麥當勞 (MCD) 2008 Q3 法說會逐字稿

Welcome to McDonald's October 22, 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 would now like to turn the conference over to miss Mary Kay Shaw, Vice President of Investor Relations for McDonald's Corporation.

Ms.

Shaw, you may begin.

Thank you.

Good morning, and thank you for joining us.

With me on our call today are Chief Executive Officer, Jim Skinner; Chief Financial Officer, Pete Bensen; and for Q&A will be Chief Operating Officer, Ralph Alvarez joining us via phone from Malaysia.

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 the forward-looking statements in our earnings release and 8-K filing also apply to our comments.

Both documents are available on www.investor.mcdonald's.com.

As are reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures.

And now I'll go ahead and turn it over to Jim.

Thanks, Mary Kay, and good morning, everyone, thanks for being on the call.

There's no denying that these are interesting times to be doing business yet in spite of the economic and financial concerns around the world, McDonald's business is growing as we continue to be recession resistant.

For the third quarter we're reporting very strong results.

Global comparable sales up 7.1%, consolidated operating income up 20%.

EPS from continuing operations is $1.05.

A 27% increase.

And a 33% dividend increase for our shareholders.

These results show that the fundamentals of our business strong and our October sales trends indicate our momentum continues.

Our plan to win and commitment to financial discipline continued to drive performance around the world.

We have strong operating results, predictable and growing free cash flow and above-target returns.

With a 20.8% return on average assets for the trailing 12-month period.

These three aspects of our business add up to sustained profitable growth for our system and our shareholders.

Specific to the shareholder return commitments, I want to point out that to date we've returned nearly $11 billion of the 15 billion to $17 billion target we set out to achieve by the end of 2009.

We are optimistic about our ability to continue our business momentum.

The simple fact is consumer trends are still in our favor.

And our plans around the world are designed to capitalize on these trends.

People's lives are still busy and they're only getting more hectic.

Value, which has always been important, is mission critical today.

For these reasons and more, the eating outside of the home market is still projected to grow over the next five years.

We are well positioned to capture this opportunity.

In the United States, there's no doubt that today's environment is challenging for consumers and restaurants.

However, we're operating from a position of strength.

Mitigating external factors and growing our business through targeted growth platforms.

The United States posted a comparable sales increase of 4.7% for the quarter.

And we continue to gain market share by providing relevant food and beverage.

Great value at all price points and unparalleled convenience.

Customers have responded to menu additions in our focus areas of chicken, breakfast and beverages.

The fastest growing segments of the eating out marketplace.

The southern-style chicken sandwich and the breakfast version on a biscuit are both resonating with customers.

Coffee continues to be a major driver of business and we remain on track with our specialty coffee rollout.

Today about 3800 restaurants are serving McCafe coffees and we expect to begin introducing the rest of our combined beverage business products smoothies, frappes, and bottled drinks in mid 2009.

There's been questions about the general product situation and its impact on our franchisees ability to make the necessary investments to implement the beverage platform.

Our franchisees are still able to get the financing they need.

Our expansive network of national, regional and local lenders, coupled with McDonald's financial strength and reputation ensures ongoing access to credit.

Although processing may take a little longer and cost may be a bit higher, this is the current reality for all borrowers today.

The bottom line is our strategies are not being effected.

In the area of value, consumers are responding to value at all price points on our menu, our core menu continues to account for the majority of our sales while the dollar menu is effective in helping us grow traffic and maintain customer loyalty in these tough economic times.

Our owner/operators are committed to the $1 menu and we continue to explore options to keep it relevant for customers and profitable for our system.

We're currently conducting as you know consumer testing to determine the best product offerings for today's environment and we expect to have a decision in the near future.

Looking ahead, we remain confident that we have the right strategies in place to grow the business for the long-term while managing through the credit environment.

Moving to Europe, our business momentum continues with a comparable sales increase of 8.2% for the quarter.

Nearly every European market is contributing positively to these results.

While an economic slowdown is being seen in several European countries, we have not been experiencing this at McDonald's as it relates to sales and guest counts.

In fact, while there's been a decline in informal eating out business in the second quarter, the most recent time period for which data is available, visits to McDonald's increased.

Despite the financial events of the last couple of weeks, trends indicate that the visit momentum remains strong in virtually all of our markets.

We're confident that Europe will continue to drive growth through the three strategies of enhancing local relevance, upgrading the customer and employee experience and building brand transparency.

Local relevance is brought to life mainly through our menu offerings.

The premium hamburger has been very successful in France and Germany and we anticipate the same results in the UK where it was just launched this month.

In addition, we're addressing the growing demand for chicken by providing new products at various price points.

In the premium tier we've added the chicken legend sandwich in the U.K.

and continue to feature new chicken products on the premium platform in the fourth tier, (inaudible) in France.

Europe's ongoing restaurant reimaging and convenience efforts help upgrade the customer experience.

Since 2003 we've reimaged more than 2000 European restaurants.

A large part of our reimaging this year and in 2009 will take place in our major European markets.

