A.

Thanks, Pete.

I will now open the call for questions.

(OPERATOR INSTRUCTIONS) Please limit yourself to one question.

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

First question is from Steve West at Stifel Nicolaus.

Hey Mary Kay.

Just one quick question about the new McCafe roll-out that you guys have been doing.

You have got about 1,300 units right now, it looks like it accelerates in the back half.

Can you guys give an indication as to how many you think you will have by the end of '08, and are these results right now in-line with what you were expecting from the Analyst meeting when you told us before?

Thank you, Steve.

First of all, McCafe is a small part of our overall strategy, put I will let Ralph talk a little about the numbers.

Ralph?

Yes, Steve, we have 1,300 in some version, and this was part of our initial testing and early rollout.

So some are in different stages of development, the rest, what we said, will be completed some point in '09.

We are not going to give specific timeframes.

It is a complicated process through zoning and everything else, and what we do know is that as we have done our thorough testing, and we are hitting or exceeding our targets in different geographies around the country.

Especially coffee and not specifically McCafe.

I think that is another distinction that is important to talk about, there are two different strategies really, Specialty Coffee and Mccafe.

Thank you.

The next question is from Joe Buckley at Bear Stearns.

Thank you.

Can you give us a rundown on check increase versus traffic increase, maybe in the three main regions in the U.S., Europe, and APMEA, please?

Hey, Joe, it is Pete Bensen.

We had traffic increases across all the segments, so that obviously is very good, and it ranged from maybe a little more than a third of our growth came from traffic in the U.S., to close to 50% from traffic in Europe, and nearly 60% in APMEA.

Thank you.

Next question, Jeff Bernstein, Lehman Brothers.

Thank you.

The question on Europe, specifically, looking at the company operated margin line.

You have got a 60 basis point improvement, but yet an extremely impressive 11% plus quarterly comp.

The increase in margins is well below the prior three quarters on an absolute basis, as well as just on an incremental basis.

Just wondering if you could talk about the drivers.

I know you mentioned commodities and labor, but if you could talk about, what you think the specific drivers for kind of limiting the margin growth, perhaps your outlook on that line, maybe what the U.K.

contribution was to that total?

Thanks.

Sure.

Jeff, this is Ralph.

We were pleased with the growth we had, and the performance across the difference segments of Europe.

Commodity costs, as Pete went over, are pretty high.

Normally if we had a 3% or so comp, we would cover our costs in Europe, but with the higher commodity costs, that number right now would have been more in the 5-plus range for the first quarter.

So that was part of the reason you did not see a higher performance.

Our controls were in-line.

Our product strategies were in-line.

On a secondary basis, in Russia, which is becoming a bigger piece of Europe, just the way we do our plant increasing there, that is a much more inflationary environment.

They don't always stock up exactly when we get increases, and so the number fluctuates a little bit more quarter to quarter, but we feel we know we will be in-line by the end of the year.

And, Jeff, specifically, you asked about the U.K.

They benefited margins by about 30 basis points in the quarter.

Thank you.

The next question is from John Glass at Morgan Stanley.

Thanks very much.

I wanted to ask for a clarification in front of my question.

The clarification is just on Easter, in March it was bad for the U.S., but good for Europe, and then the reverse happens?

If you could just clarify that, in other words the two markets don't respond the same to Easter, and then the question is on Europe, could you just in aggregate talk about the number of stores, the percentage of stores let's say, in total that extended operating hours, and again the percentage of stores that have been reimaged.

I know you talked about additional hours and additional imaging, but where are we in total on those two metrics?

John, I will clarify Easter first.

You are correct.

It is a negative to the U.S.

and a positive to Europe, but the magnitude is much different.

In the U.S., it is less than 0.5 on sales in terms of the Easter impact, but in Europe, it is more like a 2% impact, because a lot more people travel and plan their holidays around Easter in a very concentrated timeframe, so we see a 2% benefit around Easter in Europe, and a less than 5% negative in the U.S.

around the Easter holiday.

Your questions on the extended hours and reimaging.

I will take those.

Ralph has got the numbers.

On extended hours, in Europe we have about 8% of the estate is on 24 hours, and we haven't done a significant amount of extended hours.

As you may know, other than the U.K., we don't have much of a breakfast business over there, except where we have started to put McCafes in Germany.