In 2008 and 2009, the U.K.

will remodel an additional 200 restaurants with an emphasis of drive through locations.

In Germany we'll have reached a goal of remodeling or touching all of its restaurants including about 650 McCafes.

Increasing extended hours and drive through will also contribute to our growth.

Currently about 70% of our European restaurants offer some form of extended hours.

Comparable sales during these hours are outpacing the rest of the day and we continue to leverage this opportunity.

Nearly half of our restaurants in Europe have drive throughs.

But with just 45% of sales in those restaurants coming from the drive through, we have huge opportunity to grow this part of the business by maximizing efficiency, capacity and order accuracy.

Now while I focus my comments on our bigger European markets, it's important to note that we have opportunity to grow to the new restaurant development and some of these key Eastern European countries.

In fact, we plan on accelerating our openings in this region over the next two years, specifically at Poland, the Ukraine and Romania.

These are just some of the reasons we are confident -- excuse me -- in our ability to continue to deliver strong results in Europe.

In Asia Pacific, Middle East, and Africa the momentum remains strong as comparable sales increase 7.8% in the third quarter.

Driving this growth today and into the future is the unified focus on four platforms--food, especially core, menu, and breakfast.

Value.

Convenience, and the customer experience.

Breakfast represents a $450 million opportunity across APMEA.

China for example has increased its breakfast business 50% in the last year by focusing on core menu items like egg McMuffin and premium coffee.

With breakfast at 7% of total sales versus 20%, you see in countries like Hong Kong and Singapore we still have tremendous opportunity in this market.

Japan and Australia are also growing with core breakfast sandwiches, premium hot and iced coffee drinks and pastry items.

Value continues to be another cornerstone of our results in APMEA.

As it is in all of our markets.

In China, value is executed through a brand and affordability menu.

Smart couponing and loyalty cards.

In Japan, our 100 yen menu is driving traffic and tradeup.

In Australia we've recently rolled out the value picks program.

We expect the results of all of these programs to continue to drive guest counts and growth, especially in this environment.

Convenience also continues to drive strong performance in Asia Pacific, Middle East, Africa.

80% of our restaurants in China are operating 24 hours.

We also have a growing percentage of leveraging -- desert -- leveraging, desert -- excuse me, dessert, we have some in the desert, but these dessert kiosks and delivery.

In Japan we have 24 hours and almost 1500 restaurants and we're working on special nighttime menus.

Beyond that, we're innovating around convenience, with mobile ordering, e-couponing and pay pass.

We're very optimistic about our future growth in this area of the world, especially considering McDonald's really, is really just getting started in many of these markets.

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

As we enter the final quarter of the year, I'm optimistic about McDonald's outlook.

We're a strong, stable global business and remain well positioned to generate long-term profitable growth for our system and our shareholders.

Thank you.

And now I'll turn it over to Pete Bensen , our CFO for his

Thanks, Jim, and good morning, everyone.

I'm pleased by our strong results and continued momentum in the third quarter.

Jim mentioned the strategies driving our sales and discount growth in each areas of the world.

At the same time profitability and returns are benefiting from our unparalleled global supply chain, disciplined operations, and strong financial management.

Combined operating margin, a key profitability measure reached 27.5% year-to-date, September.

This is up 290 basis points over the same period last year after adjusting for the 2007 Latin America transaction.

The significant increase reflects our solid Company-operated and franchise margin performance along with ongoing G&A control.

In constant currencies, G&A was flat in the third quarter as lower expenses in Latin America offset costs associated with our brand building Olympics related activities.

We remain committed to continuing to control G&A, which declined as a percent of revenues for the nine months as it has for each of the last five years.

The strength of our business and the effectiveness of our strategies are reflected in our restaurant margins.

Franchise margins as a percent of revenues increased 60 basis points in the third quarter to 82.9%.

It's highest level since 1994.

Consolidated franchise margin dollars increased 11% in constant currencies driven by positive comparable sales momentum in every area of the world as well as our refranchising efforts.

Consolidated Company operated margins rose 40 basis points to 18.7% in the third quarter due primarily to improvement in Asia Pacific, Middle East and Africa as well as Europe.

In APMEA, strong comparable sales fueled the Company operated margin increase of 120 basis points to 17%.

It's highest level in eight years.

The ongoing strength of our business in Australia and China led this performance, although nearly every market contributed to the increase.

Australia's crispy chicken lineup and extended hours helped drive double digit comp sales growth and margin improvement in the quarter.

In China, we continued to grow margins despite the inflationary environment.

Given our menu variety, supply chain efficiencies, and comparable sales momentum, we are well positioned to navigate in this environment and further grow our business.

As such, we plan to open nearly 150 restaurants in China this year.

A growth rate of about 17%.

In Europe, our ongoing sales momentum helped Company-operated margins increase 50 basis points to 20%.

Its highest level since 1999.

While labor and commodity cost headwinds continue to pressure margins, the growing significance of two of our most profitable European countries, France and Russia, as well as improvement in many smaller markets, drove Europe's increase.

In the third quarter, our beef cost in Europe rose nearly 16% and chicken increased 12%.

But because about 75% of our food and paper costs is spread among ten different items, our overall grocery bill increased just 9% for the quarter.

We believe looking at our total basket of goods, or our grocery bill is a more complete way to look at how commodity costs impact our food and paper costs.

Our full year 2008 outlook is for Europe's overall grocery bill to increase about 8%.

This reflects a full year outlook for beef and chicken cost increases of 12 and 9% respectively.

Slightly higher than we thought in July.

Moving to the U.S.

Our U.S.

business delivered a very solid 18.2% Company-operated margin.

This is down just 20 basis points from the prior year, primarily due to higher commodity cost.

We're very pleased with this result considering the challenging cost environment.

It demonstrates both the continuing strength of our strategies, and our ability to execute successfully.

For the quarter, U.S.

beef costs rose 4% and chicken was up 6%, contributing to the overall U.S.

basket of goods increasing about 7%.

This compares quite favorably with the 12% increase in the food component of the PPI for the same period.

For the full year, our outlook for the U.S.

grocery bill is also to be up 7%.

This includes a beef and chicken outlook similar to that expected back in July.

Beef up about 8% and chicken up about 6%.

In this extremely volatile environment we remain diligent about monitoring the commodity markets.

We believe there are opportunities here and we are confident we can continue to effectively manage our input costs in this environment by leveraging our scale and utilizing our supply chain infrastructure and effective risk management practices.

It's worth noting that our goal is to maintain competitive and predictable commodity pricing.

We manage our grocery bill like a portfolio where increases in some commodities can be offset by lower prices on others.

Our comprehensive approach to restaurant profitability and margin focuses not only on cost but also price and product mix.

This approach continues to be successful as exemplified by our industry leading Company operated margins around the world.

Our global results are a testament to the strength of our business model and its flexibility to deliver in a variety of operating environments.

This enables us to maintain our focus on the long-term and continue to invest in key growth opportunities.

For example, with our U.S.

owner/operators, we continue to invest in the rollout of our new beverage business and expansion of our drive through booths at the same time.

This expansion not only fully enables the beverage business, it also benefits all drive through transactions through a more efficient layout.

In addition, we continue to reimage restaurants around the world, improving the overall customer experience and building brand perceptions.

Our ability to take advantage of key opportunities like these reflects our strong financial foundation.

Our cash is held around the world in investments that prioritize capital preservation over yield.

We maintain a strong credit rating, the highest in the restaurant industry.

Our owner/operators continue to have access to credit through a network of national, regional, and local lenders.

We have access to, but are a minor user of the commercial paper markets.

Our $1.3 billion evolving line of credit has sufficient term remaining and is unused.

And we secured attractive long-term financing in the first quarter to prefund debt that was retired in the third quarter and we have no additional significant maturities until late 2009.

Our prudent, long-term approach to financial management has given us flexibility and strength in these unprecedented financial markets.

We believe it continues to be exactly the right strategy for today and our future and can potentially enable us to seize opportunities when others can't.

One final comment before closing.

As a global business, we operate in over 100 countries with different economic cycles and a multitude of currencies.

It's one of our strengths and may, in fact, be one of the reasons you invested in McDonald's.

It also means we're impacted by changes and currency translation rates.

Over the last few months, the U.S.

dollar has strengthened against many foreign currencies, especially the euro and british pound.

While this means translation will move against us in the fourth quarter, the good news is that it seems to be having a positive impact on oil and other commodity prices.

We are proud of our results through the first nine months of the year.

Particularly given the global economic environment.

We remain focused on being better, not just bigger, while leveraging a business model that operates well in a variety of economic conditions.

I'm confident that as we continue to focus on what matters most to our customers and maintain discipline in our operations and financial management, we will further strengthen our global business.

Thank you.

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

Thanks, Pete.

I'll now open the call for questions.

(OPERATOR INSTRUCTIONS) The first question from Matt DiFrisco at Oppenheimer.

You mentioned earlier in the call that, you used the term that you're recession resistant.

Historically, Europe's been a little bit more I guess of a middle class consumer and I would assume China and Asia, your experience is similar there.

Do you think with the lineup and with the change of philosophy of how you're approaching growth in those markets also, are are you also recession resistant there or do you expect we'll see a little bit more volatility potentially if, as it seems these markets follow the trend of the U.S.

consumer?

Well, Matt, this is is Jim.

I commented a little bit on that in saying that we're seeing some slowdown in those markets today relative to the economic issues and the financial crisis in the credit markets and consumer confidence, but we're not seeing it at McDonald's.

And we have continued to charge forward with our growth in China.

For example, we're going to open 150 restaurants in China and next year we're going to open more and we're going to continue to open restaurants in Europe and so we are confident that we will have the same strategic opportunity in those markets and continue to push forward, particularly with value and convenience that will be able to show that we're as resistant in those markets relative to recession as we are in the United States.

Okay, thank you.

The next question's from John Glass at Morgan Stanley.

To follow-up with you on your commentary on currencies.