So it is still a pretty big future opportunity for us, both extended and 24 hours.

On reimaging, at the end of March we were close to 2,000 reimaged restaurants of the total restaurants in Europe, and planning another 700 or so by the end of this year.

And that is about the pace, we are on a pace of doing about 800 or so, 900 per year, and that allows for the whole estate to stay current on a cycle that is about a 10-year cycle.

Next question, Jason West, Deutsche.

Yes, thanks a lot.

I was wondering if you could talk a little bit more about the labor cost environment.

I know you see a lot of press about food costs, but labor was actually more of an inflationary in the quarter.

Just wondered if there was anything specific going on in Europe or the U.S.

on the labor line that is going to roll over here, or is this the way it is going to be for the rest of the year?

Thanks.

Well, we have had some compression on labor, and our average rate is up significantly in the U.S., and then around the world, of course.

They never go down, they are always going up, and the cost of doing business increases, it is one of the factors relative to our margins.

But I am going to let Ralph talk specifically about the numbers, Jason.

One thing that throws the number off for the quarter, Jason, is with the refranchising of the Latin America business, which had a big [mecopical] base, and had a low labor rate, it is a 90 basis point effect in the quarter on the labor rate, so it kind of throws the number off, as having a greater impact than it are really does, so that is something you need to factor into the numbers, and what Jim said on the rest, is what we deal with, and we cover the majority of it through price increases, just low inflation.

The next question is from Steven Kron at Goldman Sachs.

Thanks.

I had a question on the U.S.

margins.

On a year-over-year basis down 20 basis points seems to have held up relatively well, compared to what is has been doing over the last four quarters, selling four quarters, despite maybe the comping a little bit less.

So recognizing commodity costs is certainly inflationary, is there anything that we should be aware of, from a cost control standpoint within the four walls of the company-owned stores, that is helping to protect those margins?

It seemed to come in a little bit better than I had anticipated?

Well, Steve, we do a lot of things to mitigate the cost of the increasing commodities, like are going on the market place today, regarding those costs.

And of course, we have great work being done by our treasury group and supply chain group to mitigate those costs over time, but we don't get all of them, and unfortunately, we have our price increases, and our pricing tool models to be able to protect our consumer value at the same take price increases that are appropriate for the business and our customers.

But Ralph maybe you want to talk a little bit about --

Yes, I think in general, the margins were predictable across all three months, and we also had an emphasis on breakfast, which is a high margin business for us, and so overall, our long-term strategy of chicken, beverages, and breakfast, helps during these times also.

Next question is from David Palmer at UBS.

Hi.

Thank you.

Many economists are saying that consumption growth in Europe could slow, and some companies have cited there may be some times of slowing there already.

I am wondering, are you seeing any evidence anywhere in your European business of diminished consumer strength, and to the degree that this occurs, or is occurring, do you see your business there being somewhat more cyclical than the U.S., and perhaps you would make a change in your strategy away from premium innovations to something else?

Thanks.

Thanks for the question, David.

This is Jim.

Of course we manage our business for the long-term, so I don't expect to see any change in strategy.

That is the answer to question #3, for the third part of your question, and currently, and I talked with Ralph and the European leadership the other day, to see whether or not we are seeing any slowdown, as others are expecting to see a slowdown in Europe, and the answer in our business right now, which is the only thing we can really look at, is that, no, the trends currently are very strong, and we feel good about where we are there.

And I will let Ralph talk a little about the economy over there.

He has been in all of the markets, and spent time directly with the leadership, so it would be appropriate for him to comment.

Yes, our performance was strong across our four major markets, and we are not seeing that effect, and we have had a fairly strong premium product focus.

We had good everyday value in the marketplace, but our new products that we have out there have been good performers, and we have a nice balance between average check growth and traffic, and the number Pete mentioned, so about 50/50 right now in just about all countries, the major countries in Europe, so we are not seeing it.

We keep a very close eye on it, but we are investing there for the future.

We are building great brand strength.

Thank you.

The next question is from Jim Baker at Neuberger.

Jim?

Yes.

Can you hear me?

Yes.

Okay.

I have two questions.

Can you comment on your SG&A expense?

You had a pretty good leveraging of that, and I am wondering what that might have been, sort of an a pro forma basis, if you had had the Latin America SG&A out of first quarter '07, and then secondly, could you just comment on the operating income performance of Canada and Latin America separately, would Latin America have been, did you benefit from the Lat Am transaction, or was that a detriment in this quarter?