We have been in this unprecedented period of FX swings.

Two questions really, beyond the euro, pound relationship which you've highlighted and the sensitivity of earnings.

Is there material risk to other currencies moving against you and maybe could you quantity it?

And in talking about that, Latin America in particular, seems to be an area of concern recently.

Do you get paid in dollars for the royalties or are you paid local currencies and is that a translation risk and is there any further risk beyond the translation risk particularly related to Latin America?

John, I'll answer the second part first.

This is Pete.

We get paid in dollars from Latin America so our DL partner down there has all of the currency risk.

Another reason to do the transaction the way we did it.

The dollar seems to be strengthening against everybody around the world, the euro and the pound are the two biggest, but if I went kind of sequentially, the Australian dollar and Canadian dollar are probably the next two biggest.

We don't like to forecast exactly what currencies are going to do because they change daily, but as a prospective, if we look at last year's fourth quarter, our average euro rate was $1.45 and our average pound rate was $2.04 to give you a little order of magnitude of where we are at relative to last year.

The next question is from Joe Buckley at Banc of America.

Thank you.

Can you go back to the food comments?

I guess the beef costs in the U.S.

being up 4% in the third quarter surprises me.

That it was that modest.

But then if you're keeping a full year forecast that I think you said up 8%.

Does it imply a huge 20% type beef cost inflation in the fourth quarter?

Yes, Joe, it does exactly and that had been our outlook.

We knew this was coming kind of September through December, but again, to put it into prospective, our basket of goods was up about 7% for the quarter and we expect it to be up 7% for the full year so the fourth quarter basket will be slightly higher than the third quarter but not dramatically higher.

And so that's why we're trying to give a little bit broader prospective on how all of the food costs were going to impact us, not just beef and chicken.

And that obviously is just looking at the cost side of the equation.

I can our results this year have shown we've done a good job of being able to take price.

Our price increases in the U.S.

are still below the food-away-from-home.

We still think there's price elasticity there and we have product mix shift and guest count growth that also impact the margins.

Thank you.

The next question is from John Ivankoe at JPMorgan.

Actually a question related to last sentence you just said.

In the U.S.

the year-to-date comp has been up 3.7 and price as you stated previously is running up about 4, and traffic from what I understand is at least or around half of the comp.

So could you comment on negative mix that you've seen in the U.S.

in 2008?

And I guess more importantly as we move forward, whether things like beverages change in the $1 menu and even lower gas prices at the consumer level may actually create a positive environment for you as we move forward?

Ralph, you're over there in Malaysia, may be you would want to comment on that.

Sure.

I wouldn't call it negative mix.

The problem with average check is you have a lot of different transactions in there.

So our breakfast business as we've said in the U.S.

continues to grow faster than rest today and breakfast is a lower average tech but a higher margin transaction.

The same way with drinks.

We were strong in our drink promotions through the summer as we talked about, coffee is up more than 30% and a lot of of those end up being transactions that are during off peaks which are also smaller average check or they're only individual versus family purchases.

So those things are in the equation you have there.

And there has been some trade down as you would expect during these times and that's why we have good value across the whole menu, and have actually been strong and pushing our items like snack wraps in order to have an option for our customers.

Thank you, the next question is from Mitch Speiser at Buckingham.

Would just like to understand the margins in the third quarter in Europe and Asia Pac where the comps were generally the same?

Europe and Asia Pac in the second quarter versus the third quarter.

And yet the margin improvement was pretty substantial.

I know you mentioned some mix shifts in Europe.

Was it, perhaps was there incremental pricing in the third quarter as well and do you think these levels of expansion are sustainable over the next few quarters.

Thanks?

Mitch, it's Pete.

Europe, I'll talk about first.

That mix shift really was -- did have an impact on the margins.

Last September France and Russia, which both have margins over 20%.

They were about 17% of the [McCofko] margin dollars and now as a result of their growth as well as the refranchising in the UK and Germany, they're now over 20% of the McCofko margin dollars.

So we have a higher quality of the remaining McCofko's that are driving that margin percentage for the segment.

Pricing was pretty normal and consistent.

It was 3 to 4% amongst the major countries in Europe with Russia being higher because of the higher inflation there.

As I mentioned in the outlook, regarding next quarter, we see in Europe, a similar cost environment, our basket of goods expectations are pretty similar for the fourth quarter as they were for the third quarter and regarding APMEA continued strength in Australia and China really led the way, but almost every market had McCofko margin increases, again, doing a good job of using their strategic pricing to manage the price increases as commodity costs were continuing to come in.

So I think they'll continue to manage that way going forward as well.

Thank you.

The next question is from Jeff Bernstein at Barclays.

Thank you.

Just a question on the U.S.

business.

Jim, you mentioned the value focus being, I believe you said mission critical.

Just wondering if you could talk about perhaps your U.S.

product line other than coffee in coming months and quarters and whether value will be more indicative or evident in those promotions going forward relative to perhaps, some context of your peers?

And then actually just, you mentioned in the release and Jim, you mentioned on the call, the October comp remains strong.

Just wondering whether that, I believe that was a global comment.

I'm just wondering whether it is strong relative to September or are you seeing an uptick?

We've heard recently of mix shifts lately.

Comps slowing in the last month or two.

I'm just wondering if you're seeing anything like that?

Well, the trend we're seeing right now, Jeff, is really consistent with what we just reported for the third quarter for October.

So I'm not going to say more about it, and I would suggest that that means the trend is strong.

We just reported the number for the third quarter in October is on trend to replicate that.

Around the world.

So the other question was on the value.

The U.S.

Company taking under advisement with their franchisees over the near term what to do about the $1 menu, you know we've been looking at that relative to how to make that continue to be relevant for our customers at the same time maintaining the $1 menu, but maybe adjustment of the lead sandwich and they're talking about that in the near term and I expect to have a decision soon.

Other than the $1 menu and and then the relationship of the food and the value across the menu which we've done a good job of representing here in the United States, I think that will continue as we move into '09.

Thanks.

The next question is from Larry Miller at RBC.

Thanks, there's a lot of folks on the credit markets here in the U.S.

but it seems to be more of a global issue and part of your strategy has been to refranchise the U.K.

I was wondering if you could give us an update on what the credit markets are doing in that particular market and then if you can fill in a little bit of the sales color in those three markets over the quarter?

There's been a lot of reports that those markets are also seeing a slowdown in other retail sales and traffic.

Thanks.

Well, Ralph's been out in those markets and is out on the marketplace right now.

So Ralph, do you want to talk a little bit about that?

Sure.

First on the credit markets.

We are on plan and are franchisees have access to cash, specifically in the U.K.

and Germany where we're doing the refranchising, so those deals are unplanned.

They were in the third quarter and we'll continue into the fourth quarter and going forward.

No issues there.

It takes a little bit longer to get the credit and it's a little bit more expensive as you would expect but access is there.

As far as the other question, Larry, sales in Europe were strong throughout the geographies.

We had a very strong summer and October continues the same way.

The U.K.

as we have mentioned before is -- has done a tremendous turn around in the last 24 months and we have not seen any slowdown in that acceleration, even with what we hear out there in the marketplace and the same thing with France.

Germany had a softer September, but it bounced back strong in October and that's more promotional related between the years.

Thank you.

The next question is from Steven Kron at Goldman Sachs.

Thanks.

A question on the $1 menu, Jim.

You mentioned a couple times now you expect a decision near term that's clearly something people are going to be focused on, on what you guys do there.

You've been testing in a bunch of different markets, a bunch of different things.

I guess at this point in time, how well do you feel you guys have a sense for what the competitor response might be in those markets -- in the test markets at this point and what would you anticipate competitor response to be to raising some prices?

Would they follow or would that be a market share opportunity for them?

I think first of all you're assuming that we're going to be raising prices, I don't know that that decision has been made yet, particularly regarding the overall $1 menu.

And I suggested that the U.S.

is debating this issue right now and deciding which way they want to go in collaboration with their franchisees so we know how important it is to maintain the value of relationship across the menu for our customers today, and that decision will be made soon and will then be communicated, but maybe Ralph would want to talk a little bit about what we expect that competitors might do regarding this.

Quite honestly, we're not worried about what they may or may not do.

They've got the same pressures.

You've seen their margins.

We've got to manage this for the long-term.

We'll do what is right for the customers and what's the right sustainable long-term value.

And dollar menu will stay.

There is just probably going to be some tweaks to it, but as you notice in September we advertise $1 menu strongly and obviously wouldn't be doing that if we would be walking away from it.

Thank you.

The next question is from Jason West at Deutsche Bank.

Just bigger picture, I know you guys have historically talked about 6 to 7% annual operating income growth and just want to get your thoughts on that just given the big currency swing that we may see into '09.

Do you think that is still what you were thinking or was that more of a currency neutral number.

I know you don't give guidance but where people are -- expectations are.

Are they reasonable given the big currency swing that we're going to see?

I think they are, Jason.

We've not considered changing our targets or I shouldn't say that.

We talk about it all the time.

The fact is we think that our stated targets of 3 to 5 and 6 to 7 continue to be relevant and make sense for us as we look at the future and as we measure the past.

And so I think we're probably going to be staying in that range.

And Jason, just to clarify, we have always stated those target exclude FX.

So those are currency neutral outlook.

Thank you.

The next question is from David Palmer at UBS.

Thanks, and congratulations on the quarter.

Ralph, or Jim, the iced tea and iced coffee introductions were not really introductions in some cases I guess just broadening of the offerings were a big success in the U.S.

this summer.

I'm wondering to what degree do you think that that lift might diminish as the season goes colder here in the U.S.?

And conversely I guess about a quarter of your U.S.

stores should be ready to start selling specialty coffee beverages heading into the fourth quarter.

Could that be a measurable lift to business this winter?

If I can throw in another one regarding Europe, could you perhaps update us, are you fully rolled out in the bridge operating platform in the big three markets and could this kick off a more robust innovation cycle perhaps around chicken in the very near term in Europe?