Thank you, Jim.

This is Jim Skinner, I am going to let Pete talk about the details.

We feel good where we are with the G&A.

Our goal is to be more efficient, and we achieved that in the first quarter.

And we feel good with what we have ahead of us for the year relative to G&A, some of that is being contributed really by the Latin American transaction, to reduce G&A costs from that segment.

Pete, do you talk a little bit about the specifics?

Yes.

Yes, Jim as you asked, if you were to exclude the Latin transaction, G&A would have been up only 3% in constant currency, which considering the sales growth we think is a great accomplishment for the first quarter, as we had indicated in our annual guidance, we expect G&A to be down in relative terms for the full year, so this was in-line with our expectations, and not only reflects the Latin transaction, but the ongoing discipline and focus around controlling the G&A.

Your second question was around kind of splitting out Latin and Canada, and while we are not going to really get into a lot of those details, Latin was relatively flat with the first quarter last year, which considering it was a 100% owned, and we had all of the company operated restaurants last year, it was a few million dollars worse this year compared to last quarter, but not terribly significant.

Thank you.

The next question is from Jeff Omohundro at Wachovia.

Thanks.

Just a question on the new Southern Style Chicken products.

Just curious about the product development around that, what your testing said about price value and pricing relative to the primary competitor in that subsegment, and whether you think you might see some skewing of some results geographically with that product?

Sure, Jeff.

We do our pricing based on what customers expect to pay in our restaurants.

We do look at what other products are out there, but the most valid data point is expectations at McDonald's for the specific product, is what gives us the best accuracy, and then how that plays with the other products on the menu that may be similar, in this case, obviously, chicken.

We tested geographically dispersed on this.

We had 2,000 restaurants for this test, more than we normally have, because the we knew how it would perform in the South.

We needed to get a better handle out West and North, and so we felt strongly enough that it is something that we believed we could do nationally.

Obviously with an expectation that we are going to sell more units in the South, where people are familiar with it initially, but that long-term, this makes sense for us across the country.

Thank you.

The next question is from John Ivankoe from JPMorgan.

Thank you.

It sounds like average ticket is up a little bit less than pricing in the United States, if I understand, I think pricing is running 3 to 3.5%, and I just wanted to understand, perhaps a few implications of that.

I mean, is dollar menu up year-on-year?

I think you said breakfast is doing better, so I will take that as a yes, but do we continue to expect an increase in the average ticket less than pricing?

And does this influence your decision on future pricing?

John, this is Pete.

You are right in that the average check is up a little bit less than the average price increase, and we are seeing a little more activity on the dollar menu, but it still remains remarkably consistent in that 13 to 14% of sales, so when we look at our dollar menu activity, while the units may be up a little bit, the percentage of total sales are in that 13 to 14%, so we are very comfortable that in this environment we are continuing, to keep traffic coming in the restaurants with our strategy of focusing on the value.

It is much harder to territory those customers to come back, than it is to keep them in the restaurant.

So that is an important part of it.

But as we look forward, we use the pricing tool that Ralph alluded to, that looks at the food away from home, it looks at the impact it would have on traffic, and so we are very cognizant of making our price changes not detrimental to our traffic, or not getting away from that food away from home number.

So we are pretty comfortable with the current environment, that we will continue to be able to get some price increases, maybe not 100% of our cost increases, but still cover most of that margin as an investment for the future.

Also a small piece in that right now is if you compare it to the last three or four years of what the U.S.

marketing challenge has been, it has been very premium product focused, and we consciously have been focus as on breakfast and/or a value during these current times, and so that has a little bit of an effect also, as we kick into the premium chicken sandwich, the Southern Style Chicken sandwich now, a little bit of that will come back.

Thanks.

The next question is from Mitch Speiser at Buckingham.

Thanks.

Two questions.

First in Europe, or more generally outside the U.S., you did touch on breakfast and drive through.

Can you give us a since of what the sales mix in Europe is, all of Europe for breakfast, and for drive through, and how quickly they are growing versus the base?

I will start out with breakfast, Mitch.

This is Ralph.

In Europe, a small number, it is a small number, 1 to 2%, except for in the U.K., where it is closer to the 10% range.