And then a quick one for Peter, could you comment on currency.

Did you take any steps to hedge like peers, Heinz and Coke seemed to do over the summer?

Thanks very much.

David, you're good at this.

That's three questions.

Ralph, why don't you take the first two and then Pete can talk about this.

Yes, our drink strategy throughout the summer was strong.

It really helped our traffic and items like the sweet iced tea are more of an everyday-type value.

The iced coffee is more seasonal, and that's where as, not as much this winter but as we continue going forward, and we finish with the rollout, then you fall into the hotter drinks of lattes and cappuccinos will help fill that gap.

But we have continued with good value on our drinks and our drink volume continues up in October.

So we're seeing that not be an issue on the bridge operating platform.

In the major countries, we're rolled out enough or almost at 100% where we are able to do more of the chicken promotion.

That's part of the U.K.

success.

They have had premium products, along with snack wraps and so we're hitting chicken on both the value side and the premium price similar to what we've been able to do in the U.S.

and so that's benefiting us there.

It's benefiting us in Australia also and in Germany as we've been able to put that through the calendar.

So you're correct on that one.

And David, regarding hedging, our treasury folks were constantly looking at the currency markets and our goal is to provide some stability and predictability.

We can only hedge certain flows that come back and unlike some other companies, just a portion of our top line comes back to the U.S.

So, the pool of earnings that we can get hedge accounting for is probably smaller than other companies, but we're constantly looking at the markets and being opportunistic when we put on positions.

Thank you.

The next question is from Tom Forte at Telsey.

You've historically talked about the percentage of sales mix you get from the value menu.

Can you update that number?

And then when we think about the Monopoly promotion this year and most of the items have the game pieces them are some of the higher priced items.

How should we think about how that may perform in the environment now with consumers focusing more on value?

First of all, the mix on $1 menu remains the same.

13 to 14% and 70% from core, which is the real advantage of the $1 menu and the opportunity for us to continue to provide value across the menu and -- I forget, what's the second question?

Was about the Monopoly on the game pieces are on some of the higher products.

Ralph, you want to talk about that?

Sure, yes, that's our strategy always with Monopoly.

Added value for more price and Monopoly is comping against last year's Monopoly.

Only offset by a week so we did it in October of last year and as we said, the trends are strong so it's working well.

Thank you.

The next question's from Keith Siegner at Credit Suisse.

Thank you, I would like to ask just a follow-up question about pricing a little bit.

We've talked about the value menu, but just for the overall menu and particularly on the core.

One of the things you've often highlighted has been the fact that your pricing has been running below CPI and this year it's been running well below food at home or grocery pricing.

We've heard recently several package foods companies and a couple grocers mention resistance to pricing, particularly in September.

Considering that beef trimmings are off.

Greens are off from their peak.

Company operated margins are very high.

How do you think about that pricing dynamic on the core menu going into next year?

Ralph, do you want to?

Sure.

We've got our demand based pricing models and so we get pretty good information.

We've got -- because we have a limited menu, and we do a lot of transactions, the data we get is pretty rich as to resistance to price movements as we take them in different parts of the country.

We understand where that resistance comes in and that effects where we're willing to move and so right now we continue to stay just below food-away-from-home.

We think that's the best index for us because that's us where -- and where we believe value's most important.

Directly from our competitors.

We do watch food at home and our value scores, a big part of our improvement and they've improved significantly this year.

We believe it's because food-at-home has grown so much higher that it makes our category a better deal than necessarily eating at home.

But as we look to next year, we -- our pricing is that inflation will be similar to this year is what we think right now relative to food-away-from-home.

Thank you, the next question is from Paul Westra at Cowen.

Just a couple questions, wondering if you could help us quantify or qualify your thoughts on the impact of what gasoline prices will do?

Hopefully we're approaching up to $1-gallon less year-over-year.

Have you looked into that, how much that hurts you up on the way up and how it may hut you on the way down, and whether it will act like a stimulus check or not?

Paul, we do keep an eye on it but we've said all along because of our convenience and value we sort of stayed above the noise relative to the cost of gasoline but relative to everything else, it's going down.

It should help.

It should be a positive factor rather than a negative factor.

And the big positive there is obviously disposable in.

We're not as dependent on traffic as other brands maybe, but gasoline is one of those big disposable items.

Discretionary income that is and that's where we'll get the benefit.

Thanks.

Another question from Joe Buckley at B of A.

I wanted to ask one follow-up to my first question and then a new one.

Just your thought for 2009 in terms of food costs and the basket of goods.

And then could you update us on what the renovation costs are as you roll out the specialty coffee and what portion of that McDonald's is paying for versus the franchisees and what is sort of changing as you accelerate the rollout?

Hey, Joe, it's Pete.

Regarding 2009, obviously there's unprecedented volatility in the commodity markets right now and so our supply chain folks are in the process of working through all that with our suppliers.

So I don't have a number for you today.

I'll have a number in January.

Directionally though, with what is going on today if we see that continue, I've got to believe the increases will be less than they've been this year, but I can't verify exactly the number for you right now.

In terms of our investment in the beverage business, we haven't changed from what we originally stated at the beginning, which was it would probably cost about $100,000 on average to have the restaurant implement the beverage sell along with the drive-through booth optimization.

About 75,000 of that $100,000 was related to leasehold improvements and things and $25,000 was equipment and we had agreed to pay up to 40% of the leaseholds.

And so all of that is the same when we rolled out the program.

The actual costs are coming in slightly under but not meaningful under the hundred.

So we think that's still a good estimate.

And Joe, I think it's interesting that the number of people that are expanding their drive through footprint and putting the full package in place is greater than we had thought originally and when you hear this anecdotal information that we don't have support and we don't have credit, that number is actually higher than originally -- what we originally thought it was going to be.

Thanks.

The next question is from Mitch Speiser Buckingham.

Thank you very much.

And my question -- I'm sorry, yes, I wanted to ask about the specialty coffee program, as it relates to the experiences -- I guess you're at about 3800 stores now.

I would think at least 1500 or so have probably had the program for over a year.

Can give us a sense of is it meeting your internal expectations?

And can you give us a sense of how the drive through is working in terms of -- is it slower, quicker than average, and versus your internal expectations?

Thank you.

Ralph, could you comment on that, please?

Sure.

Mitch, we're on track.

We had about 500 restaurants that were on it for a year before making a decision to continue.

We then and that allowed us to refine the operational pieces of the program and really work on the drive through booth which is a big part of the rollout and that's why the take on the drive through booth has increased because with those items it helps improve the whole drive through operation and allows us to deliver this.

Our scores that we do through both our internal measurements and mystery shops show that we continue to improve.

As we have over the last few years, even in those restaurants that have put this in and that was one of the key measures for us.

We're on track on both the sales and the operational scores and it's a matter of getting the conversions done through the rest of the restaurants between here and sometime mid next year.

Thanks.

The next question is from Rachael Rothman at Merrill Lynch.

Hi, good morning.

Just wanted to circle back on the franchisees and their attitude towards the value menu because I know often times those of us on the outside seem to make a mountain out of a molehill but when I kind of look at your restaurant level margins in the U.S.

year-to-date and see that they're only down 20 basis points and sales are up in the 3 to 4% range so cash flow per store is up, and I know that from past conversations franchisees actually have higher margins than the Company-operated stores.

When I look at the competitive set where sales may be up also in the 2 to 3 or 2 to 4% range and margins had down 150 plus basis points, are franchisees really seeing the value menu -- are they really pushing back against the value menu?

Or are they seeing it as an opportunity to take market share, given that cash flow per store should be up and it's just those of us looking in from the outside are making something out of something that's really nothing?

Well, Rachael, Ralph and I had the pleasure of meeting with the franchisee leadership just last week and talked through the issues of the environment we find ourselves in today and of course $1 menu was part of that discussion, but as I said in my comments, the operators are still committed to the $1 menu.

And of course, as I said we're looking today at how we might make that more relevant and continue to be profitable.

And so, Ralph, do you want to talk a little bit about it because I think you might be closer to it then really I am?

Yes, Rachael, I think it's a great question.

The reality is no different than us.

Operators being just slightly up on cash flow does not meet their expectations when they're doing the investments or doing -- and we've been aggressive on investments, whether it's been reimaging or rebuilds in.

We've done 1,000 rebuilds in the U.S.

in the last five years, or the investment that we're making in the combined beverage business now.

So the commodity cost is one of those items that because we don't control it and obviously operators don't either is a sense of frustration and that's what you end up hearing and rightly so.

But they understand that we're managing much better than the marketplace during this time.

They understand the importance of everyday value but we also understand with them that some level of migration on that value menu is important in order to keep the good value scores balanced across the menu.

At some point you can't raise the price on everything else and leave $1 menu the same as we have for six years in inflationary times and so that's what we're finding out.

What do you do that still keeps the customers coming, but keeps the balance of price value across the whole menu, not just great value on the $1 menu and average value on the rest and those are the discussions that our operator body is having as we speak and that we've been having and I'm confident they'll make the right decision because we've got a lot of tests out there with good robust data.

The next question is from Howard Penney at Research Edge.

Thanks very much.

Ralph you just mentioned that you thought you would have the stores converted by mid year next year.

There's 3800 stores today.

I know there's a fairly rapid acceleration in the number of stores converted but that sort of implies a significant acceleration of the number of stores converted to be able to get to that completion date sort of mid point next year.

Is that realistic to think that you can do -- I don't know, 11,000, 12,000 stores in the next six months?

The biggest part, I always say is have you ever done a remodel on your kitchen at home.

You know how difficult it is.

Imagine doing 14,000 of them and that's what's been going on in the U.S.

The hardest part of that work is getting the drawings drawn for every single location, making sure you get all of the fabrication going, et cetera, the permits and so forth and so that part of it, which really is two-thirds of the time frame, we've got more than 10,000 restaurants that are in that, completed through that piece.