Again, they are much more of a traditional English breakfast, that when you go into the rest of Europe, it is much more of a continental breakfast focus, which is not what our core menu is, which is also why we have gone after the McCafe strategy, versus as much as our traditional menu.

On a drive through basis, it really varies significantly throughout Europe, based on the estate that we have.

So it is not as much the percentage of sales in the individual restaurant, as how we develop the estate.

So somewhere like the U.K., we had 400 restaurants in High Streets, before we ever built drive through number one, where in France and Germany, we have a much higher drive through percent.

So I think the number is more in the 30s, I think overall sales it is like a 30 or 35% range of the total sales for Europe, but it is higher in those restaurants that have drive throughs.

Thanks.

In the next question is from [Matt DeFrisco] at Oppenheimer.

Thank you.

Can you just give us a little bit of an update, I think you said 1,300 stores with the beverage roll out now, is that assuming all company owned stores, and a couple of franchised?

How does that break down, and how does that hit your last stated goal of domestically expecting by the end of '09 to have it completely rolled out?

And then as far as a test, thus far through those 1,300 stores, are you seeing that $100,000 in beverage business, are you on pace for that, that you thought you would be seeing in the earlier tests?

Matt, this is Jim.

Thanks for the question.

As we mentioned earlier, we are in 1,300 restaurants.

We are on pace.

We expect to do what we say, that will be implemented in 2009 in 100% of the restaurants.

It is spread across the board.

It is not company owned first and then the franchised, as a matter of fact it is more franchised than the company owned along the way.

We will be done when be said we would be done in '09.

As I mentioned earlier, right now in '08, it is not a big part of our growth, because we are in the implementation stage.

And we are seeing the results, as Ralph mentioned earlier, that we expected from this, and we are in good shape on this strategy.

And Matt, it is Pete.

Remember that $100,000-plus lift in sales is a combination of not only the specialty coffee, which is the initial part of this rollout, but then the broader beverage business which includes the bottled beverages, the smoothies, the frappes, the sweet tea, it is more holistic.

So you will see that come on in pieces.

Thank you.

The next question is from Rachael Rothman from Merrill Lynch.

Hi, thanks.

Could you talk a little bit about the competitive environment in the U.S., and the actions you have seen out of maybe and of the other fast-food competitors?

is it similar to what you were seeing the last time we heard from you guys in January, or have you seen competitors' propensity to discount increase?

Has there been any change in that?

And could you talk about how quickly you are able to adjust, either your pricing or promotions in reaction to that?

Is it a 6-week window, or a 3-month window, or how do you guys go about evolving your strategy in reaction to what is going on in the marketplace?

Thanks.

Rachael, I will just make a headline comment, and then let Ralph tell you about the details relative to the competitors, but we don't see a lot of change in the environment, and most importantly, when it comes to our strategies, we lead with our strategies relative to the long term and the expectation over, if you looked at '08, for example, our strategies are in the can.

We don't expect if you look at everyday affordability, and the value that we have on our plate today of providing our consumers, and then the other initiatives around the sandwiches, and the beverages, our strategy is in place.

We don't expect that we are going to have to do any reacting to what the competitors are doing, but having said that, I will let Ralph talk a little bit about what he sees in the competitive environment.

Rachael, we saw the normal pick-up that we see every January/February when it is winter, and we all do less sales on a per day basis, and people have less money in their pocketbooks, but not anything that is significantly different than what we see every first quarter.

And so o a reaction basis, again, we don't react to that, but we would react, if we saw something in our business or consumer reaction that we should adjust, we stay in tune with the customer very carefully, and we can do that very fast.

It is not quarterly or six months, we can move on a dime on that.

We have our 60% of our money is spent locally, which allows us to react geographically, which is very important.

We are not heavily nationally by that, from a media point of view, which again, gives us that flexibility, we believe that is very important.

Thank you.

Next question is from Larry Miller at RBC.

Yes, hi, guys, I wanted to ask that question from a different angle, not as it relates to discounts, but as it relates to products.

A lot of guys have been take your successful snack wrap and rolling it out through their system, do you think that might be contributing based on your experience to the slowdown that we are seeing in the U.S.?

I don't think so, Larry.

And, of course, what is new, this has been happening for 50 years around here.

But I don't really see any impact directly on these new initiatives in terms of the menu.

Ralph, maybe you have seen something, but I don't think so.

No.

We look at our product mix, and our product mix are strong in these different items, and it is something that happens when you have success, so we understand that, and we have got our next two to three-year pipeline of different items that we will have ready when the time is there.

Thank you.

The next question is from Keith Siegner at Credit Suisse.

Thanks.

One more quick question on the margins.

Unit closures and refranchising kind of came in a little bit ahead of our expectations.

Can you just outline what if any benefit these had to the company operated margins for the quarter, and if any, how that might trend into 2Q?

Yes, Keith, it is Pete.

We did see a little bit of benefit in the U.S.

on our company operating margins from some of the refranchising, but there isn't a specific target or goal that they have.

So while I think probably throughout the rest of the year, we will see is a slight benefit to that, it really depends on the mix of stores that they sell.

They aren't specifically selling restaurants because there are poorer margin performers, they are looking more holistically at the marketplace, and which stores are should we operate, which ones should franchisees operate, et cetera.

So while there is a slight benefit, that isn't the primary goal, or something that we are necessarily focused on.

And on closures, we had a few in Japan, as part of the plan in Japan, we also are building much more of the restaurants today, with drive through that we need.

We have a lot of smaller in-line locations, and as those leases come up, where we can replace, have a place for the customer base to move, we have been doing more of that in Japan.

Thank you.

The next question is from Joe Buckley from Bear Stearns.

Thank you.

Question on breakfast, it has consistently been one of your stronger day parts over the last couple of years, and obviously there is a lot of activity in this space.

What does your research show in terms of why breakfast is growing, when much of the rest of the dining out market seem likes it is not?

It is breakfast away from home that is growing.

It is not breakfast in general.

So if you look at coffee as a great example, coffee consumption is down overall.

It is down a lot at home, but it is up away from home.

And so just societal changes with less of a structured work place, and people out and about, the biggest thing we see with our breakfast business, it no longer comes just at that rush we used to get.

It is very steady throughout the hours we are open.

And Joe, if I could, breakfast has always been a great opportunity for us to deliver the best service, the best quality, and a variety of products that are very affordable, and I think we get some of our best experience delivered to our customers at breakfast time, and it has been that way for some time, so we have been in breakfast for 30-plus years, and it is a great experience for our customers are at that time, and it continues to get better.

Thank you.

Next question, David Palmer from UBS.

Thanks.

It appeared that in the first quarter in the U.S., that McDonald's same-store sales began to kind of close in with that of the industry, your share gains perhaps weren't as rapid as what they were in much of '06 and '07, and I am wondering if the lift, do you see that the lift to your sales from breakfast and some late night in particular, might be diminishing, and we might be in one of those time periods where those platforms may not be the lift that they were, or waiting for this beverage initiative to get to scale, and we just may have a lower growth rate in between?

Thanks.

Well, David, first of all, when you look at our report this morning, and when you consider the fact we are coming off of five consecutive years of growth, right, contributed by all day parts, including extended hours.

And then the environment we're operating in here in the United States, because I assume your question is more than about the United States, as around the world, and when you look at those numbers, and you look at the results, we have to be fairly pleased with where we find ourselves, when you look at the backdrop of five years of success, and the thresholds, in terms of the lofty numbers, and where we found ourselves.

And so I think the answer to that question is no, other than the normal slowdown that you are seeing regarding the economy here in the United States, which I talked about in January.

Now, Ralph, don't know if you want to say anything else.

Yes, the early numbers that we had, we took market share in the first quarter again, and so that is, from an absolute sales number, we were lower obviously that we have been the last five years, but we took market share, and we measure that on traffic, not on sales, and our focus is on traffic, because that is the critical component.

We will figure out how to get the successful average check from them down the road.

Okay.

It looks like we are out of questions.

So I will go ahead and turn it over to Jim for a few closing comments.

Well thanks everybody for being on the call.

In closing, I just want to reiterate that the fundamental strength of our global business continues.

And we have delivered very strong first quarter results.

Our plan to win is working in every area of the world, and we have had the right strategies in place to provide sustained profitable growth.

Our globally diversified business positions us to deliver in all types of operating environments, and is an unparalleled advantage for our system and shareholders.

We remain confidant and optimistic that we will achieve our revenue income and return to all of you.

Thank you very much.

Thank you.