So even though there's only 3800 open, there's the majority of the restaurants are somewhere in that construction time line and so we feel confident that it continues on path to have us -- pretty close to where we thought we were going to be in the beginning.

Sometime in mid year.

Thank you, the next question is from Larry Miller at RBC.

Yes, I actually had two questions.

I think it was maybe two years ago Wendy's tried to move from a $0.99 menu to I think they call it a value choice menu.

Something where the price point was higher.

As you guys kind of study the competition, what do you think maybe didn't work and you can learn from that going forward?

And the second question is looks like we're going to have after the election it's going to be maybe a Democratic President, Democratic Congress and as you guys think about the potential legislation that can go through on '09.

What impact should we be aware of on your business potentially in '09?

It looks like there might be an impact on minimum labor with check card and minimum wage.

Can you guys talk about that briefly?

Ralph, do you want to talk a little bit about the first question and actually make a comment about the Free Choice Act, if you will.

Right.

Larry, on the -- what we've done is we've studied our customer.

We're not sure about Wendy's customers -- we obviously trade customers but we've studied our customers specifically our $1 menu customer very strongly as to what are the motivating drivers.

How much of it is the fact that it's $1.

How much of it are the items the $1 menu.

How much of them are transaction drivers or how much of the visits are -- those are add-ons, for example extra value meals and that's how we're making the decision and we've been pretty upfront that at this point we're going to stick with the name $1 menu.

So that tells you a lot right there and we think that's an important part of how our customers view this offering today.

Not sure what they did -- I mean I know what they did but not sure why they had the impact they had, but we think we understand where our customers are on this one and no, it's not without risk but understand the ramifications.

And Larry relative to the political environment, and the potential for a new President.

We're going to have a new President.

McDonald's really is a big Company but at the same time it's 32,000 small businesses and so we operate in 32,000 communities around the world and in the United States we operate 10,000 communities and it's really about our franchisees and their ability to operate their businesses effectively.

Certainly with our support strategically and relative to our customer relevance and focus on the stores and so we're not concerned really about who the next President's going to be relative to how we operate our business.

We've been around for 52 years and operated under every administration, obviously successfully.

Relative to the Employee Free Choice Act, there is concern in the marketplace and small businesses about this and in particularly large businesses where as you know, the potential new law would eliminate the requirement of a secret ballot to unionize making it easier for Unions supposedly to win elections.

Instead of the secret ballot 50% or more of the employees simply have to check off an agreement and we feel though that if that legislation is adopted that because of our disperse locations, the fact that each of these is a small business run by franchisees with the exception of the 15 or 20% that are Company owned that those have to be done one at a time and that we're able to operate in that environment and that our younger workers really, when it gets right down to the voting are not sure they want to spend their discretionary income on Union dues or being Unionized and really not a lot of benefit for them.

That's sort of the way we look at the Employee Free Choice Act.

Thank you.

Looks like we have one final question for Rachael Rothman at Merrill Lynch.

Rachael?

Yes, sorry.

On a different topic on the franchise level margins.

I guess looking globally across the different regions, the franchise-level margins seem to range from, call it a low of 78 or 79 in Europe to somewhere 90% so in Asia Pacific.

As you guys continue to refranchise, how should we think about what the target franchisee margin could be as we get to the end of 2009 or how much opportunity is there for you guys to push that on a percentage basis and obviously the actual dollars would increase as well as franchising would become a larger portion of your business?

Rachael, it's Pete.

The most dramatic impact we have on franchise margins is obviously driving comp sales.

So Asia obviously is a lot higher because we have our Japanese joint venture there that pays us a royalty with no corresponding cost hitting the franchise margin line.

So, if you start it at this year's levels, your comp assumptions will be a big part of where we're going to get to in 2009 because a lot of those occupancy costs are fixed.

The disparity between regions is somewhat indicative of where we do more leasing versus property ownerships so you may know that in cases where we own the property, we have no cost hitting the franchise margin because we don't depreciate land but if we lease sites we obviously have lease expense that's shown as an occupancy cost.

The other impact is on our refranchising, as we're putting more restaurants in the hands of franchisees, there's a greater proportion of lease sites are becoming franchised.

So it is having a slightly negative impact on the franchise margin, but by far the biggest impact is what are comps going to do to drive the top line.

Yes, Pete and on that one, because a lot of that early refranchising activity that we did was in the U.K.

which is a marketplace where we have a lot of leases.

That actually has had a dilutive impact on franchise margins in Europe but it's been more than offset by the strong comparable sales.

Thank you, and now I'll turn it over to Jim for some closing comments.

Thanks, everybody for joining us this morning.

In closing I want to reiterate my confidence and optimism for our continued business momentum.

McDonald's is operating from a position of strength.

We have the right strategies in place and they're on track to grow the business for the long-term and are taking the necessary steps to manage through the current environment.

Our strong operating results predictable in growing free cash flow and above target returns add up to sustained profitable growth for our system and our shareholders.

Thank you.

Thank you.

Thank you, this does conclude today's conference call.

We thank you for your participation.

At this time you may disconnect your lines.